On October 19, Pakistan’s Chief Economist at the Ministry of Planning Dr. Nadeem Javaid presented a talk, hosted by the Julis-Ravinowitz Center for Public Policy & Finance, about the China-Pakistan Economic Corridor (CPEC) initiative. CPEC constitutes a $50 billion investment by China in order to expand trade and commerce between itself and Pakistan and is an extension of China’s “One Belt, One Road” (OBOR) initiative. CPEC officially commenced in 2015, and construction projects are currently underway in Pakistan in order to link its port cities to inland China.

Background

Javaid began his talk by pointing out that Asia will become the most important region economically and that in order to capitalize on this, countries have begun to invest in interconnecting the Asian countries, specifically in trade. Javaid noted that the market containing South Asia, Central Asia, and China will comprise three billion consumers, and Pakistan is located at the intersection of these three engines of economic growth. The CPEC will enable goods to flow from the Middle East, South Asia, and Africa to China and Europe via the “One Belt, One Road” initiative being developed in tandem. CPEC and OBOR will enhance trade between countries in the Eastern Hemisphere, and in order to keep and expand jobs in the region, Javaid noted that individual countries have incentives to increase cross-border trade with neighboring countries.

CPEC

In Asia, Javaid explained that this form of cross-border trade is being revived in the form of a new Silk Road, the OBOR initiative, and this initiative is being emphasized by China. If the infrastructure is put in place throughout South and Central Asia, then there would be a continuous route connecting Europe with China, spanning 60 countries. More countries have demonstrated interest in this initiative, and Javaid noted that by 2018 he expects 90 countries to sign on to this initiative, including most of the European countries. On top of this, Javaid noted that $100 billion has been earmarked for the newly formed Asian Infrastructure Investment Bank in order to finance cross-country infrastructure projects.

Current Development

In Pakistan, the main center of action is the Gwadar port situated on the Arabian Sea, where massive infrastructure and industrial projects are currently under construction. The aim is to provide a continuous link between Gwadar and the Chinese province of Xinjiang, linking all the major Pakistani cities with inland, and then coastal China.

Javaid pointed out that Xinjiang and surrounding Chinese provinces are not doing too well economically, whereas coastal China is. He noted that in order for goods to be shipped to Europe from Gwadar, they would need to be processed in Xinjiang due to its geographic location, and he explained that the Chinese government needs to invest in production facilities in Xinjiang to encourage this cross-continental trade. Meanwhile, Pakistan is going to dovetail its strategy to enhance industrial capability along the CPEC routes under industrial cooperation arrangement with China.

Trade and Financing

Javaid pointed out that currently, goods coming from Europe, Africa, and the Middle East travel to China via the ocean, which involves going around India before coming back up toward the eastern Chinese ports. Once the CPEC has been constructed, Javaid predicted that the travel time for these same goods would be cut roughly in half, saving both time and high transportation costs. These savings are one of the driving forces behind CPEC.

Javaid also brought up the issue of financing, since CPEC is a very expensive and capital-intensive project. Under CPEC, Pakistan is investing $33 billion in its energy sector, specifically in power plants (IPP mode), in order to meet its current and future energy demands. China is lending a hand, as it has mobilized some Chinese firms to invest in Pakistan’s energy and infrastructure projects. Pakistan has offered these firms guaranteed returns, and China has made it easier for them to take out loans from Chinese banks on preferential arrangements to fund and carry out these projects in Pakistan. Javaid explained that the funds are being treated like private funds, even though they have guaranteed returns.

Economic Consequences

Javaid noted that one consequence of CPEC will be that Pakistan will become Asia’s energy hub, since he expects many oil and gas pipelines to run from the Gwadar port to inland China and Central Asia. Pakistan will become a major player in Asia, and this may lead to some tensions between India, Pakistan, and other Central and South Asian countries. He also noted that Gwadar will witness a growth in transportation, production, and storage-focused industries, since it will serve as a bridge to Southeast Asia from the Middle East. He added that Pakistan itself will experience a surge in economic activity as a result of CPEC, since about a third of Pakistan’s population is between the ages of 22 and 40, and Pakistan contains a high amount of irrigated land, minerals, milk, and wheat, which the world needs. He noted that the potential economic value of Pakistan’s resources is greater than the value of Saudi Arabia’s and Iran’s oil reserves, but Pakistan has not yet efficiently exploited these resources, most likely due to a lack of investment. He explained that last year’s growth rate was 4.7%, so he projected that Pakistan will grow at a rate of 5% as the CPEC is implemented. He noted that there are changes that are being implemented in various sectors outside of CPEC that he projected will push the growth rate up further by 1%.

Javaid warned about Pakistan’s productivity rate, which is four times lower today than it was in the 1970s. He attributed this to a current energy shortage, which is handicapping manufacturing companies by prioritizing energy allocation to households over factories. He also noted that Pakistan currently has a low tax to GDP ratio, which limits the government ability to invest in projects, and also has been experiencing a decline in direct investment from countries other than China. He pointed out that if the youth population is not employed and educated soon, then this will cause some societal problems. Other problems include low global commodity prices, which have been causing problems for export industries within Pakistan, as well as a reluctance to implement structural reforms.

On the positive side, Javaid said that Pakistan has experienced its fastest growth in the last seven years and has brought down its fiscal deficit, inflation, and interest rates. Pakistan has also worked to ensure peace throughout the country, which will bring more economic stability. To tackle the energy crisis, he explained that Pakistan has been re-evaluating the type of power generation facilities that it has and plans to alter the ratio of oil and gas power plants to coal power plants in order to bring down energy costs. Another top priority is effectively engaging with Pakistan’s youth and elderly population, particularly in making sure that everyone is involved in the projected economic growth. Javaid projected that CPEC Investments (directly and indirectly) will create around two million jobs by 2022 and that the private sector will grow as a result.

To conclude, Javaid said that by 2025, Pakistan plans to achieve 25 goals and aims to be on par with countries such as Turkey, Malaysia, and China on these 25 socio-economic dimensions. If the CPEC works as intended, then Pakistan will become a dominant player in Asia and globally.

Please reach out to Abhiram Karuppur at karuppur@princeton.edu for any questions, comments, or concerns.

Written by thefinancier

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