Pakistan Institute of Development Economics


Pakistan can’t reap the benefits of CPEC

Publication Year : 2016
Author: Nasir Iqbal
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The China–Pakistan Economic Corridor (CPEC) is widely considered to be a game changer for both Pakistan and the region. It is a major stimulus for Pakistan, promising rapid economic growth, massive infrastructure development, 700,000 new jobs over the next fifteen years and the creation of special economic zones along the route. But Pakistan may not have developed the required foundations to realise the full benefits.There are three prerequisites to reap the potential benefits of road infrastructure: human capital, local connectivity and a business environment that will attract foreign direct investment (FDI). The current state of these prerequisites is poor in all of the 19 districts through which the route passes.First, the human capital situation in these districts is lagging. The rate of higher education completion is very low in CPEC districts — ranging from 17 per cent in Kohistan to 38 per cent in Khuzdar, compared with 52 per cent nationally. The case is similar with regards to other education indicators, such as the adult literacy rate and the net enrolment rate.Second, local road and transport networks are underdeveloped. Well-functioning rural roads are needed to connect growth-generating sectors in different regions and achieve a wider distribution of economic benefits. They are also a prerequisite to the development of remote and/or environmentally difficult areas. Infrastructure investments in rural areas lead to higher farm and non-farm productivity, employment and incomes.Nationwide around 60 per cent of mouzas (a type of administrative region similar to a village) are less than one kilometre from a sealed road and 67 per cent of mouzas have good transportation links within the same radius. But in CPEC districts, road and transport connectivity is woeful — only 4 per cent and 23 per cent of mouzas in Kohistan, for example, have road and transport connectivity respectively, and the story is similar in other districts.Third, FDI inflows are constrained by a poor business environment. In 2016, Pakistan ranked 138th out of 189 economies in terms of ease of doing business. Even within South Asia, Pakistan ranked 6th out of 8. Indicator-wise data reveals that getting electricity (ranked 157), paying taxes (ranked 171), trading across borders (ranked 169) and enforcing contracts (ranked 151) are the most seriously low-performing indicators.In order to improve upon the indicators, institutional frameworks — such as political stability and an independent legal system — play an imperative role. Unsurprisingly, the quality of institutional frameworks in Pakistan is very poor. Pakistan is in the third percentile for political stability and absence of violence or terrorism, where 0 is the least desirable and 100 the most desirable rank. South Asia as a region ranked in the 33rd percentile, compared with Europe and Central Asia (ECA) which is ranked 64th.In control-of-corruption indicators, Pakistan ranked in the 22nd percentile while South Asia and ECA are in the 39th and 64th percentiles respectively. The situation is similar for rule of law and regulatory quality indicators.To reap the full potential benefits of CPEC, Pakistan needs to improve upon the three prerequisites, in all of which it is currently underperforming. First, Pakistan needs to invest in the developing institutions that require restructuring to improve legal frameworks, to implement rule of law and to ensure political stability.Second, the development of local road and transport systems should be part of the CPEC agenda. Without creating local connectivity, the route may not produce the desired economic growth and employment. Provincial governments should actively plan and develop local roads and transportation networks.Third, development of human capital through formal education and technical training should be streamlined, especially in deprived districts. The government should design area-specific training courses to cater to local needs. For this purpose, an assessment study can be conducted to understand local needs and business opportunities.Without the implementation of an integrated institutional framework, establishment of a local road and transport network or developing area specific human capital, the fruits of CPEC may never materialise.