May 29 ,2015
China Invests in Pakistan
In a major economic development for Pakistan, the Chinese government has committed to a major 46 billion dollar investment in Pakistan’s economy over the next six years. This amounts to over 7 billion dollars per year of foreign investment from China alone, which dwarfs anything Pakistan has received from other countries. In the past, even 1-2 billion dollars in a year was typical for Pakistan. The Chinese investment also makes the 1.5 billion dollars in aid from the US that Pakistan currently gets much less significant.
The key aspect to this investment is that it is not foreign aid being given to the government, which often gets wasted or mismanaged. Instead, it is to consist of major industrial and infrastructure projects that China will build in Pakistan in order to boost the overall growth of the economy.
The biggest chunk of investment will be in the power sector, both fossil fuel plants and renewable energy such as wind and solar. The national grid will add 10 gigawatts in capacity by 2017 and another six gigawatts by 2021, essentially doubling Pakistan’s electricity production capacity. For the last seven years, Pakistan has been hobbled by chronic power shortages that effect both everyday life and the industrial sector. Adding this much power to the grid will dramatically enhance growth.
China will also invest in a major expansion of Pakistani infrastructure. A new Karachi-Lahore motorway is to be built, along with railways and pipelines connecting the Gwadar port through to the north of Pakistan and into China.
In addition, special economic zones are to be created in which Chinese companies can set up industrial production. Pakistan has ample cheap labor, and as Chinese living standards keep rising, low wage manufacturing will start to shift out of China and look for new homes; hopefully these economic zones can attract a good share of that, boosting employment and exports.
China is not doing this out of charity. This represents both a business and national security decision for China. The Chinese see Pakistan as potentially a very attractive long-term investment. It has a rising middle class, almost 200 million people, and has a large number of educated workers.
In addition, China wants an access to the Indian Ocean and the markets of the Middle East that does not require it to rely on sea lanes through Southeast Asia that can be easily blocked (the Malacca Straits by Singapore). China also sees a strong, nuclear-armed Pakistan, as a useful counterweight to India, the other Asian giant that has aspirations of becoming a global power. Finally, China wants to prevent Islamic militancy from spreading to its Muslim regions in western China, and therefore it sees ending the long Taliban war in Afghanistan and Pakistan as a priority. China will push Afghanistan and Pakistan to reach a settlement that ends the Taliban scourge.
Pakistan’s government and military are taking this very seriously. A large military force is being organized to provide security for the influx of Chinese workers. The last thing Pakistan wants is for this investment to sour because Chinese engineers are routinely kidnapped by Taliban.
Pakistan remains a poor country, but it has come a long way since 1947. Currently annual GDP per person is about 4500 dollars, compared to 50,000 in the US (when adjusting for purchasing power). To reach the level of a developed country, Pakistan needs to get that number up to around 20,000 dollars (about where Malaysia or Chile are). This would require about two doublings of GDP per capita. If Pakistan can get its growth rate up to 7% per year (about 5-6% per person), it can reach developed country status in less than 30 years.
During the Musharraf years, under the economic stewardship of Shaukat Aziz, Pakistan’s economy was able to do 7% annual growth rates, but after 2008, growth slowed to about 4% under the civilian governments. This Chinese investment has the potential to transform the Pakistani economy, and as the middle class rises and expands, it will also hopefully transform Pakistan’s politics into something more than a tug of war between patronage machines of the Bhuttos and Sharifs.
