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Pakistan's geoeconomic delusions

Over the past few weeks, senior Pakistani officials, including the country's powerful army chief, have signaled or directly said that their country's foreign policy will from now on focus on geoeconomics. This is a welcome rhetorical shift. Decades of barter with Pakistan's geostrategic value – including as a "frontline state" in the Cold War and the War on Terror – has contributed to the loss of countless lives, hindered human development and made Pakistan a highly indebted security state.

Geoeconomics would turn this script upside down. Definitions of the term vary, but the Pakistani office uses it to denote something that resembles an end to war. In a public address last month, the Pakistani Chief of Staff, General Qamar Javed Bajwa, offered a “geo-economic vision” that focuses on regional integration and the common pursuit of sustainable development in an environment of peace and stability. The upward trend for one of the poorest and least integrated regions in the world would undoubtedly be enormous.

Aside from good intentions, Pakistan's fulcrum toward geoeconomics is likely to hit a wall of reality – and quickly.

For starters, the country cannot easily evade geopolitics. And the regional outlook suggests conflict, not connectivity. Neighboring Afghanistan could experience civil war if the United States leaves. And despite the restoration of a ceasefire with India along the line of control, there is no sign that either side will make the kind of concessions on the Kashmiri dispute that would be essential to permanent normalization.

Then there is the US-China Cold War, which shows no sign of slackening in biden – as demonstrated by the war of words between US and Chinese delegations during bilateral talks in Alaska last month. Pakistani officials say they do not want their part in it, but they could get involved. Islamabad relies on Beijing for essential military equipment that will deter New Delhi, while Washington armed New Delhi to compensate for Beijing. Although the United States has provided more than $ 3 billion in arms to Pakistan since September 11, those transfers have decreased significantly since 2016, according to the Stockholm International Peace Research Institute.

Meanwhile, Washington seems not only to have lost interest in Pakistan, but also sees the country as firmly embedded in China's influence. For example, a report by the US Institute for Peace Study Group published last year argued that the “China-Pakistan axis is strengthening”. His policy options included "calling for a suspension of Chinese arms transfers to Pakistan" and "coordinating Chinese diplomatic support for Pakistan with US leaning towards India".

Reconciling all of this would be complicated enough, but implementing the tough political reforms that are critical to keeping geoeconomics working in their favor also seems out of reach for Pakistan. The case of the China-Pakistan Economic Corridor (CPEC) shows why.

In 2015, Beijing and Islamabad launched the Belt and Road CPEC, which has been billed as a connectivity initiative linking China's western inland region of Xinjiang to Pakistani ports on the Arabian Sea. In other words, it was a great geo-economic project.

The CPEC helped Pakistan accelerate $ 19 billion worth of electricity, road and other infrastructure projects. However, Pakistan was bleeding forex as imports of machinery and materials rose and exports lagged. Ultimately, the poor planning of the government then led by Nawaz Sharif (partly motivated by election pressure) drove Pakistan back into the arms of the International Monetary Fund.

Six years after its inception, CPEC is nowhere near a functioning economic corridor. It can never become one. Today the port of Gwadar is idle. And Sino-Pakistani overland trade remains very modest despite a surge prior to the pandemic. An economist in the previous Pakistan Muslim League (N) government in Islamabad predicted that Pakistan would earn $ 6 billion to $ 8 billion annually in tolls and other revenue from CPEC by 2020. These numbers were and are fantasy.

The 2018 elections brought a new government to Islamabad, led by ex-cricketer Imran Khan. Although economic growth has stalled, exports have steadily improved under Khan. Efforts have also been made to remove logistical bottlenecks, including on the border with Afghanistan.

For the guidance of Pakistan, however, geoeconomics remains largely an imaginary line on a map. For example, as part of Islamabad's push, Khan's government invited Sri Lanka to join the CPEC. However, it is unclear what it means to join the CPEC. The two main ports of Pakistan, Karachi and Mohammed Bin Qasim, are already connected to the port of Colombo in Sri Lanka via many shipping lines. And Colombo is a regional transshipment power plant – a role that Pakistan is striving for. In other words, it's a competitor.

Even if there was conceptual clarity on the Pakistani side, its connectivity dreams look more like logistical nightmares. At the beginning of March, the Pakistani trade advisor Abdul Razak Dawood announced the restart of a freight train service connecting Pakistan with Iran and Turkey with great enthusiasm. A week later, the relaunch was postponed, partly due to the miserable conditions of the Pakistani railway lines.

Khan and others tout Pakistani ports as the shortest sea routes for Central Asian interior republics. And while this is indeed the case for many of these states, according to the Central Asian Regional Economic Cooperation Program and the Asian Development Bank, Pakistani routes are the slowest and most expensive transports due to a time-consuming border clearance process and heavy reliance on road. For example, it took an average of 45.6 hours for cargo to clear a Pakistani border crossing in 2019, compared to around nine hours in Kazakhstan, Uzbekistan and Turkmenistan. Border clearance costs in Pakistan were 34 to 220 percent higher in 2019 than in these countries. This is one of the reasons why Karachi and Mohammed Bin Qasim saw a decline in handling volume from 2016 to 2019 despite expanding handling capacity.

Infrastructure and transit trade could never be the be-all and end-all of Pakistan's geo-economic hub. Pakistan will not thrive just by transporting other countries' goods. This economic model may have worked for city-states like Dubai and Singapore at one point, but it won't apply to a country of more than 220 million people, where more than a million young people join the workforce annually.

Exports are the missing piece of the Pakistani economic puzzle and an important reason why sustained economic growth at high levels has been difficult to achieve. Geo-economic instruments – including trade pacts, tariff policies and transport agreements – need to be used to bring more Pakistani goods to more markets. However, to improve the competitiveness of exports, Pakistan's political economy must also be disrupted. The problem is that the country's civil and military elite benefit from the status quo.

Despite the endless political turmoil in Pakistan, the civil and military elite have collectively carteled important industries such as automobiles, fertilizers and sugar. Their profitability is based on anti-competitive import duties and generous, distorting subsidies. Competition would force Pakistani companies to innovate and increase productivity – profits that could drive some of them to go global. Instead, they go the simpler route made possible by public policy to sell inferior goods at inflated prices to their own domestic market.

Because of their predatory behavior, the Pakistani elite can likely cannibalize the profits of a modest economic opening and prevent them from reaching common Pakistanis. Conquering the elite could even make Pakistan's geo-economic hub a non-starter.

Many of these civil and military cartel actors have also benefited from Pakistan's electricity rush by investing capital in building power plants and selling electricity to public utilities at some of the highest rates in the region. Unsurprisingly, Pakistan has a surplus of electricity after a government-led electricity gold rush, even though its grid remains in dire condition. The public arrears to these private power producers continue to increase due to the high power losses due to the inefficiency of the grid and the rampant theft of electricity. Pakistan has problems paying for expensive energy that only gets more expensive.

Electricity tariffs paid by ordinary Pakistani consumers are projected to increase 36 percent over the next two years as Islamabad begins paying off debts to private electricity producers, including companies owned by the army charity and members of Khan's own government. High utility costs will affect Pakistan's export competitiveness. And domestic industry is likely to continue to demand protective measures to fend off foreign competition. A real economic opening seems unlikely.

Like the electricity problems in Pakistan, an ongoing cotton crisis threatens to cause serious damage. Raw and value-added cotton products make up the bulk of Pakistani exports. But cotton production fell 34 percent in the past year alone and has dropped to its lowest level in three decades. However, part of this is due to the pandemic. The early lockdowns drove cotton prices down and sent some farmers to other cash crops. However, the cotton crisis in Pakistan preceded the pandemic. The industry is facing more permanent structural challenges. Returns have decreased significantly due to climate change. In 2019, almost a third of the country's expected cotton harvest was destroyed by extreme weather. And sugar subsidies have lured farmers away from cotton.

Given the importance of the harvest to Pakistan, one would think the government would double its support to local research institutes to improve the quality of cottonseed. But instead of solving its own problems, Pakistan is outsourcing the solutions to others. In this case, Uzbekistan was asked for help. Indeed, the cotton crop, which has been declining for years, appears to be an afterthought for Pakistani leaders. Their indifference should be a dose of reality for anyone who believed that Pakistan could integrate into the world economy as a major geo-economic player.

A real linchpin for geoeconomics needs to start with reforms at home. Until the rules of the game are changed, Pakistan will simply tumble from crisis to crisis as most of its citizens suffer and the elite laugh at the bank.

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