THE China-Pakistan Economic Corridor (CPEC) project is a win-win proposition for both countries. It can create ‘Double Happiness’ (Chairman Mao’s favourite cigarette brand).

For Pakistan, CPEC promises the installation of the basic infrastructure essential for rapid growth. It would replicate a development model that enabled China to achieve double-digit growth for almost four decades.

CPEC is also important for China. It is the first stage of President Xi Jinping’s Belt and Road initiative designed to establish closer land and maritime links with 65 Eurasian countries. CPEC will help stabilise ‘Iron Brother’ Pakistan economically, counter terrorism, provide China an alternative, shorter route to markets and energy sources in the Gulf, west Asia and beyond, and enable the efficient utilisation of some of China’s financial reserves and excess manufacturing capacity.

Western criticism of the CPEC project smacks of sour grapes. Yet Pakistanis would do well to not be misled by motivated critiques.
Pakistanis would do well to not be misled by motivated critiques.

Prior to the CPEC launch, foreign investment in Pakistan was virtually frozen. The CPEC commitment and financial flows have helped accelerate Pakistan’s GDP growth rate from 3.7 to around five per cent; its stock market is the best-performing in Asia; it has been reclassified as an emerging rather than frontier market; and Western companies are now open to investing here.

All commercial enterprises seek to earn a profit. Chinese companies also operate on market principles. China’s authorities have allowed their companies to compete for various projects and thus enabled Pakistani counterparts, if they wish, to negotiate Chinese participation (in equipment supply and construction) at the best market prices. If monopoly control and price gouging have occurred, for example, in some power projects, it has mostly been due to the collusion of Pakistani entities and, in some cases, of Western equipment suppliers.

Pakistan’s infrastructure cannot be built without capital imports. Chinese loans for government projects are provided on concessional terms. The proportional burden for their repayment will decline as Pakistan’s economy grows. For commercial projects, Chinese partners arrange loans at around 5 to 6pc with extended repayment periods. These terms are unavailable elsewhere. (Pakistan has floated sovereign bonds in Western markets at 8pc.) Increasingly, Chinese companies are also willing to put equity into commercial projects and thus assume a part of the risk.
Commercial loans are expected to be paid back from anticipated profits. A part of the debt is likely to be off-loaded through share sales in public markets.

The UN-sponsored World Happiness Report 2017 ranks China at 79, Pakistan at 80 and India 122 among 155 countries. A Forbes magazine analysis attributed the Pakistani population’s significantly higher ‘happiness’ than India’s to two factors: greater economic freedom and larger government expenditures. Such expenditures have been made possible mostly by the CPEC project.

Pakistani ‘happiness’ can be further enhanced if the country can efficiently execute the CPEC infrastructure projects and extend these investments to social infrastructure and the real economy. So far, despite glitches, CPEC implementation is proceeding well. But Pakistan must address three major issues.

First, there is the provision of adequate security for CPEC projects, threatened as they are by Indian-sponsored terrorism and sabotage. India has reportedly told China that it will never accept CPEC.

Second, equitable allocation of CPEC projects and investment to the smaller provinces is essential to ensure national support. Hopefully, CPEC will not be allowed to become an issue in the forthcoming national elections.

Third, there is a need for policy consistency. Sudden changes in some policies — no new power plants based on imported fuel, shifts in power tariffs, tax incentives and rates — are evidently the consequence of tensions between some of Pakistan’s power players. Such arbitrary policy shifts create uncertainty.

Beyond the current CPEC projects, there is need for an increasing focus on social infrastructure: clean drinking water, healthcare, waste management, urban transportation and education. Many Chinese companies are keen to participate in such projects, which can best be implemented through public-private partnerships with the federal, provincial and local governments.

The real fruit of the CPEC enterprise will come from investments in the sectors that are the real generators of production, employment and growth: industrial manufacturing, agriculture and agro-industries, consumer goods, and housing and related supply chains and services, including their digital component. Such investment promises high returns. Here too, Chinese companies are prepared to invest significant amounts in viable ventures.

To encourage such investment, it is essential to actively promote more frequent and intensive exchanges between Pakistani and Chinese economic actors and companies, especially the smaller companies that are totally unfamiliar with each other. Sporadic efforts have been made, yet no organised mechanism is available.

Investments in infrastructure and the growth sectors in Pakistan are constrained by the paucity of local finance. The government is poor because of inadequate and inefficient tax collection and wasteful expenditures on loss-making state corporations and populist subsidies. Bold policy action is essential. In the private sector, apart from a few family conglomerates, Pakistani enterprises do not possess the capacity to put up the initial equity even for sound projects. Most cannot finance the preparation of bankable feasibility studies. Yet, it is these smaller enterprises that can generate the most jobs. Local banks and financial institutions, including the dormant China-Pakistan Development Company, should be incentivised to provide start-up finance to smaller enterprises. Locally and externally generated Private Equity Funds can also play a vital role in bridging the domestic financial shortfall.

Finally, to take full advantage of domestic demand-led growth, Pakistan must formulate a long-term Pakistan-First trade and industrial policy. Most of Pakistan’s Free Trade Agreements (FTAs) have been concluded on the presumption that it can expand exports if it has trade access. Yet, history proves that unless a country has the capacity to produce goods, it cannot export them even if it has access. To build domestic manufacturing capacity, Pakistan must selectively discourage imports of goods it can produce. Once competitive, such products can add to exports. To implement this policy, Pakistan’s FTAs and World Trade Organisation tariff schedules and commitments must be comprehensively revised, and the illegal smuggling of dumped goods from Afghanistan and elsewhere effectively halted.

The road to double happiness is clear and visible. Pakistan and China must not be diverted.