Economic integration

Challenges and Opportunities – Analysis – Eurasia Review

By Haroon Sharif *


As the momentum of global economic gravity continues to shift to East Asia, the contours of a new economic and political geography in South Asia are also becoming visible with improved connectivity between West China, the Pakistan and Central Asia. Led by the Belt and Road Initiative of China (BRI), this transition is already influencing the ways of thinking about politics, culture and economic development in the region. Long plagued by internal and geopolitical conflicts, it is also an opportunity to exploit its potential for economic prosperity, stability and human development. These changing times pose a great challenge for leaders in the public and private sectors to step out of their comfort zone and capitalize on new economic opportunities and new models of engagement with new actors. It is relevant to note that like the boom period of the ancient Silk Road, these emerging economic corridors are driven by the dynamics of economic proximity rather than security.

The China-Pakistan Economic Corridor

China’s flagship BRI and the China-Pakistan Strategic Economic Corridor (CPEC) have laid a solid foundation for regional connectivity. The success of CPEC as a transformational investment is essential for China and Pakistan to demonstrate their ability to steer this region towards sustainable growth. Pakistan needs to work on several structural reforms to increase its institutional capacity to maximize the results of the CPEC for the benefit of its large and young workforce.

Thanks to improved power generation infrastructure and transportation connectivity, bilateral trade between China and Pakistan has increased and amounted to US $ 17.49 billion (S $ 23.48 billion ) in 2020. Pakistan recorded an increase of almost 70% of its exports to China in the first quarter of 2021. with 888 million US dollars (1.19 billion Singapore dollars) against 526 million US dollars (706 million Singapore dollars) at the same time last year. The projected potential for two-way trade is between US $ 80 and 100 billion (S $ 105.8 billion and S $ 134.2 billion) by 2030, by which time most of CPEC’s investments will be completed. However, to achieve this goal and have a favorable trade balance, Pakistan will need to increase its per capita income, productivity and the quality of exportable goods to meet international standards.

The challenges of structural change

For Pakistan, three areas of structural reform require urgent attention. First, it will need to strengthen the structure and orientation of its bureaucracy towards a pro-growth system. Second, it is necessary to integrate the role of the private sector in economic diplomacy where geographic proximity plays a central role. Pakistan should also be prepared to let go of inefficient sectors that have thrived on patronage and state protection. Third, investment in regional knowledge networks will be crucial to maintain its key position in new regional markets. Pakistan must benefit from the research and development expertise of China and the rest of Asia and link its universities and think tanks to those of its Asian neighbors.

Sustainability of economic growth

Pakistan’s economic structure and management have not changed much over the past three decades. Its economy grows steadily at five to six percent and then fails to maintain that growth rate due to chronic fiscal and balance of payments imbalances.. The momentum is thus broken, and the emphasis is placed on stabilization through monetary tightening and the compromise of the investments necessary for a period of sustained growth. Pakistan needs to work on a competitive economic value proposition to attract foreign direct investment from China and the rest of the world. With one of emerging Asia’s lowest savings and investment-to-gross domestic product (GDP) ratios, there is a need to create the required fiscal space and investor-friendly policy continuity to double the investment-to-GDP ratio.

Pakistan needs more than 7% sustained growth to reach the level of middle-income countries in the next 10 years. This will create jobs for its large workforce. However, only a competent economic team, supported by all political and institutional power structures, can achieve this.

Geopolitical challenge

The recent rather abrupt withdrawal of the US-led coalition from Afghanistan must be seen in the context of China’s transformational regional transition. With more than 40 years of conflict, Afghanistan remains a major obstacle to stability and shared regional economic prosperity. Its economy is set to plunge after recent capital flight, aid suspension, central bank reserves of US $ 9 billion (S $ 12.08 billion) and the International Monetary Fund’s support program post COVID -19 of 450 million US dollars (604 million Singapore dollars). Almost 90 percent of the population lives below the poverty line of US $ 2 (S $ 2.68) per day, with heavy reliance on basic agriculture as the main source of income for over 50 percent Population.

Stability in Afghanistan is linked to the rapid implementation of connectivity infrastructure projects in Pakistan, Iran and Central Asia. China is investing heavily in the development of its western provinces bordering Pakistan, Tajikistan and the Kyrgyz Republic. Any destabilization in Afghanistan will slow the pace of development in those regions.

Strategic opportunity

Optimistically, in the medium term, Afghanistan’s advantage lies in its central location to connect South and Central Asia to Middle Eastern markets, and its vast mineral resources are estimated to be over 1 Trillion US dollars (1.34 trillion Singaporean dollars). These strategic allocations directly complement China’s ambitions and expertise in regional connectivity to develop an infrastructure to support mining development.

At this point, China, Pakistan and other neighboring countries are in the best position to harness these precious endowments and link Afghanistan to Western China through the CPEC.

* About the author: Mr. Haroon Sharif served as Minister of State and Chairman of the Pakistan Investment Board in 2018-2019. He remained Pakistan’s main representative for industrial cooperation in the China-Pakistan Economic Corridor Joint Cooperation Committee. He can be contacted at [email protected]. The author assumes full responsibility for the facts cited and the opinions expressed in this article.

Source: This article was published by ISAS