'E' in CPEC

The Pak Banker - - 4EDITORIAL - Aadil Nakhoda

THE China-Pak­istan Eco­nomic Cor­ri­dor (CPEC), once com­pleted, will be­come a ma­jor mile­stone in Pak­istan's eco­nomic his­tory. The road net­works that will ex­tend from Gwadar to the Chi­nese bor­der along with sev­eral power projects, and in­fra­struc­ture de­vel­op­ment in­clud­ing ex­port-pro­cess­ing and in­dus­trial zones, will ben­e­fit the econ­omy.

The Chi­nese govern­ment's in­ten­tion is clear. It wants to con­nect the western re­gion of China to one of the clos­est sea­ports, Gwadar, with an ef­fi­cient trans­porta­tion net­work that pro­vides eas­ier ac­cess to a ma­jor sup­plier of oil and other nat­u­ral re­sources nec­es­sary to de­velop its western re­gions. This strat­egy is in ac­cor­dance with the Western De­vel­op­ment Pro­grammes in­tro­duced in the late 1990s to fo­cus on the in­dus­trial de­vel­op­ment of the western re­gions. Gwadar's prox­im­ity to the oil-rich and re­source-in­ten­sive Middle East will let Chi­nese im­porters cir­cum­vent the al­ter­na­tive sea routes that in­volve pas­sage through sev­eral coun­tries in the In­dian Ocean and the ex­ten­sive land trans­port from its sea­ports in east­ern China. It is likely that sev­eral tons of nat­u­ral re­sources and in­dus­trial sup­plies will flow through Pak­istan.

A vi­able in­dus­trial de­vel­op­ment strat­egy is a pre­req­ui­site for eco­nomic growth. It is im­per­a­tive that strate­gies are evolved that in­volve ap­pro­pri­ate in­dus­trial poli­cies as oth­er­wise CPEC will just be a 'tran­sit' route with no added ben­e­fits to Pak­istan other than pro­vid­ing a shorter trans­port link to China and its trad­ing part­ners.

Western China con­trib­utes to ap­prox­i­mately 20pc of eco­nomic ac­tiv­ity and 30pc of the pop­u­la­tion of China. As it is likely that CPEC will be a con­duit pri­mar­ily for Chi­nese im­ports from the Gulf coun­tries (clas­si­fied as Bahrain, Kuwait, Oman, Qatar, Saudi Ara­bia, and the UAE) in the Middle East to western China, we need to an­a­lyse the cur­rent de­mand for Chi­nese.

We can clas­sify im­ports into pri­mary prod­ucts and pro­cessed prod­ucts ac­cord­ing to UN Com­trade's 'broad eco­nomic cat­e­gories'. Pri­mary prod­ucts are likely to have low lev­els of value ad­di­tion and the man­u­fac­tur­ing process has only made a mi­nor con­tri­bu­tion to the prod­uct's value. For in­stance, crude oil is clas­si­fied as a pri­mary prod­uct and pe­tro­leum oil as a pro­cessed prod­uct. In 2014, China im­ported some $88 bil­lion worth of fuel and lu­bri­cant from the Gulf coun­tries of which $76bn was un­pro­cessed pri­mary im­ports. This sug­gests that more than 85pc of the fuel and lu­bri­cants im­ported from the Gulf by China was pro­cessed af­ter be­ing trans­ported to China.

On the other hand, Pak­istan im­ported $13bn of fuel and lu­bri­cants of which $5.6bn were un­pro­cessed pri­mary prod­ucts. Even if China is to im­port 5pc of its to­tal im­ports of un­pro­cessed pri­mary prod­ucts from the Gulf coun­tries through CPEC, it will al­most dou­ble the cur­rent flow of such prod­ucts into Pak­istan. Sim­i­larly, China im­ported ap­prox­i­mately $17bn worth of in­dus­trial sup­plies from the Gulf coun­tries, which is sig­nif­i­cantly greater than $2.4bn im­ported by Pak­istan in 2014. As a ma­jor­ity of the im­ports into China through CPEC are likely to be nat­u­ral re­sources and in­ter­me­di­ary in­dus­trial sup­plies, a fo­cus on the de­vel­op­ment of in­dus­tries that rely on such prod­ucts as their ma­jor in­puts can be de­vel­oped. For in­stance, the in­flow of pri­mary fuel and lu­bri­cant prod­ucts can pro­vide op­por­tuni- ties for pe­tro­leum re­finer­ies, par­tic­u­larly in Balochis­tan. Al­though, there are only a hand­ful of re­finer­ies in Pak­istan, they are lo­cated ei­ther in or near Karachi or in Pun­jab. The in­flow of in­dus­trial sup­plies into Pak­istan, such as petro­chem­i­cal in­ter­me­di­aries, may pro­vide op­por­tu­ni­ties for plas­tic man­u­fac­tur­ers to es­tab­lish busi­nesses along the route.

The govern­ment can ne­go­ti­ate a deal with its Chi­nese coun­ter­parts that pro­motes value ad­di­tion within Pak­istan. For ex­am­ple, ini­tially a small per­cent­age of all pri­mary fuel and lu­bri­cants im­ported into Gwadar by China could be con­verted into pro­cessed goods within Pak­istan and then trans­ported to China. This pro­por­tion can be in­creased over the years. Sim­i­lar poli­cies can be adopted for other in­dus­tries, such as the petro­chem­i­cal in­dus­tries, for which China de­pends upon the im­ports of pri­mary and pro­cessed prod­ucts from the Gulf coun­tries.

It is im­por­tant to men­tion that the free­trade agree­ment be­tween Pak­istan and China in its cur­rent form is un­likely to pro­mote ex­ports from Pak­istan into China. The trade bal­ance is largely tilted to­wards China and this is likely to grow as the Pak­istani trans­porters to China are likely to carry Chi­nese prod­ucts on the re­turn jour­ney. In ad­di­tion, the ex­ports from Pak­istan to China are cur­rently heav­ily con­cen­trated in cot­ton yarn, which con­trib­utes to about 70pc of the ex­ports from Pak­istan to China.

A strong in­dus­trial pol­icy to com­ple­ment CPEC is es­sen­tial, one that pro­motes the de­vel­op­ment of strate­gic in­dus­tries at spe­cific lo­ca­tions within Pak­istan. With­out ap­pro­pri­ate in­dus­trial poli­cies, CPEC may fail to achieve pos­i­tive out­comes for the Pak­istani econ­omy.

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