The economics of CPEC ISHRAT HUSAINUPDATED JAN 03, 2017

IN a country where negativity and cynicism reign supreme, critics and detractors of all kinds are revered, and emotional
outbursts and fabricated stories dominate the air waves and social media, it is difficult to present a dispassionate
analysis of national issues.
Since China announced the China Pakistan Economic Corridor (CPEC), more time and energy has been spent in finding
faults, poking holes and raising doubts based on speculation and conjecture. Had this investment been announced in
another developing country, the national reaction would be: how do we plan to ensure maximisation of benefits to the
economy? What are the weaknesses and deficiencies in the existing set-up we need to overcome? But this type of
thinking is not in our DNA. We are either in a mood for celebration and self-congratulations or outright condemnation
and depiction of exaggerated pitfalls.
There are three types of reservations against CPEC. First, those who believe that this whole endeavour is designed to
benefit Punjab to the neglect of the three smaller provinces. Fanning parochial and ethnic prejudices, doubts are created
about the narrow impact of these projects. Second, that the country would be saddled with costly external loans and
outflows forcing Pakistan to go for another bailout. Frightening numbers such as totals of $110 billion are floating
around. Third, some Baloch youth believe that they would become a minority in their own province. Mistrust and not
perceived economic gains underlies such anxiety.
The government has not helped matters as it has not placed all the data and information about capital structure,
detailed sources of financing, project sponsors etc pertaining to CPEC, in the public domain.
There are three types of reservations against CPEC. How can we address them?
This article, to allay some of the reservations, proposes that the Planning Commission and PIDE use the well-established
framework of cost-benefit analysis to evaluate and monitor the net benefits of CPEC projects. Benefits can be of three
kinds: (a) direct, measured by incremental contribution to gross value added in energy and infrastructure. Assuming
energy elasticity of greater than one, a two per cent growth in energy production and usage would increase GDP by
more than 2pc from the current level (b) indirect, measured by the multiplier effect of activities resulting from the direct
demand of goods and services and (c) induced effects or externalities: eg bringing in roads and electricity may make
some economic activities feasible and reduce outmigration of skilled labour from those areas. Costs can be of four types:
(a) direct costs associated with investment in electricity generation , transmission and distribution or construction of
roads; (b) indirect costs: large scale investment projects create scarcity premiums and domestic prices of some goods
and services are bid up. These premiums get reduced when competition sets in; (c) unavoidable incremental costs: in
the absence of the required amount of domestic supplies of quality and specifications, imports have to make up the
shortfall; and (d) avoidable incremental costs: proper planning, coordination and active management can substitute
high-cost inputs by low-cost inputs keeping quality intact.
Net benefits are thus estimated as the difference between the discounted flow of aggregated benefits and the
discounted flow of all types of costs over the given time horizon. This calculation is not straightforward and is beset with
many conceptual, empirical and measurement difficulties. The most problematic area is the aggregation of easily
quantifiable direct benefits or costs with estimated indirect and induced benefits and costs. The latter are sensitive to
the assumptions on which they are based. Economists, by setting up monitoring experiments, discover new data that
helps in fine-tuning and refining the original estimates. The outcomes therefore depend upon minimisation of avoidable
costs and expansion of induced benefits thus enlarging the quantum of net benefits.
The avoidable costs phenomenon can be illustrated with the help of two examples. If the Chinese managers, skilled and
technical staff continue to be deployed throughout the duration of the project, the unit cost of labour after taking into
account the expatriate wage premium, security, housing and mobility expenses would be relatively much higher
compared to a situation where preponderantly Pakistanis were employed. If the government makes advance plans for
these positions to be transferred to Pakistanis over a staggered period through training, on the job apprenticeship,
attachments and under study assignments supervised by Chinese trainers, cost savings would be substantial and net
benefits much larger. This requires coordination, target setting, monitoring and outsourcing to vocational and technical
training institutes, private providers and the provincial governments.
Similarly, it is guesstimated that at least 100,000 additional trucks would be needed to transport construction materials,
movement of export-import trade and increased volume of goods. If investment in the sub sector is not carried out well
ahead of the CPEC projects peak load demand, the prices of trucking would escalate, putting Pakistani exports at a
competitive disadvantage. The cost matrix of CPEC projects would also move upwards thus increasing the indirect costs.
However, if Pakistani truck manufacturers are provided ballpark figures they can invest in expansion of existing capacity
in tandem with the suppliers of parts and components. Indirect benefits would increase through creation of new jobs in
the industry and efficiency gains from the economies of scale.
On the benefit side, it must be ensured that the most dynamic and enduring benefits from CPEC accrue to the people
living in the deprived districts of Balochistan and southern KP. The opening up and integration of these districts with the
unified national market of goods and services would make their fisheries, mining, livestock, horticulture and other
activities economically feasible, creating incomes and jobs and helping lift them out of poverty. Roads and electricity are
precursors for broad-based development as they minimise post harvest losses, waste and spoilage of perishable
agriculture commodities, reduce the cost of delivery to market towns, and confer purchasing power in the hands of
farmers who then use it to buy consumer goods, generating a second round of economic activities in these districts
By playing a more active role in maximising the benefits to the people of deprived districts and containing avoidable
costs, the government would be able to allay a lot of misapprehensions and doubts.
The writer is a public policy fellow at the Woodrow Wilson Centre, Washington, D.C.
Published in Dawn, January 3rd, 2017

Pakistan and China

Dark corridor Jun 4th 2015
Conflict in Balochistan must be resolved for a trade-corridor between Pakistan and China to bring rewards
DISGUISED in the uniforms of paramilitary police, gunmen checked the ID cards of the passengers of a Karachi-bound
bus before slaughtering all those they considered not native to the western Pakistani province of Balochistan. A total of
22 Pashtuns were killed in the attack on an isolated road south of Balochistans capital, Quetta, on May 29th.
Responsibility was claimed by the United Baloch Army, part of a tangle of separatist groups in the province.
The insurgency began a decade ago and is now the most violent and long-lasting of five rebellions that have broken out
in Pakistans largest, most thinly populated and least developed province since the countrys independence from Britain
in 1947. That makes Balochistan, one of the most troubled areas of Pakistan, a surprising location for what officials hope
will become one of the worlds great trade routes, linking the deepwater port of Gwadar with the city of Kashgar, a
trading hub in the western Chinese region of Xinjiang (see map). During a visit to Pakistan in April by Chinas president,
Xi Jinping, it was announced that China would invest $46 billion by 2030 in new roads, the upgrade of existing ones,
power plants, pipelines and other projects to fulfil this dreamfar more than America has invested in Pakistan in recent
years.
China hopes that the China-Pakistan Economic Corridor (CPEC), as it is called, will enable oil and gas from the Persian
Gulf to be piped through Balochistan, over the Hindu Kush mountains, and into Xinjiang. Chinese goods would have a
much shorter route to world markets than the one through the Malacca Strait, which China frets is at the mercy of
Americas navy.
China has pledged investment before in Pakistan that has not proved as large as promised. This time, Pakistani officials
say that nothing, not even the treacherous topography of the border with China, will be allowed to get in the way.
Recently a tunnel was completed around a lake 14 miles (23km) long that had submerged a section of the Karakoram
Highway traversing the two countries border. The lake was created by a landslide in 2010.
But Balochistans turmoil is a good reason to doubt that Chinese investment will flow in quite the abundance suggested
during Mr Xis trip, at least not into that province. Despite evidence to the contraryan attack by Balochs in January on
the electricity grid knocked out power in 80% of the country, including the capitalofficials dismiss it as a low-level
insurgency run by infighting separatists whose ethnic group barely forms a majority in Balochistan. All will be fine, they
say; thanks, not least, to the help of a 10,000-strong force that Pakistan promised Mr Xi would be set up to protect
Chinese workers.
China, however, still worries. There have been occasional kidnappings and killings of Chinese workers in Pakistan in
recent years, including in Balochistan. In March Baloch separatists attacked tankers carrying fuel to a Chinese company
working on a mining project. Gwadar port, which was recently put under the management of a Chinese state-owned
company, is a particular target. Militants do not want to see it developed unless Balochistan becomes independent.
They fear that if it were ever to become a thriving port, then outsiders would flood in. That could weigh the provinces
demographic balance even further against Balochs.
Pakistans previous attempts at pacifying Balochistan do not inspire confidence. Gung-ho generals intent on brutally
suppressing the insurgency have succeeded only in intensifying it. The army rejects such charges: security in the
province, it says, is in the hands of civilian-controlled police and the paramilitary Frontier Corps. These forces, however,
have close ties with the army and intelligence services.
Since he took office in 2013, Pakistans prime minister, Nawaz Sharif, has tried to encourage Baloch moderates. With his
support, they took control of the provincial government that year and started a dialogue with the rebels. But the new
government has found it difficult to persuade the security forces to curb their excesses. Hasil Bizenjo, a leading Baloch
politician, says that although there has been a hiatus in the killing and dumping of the bodies of suspected militants, the
problem of forced disappearances continues. He believes the army will only support a political dialogue for a few more
months, after which it will fight the militants in a big way.
Some Pakistanis believe the CPEC will help boost Balochistans economy and thus restore stability. If they prove wrong,
much of the trade it generates is likely to skirt most of Balochistan; more of it would flow through less-troubled Punjab.
Baloch politicians believe the Punjabi establishment is hoping for just that outcome.

Pakistans misguided obsession with infrastructure

The government is building more airports, roads and railways, even though the existing ones are underused
Jan 19th 2017| ISLAMABAD
NEARLY 20 years after it opened, Pakistans first motorway still has a desolate feel. There is scant traffic along the 375km
link between Islamabad and Lahore (pictured). Motorists can drive for miles without seeing another vehicle, save
perhaps for traffic cops manning speed traps. As the two cities are already connected by the Grand Trunk Road, which is
90km shorter and toll-free, there is simply not much demand for a motorway.
Yet this $1.2bn white elephant is one of the proudest achievements of Nawaz Sharif, who was prime minister when it
opened in 1997 and is once again running Pakistan. Mr Sharif, who enjoys comparisons to Sher Shah Suri, a 16th-century
ruler who renovated the Grand Trunk Road, never tires of talking about it. He regained power in 2013 with a campaign
which both harked back to his famous road and promised more infrastructure to come. He even pledged bullet trains
that would enable pious passengers to leave Karachi after dawn prayers and arrive in Peshawar, more than 1,000km to
the north, in time for evening worship.
It is an article of faith for Mr Sharif and his party, the Pakistan Muslim League Nawaz (PML-N), that investment in
infrastructure is a foolproof way of boosting the economy. His government is racing to finish umpteen projects before
the next election, due by mid-2018, including a metro line in Lahore and a new airport for Islamabad. The likelihood is
that the new airport (which has been plagued with problems, including runways that have been built too close together)
will be as underused as most of the countrys other airports, many of which are modern and spacious.
Pakistans infrastructure is underused because the economic boom it was meant to trigger has never arrived. Over the
past three years the government has successfully staved off a balance-of-payments crisis, achieving some measure of
macroeconomic stability. It has trimmed the budget deficit, partly by broadening the tax take and partly by cutting
energy subsidies. That, along with lower oil prices, has narrowed Pakistans trade deficit and allowed it to begin
rebuilding its foreign-exchange reserves. The stockmarket has risen by 50% since the end of 2015.
But terrorism and insurgency have put off investors, both foreign and domestic. The country is also held back by
inefficient and often cartelised industries, which have fallen behind rivals in India and Bangladesh. Exports, 60% of which
are textiles, have been shrinking for years. Much more needs to be done to create an educated workforce. Almost half
of all those aged five to 16 are out of school25m children. Health, like education, is woefully underfunded, in part
because successive governments shy away from taxing the wealthy. Only 0.6% of the population pays income tax. As the
World Bank puts it, Pakistans long-term development depends on better nutrition, health and education.
Cement to be
But Mr Sharifs government is pinning its hopes on yet more infrastructure to fix the countrys economic problems, in
the form of a $46bn investment scheme known as the China-Pakistan Economic Corridor (CPEC). Much of it is being
financed on commercial terms, including several power plants. Pakistan undoubtedly needs to relieve a chronic shortage
of electricity. But critics fear the country will struggle to pay back the debt, especially if foreign-exchange earnings from
exports continue to dwindle. At the very least, the government will need to continue chasing deadbeat customers to pay
their bills and cutting expensive subsidiessteps that are deeply unpopular.
In addition to boosting Pakistans power supply, CPEC is supposed to link China by land to Gwadar, a deep-water port on
the Arabian Sea, in the hope of creating a lucrative new trade route. New or upgraded roads will stretch the length of
the country. The Karakoram Highway between the two countries, which was built in the 1960s at vast expense over a
high and crumbly mountain range, is being upgraded as part of the trade corridor. But it forever needs patching up and
is little used. Sceptics say Xinjiang, Chinas westernmost region, is still too poor for better transport links to make much
difference to Pakistans economy. Securing isolated stretches of road from separatist rebels in Balochistan is also
gobbling up large amounts of cash.
Lijian Zhao, a Chinese diplomat, says China is all too aware that Pakistan needs more than just big-ticket infrastructure if
it is to flourish. Disarmingly, he praises the efforts of Britain and other countries to improve Pakistans software, such
as education and the rule of law. But Chinas expertise is hardware, says Mr Zhao.
It may not concern Mr Sharif unduly if the next generation of roads is as deserted as the last. Civilian governments have
often struggled to get much done in between military coups, but voters are impressed by gleaming new projects, even if
they never use them. Its an approach that has worked for Mr Sharifs brother, Shehbaz, the popular chief minister of
Punjab province. He has lavished resources on endless sequences of over- and underpasses to create signal-free traffic
corridors in Lahore, the provincial capital, that are of most benefit to the rich minority who can afford cars.
There are limits, however. Khawaja Saad Rafique, the railways minister, recently admitted to parliament that the
country would not be getting a bullet train after all. When we asked the Chinese about it, they laughed at us, he said.