Challenges posed by the Pak-China corridor
Govt is advised to consult, involve all stakeholders, use this opportunity to initiate long-delayed economic reforms
The writer is a PhD candidate in Economics at the University of Warwick, specialising in monetary economics
Recently, the Chinese President Xi Jinping and the Pakistani premier Nawaz Sharif signed a massive MoU of approximately $46 billion to construct the China-Pakistan Economic Corridor (CPEC). Spanning approximately 3,000km, the CPEC is part of the mega Silk Road project initiated by China to firm up its connectivity to Europe, Central Asia and Africa through road and port networks. The MoUs include agreements on other joint ventures, including financing for the energy, infrastructure, trade and technology sectors.
These projects provide Pakistan with a promising opportunity to overcome its chronic economic challenges, primarily in the energy, trade and technology sectors. However, there are fundamental long-term structural consequences of this agreement, which may possibly have negative impacts on the Pakistani economy.
First, due to the needless secrecy and confidentiality displayed by the ruling party, there is a lack of transparency surrounding the entire venture, as pointed out by economists Dr Kaiser Bengali and Dr Ashfaque Hasan Khan. There are several doubts about the breakdown of investment in the aforementioned areas and the precise nature of the loans. Under the World Bank type tied loans, for example, bids for projects are invited from a group of companies from the creditor nations, enabling them to be awarded to the most cost-efficient companies. From the details that are sluggishly emerging about the deal with the Chinese, there appears to be no public bidding or announcement of these projects, rendering ambiguity to the entire process. In order to ensure transparency and accountability, essential details regarding the projects must be shared with parliament and with the public.
Consequently, it is suspected that a major proportion of these loans will be funnelled back to China, benefiting only Chinese construction firms and experts. Not only is this unscrupulous, it may translate into disastrous economic consequences for Pakistan, since the methods commissioned may not be as cost-efficient or the most economically viable, as otherwise ensured under public bidding. The Planning Commission and/or the finance ministry could play a pivotal role by identifying the economic feasibility of these projects, and an ancillary role in the implementation in order to ensure maximal economic efficiency.
A second concern that needs to be addressed by the government is related to the long-term economic costs and benefits of the Chinese investments, such as those related to the energy sector. While it may be true that the injection in the energy sector could possibly enable Pakistan to overcome its energy crises in the short- and medium-term, the long-run issues plaguing the energy sector will continue to persist. The main issues aggravating the energy sector are related to its low productive capacity, inefficient distribution network with high line losses and anaemic governance. Long-term benefits can only be realised if Pakistan manages to undertake significant structural reforms in this sector. Chinese investment in the energy sector partially fills an exponential vacuum created by the fragile governance structure, but also indicates the government’s indifference towards the critical economic reforms proposed to successive regimes. Therefore, in the short-to-medium-term, the investment might benefit our energy-sapped industries, translating into moderately-above-potential output growth of between four to six per cent, but presents minor, real long-term gains unless imperative economic reforms are undertaken. Worse still, it might further intensify the existing problems in the energy sector due to our dependency on foreign capital to fill the vacuum.
Third, there are crucial issues related to our economic capacity, and our ability to absorb the massive investment. In order to translate any short-term gains into long-term economic success, Pakistan should aim to increase its absorption capacity — say, in the labour markets — by investing in both vocational training programmes, and by revitalising the education sector. This will assist Pakistan in generating semi-skilled labour in the short run to accommodate the Chinese investment, and skilled labour in the long run to generate persistent economic prosperity in future decades. It would be prudent for the government to exploit the surplus in its public expenditure resulting from the Chinese investment, and support the development of rural areas, and invest in oft-ignored areas related to health policy and women empowerment. Continuous reliance on outsourced technical and administrative expertise will not benefit Pakistan in the long run.
Although the CPEC is currently plagued with uncertainties, there is immeasurable scope for progress. The government is advised to consult and involve all stakeholders, and utilise this opportunity to initiate long-delayed economic reforms, and build a firm governance and accountability structure, which will pave way for both short- and long-term economic growth. Otherwise, Pakistan will be permanently reined through external assistance.
Published in The Express Tribune, May 8th, 2015.
These projects provide Pakistan with a promising opportunity to overcome its chronic economic challenges, primarily in the energy, trade and technology sectors. However, there are fundamental long-term structural consequences of this agreement, which may possibly have negative impacts on the Pakistani economy.
First, due to the needless secrecy and confidentiality displayed by the ruling party, there is a lack of transparency surrounding the entire venture, as pointed out by economists Dr Kaiser Bengali and Dr Ashfaque Hasan Khan. There are several doubts about the breakdown of investment in the aforementioned areas and the precise nature of the loans. Under the World Bank type tied loans, for example, bids for projects are invited from a group of companies from the creditor nations, enabling them to be awarded to the most cost-efficient companies. From the details that are sluggishly emerging about the deal with the Chinese, there appears to be no public bidding or announcement of these projects, rendering ambiguity to the entire process. In order to ensure transparency and accountability, essential details regarding the projects must be shared with parliament and with the public.
Consequently, it is suspected that a major proportion of these loans will be funnelled back to China, benefiting only Chinese construction firms and experts. Not only is this unscrupulous, it may translate into disastrous economic consequences for Pakistan, since the methods commissioned may not be as cost-efficient or the most economically viable, as otherwise ensured under public bidding. The Planning Commission and/or the finance ministry could play a pivotal role by identifying the economic feasibility of these projects, and an ancillary role in the implementation in order to ensure maximal economic efficiency.
A second concern that needs to be addressed by the government is related to the long-term economic costs and benefits of the Chinese investments, such as those related to the energy sector. While it may be true that the injection in the energy sector could possibly enable Pakistan to overcome its energy crises in the short- and medium-term, the long-run issues plaguing the energy sector will continue to persist. The main issues aggravating the energy sector are related to its low productive capacity, inefficient distribution network with high line losses and anaemic governance. Long-term benefits can only be realised if Pakistan manages to undertake significant structural reforms in this sector. Chinese investment in the energy sector partially fills an exponential vacuum created by the fragile governance structure, but also indicates the government’s indifference towards the critical economic reforms proposed to successive regimes. Therefore, in the short-to-medium-term, the investment might benefit our energy-sapped industries, translating into moderately-above-potential output growth of between four to six per cent, but presents minor, real long-term gains unless imperative economic reforms are undertaken. Worse still, it might further intensify the existing problems in the energy sector due to our dependency on foreign capital to fill the vacuum.
Third, there are crucial issues related to our economic capacity, and our ability to absorb the massive investment. In order to translate any short-term gains into long-term economic success, Pakistan should aim to increase its absorption capacity — say, in the labour markets — by investing in both vocational training programmes, and by revitalising the education sector. This will assist Pakistan in generating semi-skilled labour in the short run to accommodate the Chinese investment, and skilled labour in the long run to generate persistent economic prosperity in future decades. It would be prudent for the government to exploit the surplus in its public expenditure resulting from the Chinese investment, and support the development of rural areas, and invest in oft-ignored areas related to health policy and women empowerment. Continuous reliance on outsourced technical and administrative expertise will not benefit Pakistan in the long run.
Although the CPEC is currently plagued with uncertainties, there is immeasurable scope for progress. The government is advised to consult and involve all stakeholders, and utilise this opportunity to initiate long-delayed economic reforms, and build a firm governance and accountability structure, which will pave way for both short- and long-term economic growth. Otherwise, Pakistan will be permanently reined through external assistance.
Published in The Express Tribune, May 8th, 2015.