Talking to the Tiger
Increasing trade ties with South Korea, a formidable economic power, could open many new windows for Pakistan.
Pakistan’s brewing Free Trade Agreement (FTA) with South Korea is an opportunity beyond the simple import and export of goods. It is an opportunity to embrace the story of an underdog that becomes an economic tiger. We know that South Korea is a modern marvel, but few understand the hardships of its journey. In 1960, the South Koreans made an average of $79 per year, a figure low even by third world standards. Fast forward to 2013, and South Korea’s per capita income is close to $26,000. For perspective, Pakistan’s figure is a paltry $1,513. In 1960, South Korea and Pakistan could be considered economic equals. Now, they are worlds apart.
South Korea’s iconic President Park Chung-hee had a simple message for his people. He repeated “We must not pass this poverty to the next generation.” This idea remained the bedrock of South Korea’s economic engine for over three decades. President Park learned early that foreign aid could not save South Korea. For him, the only path towards growth was a strong infrastructure built upon highways, factories and refineries. From 1961 to 1989, the South Korean economy grew at an average of eight percent per annum. This startling drive was made possible by a combination of strict fiscal focus and visionary leadership. Pakistan, right now, could use both.
On July 8, Pakistan and South Korea agreed to a fact-finding pre-FTA study. In a year’s time, this study will frame the specifics of the actual agreement. At the Joint Trade Committee’s (JTC) first meeting in Seoul, Pakistan’s Commerce Minister Khurram Dastgir and South Korea’s Minister of Trade Yoon Sangjick signed the study. The roots of this FTA lie in former South Korean Prime Minister Chung Hong-won’s 2014 trip to Pakistan. Along with MOUs on trade and energy, Pakistani P.M Nawaz Sharif proposed an FTA to further bilateral ties. His counterpart agreed, and the JTC was formed to make this happen.
Pakistan already has FTA’s with Sri Lanka and Malaysia, and trade deals with Turkey and Thailand are in progress. It is a given that exports and Foreign Direct Investment (FDI) drive economic growth. Unfortunately, Pakistan’s role in the global War on Terror has sapped its industry of vigor, and created a huge infrastructure gap. The State Bank of Pakistan (SBP) reported in March that Pakistan needs to invest ten percent of its GDP until 2020 to close the Rs.298 billion deficit. However, crippling circular debt and austerity measures imposed by the International Monetary Fund (IMF) make this a tough ask without foreign help.
Despite 11,000 Pakistanis living in the country, South Korea’s trade with Pakistan never really took off. In 2014,
the figure stood at $1.17 billion, down almost 27 percent from two years before. These are poor returns, especially since South Korea’s global trade now towers over $1.1 trillion. Dr. Song Jong-hwan, South Korea’s ambassador to Pakistan, suggests distance and security issues have played a role. At $140 million, South Korea’s FDI figure for Pakistan is similarly dismal. In contrast, India is home to $2.75 billion in South Korean capital. There are also 615 South Korean companies working in India compared to Pakistan’s 32. Both countries hope the FTA will turn these stats around.
South Korea’s interest in Pakistan is not new. Half a century ago, in the “Golden Sixties,” President Park was fascinated with General Ayub Khan’s economic program. Reportedly, he tried to copy Ayub’s second “Five-year Plan” for South Korea. However, by the 1980s, South Korea had become a manufacturing powerhouse, while Pakistan was a frontline state in the Cold War. It took Chinese President XI Jinping, and his New Silk Road dream, to remind South Korea of Pakistan’s value. China’s “One Belt, One Road” project aims to revive the ancient trading routes connecting Eurasia, and Pakistan will be a crucial partner in the process.
Like China, tech-savvy South Korea wants cheap access to resource-rich Central Asia. It has also realized that trade partnerships are paramount to sustain growth. In June, China and South Korea signed an FTA that President Jinping called a “monumental event.” Even in fluid financial times, South Korea expects to add one percent to its GDP over ten years, thanks to the sheer scale of trade. For China, this was partone of a grander, trilateral agreement involving Japan. Meanwhile, the South Korean FTA slots neatly into Pakistan’s “Look east” policy for economic revival. Any partnerships that enable the CPEC will make its economy more robust.
There are also specific exports that the FTA will help with. Zakaria Usman, former president of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), outlined these on a trade trip to Seoul in August 2014. He said then, “We need to lower tariffs on Pakistani mangoes. There are many tariffs on Pakistani fruits and vegetables that give us a disadvantage, compared to other countries like India.” Another key talking point was salt used for industry and deicing roads. Pakistan provides only five percent of South Korea’s requirement right now, but this figure could jump to 40 percent with an FTA.
At last year’s summit in Islamabad, Nawaz Sharif highlighted the energy sector as most ripe for South Korean investment. New hydropower projects (HPPs) shepherded by South Korean companies are already underway. The 84 MW New Bong HPP came online in 2013, while the Patrind and Gulpur HPP’s are nearing completion. Agrotechnology is another avenue for cooperation. Pakistan is an agrarian economy, and South Korea has proven expertise in smart farming. In the 1970s, its state-sponsored “Green Revolution” gave the country food security through research on new rice varieties called “tongil.” The Korea Project on International Agriculture (KOPIA) has since helped many poor countries in Africa and Asia reap higher crop yields.
Ironically, Pakistan’s war-ravaged economy has an unforeseen positive for regional investors like South Korea. At $118 per worker, Pakistan has the lowest cost of labor for countries with acceptable infrastructure and skills. The rupee’s devaluation as a result of IMF diktats has also raised Pakistan’s attractiveness. For the last two decades, China has been the go-to country for cheap manufacturing, but that is changing. Its minimum wage grew by almost 17 percent in 2014, to the new high of $500. With further hikes expected in the following years, a fair number of foreign companies are planning to leave China.
China’s proclivity to co-opt investor technology has also become a problem for countries like South Korea. To date, six of its top export sectors have been overtaken by China in this fashion. In the smartphone business, for example, Huawei and Lenovo have now pipped the combined market share of star South Korean brands Samsung and LG. If the security situation improves, Pakistan, along with the Philippines and Thailand, could become new hotspots for foreign firms fleeing China.
With Pakistan’s ascension to the Shanghai Cooperation Organization (SCO), its case as the “Central Asian connection” for East Asia is strengthened. Pakistan’s Gwadar port will be the maritime gateway linking to China’s new Silk Road through the CPEC. Sartaj Aziz, the country’s national security advisor, believes Asia is moving “from geo-strategy to geo-economics.” In such times, the Pak- South Korea FTA will be a blessing. Pakistan needs intercontinental connectivity not just for trade, but also to shake off its image as a jihadist beehive. The writer is a freelance columnist and audio engineer.