CPEC, Grid Pin

CPEC 2018 Summit: Reality versus myth

PAKISTAN is facing an era of premature de-industrialisation that is seriously eroding chances of sustainable economic development, including managing Current Account deficit and employment for the future generation. It is a forgone conclusion that trade and fiscal policies adopted by successive government since 1992 have accelerated this process of premature de-industrialisation.

Pakistan’s demographic situation necessarily requires that the country be inherently designed as an export-based country having a substantial industrial base. However, imprudent and short-term policies in the past have turned this country into a trading nation.

There is a view that CPEC will be a ‘trade route’ only which would accelerate the process of de-industrialisation and even if there is some industrialisation that would be similar to export processing zone for Chinese enterprises. This, in addition to other effects, will result in a non-level playing field for Pakistani industrial sector. Both these observations are not based on correct assertions.

In fact, if the plans are implemented in the correct perspective, there will be reverse direction and CPEC may be the tipping point of the reversal of premature de-industrialisation.

POLICY FOR INDUSTRIALISATION AND CPEC

Industrialisation requires a medium to long-term approach in trade, tariff and fiscal policies coupled with an overall plan for import substitution and export promotion. If we study Pakistan’s economic scenario in post-1970 and specially post-1990 periods, we observe that our tariff, trade and fiscal policies were based on short to medium-term objectives.

There is no long-term economic plan that could cater for industrialisation which is essential in this country. If this subject is deeply studied, then it transpires that the lack of industrial planning is not by default but by design. It is so as any long-term policy measure may not be entirely conducive to the guidelines and principles laid down by the WTO.

Every jurisdiction has the right to cater for its industrial and economic priorities within the framework of WTO but Pakistan’s record reflects complete submission to generic measures without catering for realities.

It is heartening to note that some serious indication have been observed in the 2018 Budget in this respect and fiscal corrections have been made to eliminate non-level playing platform in the fiscal structure for trade versus industry. However, unlike the common perception, the detailed road map for industrialisation, using Pakistani raw materials and labour has been laid down in CPEC.

If we study the phasing of CPEC, then it transpires that Chinese economic considerations require shifting of industries based in Eastern China to Western China and places on route to export terminals at Gwadar and Karachi.

It is correct to assume that China’s first priority will be to industrialise its Western side and no extra concession can be sought from China on this subject. Nevertheless, availability of local raw material, such as cotton and other agricultural produce in the areas of Pakistan, will not make it economically feasible to move such raw materials upward to Western China, process there and then export via CPEC.

It will make economic sense to locate the industrial processing units in Pakistan’s geographical territories for onward export via Gwadar and Karachi ports.

If the detailed framework of CPEC, as prepared by the Chinese Government, is studied, then it has adopted the plains of Northern Punjab, Southern Punjab and Northern Sindh and Karachi as hubs for industrial developments.

It is pity that economic plans that should have been done by us has been undertaken by the Chinese while planning CPEC. This summarily exhibits that there are reasonable chances that the process of premature de-industrialisation in Pakistan may stop if CPEC is implemented as per the plan.

The other relevant aspect of this shift of some industry from China to Pakistan is a natural check on the menace of under-invoicing of the imported Chinese products. There is a normal complaint that Chinese products are available in Pakistan due to under-invoicing and fiscal benefits which directly discourages local production of such products.

A clear and apparent example is the import of ‘tiles’ ‘ceramics’ and other such items. Manufacturing of such products in the industrial zones based under CPEC in Pakistan may be an ultimate solution to the factors which are leading to de-industrialisation of Pakistan.

LEVEL PLAYING FIELDS FOR PAKISTANI INDUSTRIALISTS AND INVESTORS

Notwithstanding the aforesaid positive aspects, as described above, there is a fear, which at time appears to be a reality on account of lack of communication, that industrialisation of Pakistan in the manner referred above, will be limited to Chinese enterprises under Special Economic Zones (SEZs) formed under CPEC.

Critics of CPEC, without complete knowledge of facts, state that such SEZs will be (i) limited to Chinese entities and enterprises only, and (ii) would provide non-level playing field to existing Pakistani industrial units for same products located in non-SEZ areas.

It is highly essential that there should be complete clarity on the subject. If the situation is otherwise then the perception and criticism of the other side would emerge as a reality.

My study of papers relevant to CPEC suggests that the documents clearly state that investment in SEZs created under CPEC is not limited to Chinese investors only. Investors and industrialists of Pakistan are equally entitled to own and operate the enterprises in SEZ.

Accordingly, it would be a wrong notion to perceive that this industrialisation will be an attempt at ‘colonisation’ of and ‘deprivation’ for Pakistani enterprises. Nevertheless, it is essential for the relevant quarters and independent analysts to clarify this position and dilute the misperception that are arising on this subject.

The second aspect of this subject is also very important. There should not be any concession or protection in tariff and taxes, which necessarily and compulsorily provide disincentive for the existing units of similar products located in other parts of the country.

For example, if ‘tiles’ ‘auto parts’ etc. are promoted to be located in SEZs, then there should be adequate facilitation for the existing manufacturing units for such products located in other part of the country to provide a level playing field.

The aforesaid comments on CPEC are destined to bring forth the next stage of development of CPEC that essentially relates to ‘industrialisation’ and ‘business-to-business’ relationship. Unless these aspects are properly disseminated by independent business people, the expectation and communication gap cannot be bridged.

In short it can be summarised that:

  • CPEC’s industrialisation plans fills in the gap that has emerged over last four decades in the field of plan for Industrialisation of the country.
  • Location of industrial units in SEZs will promote industries in Pakistan using local raw material which effectively means that value addition previously being undertaken outside Pakistan will be undertaken in Pakistan. This will naturally improve employment opportunities in Pakistan.
  • It is a misperception that SEZs located under CPEC are limited to Chinese enterprises and entities. Pakistani businesses are equally entitled.
  • It needs to be ensured that existing Pakistani industries located outside CPEC SEZs are provided level playing field in relation to CPEC SEZ units.
  • CPEC industrial units, especially for consumer products, will provide an automatic solution relating to tariff issues and pricing issues for imports of such items from China.

There is a need for detailed communication and clarification on this subject.

The writer is Senior Partner, A F Ferguson & Co.

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