Monday, 22 February 2016

Who Benefits from CPEC?

by Asad Sayeed

Photo credit: Wikipedia/mandarineveryday

The China Pakistan Economic Corridor (henceforth CPEC) has evoked mixed emotions in the country. On the one hand, the Federal Government and the private sector (especially some businessmen and bankers) have called CPEC a ‘game changer’ in the fortunes of Pakistan’s economy and on the other hand, provincial elites – particularly of Balochistan and Khyber Pakhtunkhwa (KP) – are apprehensive that their provinces will not get the fair share of benefits that will accrue from CPEC. The debate on CPEC thus is polarized around the issue of horizontal inequality that it is expected to generate.

There is however no debate on the actual nature of benefits that are expected to accrue to the economy at large and the larger distributional issues that it may create. Such a debate will potentially sharpen the discourse on both the growth potential of CPEC as well as its distributional consequences in their entirety.

One reason for the controversy about CPEC is the mystery that shrouds the project. All that is known thus far is that China is going to provide US $ 46 Billion over an unspecified period of time for all manner of projects, both infrastructural and industrial in nature. First, we were told that CPEC will provide road connectivity across Pakistan. When it transpired that apart from certain patches, Pakistan is quite well roaded and at best additional lanes may be required to add to the volume that the transit corridor will require. We were then told that it is not roads only but there will be economic zones established along the corridor. Thus, CPEC is going to usher in a new era of industrialization in the country. When it was pointed out that Pakistan is severely energy deficient and it is not even meeting the electricity and gas needs of existing industry, we were told that much of CPEC is actually about plugging the energy bottlenecks that Pakistan is plagued with. However, we also know now that Pakistan’s electricity problem is not about capacity but a wrongly structured and under-invested distribution and transmission system. Gas is in short supply but China is itself gas deficient and can scarcely help Pakistan on that front.

What we do know, however, is that the Chinese commitment is real and that there is going to be investment coming into Pakistan. While there is confusion on the Pakistani side as to the actual purpose of investment and its allocation across activities, such a large dose of foreign exchange is considered good for the economy, just as foreign investment from anywhere is good for the economy. If this is the case, then CPEC should be evaluated on the criteria that Foreign Direct Investment (FDI) from anywhere in the world should be evaluated.

The literature on FDI suggests there are two major benefits that are expected to accrue to developing economies through FDI. The first is that capital rich and labour scarce countries move their capital to capital scarce and labour rich countries. As a result, rates of return on both capital and labour increase in their respective countries. Now China has become capital rich in the recent past but continues to be a labour rich country also and in no small measure. It is thus no wonder that wherever China takes its capital, it takes its labour also, be it Africa or South and South East Asia. So Chinese investments will create few linkages so far as gainful employment for Pakistanis is concerned. It can still be argued that infrastructure created by CPEC will have second round benefits. This will depend entirely on how much of this investment will come into infrastructure and how much will be allocated to private industrial projects. A few roads (and road extensions) and a few power plants just do not evoke the ‘game changing’ impact of infrastructure development that CPEC is billed to deliver.

The second positive impact of FDI is that it transfers technology and knowhow from developed to developing countries. Now China may be known globally for its ability to produce goods cheaper than others but it is not necessarily at the cutting edge of innovation or scientific development. While some benefits may accrue on this front, they are again not of a ‘game changing’ nature.

So far we do not know whether industrial investments will come in the shape of loans or equity investment by Chinese companies under-written by the Chinese Ex-IM bank. In either case, these investments will strain Pakistan’s balance of payments situation in the medium to long term as loans will have to be repaid and/or profits will be repatriated. Given Pakistan’s intimate security relationship with China, it is unlikely that the Pakistani government will have too many degrees of freedom in drafting contracts which safeguard Pakistani interests.

So what is the excitement all about? It is not as if a little bit of straight forward economic logic would not bring serious observers to similar conclusions. It appears that there are a number of short term benefits coming through for certain groups. The present government will get some kudos for having brought in foreign investment in the short run, businessmen will become junior partners in industrial investment that Chinese businesses will make and the bankers will find an avenue to lend to local businesses investing in Chinese projects. Pakistan’s perennial problem of lack of gainful employment opportunities in a youth bulge population, a crumbling energy infrastructure and a cyclical pattern of external account vulnerability, however, will not be resolved. In addition, CPEC is likely to further exacerbate vertical inequality as virtually all benefits accruing from this investment will be going to the rich.

While the issue of horizontal inequalities that may emanate from CPEC have been rightly raised, there is need for collective action to raise the issue of vertical inequalities also. Any takers for that?