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REGIONAL CONNECTIVITY

Road to Future Prosperity

Adviser to Prime Minister on Commerce and Investment Razak Dawood has recently revealed that Pakistan’s exports to China, Afghanistan, Iran, Turkey and the Central Asian Republics grew by 35 percent during the first quarter of the current fiscal year as compared to the corresponding period of last year. In his tweet, the adviser said, “The Ministry of Commerce’s focus on Regional Connectivity to increase trade with our neighbours has started showing results as the exports from Pakistan to these countries grew up to $938 million during July-September (2021-22) as compared to the exports of $694 million in July-September 2020-21. He also encouraged exporters to aggressively market their products in regional markets to boost trade. “I encourage our exporters to aggressively market their products in the regional markets to increase their exports,” he said.
This encouraging development has been a result of Pakistan’s focus on promoting regional connectivity to promote peace, harmony, economic progress and prosperity. This huge stride has been achieved in the backdrop a perennial neglect on the part of Pakistan’s policymakers of reaping the dividends of enhancing exports to regional countries.
Importance for Economic Development
Examples of European Union, Southeast Asian and East Asian economies are pertinent in this regard as the EU’s regional trade constituted 65% of the bloc’s international trade while that ratio in East Asia was 35% and in Southeast Asia 25%. But, according to the World Bank data, intra-regional trade accounts for about 1% of South Asia’s gross domestic product (GDP) compared to almost 11% for East Asia and the Pacific. And insofar as Pakistan is concerned, its intra-regional trade declined in the last 10 years as exports to neighbouring countries fell to 7.4% in 2018 from 12.2% in 2011. Similarly, Pakistan’s regional imports dropped to 4.7% in 2018 from 7.4% of its total global purchases in 2011.
This has happened in a backdrop where connectivity is seen as an unchallenged path to maximizing regional economies, and for moving past new systemic threats like climate stress and water deficits. So, in order to grow as economies, regional connectivity is now widely seen as a key intersect on which development in any region should pivot. Since improved regional connectivity leads to growth and development by accelerating countries’ efforts in trade, energy, food and water security, and other areas critical for human development, Pakistan too has realized that connectivity is among the most important trends of the 21st century, and the current government has rightly prioritized working in this domain as, given its prime strategic location, Pakistan can potentially bring together several countries in Eurasia and beyond, in a new age that is characterized by win-win outcomes instead of zero-sum returns.
Current government’s policy
Prime Minister Imran Khan is vigorously pursuing regional connectivity initiatives, whether it be under China-Pakistan Economic Corridor (CPEC) or Uzbekistan-proposed Central and South Asia connectivity plan to gain access to the Central Asian markets in return for Central Asia’s access to Pakistani ports at Gwadar, Bin Qasim and Karachi for trade of goods and export of energy.
A new concept of ‘security’
Traditionally, Pakistan’s ‘national security’ doctrine has been focused around the development of conventional and nuclear firepower. This (old) doctrine is fast becoming obsolete, in a world where conventional battles have been replaced by the elusive notion of a hybrid war. Iran has not been attacked through wars; it was ‘attacked’ through economic embargo and international isolation. A conventional (external) war did not weaken Pakistan over the past two decades; proxy fighters and economic sanctions (e.g. FATF) did. A war did not cripple India over the past year; collapse of healthcare infrastructure and infighting did. A war did not win China its power in the region; economic power and regional connectivity did.
Learning from these and other lessons, a more nuanced idea of security — spanning economic progress, technological advancement, regional connectivity, knowledge entrenchment and political stability — is now developing within the policy theatres of Pakistan. A clear and unequivocal articulation of this new understanding of national security came in the recent “Islamabad Security Dialogue,” held in Islamabad, in which the Army Chief explained that “the contemporary concept of national security is not only about protecting a country from internal and external threats but also providing a conducive environment in which aspirations of human security, national progress and development could be realised.” This new concept of security “is not solely a function of armed forces anymore. National Security in the age of globalisation, information and connectivity has now become an all-encompassing notion; wherein, besides various elements of national power, global and regional environments also play a profound role. National security is thus multi-layered: outer layers being the exogenous factors of the global and regional environment and inner layers being the endogenous factors of internal peace, stability and developmental orientation.”
Now, Pakistan’s strategy is based on a ‘geo-economic’ vision, centred around four core pillars: 1) striving for peace within and outside of Pakistan; 2) abandoning military interference in the internal affairs of regional countries; 3) boosting intra-regional connectivity; and 4) promoting intra-regional trade relationships.
Role of CPEC
Geo-economics has increasingly started playing a much bigger role than the traditional geo-politics in international arena. Even the world powers have started giving more space to geo-economic interests in their foreign policies than anything else. Trade, investment and economy-based knowledge are shaping national interests as well as global trends. Booming and ever-expanding private stakeholders have become more influential and have pushed the states to think beyond politics and work for economic interests.
In this global context, Pakistan has launched ‘Economic Outreach Initiative’ and has undertaken a paradigm transformation in its foreign policy, moving from geo-politics-dominated to geo-economics-dominated foreign policy. The idea of this transformation is to explore and connect the economic potentials of Pakistan with the rest of the world. Pakistan, while being situated at the crossroads of Central Asia, Middle East and South Asia, offers very unique opportunities for trade, investment, tourism, education, logistics, etc. Recognizing this massively-untapped economic potential, China has invested billions of dollars in Pakistan in the form of China-Pakistan Economic Corridor (CPEC), major component of China’s One Belt, One Road Project (OBOR). CPEC is meant to increase the regional connectivity between Asia and Europe to widen commercial avenues. It includes mega projects in different sectors; roads, railways, energy, agriculture, water, industrial infrastructure, etc. In addition, China is encouraging many of its businesses to have manufacturing operations in the Special Economic Zones (SEZs) being constructed across Pakistan under CPEC. Regional political developments are further aiding the economic environment, especially after the end of war in Afghanistan and a more sustainable indigenous government coming to power in Afghanistan. China and interim Afghan government are also planning to extend CPEC into Afghanistan, which will facilitate and enhance the connectivity up to Central Asian Republics (CARs), thus further enhancing the economic potential of the region as a whole.
It is relevant to update that Pakistan is an origin of Foreign Direct Investment (FDI) from Europe, USA, the Gulf, East Asia, etc. The CPEC has accelerated the FDI attraction. Pakistan’s export destinations and import origins are across the globe; it is one of the world’s leading destinations for adventurous mountaineering tourism too. Its information and communication technology sector is on the boom. Having signed free trade agreements (FTA) with China, Sri Lanka and Malaysia, Pakistan has become relatively bigger market. The unilateral trade concessions granted by the EU, in the form of GSP+ status further expand the market outreach of Pakistan. Its own local market, of over 220 million people, is good enough to satiate any business ventures. The cumulative effect of these factors is attracting international economic players to consider Pakistan as an option of businesses/investment in future. Avenues for bilateral and plurilateral interactions are increasing. Middle East countries can also benefit from multilateral forums of this positively ever-changing situation, particularly from trade, investment and services perspectives.
The regions adjacent to Pakistan – South Asia, Central Asia and West Asia – are among the least economically integrated in the world, in terms of trade, investment, finance, infrastructure, regional value chains, labour mobility and social integration. Therefore, unlocking the potential for such regional integration, within and between these regions, would provide a significant impetus to economic growth, productivity and prosperity. Pakistan is located at the center of these three regions and has the most to gain from their internal integration and their connection to each other, and beyond to other regions: Europe, Asia and Africa. This is the basic premise and promise of the concept of “geo-economics” propagated by the Government of Pakistan.
Trade links between Pakistan and the Gulf countries are fairly robust and would be expanded with Gwadar’s use for oil and petroleum exports via pipelines to China, which is part of the CPEC vision. The overland projects through Iran – in particular the Iran-Pakistan (IP) gas pipeline and upgraded rail connection extending to Turkey – could also be implemented once the sanctions against Iran imposed by certain powers are lifted, and commercial financing becomes available.
The need for structural reforms
For Pakistan, three areas of structural reforms need urgent attention for managing this extraordinary transition.
First, Pakistan will have to strengthen the structure and orientation of its bureaucracy towards a pro-growth system. The existing system has little understanding of the already changed, and continuously evolving, global economic landscape. For instance, several countries have taken progressive steps in this direction, by merging trade and foreign policy objectives.
Second, there is a need to mainstream the role of private sector in the new economic diplomacy where geographical proximity will have a central role. The country should be willing to let go of the inefficient sectors which have flourished on patronage and state protection. Pakistan’s competiveness has nosedived over the past couple of decades, when compared with its peers. The old school of import substitution and protection to local industrial base has stagnated the growth potential, as such firms will never be able to compete with emerging Asia. If a level playing policy environment is created, the private sector can enhance productivity and ensure job creation by being part of regional value chains.
Third, investment in regional knowledge networks will be crucial to sustain Pakistan’s key position in the new regional markets. Pakistan must benefit from China’s phenomenal research and development expertise in all spheres, and link up its universities and think tanks with south and west Asian neighbours. It is the exchange of skilled youth which will generate ideas and strengthen regional integration for shared growth and stability.
With improvements in connectivity infrastructure, bilateral trade between China and Pakistan is growing and stood at USD17.49 billion in 2020. Pakistan recorded nearly 70 percent increase in exports to China in the first quarter of 2021, with USD888 million as compared to USD526 million in the same period. The overall exports to China in the financial year 2020-21 increased to USD2.33 billion from USD1.74 billion in the last year. The projected potential of bilateral trade between the two countries is USD100 billion.
However, in order to realize this goal, Pakistan will have to increase its per capita income, productivity and quality of exportable goods to meet international standards. Human resource development will play the most crucial role if real benefits of regional connectivity are to be realized with a visible impact on the lives of the poor. The current structure of skills-training will have to be shifted from efficiency-based, to knowledge-based skills, to reap benefits of the fourth industrial revolution.
Role of Afghanistan
Pakistan and Afghanistan serve as a bridge between South Asian and Central Asian countries, considering the geographical locations and political histories. Therefore, promoting regional connectivity in the South Asian-Central Asian region contains the potential of advancing economic development and peace in the entire region.
A peaceful, stable, sovereign and prosperous Afghanistan is fundamental to the success of Pakistan’s multipronged initiative for fostering socio-economic connectivity and cooperation in the greater Southwest and Central Asian region. For long-term regional stability and prosperity, Pakistan has proactively adopted a regional approach and framework for post-conflict Afghanistan and the greater Southwest and Central Asian region. It is because stability in Afghanistan is directly linked to timely implementation of connectivity infrastructure projects in Pakistan, Iran and Central Asia. China is heavily investing in development of its western provinces which border with Pakistan, Tajikistan and Kyrgyz Republic. Any destabilization in Afghanistan will slow down the pace of planned development in these regions.
Hence, looking at an optimistic medium-term outlook, Afghanistan’s comparative advantage is vested in its central location to connect South and Central Asia to the markets in the Middle East, as its vast mineral resources estimated over one trillion dollars. Both these strategic endowments directly complement China’s regional connectivity ambitions and expertise to develop supporting infrastructure for mineral development.
At this point, China, Pakistan and other neighbouring countries are best positioned to exploit these precious endowments and link Afghanistan with western China through CPEC. The other low-hanging fruits for China’s infrastructure development include building of roads and power sector development. The war-torn nation imports 70 percent of electricity from neighbouring countries. Investments in these sectors will not only create jobs for Afghan youth but will also increase people’s confidence in the benefits of regional connectivity as an instrument of economic development and future diplomatic partnerships.
Conclusion
For Pakistan, regional connectivity will generate additional economic growth and welfare gains, with their attendant benefits for domestic stability. In addition, the country stands to make tremendous political and security-related gains as regional integration gives hitherto competitive regional actors genuine stakes in Pakistan’s security. Moreover, active pursuit of regional connectivity as a policy priority will also help ease security pressures on Pakistan. On the other hand, normalized interstate relations and mutual economic dependencies should generate incentives for meaningful collaboration on mutually beneficial economic investment. Moreover, a move in this direction will begin to change Pakistan’s acutely negative global narrative that Pakistan is responsible for holding out on economic integration, and in turn, undermining people’s welfare in South Asia. This change is crucial, not only to improve Pakistan’s international standing, but also because the negative perception has cost Pakistan dearly in terms of being able to generate global investor interest in the country.
The writer is a member of staff.