BoI’s
reservations
Yes, the Board
of Investment (BoI) did have its disagreements and reservations on China’s
approach to industrial cooperation, but that’s water under the bridge after
Prime Minister (PM) Imran Khan’s successful visit to Pakistan’s all-weather
friend. This visit has injected a much-needed dose of clarity into various
facets of ongoing economic cooperation that Beijing has been extending to
Islamabad. A Business Recorder news
report of November 3, 2018, had brought under sharper focus BoI’s “serious”
reservations that it had expressed vis-à-vis China’s purportedly backing out of
commitments on proposed industrial cooperation. The report had appeared at a
time when PM Imran Khan was still in China receiving assurances from Chinese
leaders from President Xi Jinping downwards of help for what the PM has
described as a ‘very difficult’ economy. BoI’s draft framework is to have focused
on promoting Pakistan’s industrial competitiveness through transfer of
technology and market access. However, the proposed Memorandum of Understanding
(MoU) for industrial cooperation by the Chinese side focuses on domestic demand
in the Pakistani market. BoI is not opposed to relocation of industries from
China to Pakistan. On the contrary, it is in the process of devising an
additional incentives package for relocation of industries from abroad, and
this point was given significant importance in the BoI’s framework agreement. However,
the relocation aspect is conspicuous by its absence from the Chinese MoU
(implying reliance on more imports from China to meet domestic demand). The
BoI’s framework agreement was devised to bring more industrial sectors into the
scope of industrial cooperation under the China Pakistan Economic Corridor
(CPEC). The Chinese MoU however only supports cooperation in their preferred
areas, i.e. iron, steel, textiles, petrochemicals, mines and minerals. A
significant exclusion was that of agriculture and other industrial sectors
agreed to in the long-term plan. A financing mechanism for specific projects
was also proposed to achieve the goal of increased investment from China for
improved industrial competitiveness of Pakistan, but has failed to find even
mention in the Chinese MoU. As any student of economics and finance knows by
now, Pakistan has a huge trade deficit with China, which the BoI sought to
address through enhanced bilateral trade to narrow the trade gap. But this too
has been excluded by the Chinese side. Nor does the Chinese MoU mention the
proposed mechanism for cooperation in the agreed priority sectors. The
framework agreement proposes enhancing Pakistan’s industrial competitiveness
through not only technology transfer, higher degree of access to the huge
Chinese market, but also skill development and labour productivity. But the
Chinese thrust seems more focused on meeting Pakistan’s domestic market demand,
exploration of the international market through industrial cooperation based on
various Special Economic Zones (SEZs), attracting investment from world
companies and promoting industry concentration in Pakistan. While the Chinese
MoU does mention skill development and labour productivity, these aspects have
been missing from the experience of Chinese entities’ entry into Pakistan so
far. Most if not all Chinese entities working in Pakistan overwhelmingly bring
their own workforce to projects in Pakistan, with hardly any employment for
local labour, let alone skill enhancement.
Perhaps one of
the main reasons for these divergences to have emerged in the policy framework
and implementation process of CPEC is the fact that since this massive project
began, the bulk if not almost all Chinese entities entering the Pakistani
economic firmament have not been state-owned but rather private companies, a
phenomenon that has surged since China embraced capitalism some three and a
half decades ago. Whereas state-owned enterprises function under the strict
discipline of the Chinese Communist Party that sees Pakistan as an all-weather
friend, the mushrooming private companies bring to the table a rougher culture
of self-interest than Chinese state-owned entities and even private companies
from round the globe. Our economic policymakers in particular must not lose
sight of the fact that only a few CPEC projects enjoy Chinese government’s
lending against which the government of Pakistan has pledged sovereign
guarantees. The recently-concluded visit of PM Imran Khan has underscored the
need for the relevant ministry to instruct BoI to draft more carefully the
contracts we sign with Chinese private companies so that the aspects discussed
as missing from the Chinese proposals are addressed and clauses added where
necessary to ensure cast-iron guarantees of performance, terms and conditions
so that various complaints that have emerged so far of Chinese private
companies not adhering to these can also be overcome. Niggling complaints
regarding Chinese private companies’ performance in Pakistan should not however
distract from the strategic criticality of Chinese investment in our economy,
not exactly a destination of first choice for global capital.
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