A new look at the economy

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Situationer

M. Ziauddin

Pakistan’s economy has remained as unpredictable as our cricket team all these 70 years of our existence.
We have recorded growth rates of 10-12 per cent in some years.
And found ourselves in the pits with 2-3 per cent in some years.
We have been known as a middle income country for some years.
But it is more of statistical garbage than a reality as there exist some small little islands of prosperity surrounded by a vast sea of poverty.
So what do we do now?
Continue living with such a depressing scenario and suffer the imminent consequences.
Or try looking for ways to break the shackles of the model in vogue?
Let us take a look at our comparative advantages:
1) We are an agricultural country;
2) We are a market of about 200 million people;
3) Pakistan is located at the crossings of trade routes from Casablanca in Africa to Kashgar in West China’s Xinjiang Uyghur autonomous region and from Thailand in Southeast Asia to Turkey beyond the Middle East.
These advantages can be exploited to the maximum if we become a trans-shipment economy.
Rather than continue to hanker for an export-led economy.
Which we have been trying all these last 30 years or so to achieve but without any success.
Converting our economy to a trans-shipment one would require a well-thought-out trade policy.
That would allow almost free-of-duty entry of raw materials, intermediaries and equipment in knock-down condition.
To be warehoused in Pakistan and then forwarded to final destinations after the required value addition.
Such a regime would also require letting the rupee float on its own without the support of any artificial crutches.
Such a policy would also attract foreign direct investment.
In avenues in which it would be more economical for the sponsors to fabricate items inside Pakistan for local consumption.
And also to re-export them to the four-corners from the ‘hub’.
This will also facilitate the transfer of technology and training of skilled manpower.
Transfer of appropriate technologies would also open the way for Pakistan to graduate from being an agricultural country to a leading high quality processed-food and light manufactured goods exporter.
New Opportunity
Luckily for Pakistan a new opportunity in the form of China-Pakistan Economic Corridor (CPEC) has opened up between Balochistan—— which is said to be gifted with mineral riches amounting to trillions of dollars— and Western China—— where industrialization is taking place at an accelerated pace.
The trade quantum that would be passing through between Gwadar port of Balochistan and Xingjian in Western China in the next ten years or so—— is estimated to amount to a trillion dollars annually.
To make the best of this opportunity we need to invest in developing a huge mass of educated and skilled manpower out of the youth bulge with which Pakistan is endowed.
Approximately $28 billion worth of fast-tracked “Early Harvest” projects are to be developed by the end of 2018——— because China wants its shortened global trade routes to start paying without much loss of time.
Avenues of Investment
With extensive roads, railways, ports, and energy infrastructure being laid down, businessmen all around Pakistan would be finding new opportunities worth their money and time.
The Corridor is facilitating enhanced connectivity and power to the otherwise diffracted and energy hungry economic centers of Pakistan.
With many projects being developed on fast-track as part of the Early Harvest Projects, multiple business opportunities across the value chains of industry are set to open up.
Regional connectivity
CPEC and its connectivity with Central Asia, Middle East and Africa will help reshape the entire region. The corridor will transform Pakistan into a regional economic hub. It will be a confidence booster for investors and attract investment not only from China but other parts of the world as well.
Other than transportation infrastructure, the economic corridor will provide Pakistan with telecommunications and energy infrastructure.
China’s Western Region
Pakistan also needs to do some original thinking for economic exploitation of land-locked Western part of China for mutual benefit.
China’s Western region is spread over 71 % of mainland China, but has only about 29% of its population, and generated 20% of its total economic output, as of 2009.
The main components of the strategy chalked out to develop the region include the development of infrastructure —transport, hydropower plants, energy, and telecommunications—, enticement of foreign investment, increased efforts on ecological protection such as reforestation, promotion of education, and retention of talent flowing to richer provinces.
Pakistani entrepreneurs as well as officials responsible for formulating economic policies need to visit at least the immediately adjacent Chinese regions to Gilgit Baltistan and try to meet the game changer at its own game for mutual economic gains.
One cannot rule out the possibility of existence of opportunities tailor-made for exploiting by Pakistani entrepreneurs in these areas.
In the initial years while the CPEC project is being completed and perhaps even at least a decade from the completion Pakistan is likely to undergo a phased transformation from an overwhelmingly import-based economy to a lucrative trans-shipment economy necessitating speedy expansion in the capacities of Pakistan’s ports and drastic reduction in turnaround time at these ports.
Indian ports are said to require an average of 84 hours to turn around a shipment. Busier ports like Hong Kong and Singapore get the job done in seven. At present, it takes more than a week to turn around a shipment in Pakistan.
The country’s ware-housing capacity would also need to be expanded at least by 25 times over the period of completion of the CPEC project.
And with the increase in trans-shipment activity following the completion of the project this capacity would need to be kept expanding continuously dictated by the volume of shipments crossing the country.
Since a lot of raw materials, intermediaries and even durables in knock-down conditions plus finished and semi-finished products would be passing through with Pakistan serving as the hub to and from markets located in the immediate and not-so-immediate vicinities, ample opportunities are expected to open up for local reprocessing along with simple as well as high-end value additions.
The phased transformation of the economy from one based essentially on imports to trans-shipment or ware-house economy is expected to unleash widespread restructuring process with many of the currently viable economic activities becoming unviable and in their place brand new business opportunities would crop up and new entrepreneurs technologically well-versed and sharp enough business-wise would stand to take full advantage of the new opportunities.
In order for the trans-shipment economy to grow seamlessly, and at a faster pace the government of the day would need to realize that it would have to significantly lower the tariff barriers for a smooth and economic flow of goods in and out of the country.
In the beginning, government’s income from trade-related duties would sharply decline in the process but the income from increased volumes of imports, toll taxes as well from GST on value additions in the domestic warehouses would more than make up the losses.
In fact the income from these sources would be many times more than the government would have collected from normal trade-related tariffs and levies in an import-based economy.
Relocation of Chinese units
Justin Yifu Lin, former Chief Economist and Vice President of the World Bank and current Councilor of State Council and Vice Chairman of All-China Federation of Industries and Commerce, while on a recent visit to Pakistan stated that:
“Pakistan has the potential to grow as dynamically as China if Pakistan government were to proactively create conditions to capture the pending relocations of light manufacturing from China and facilitated Chinese firms to enter those industries.”
Professor Justin suggests Pakistan to focus on attracting light manufacturing from China as it moves away from labor intensive to capital intensive industries.
Professor Justin also suggested removing constraints on private companies operating in light or higher value adding industries and if there are no local firms in an industry then the government must lure/attract foreign investment, support private sector innovations and provide tax incentives to pioneer firms.
A couple of Chinese entrepreneurs have already snapped up two major deals— the Karachi Electricity Supply Corporation and 40 per cent of Pakistan Stock Exchange.
Quoting some executives of Pakistan’s biggest firms a foreign news-agency has reported that Chinese companies were looking mainly at the cement, steel, energy and textile sectors, the four which make up the backbone of Pakistan’s $270b economy.
Meanwhile, China’s steel giant Baosteel Group is in talks over a 30-year lease for state-run Pakistan Steel Mills.
Chinese companies have also shown interest in investing in the telecom and auto sectors. More welcome is the fact that the Chinese interest in buying into Pakistani businesses has emerged at a time when the interest of Western investors in Pakistan is on a steep decline.
And it is time as well for Pakistani hosts to be asking themselves, how best and quickly they can learn from the Chinese business practices, their work ethics and the high rates of productivity that the Chinese workers have achieved.