KARACHI: There was widespread speculation that China, the second-largest economy in the world, would move its labor-intensive industries, such as textile, to Pakistan to benefit from lower production costs. The action would open up employment opportunities for Pakistan’s cheap labour force and contribute to an increase in export revenues.
Despite their higher labour costs than Pakistan and much smaller populations, Cambodia, Laos, and even Ethiopia have attracted a number of Chinese industries that Pakistan has so far been unable to attract.
To highlight the barriers to foreign investment in Pakistan, the Pakistan Business Council (PBC), a business policy advocacy platform, published a thorough study titled “Catalysing Private Investment in Pakistan: Leveraging Chinese Investment in CPEC” in May 2022.
Given that Beijing is moving its industrial facilities outside of its borders and removing the “Made in China” label from many products in an effort to regain US markets, Pakistan may yet welcome some Chinese businesses as well as foreign investment from other international locations.
As part of a trade war, Washington has raised import taxes on a variety of Chinese goods.
According to the PBC study, its goal is to give policymakers advice on how to address the fundamental problems that have led to low investment in Pakistan.
The report highlights the challenges faced by Chinese investment in Pakistan under the China-Pakistan Economic Corridor (CPEC) framework and compares key indicators with Pakistan’s peer economies.
According to the study, Chinese manufacturers seem to have relocated some of their production abroad in order to avoid the “Made in China” label, particularly to Southeast Asian nations like Vietnam, Thailand, Indonesia, and Malaysia.
Smaller nations in the region, like Cambodia and Laos, appear to have benefited from sizable inflows of Chinese FDI.
Pakistan has a sizable opportunity thanks to the trend of Chinese manufacturers moving their operations offshore. The manufacturing of textiles and apparel is the main focus of this opportunity (to draw Chinese factories).
However, if the right environment is created, a variety of other industries, from auto parts and light engineering to mobile phone assembly/manufacturing, can also be the potential targets for relocation.
Since 2013, China’s investment in countries participating in the Belt and Road Initiative (BRI) has increased steadily. Between 2013 and 2020, it invested a total of $139.5 billion in these nations.
According to the study, Pakistan’s share of China’s OFDI (outward foreign direct investment) in BRI nations since 2013 was 5.1 percent, with total gross inflows totaling $7.1 billion during this time.
The report identifies a number of significant problems that Pakistani investors face. These include the political risk that prevents long-term investment, a business-unfriendly tax and regulatory system, low labour productivity, weak intellectual property rights, uncompetitive energy prices, high logistic costs, and limited comparative advantage in accessing external markets through bilateral or regional trade agreements, among others.
In comparison to the surge in investment in peer countries, the flow of FDI into Pakistan has remained low as a proportion of its gross domestic product (GDP) and in relation to the size of its market.
In contrast to Laos ($5.1 billion), Cambodia ($3.6 billion), and Vietnam ($5.5 billion), Pakistan attracted FDI worth $1.8 billion in 2020. However, Bangladesh only received $1.5 billion more in FDI.
