Macro and Micro Dividends of CPEC


Macroeconomics is associated with the conditions of national economies; it deals with statistics such as unemployment rates, gross domestic product (GDP), overall price levels, and inflation however, microeconomics deals with single factors and the effects of individual decisions.

CPEC, being a complete package of rail/road networks, infrastructure and energy projects, promises economic growth. Industrial and special economic zones (SEZs) are considered to be economic backbone within the structure of CPEC. At the moment, Pakistan needs a more developed industry to lay solid ground for its economic takeoff. The establishment of dedicated industrial zones along the routes of CPEC will provide a golden opportunity to enable Pakistan accelerate the process of high level industrialization.

Under the CPEC plan, Pakistan will be fully loaded with industrial parks and processing zones. The backward and remote areas of Pakistan will receive a large chunk of these zones in the second phase.

The CPEC has direct bearings on the economy of Pakistan and China. Pakistan’s exports in the current fiscal year are around US$ 17 billion. The CPEC will give an unprecedented boost to the bilateral trade between Pakistan and China as industrial and agricultural production would be generated in 29 industrial parks and 21 processing zones all over the country during the first phase of the projects.

These Industrial zones can be manufacturing hubs producing a large amount of goods that directly cater to the ever accelerating urbanization process and rapid burgeoning of middle class. Having local production replace the imports can help bring down price and increase affordability in areas where tariff or transport cost is high. Injection of more advanced technology will also help improve quality and reduce environmental impact in areas where Pakistan already has a reasonably developed capacity.

Also, these industrial zones will enable Pakistan to produce more internationally competitive products, both to improve its engineering image, and to tilt the trade balance more in its favor. By making industrial zones production the center of high quality manufactured goods, Pakistan will be more favorably positioned in the international trade market. A larger percentage of manufactured goods in export portfolio will not only make it more resilient to changes in market demand and price fluctuation, but will also bring more profit due to a bigger added value. A shining example of China-Pakistan cooperation further bearing fruit is the successful sale of JF-17 fighter jets to Myanmar, and there are all the reasons to believe that this success story can be replicated in the non-military sectors as well, with the help of industrial zones. Manufacturing sector, with its multiplier effect down the pipeline of value addition, is the key contributor to employment opportunities, export volumes and development of country. For a country of the size of Pakistan, without  a  solid  industrial  base,  however rapidly its GDP is growing, it will be doing only high-speed taxing rather than a real take-off,  with  the  economic  dividends  from  non-industrial sectors not strong and sustainable enough to support a shift in a country’s economic landscape.

It is estimated that Chinese investment can lift GDP growth beyond 6% through direct impact for the financial years of 2016-18. The local component of this investment is expected to be around US $ 18 billion, assuming a higher local component for investments in Hydel, Road, Rail and Gwadar Port (50% to 80%) and lower for machinery intensive coal-based power plants (20%). This alone could add 2.1 percent to GDP growth each year during the financial year 2016-2018 and raise GDP growth above 6%.

In 2016, the industrial sector has already recorded a remarkable growth of 6.8 percent against the target of 6.4 percent and it is all time high in last eight years.  According to the Pakistan Economic Survey 2014-15 industrial sector registered only a 3.62 percent increase, not only far below the development targets set at 6.8 percent, but also lower than last year’s 4.45 percent growth.

As Pakistan is facing a severe energy crisis along with a critical infrastructure deficit, these investments will also help Pakistan in solving the power shortages that have crippled its economy, thus serving mutual needs of both the countries. Over $34 billion worth of energy infrastructure are to be constructed to help alleviate Pakistan’s chronic energy shortages, which regularly amounts upto 4,500 MW, and have shed an estimated 2-2.5% off Pakistan’s annual GDP. Over 10,400MW of energy generating capacity is to be developed between 2018 and 2020 as part of the corridor’s fast-track “Early Harvest” projects in conjunction with four projects under construction prior to the announcement of CPEC. Electricity from these projects will primarily be generated by coal, wind and solar sources.

Once fully developed, Gwadar port and allied facilities can provide Pakistan with estimated annual revenue of US $40 billion, besides generating two million jobs. The corridor through Gwadar will give China shortest access to the Middle East and Africa, where thousands of Chinese firms, employing tens of thousands of Chinese workers, are involved in development work. The corridor also promises to open up remote, landlocked Xinjiang region and create incentives for both state and private enterprises to expand economic activity and create jobs in this underdeveloped region.