Pak-China Industrial Corridor to Boost Pakistan's FDI, Mfg and Exports

Industrial parks and special economic zones are part of the China-Pakistan Economic Corridor memoranda of understanding recently agreed between the leaders of the two countries. The key pre-requisites for  the establishment of these zones are resolution of the energy crisis and building of a competitive infrastructure in Pakistan.

Energy and Infrastructure:

The first phase of the economic corridor is focused on $45.6 billion worth of energy and infrastructure projects. China's state-owed banks will finance Chinese companies to fund, build and operate $45.6 billion worth of energy and infrastructure projects in Pakistan over the next six years, according to Reuters. Major Chinese companies investing in Pakistan's energy sector will include China's Three Gorges Corp which built the world's biggest hydro power project, and China Power International Development Ltd.

Under the agreement signed by Chinese and Pakistani leaders at a Beijing summit recently, $15.5 billion worth of coal, wind, solar and hydro energy projects will come online by 2017 and add 10,400 megawatts of energy to the national grid.  An additional 6,120 megawatts will be added to the national grid at a cost of $18.2 billion by 2021.

The transport and communication infrastructure—roads, railways, cable, and oil and gas pipelines—will stretch 2,700 kilometers from Gwadar on the Arabian Sea to the Khunjerab Pass at the China-Pakistan border in the Karakorams.

Starting in 2015, the Chinese companies will invest an average of over $7 billion a year until 2021, a figure exceeding the previous record of $5.5 billion foreign direct investment in 2007 in Pakistan.

Special Economic Zones:

Beyond the initial phase, there are plans to establish special economic zones in the Corridor where Chinese companies will locate factories. Extensive manufacturing collaboration between the two neighbors will include a wide range of products from cheap toys and textiles to consumer electronics and supersonic fighter planes.

The basic idea of an industrial corridor is to develop a sound industrial base, served by competitive infrastructure as a prerequisite for attracting investments into export oriented industries and manufacturing. Such industries have helped a succession of countries like Indonesia, Japan, Hong Kong,  Malaysia, South Korea, Taiwan, China and now even Vietnam rise from low-cost manufacturing base to more advanced, high-end exports.  As a country's labour gets too expensive to be used to produce low-value products, some poorer country takes over and starts the climb to prosperity.

Once completed, the Pak-China industrial corridor with a sound industrial base and competitive infrastructure combined with low labor costs is expected to draw growing FDI from manufacturers in many other countries looking for a low-cost location to build products for exports to rich OECD nations.

Key Challenges:

While the commitment is there on both sides to make the corridor a reality, there are many challenges that need to be overcome. The key ones are  maintaining security and political stability, ensuring transparency, good governance and quality of execution. These challenges are not unsurmountable but overcoming them does require serious effort on the part of both sides but particularly on the Pakistani side. Let's hope Pakistani leaders are up to these challenges.

Summary: 

Pak-China economic corridor is a very ambitious effort by the two countries that will lead to greater investment and rapid industrialization of Pakistan. Successful implementation of it will be a game-changer for the people of Pakistan in terms of new economic opportunities leading to higher incomes and significant improvements in the living standards for ordinary Pakistanis. It will be in the best interest of all of them to  set their differences aside and work for its successful implementation.

Here's a National Geographic Documentary on CPEC:

https://youtu.be/q2lWYxbIBCs




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IDEAS 2014: Pakistan's Biggest Ever Arms Bazar in Karachi

International Defense Exhibition and Seminar (IDEAS), Pakistan biannual arms show, made a modest beginning in year 2000 on President Musharraf's directive. It has since grown into a major international event with hundreds of exhibitors and delegates attending from several dozen countries. It has also served to help highlight and promote Pakistan's domestic defense industry and sign several arms export deals with friendly nations.

The just concluded IDEAS 2014 attracted 333 defense-related companies including 50 companies from Pakistan. Delegates from 50 countries attended the show this year.

The fact that Pakistan is the third largest importer of arms in the world is not lost on major arms merchants. World's top arms importer is India with 14% market share followed by China and Pakistan with 5% each, according to Stockholm-based SIPRI. 

International Arms Market Source: SIPRI

While Pakistan's traditional allies China and Turkey were the biggest exhibitors occupying the largest space at the show, the most notable new entrant this year was Russia, the biggest arms supplier to Pakistan's arch-rival India.  Russian defense minister visited Pakistan and agreed to sell Mi-35 attack helicopters. There was also a report in IHS Jane's 360 publication that, under a new Pakistan-Russia defense cooperation agreement, Russia will now directly supply RD-93 Klimov jet engine for JF-17 fighter aircraft jointly developed by China and Pakistan. 

While the JF-17 was the star of the show for Pakistan, other major Pakistan-made attractions included smart-bomb named Takbir, a high-tech weapon system POF Eye, and new drones Burraq and Shahpar and trainer aircraft Mushshaq and Super Mushshaq.  There were also armored car manufacturers catering to rising domestic demand fueled by security concerns in Pakistan. 

Pakistan-made Takbir ‪ is a 250 Kg air-launched smart bomb that can accurately hit target 80-100 km away. It expands its wings as soon as it is launched and makes its way while dodging the hurdles in its way to hit its intended target. 

Pakistan-made POF Eye is a special-purpose hand-held weapon system similar in concept to the Israeli-made CornerShot that can fire weapons (bullets, hand-grenades) around corners. It is designed for SWAT and special forces teams in hostile situations, particularly counter-terrorism and hostage rescue operations. It allows its operator to both see and attack an armed target without exposing the operator to counter-attack. 

Pakistani officials claim having closed several arms export deals to sell different weapon systems, including agreements with four Middle Eastern and African countries for the sale of one JF-17 squadron each. 

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Apple iPhone 6, 6Plus Launched in Pakistan

Pakistani cell phone service operator Ufone has partnered with Apple to launch iPhone 6 and iPhone 6Plus smartphones in Pakistan. Ufone customers can register online for iPhone 6 and iPhone 6 Plus at the company’s website.

Smartphone sales have accelerated in recent months after the roll-out of 3G and 4G services in Pakistan. The number of 3G subscribers has reached 4 million mark, apparently surpassing all other broadband technologies in the country, within the first three months of the issuance of 3G and 4G licenses in the country. There are around 3.7 million broadband subscriptions in Pakistan for all technologies combined including WiMAX, DSL, EvDO, FTTH, Satellite, HFC and others till May this year.

Total number of mobile subscribers in Pakistan is over 150 million. A growing number of these subscribers are smartphone owners who are using web services like e-commerce and social media. Gertjan van Laar, an app developer who recently published a report on smartphone usage in Pakistan, told Tech in Asia that smartphone penetration has reached between 7 and 10 percent of the population – in contrast to the general mobile penetration rate of 80 percent.

Here are some of the highlights of the report on smartphones in Pakistan:

1. Android is Pakistan’s top smartphone OS with 68 percent share just among smartphone users

2. Apple iOS is second with 24 percent share; Windows Phone is third at eight percent

3. Samsung is the top brand; iPhone is second; homegrown phone-maker QMobile is third

4.  35 percent  of smartphone users in Pakistan own a low-cost phone.

Growing availability of smartphones  and 3G/4G services is enabling Pakistani apps developers to build and offer a wide range of apps, including everything from the most-used messaging apps to social networking, games, entertainment, government, banking, business and finance, navigation and utility apps, such as budgeting and data backing, according to a report in The Express Tribune newspaper. In addition to software houses, an active community of mostly self-taught freelance app developers is also bidding for projects listed on global online platforms, such as oDesk, Elance, Guru and Freelancer, the paper adds.

Increasing access to advanced smartphones and mobile broadband augurs well for innovation and investment in Pakistan.

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US Government Explains 20X Difference Between US-India BPT Trade Figures

Source: US Government's Bureau of Economic Affairs 

A GAO study showed that U.S. data on offshoring of services to India are more than 20 times smaller than India’s data. What’s the story?

The GAO study showed that U.S. imports from India of business, professional, and technical (BPT) services as published by BEA are substantially lower than India’s data on exports of BPT services to the U.S. (chart 1, left panel).¹ However, when adjusted to a similar conceptual basis using information from the GAO report, the difference is actually quite small (chart 1, center panel).

The large gap between the U.S. and Indian data mainly reflects differences in how BEA and India define BPT services. BEA data are consistent with international standards for balance of payments accounting; India’s data, which are based on data from an Indian trade association, do not conform to international standards.  In fact, a 2005 study published by the Reserve Bank of India (RBI) showed that computer services exports (a large component of BPT services) to the U.S. based on international standards are much lower than India’s published data (chart 1, right panel).² In addition, a 2004 report by the OECD found that 97 percent of India’s exports of computer services to large OECD member countries were unaccounted for in those countries’ data on imports.³

Depending upon how one adjusts for important definitional differences, the gap between the U.S. and Indian estimates either entirely disappears or is substantially reduced.

Chart 1: U.S. and Indian Data on Trade in BPT Services, 2002

Source: GAO; calculations by BEA

¹ Government Accountability Office, “U.S. and India Data on Offshoring Show Significant Differences,” October 2005.

² Reserve Bank of India, “Computer Services Exports from India: 2002-03,” Reserve Bank of India Bulletin, September 2005.

³ Organization for Economic Co-operation and Development, Information Technology Outlook 2004, October 2004.

 

What are the reasons for differences between U.S. and Indian data on trade in business, professional, and technical services?

The U.S. and Indian data on trade in business, professional, and technical (BPT) services are not directly comparable because of substantial definitional differences.  When the U.S. and Indian data are adjusted for definitional differences, the difference in estimates either entirely disappears or is substantially reduced.  Some major definitional differences are:

      Indian workers in the United States.  India’s data on trade in BPT services include services provided by Indian nationals who reside in the United States.  BEA follows international standards for balance-of-payments accounting by excluding the compensation paid by U.S. firms to U.S. residents.  Foreign workers who are in the United States for less than one year are considered to be foreign residents, and typically their earnings are included as compensation of employees (under “income” in the balance of payments accounts).  Workers who are in the United States for more than one year are considered to be U.S. residents, and so their earnings are excluded from the balance of payments accounts.  According to the GAO study, Indian officials acknowledged that temporary Indian workers in the U.S. have accounted for about 40 to 50 percent of their data on exports of BPT services.

b)      Sales through affiliated companies.  India’s data on services exports to North America include sales of services to affiliates of U.S. companies located in India or another foreign country, as well as sales by affiliates of Indian companies located in the United States to other U.S. residents.  According to international standards, BEA excludes these sales from U.S. trade in services because the transactions did not occur between a U.S. resident and a non-resident.  A U.S. company’s foreign affiliate that is located in India is an Indian resident, and so its transactions with other Indian residents should not be included in the balance of payments.  Similarly, an Indian company’s affiliate in the United States is a U.S. resident, and so its transactions with other U.S. residents should not be included. According to the GAO study, an Indian official stated that inclusion of sales to affiliates of U.S. companies is “likely a significant factor” accounting for differences between U.S. and Indian data.

c)      Sales of goods.  India’s data on trade in BPT services include some sales of goods, such as prepackaged software and software embedded on computer hardware.  The U.S. data on trade in these products are included in the goods trade data, not in the services trade data.  According to the GAO study, Indian officials stated that embedded and prepackaged software account for about 10-15 percent of India’s estimate of exports of BPT services to the U.S.

d)      Sales of technology-enabled services.  India’s data on trade in BPT services include some technology-enabled services (such as some financial services).  BEA includes these services in other services categories.

e)      Intrafirm trade.  Through 2006, U.S. data for trade in services are collected separately for cross-border trade between unaffiliated companies and for intrafirm (or affiliated) trade.  The surveys that BEA uses to collect data on unaffiliated trade are detailed enough to allow BEA to identify trade in BPT services vis-à-vis India.  Affiliated trade, however, is collected on separate surveys, and data for individual foreign countries that separately identify BPT services are unavailable.  Therefore, reported BEA data for BPT trade with India cannot be directly compared with the Indian data, because BEA’s data for BPT services include only unaffiliated trade and India’s data on BPT services include both affiliated and unaffiliated trade.

 

How did BEA calculate the adjusted data shown in the chart above?

BEA adjusted both its own estimates and the Indian estimates to eliminate definitional differences between U.S. and Indian data.

BEA adjusted its own data to include an estimate of affiliated transactions, which are collected on surveys that do not allow for BPT services to be separately identified by individual foreign country. In order to estimate affiliated imports of BPT services from India, BEA used a ratio calculated from global affiliated and unaffiliated imports of BPT services. BEA used the same procedure to estimate affiliated imports of computer services (table 1).


Table 1: Adjustments to BEA’s data, 2002
[Millions of dollars]
 

		BPT Services	Computer Services
Published BEA estimates (based on reported data)
a.	Global imports	33,488	4,315
b.	Affiliated imports	23,940	2,800
c.	Unaffiliated imports	9,548	1,515
d.	Ratio [b/c]	2.51	1.85
e.	Unaffiliated imports from India	288	201
Implied estimates (derived from global ratios)
f.	Affiliated imports from India [d*e]	722	371
g.	Total imports from India [e+f]	1,010	572

Source: BEA.


Data from India on BPT exports to the U.S. were adjusted to remove the definitional differences with BEA data and international standards as described above. BEA based the adjustments on information provided in the GAO study. Not all differences were quantified in the study, so some differences remain (table 2).


Table 2: Adjustments to India’s BPT services data, 2002
[Millions of dollars]
 

		High estimate	Low estimate
I.	Exports of BPT services (published by India; chart 1, left panel)	6,464	6,464
II.	Adjustments for definitional differences (derived from GAO report):
	a. Indian workers in the U.S.	40%	50%
	b. Sales through affiliated companies	20%	30%
	c. Sales of goods	10%	15%
III.	Total [a+b+c]	70%	95%
IV.	Adjusted Indian estimate of exports of BPT services [I*(1-III)] (chart 1, center panel)	1,939	323

Source: GAO; calculations by BEA.


The ranges for adjustment factors (a) and (c) were provided by Indian officials and published in the GAO study. The effect of factor (b) was estimated by BEA at 20-30 percent, because the GAO study said that Indian officials thought the effect of this factor was “significant” but that the effect of factor (c) was “insignificant” at 10-15 percent.

The September 2005 RBI study on Indian sales of computer services provided data that corrected for some definitional differences but the estimates still were not directly comparable to U.S. estimates because the Indian estimates were presented based on trade negotiation categories (i.e., GATS rules) that included sales by Indian-owned companies in the United States to U.S. residents, sales by Indian workers in the United States, etc. BEA used data from the RBI study to calculate a ratio of Indian exports of computer services using balance of payments definitions to total (broadly defined) deliveries of Indian computer services using GATS rules at the global level; this ratio was 39%. In addition, the study provided data on the delivery of Indian computer services (broadly defined) to North America. BEA used the global ratio to estimate balance-of-payments basis exports of computer services to North America. BEA then estimated the portion of exports to North America attributable to the U.S. using information from an Indian software trade association (table 3).


Table 3: Adjustments to RBI’s Computer Services Data, 2002
[Millions of dollars]
 

		India's exports of computer services
a.	Global delivery of services - broad definition	31,133
b.	Global exports - balance-of-payments basis	12,077
c.	Ratio [b/a]	0.39
d.	Delivery of services to North America - broad definition	4,046
e.	Exports to North America - balance-of-payments basis [c*d]	1,569
f.	Ratio (U.S./North America)	0.82
g.	Exports to United States [e*f] (chart 1, right panel)	1,287

Source: RBI; NASSCOM; calculations by BEA. 

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