Bangla Tuesday, April 07, 2020

Making CPEC work - I

At a panel discussion organized by Pathfinder and Martin Dow Group during Davos 2020, Dr Abdul Hafeez Shaikh spoke about understanding the China Pakistan Economic Corridor (CPEC) and making it work. 

He provided the context for CPEC by sharing the “Big Facts” about the economies of China and Pakistan; the current international economic environment; the main features of the Belt and Road Initiative (BRI) and CPEC. Key considerations critical for the initiative to ‘work’ i.e., live up to its fullest promise, were highlighted by him.

China and Pakistan have strong diplomatic, political and military ties. However, economic interaction has been limited. The great economic transformation of China is not reflected in Sino-Pakistan economic relationship. CPEC is an attempt to link the two economies, and, if designed and implemented properly, it can be transformational both for Pakistan, Western China and the region at large.

With a population of about 1.4 billion, China’s current Gross Domestic Product (GDP), is US$12 trillion, second only to the USA (US$19 trillion) and more than the combined GDPs of Japan, Russia, India and Brazil. 

China is the most globally integrated economy because its annual trade surpassesUS$4 trillion. Its Foreign Direct Investment (FDI) stock is US$1.4 trillion. China’s economic rise is due to policies adopted by Deng Xiaoping and his successors since the late 1970s. 

The scale of China’s success can be measured by (1) the average annual growth rate for about 40 years since 1978 has been close to 10%, leading to (2), the lifting of about 800 million people out of poverty. If leadership is measured by the impact on the lives of the most number of people, Deng Xiaoping is unrivalled in the 20th century,” says Dr Abdul Hafeez Shaikh.

According to Pakistan’s Advisor Finance to the Prime Minister, Imran Khan, China faces some real challenges to improve its income per person (GDP per capita)which is currently at capita GDP US$9K, placing China at number 71 in the global rankings, well below Switzerland (US$80K), US (US$60K), Singapore (US$57K), Germany (US$44K), Japan (US $39 K), and also Turkey (US$10K) and Malaysia (US$10K).

China’s strong average performance conceals wide income disparities within the country with some regions (Shanghai, Tianjin, Beijing, Shenzen) doing much better than others. The difference between urban and rural areas is 3:1 and between coastal and inland areas it is 2:1. Ranging between U$20,000 for some versus US$5,000 for others, these regional variations pose a threat to social cohesion and harmony, Dr. Shaikh says.

The Chinese success story includes political and economic stability, smooth transition of power from one set of leaders to the next, and a disciplined and inexpensive labor force. The other leading factors have been China’s capacity to sell its products to others (exports: US$2.3 trillion) and form alliances with international firms to bring hundreds of billions of dollars of investment into the country.

It has a willingness to benefit from trade even with countries with which there are serious disputes as with India, China is India’s biggest trading partner (US$85 billion). Last year alone India’s exports to China increased by 40%.

The Pakistan PM’s Advisor Hafeez Shaikh informs us that Pakistan has a population of 210 million and a current GDP of about US$0.3 trillion. The per capita GDP of US$1,630 puts Pakistan at number 145 globally. Its average historical growth rate is just below 5%.

But Pakistan has been unable – throughout its history – to have a sustained period of high growth in its national income. The ‘growth spurts’ it has experienced have never lasted for more than four years. Dr. Hafiz Shaikh says that a big and continuing failure of all governments – and the business community – has been the inability to integrate the Pakistani economy globally, or even regionally. The country has never excelled at exports or succeeded in convincing others to bring their capital to it. This failure to form alliances and build economic bridges with others is in contrast to the experience of China and other successful emerging economies.

Two other big facts of Pakistani history have shaped – or stunted – the economic trajectory of Pakistan keeping it trapped at a low level of economic attainment. The first fact is that since its independence in 1947, Pakistan has continuously faced war. These include border conflicts, the Kashmir wars, the 1971 War, the Cold War, the Soviet Afghan War, and the so-called "war against terror”. These conflicts have been costly. They skewed public expenditure decisions, and created perceptions about the country which deterred international players from making longer-term commitments to the country’s economy.

Throughout its history, political stability has eluded the country. No elected Prime Minister has completed his or her tenure and the transitions have at times been unruly and costly for the country. It led to the disruption of emerging momentums in the economy.

But the last few years have seen the Constitution being restored. Elections have taken place. The last transition of political power was relatively smooth with freedom of expression on most subjects, Civil Society is a vocal, organizing force. The country’s potential remains large, being abundantly endowed in natural resources like minerals, coal, water, gas and a location at the center of three regions. 

There is hope that CPEC will be a great economic opportunity. With the global GDP around US$75 trillion, the growth rate in 2017 was 3.5 % and the IMF projection for 2018 was 3.9 %. This is relatively good performance across many regions of the world.

But just below the surface, the mood is one of anxiety and concern. Dr. Shaikh says: "There is a fear that the room for manoeuver may be limited". The interest rates are already at a very low point. The Fed target rate is 1.5%, the ECB rate around zero, limiting the effective use of monetary policy.

Given a 1.5 trillion-tax cut, increasing public debt to a dangerously high level, China’s Private Debt is seen to be too high. Some countries are running chronic imbalances. China, Germany and Japan have chronic Current Account surpluses while the US and the UK have chronic Current Account deficits. 

The public rhetoric in the US and parts of Europe is turning hyper-nationalist and protectionist, questioning the global financial architecture. With Britain opting out of the EU, hardliners have gained in the polls in some European countries. Tariffs have been imposed on some items with threats of more. These policies have led to looming trade wars and a downturn in the global economy. Multilateralism and even free trade is being questioned.

The Chinese President Xi Jinping is offering an alternative vision of connectivity, facilitation of trade and integration of markets across regions and continents. His One Belt and Road Initiative (BRI)focuses on connectivity and cooperation between China and Europe/Asia. 

The ‘Belt’ covers the ‘Land’ and the Maritime ‘Road’ covers the ‘Sea’ The land projects include (1) Eurasian Land Bridge (Western China to Western Russia) (2) Railway from Xinjiang to Germany (via Kazakhstan, Russia and Poland) (3) China Mongolia Russia Corridor (Northern China to Eastern Russia) (4) Central and West Asia Corridor (Western China to Turkey) (5) Indo-China Corridor (Southern China to Singapore). Estimates of its overall size range between US $4 and US$8 trillion, covering 68 countries in Asia Pacific, Central and East Europe, with 40% of the world’s GDP.

The Maritime Silk Road fosters connectivity the South China Sea, the South Pacific Ocean and the wider Indian Ocean.

 

(This is the first part of extracts from a talk given over dinner at the Schatzalp Restaurant on Tuesday, Jan 21, 2020 at Davos. The writer is a defense and security analyst).