Pakistan rethinks its role in Xi’s Belt and Road plan

[Indus Pakistan]

That's true to an extent, but hammering the local market with imports and killing the incentive to produce domestic alternatives is not the solution either. I agree, there are severe rent-seeking and shady issues with our companies, but you're not going to encourage the growth of positive suppliers by basically leaving the market to foreign firms. For example, it takes time for a domestic company to gather capital (esp. as a Pakistani business) to invest in the necessary machinery and, in turn, it takes time to scale that across enough buyers to lower the overhead costs (and the pricing). But these businesses can't scale if the market has opted for Chinese goods.

Nope. I disagree. I know the point your making. Every country needs to employ certain degree of autarky. It's like planting saplings. You need to protect them. You need to nurture them until one day they grow big and flourish giving fruit. So for instance take the auto sector. You lock out any imports and either set up a public company or give monopoly to private concern to manufacture one truck, one car, one bus, one motorbike, one tractor. The reason for one is to give economies of scale. Of course there will be local supply network to support such production. But you approach Volvo and go for a 50/50 partnership. One Volvo saloon, one Volvo truck, one Volvo bus, one Volvo tractor is chosen as production run. Let's call the concern VolPak.

Since the entire country is hostage market to VolPak the company enjoys economies of scale. Let's assume this is 1950s. By 1960s VolPak has total market share of the sector and every year the supply chain slowly is being consolidated where most of the parts are manufactured locally. This of course creates demand for all sort of feedstock. Plastics, steel etc. VolPak sets up a subsidiary VolSteel in colloboration with Swedish Steel to supply steel to it's subsidiary companies and the wider Pakistani market.

By 1980s having enjoyed over 30 years of protection and monopoly of the Pakistan market VolPak has achieved majority indigenous part supply and is now strays into designing it's own car which is just a improved version of the previous Volvo design. But this model can be called Pakistani made and Pakistan designed. By now VolPak is large company and it begins aggressive export campaign. Enjoying the monopoly of the Pakistani market it feels it has the financial strength to seek out developing markets. Because it's vehicles cannot compete with western models it goes for price sensitive markets like Africa, South East Asia and even Eastern Europe.

By now VolPak has severed it's link from Volvo as the company goes strength to strength. by 1990s VolvPak enjoy huge sales - domestic and exports. The government comes under pressure from outside to open up the country. Pakistan opens up the market but by 2000s VolPak is making cars, trucks, buses, tractors that can compete with the best.

Pakistan has been independent for 70 years. Our industry has enjoyed seven decades of protection. When you do think they are going to be able to stand on their own feet? 700 years???

 

[Verve]

Chinese are now going to pace up the investment and planned relocation of their industries under CPEC plan.

 

[GeraltofRivia]

That's true to an extent, but hammering the local market with imports and killing the incentive to produce domestic alternatives is not the solution either. I agree, there are severe rent-seeking and shady issues with our companies, but you're not going to encourage the growth of positive suppliers by basically leaving the market to foreign firms. For example, it takes time for a domestic company to gather capital (esp. as a Pakistani business) to invest in the necessary machinery and, in turn, it takes time to scale that across enough buyers to lower the overhead costs (and the pricing). But these businesses can't scale if the market has opted for Chinese goods.

There are positive players who have been affected by CPEC (in the wrong way). E.g. DESCON was complaining about Chinese companies getting tax break benefits unavailable to them and local companies.

Moreover, while the fiscal side is costly, the gov't picking a cheaper import is a way to balance the fiscal books at the cost of macroeconomic disadvantage. By selecting the Chinese, not only are they spending the fiscal budget, but are tapping into ForEx reserves, which the Chinese companies stretched thin by importing their own machinery, materials and labour. Had they spent on Pakistani companies, the investment would have

I think it is beneficial to talk a little bit about the early journey when China was open for foreign investment and how Chinese local industry bounced and reached this point.

In the early days of China’s reform, China setup a few special economic zones to allow foreign companies to invest and setup factories in China. In order to attract foreign investment, a lot of financial incentives including free land, low tax or tax breaks were made available to them. Naturally massive amount of investment came to China to setup factories. However old SOEs and local cooperative enterprises were in no place to compete with them in the open market given the foreign producers had better technology, modern management/supply chain methods and policy support. Plus the SOEs have the liability of pension scheme that inherited from the pre-reform period. In the 90s most of them have gone insolvent and there were massive layoff of state workers. There was a lot pessimistic view that local industry would never rebound and survive in the condition.

However the key goal of China economic planners at the early stage was to generate employment and economical activities. The newly injected capital was needed to move a poor and sluggish economy into growth mode and foreign entrepreneurship was needed to give Chinese the capitalist mindset. The foreign companies entered China during the early period may have made excessive profits but in the whole scheme of things the long term economical benefits they brought to China should be recognized.

I guess the point here is that it is important to be diligent but equally having long term (I mean long term but the next election) and holistic perspective are also needed in looking at foreign investment.

It turned out that the increased economical activities have also provided the market and capital for the new generation of local industry to grow. New class of capitalists emerged and flourished. They may started from humble beginning but progressively they moved up the value ladder of the supply chain by learning from the foreign peers. As they were emerged from a highly competitive market, they are highly competitive in the global market too.

Not saying Pakistan should and need to go through exactly the same process but I think there were some experience and inspiration that can be used to help your journey.

 

[Khanate]

Honestly, you might consider this harsh but Pakistan has no real industry. What industry? A mafia operating as 'industry' under the patronage of the state which offers licences and restrictions that allow this racket to go as 'industry'. Why is Chinese 'maal' cheaper? Why is Pakistan 'maal' not on sale in Middle East, Africa, Europe and Asia? Why? Has somebody tied our 'industry' with cuffs?

Our so called industry is just fat cat money making licensees who are protected by the government. Under this protection they have the 200 million hostage market and supply them with shoddy products at high prices with terible customer service. But outside this bubble of protection - on the global market place they are exposed. They struggle to sell anything because global buyers are not going to buy shoddy products at high prices. Thus the abysmal export figures for Pakistan. Even Bangladesh exports more.

To place it in perspect the entire Pakistani industry, traders, farmers, service providers from pool of 200 million earn the country about $20 billion. This figure is about same as remitances from abroad at $20 billion. This means the entire ecnomy of Pakistan just produces the same as ex-pat workers. Think about that.

Every good business acts like a mafia. From Standard Oil to Microsoft or Chaebols. I still prefer them over PSM, PIA, et. al. because they when they fail, they won't get a blank cheque from the government.