Volume 22 Issue 5, May 2018
 
 

 

The Asian Development Bank (ADB) is one of the largest and most important multilateral development banks. The ADB has a membership of 67 countries, of which 48 are located in Asia. ADB-financed projects exist in 42 developing countries.
Pakistan ranks as one of the top borrowers from the ADB after China, India and Indonesia. The ADB offers ‘hard’ loans to the more developed and advanced members and ‘soft’ loans, with lower interest rates, to the less developed and poorer members. The ADB’s financing is focused on education, finance sector development, infrastructure, regional integration, environment and private sector lending. The ADB is an important development partner of Pakistan and its assistance has helped alleviate development challenges across several important sectors.

Since 1966, the ADB has financed and supported several projects in Pakistan. The funding from the ADB was critical in supporting the Industrial Development Bank of Pakistan in the 1960s. In the 70s, the ADB enhanced cooperation in the energy sector. The Tarbela Dam, a hydropower generating facility, was initially financed by the ADB. Although, provision of better health and education facilities as well as the alleviation of poverty are the most important objectives of the ADB and cooperation must be enhanced in these sectors beyond any doubt, the performance of Pakistan in trade and industry development has been poor relative to other Asian countries. Along with the emphasis on the social sector, the ADB must also enhance the potential of the industrial sector by increasing trade and economic cooperation of Pakistan within the Asian region.

The Country Partnership Strategy for Pakistan is designed under the framework of Pakistan Vision 2025, a government initiative to make Pakistan the next ‘Asian tiger.’ A private sector-led growth and competitive knowledge economy have been identified as a major priority. Privatization, public-private partnerships, macroeconomic stability and SME development are important components of this policy, while more focus is needed on research and development, healthy and educated workforce, labour and goods market efficiency, financial market sophistication and value-chain improvement feature to achieve a competitive knowledge economy. Considering the development of public and private sector enterprises, the ADB has engaged in reforms of public sector enterprises, development of public private partnerships, project management and support for procurement.

The China Pakistan Economic Corridor (CPEC), heralded as a game-changer, should not only have a positive impact on industrial development in Pakistan but should provide significant opportunities to increase exports from Pakistan, particularly to the Asian region. The CPEC is hailed as a flagship project of the One-Belt One-Road initiative undertaken by China at a global level. China is determined to increase its connectivity with Europe and Africa. However, the major objective of large-scale infrastructure development is to not only increase the transportation linkages between Asian countries and the rest of the world but to improve the economic environment within the region. Although, the Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund have been created as Chinese initiatives to finance OBOR-related projects and support large-scale investment, the ADB must ensure complementary investments that increase the ability of Pakistani firms to participate in international trading activities. Even though the main objective of export promotion programmes should be to increase the global outreach of Pakistani firms, there is substantial potential gain from boosting the export performance of Pakistani firms to Asian countries.

According to the ADB’s Country Partnership Strategy 2015-19 for Pakistan, the ADB is engaged in the development of national transportation networks in Pakistan. More than US$3.3 billion have been provided to Pakistan by the ADB for the improvement of the transportation sector. Since 2007, the ADB has financed more than 480 kilometres of the new motorway network. It is financing the development of provincial roads in Sindh and KP, while also financing the BRT projects in Karachi and Peshawar. The ADB is financing the Regional Improving Border Services Project, which is expected to improve the ranking of Pakistan in its ability to trade across border. The ADB also has a successful trade finance program, which supported more than 1900 transactions between 2009 and 2014, totaling US$ 7 billion. Increasing trade finance opportunities for firms has not only increased their own income but also allows them to hire more workers. Pakistan was ranked as the top recipient of the ADB’s trade finance program in 2015, followed by Vietnam and Bangladesh. The ADB also provides a guarantee facility to small-scale dairy farmers to increase their production and income.

The ADB has recommended that Pakistan should adopt export-oriented policies and increase its exports to its regional partners. It focuses on expanding trade between Pakistan and the Central Asian region. According to Trademap.org, the Central Asian economies, namely Kazakhstan, Uzbekistan, Turkmenistan, Kyrgyzstan and Tajikistan, imported US$ 47 billion in 2016. More than 1/3rd of the imports were machinery (electrical and non-electrical) and mineral fuels. On the other hand, the Central Asian economies exported more than US$ 54 billion in 2016, the majority of which was mineral fuels. Pakistan can import crude oil and natural gas from Central Asian economies through a network of pipelines. This is being realized through the ADB-supported TAPI (Turkmenistan, Afghanistan, Pakistan, India) pipeline. CAREC was established in 2001 with the purpose to economically integrate Central and Western Asian economies with Pakistan and China through trade. It has increased from $247 million worth of loans and assistance granted for six projects in 2001 to more than US$ 18 billion granted for 122 projects in 2011.

Larger Asian economies such as China, Japan, Hong Kong and the Republic of Korea rank among the top six exporters in the world. Considering the data from Trademap.org, these countries also rank among the top eight importers in the world. Asian economies are typically export-oriented. However, Pakistan exported only US$20 billion in 2016. With a GDP of $300 billion, the export to GDP ratio for Pakistan is even below the average for South Asian countries, a region that is significantly less export-oriented than the East Asian region. Approximately US $5.7 billion was exported from Pakistan to the Asian countries, out of which $3.6 billion was exported to China, Afghanistan and Bangladesh. Although, Pakistan has a free trade agreement with Sri Lanka and Malaysia, its exports to each of these two countries was less than US $240 million.

Pakistan mainly exports cotton and rice to the Asian economies. It exports cotton yarn to China and Bangladesh which are major destination for woven fabric. Pakistan primarily exports semi-milled or wholly milled rice to China. Apart from cotton and rice, the exports of made-up textile products and leather products from Pakistan to the East Asian markets is almost negligible. Even the traditional manufacturing industries in Pakistan have struggled to export to Asian markets. They have done comparatively better in exporting to the European and the US markets. Although, the Asian markets are not typically considered as importers of made-up textile products, the larger Asian economies imported more than US $20 billion worth of textile products in 2016. Similarly, the larger Asian economies are counted amongst the major importers of leather products.

Although price competitiveness is a challenge when access to foreign markets is limited by the presence of tariff measures and exchange rate volatility, non-tariff measures such as Sanitary and Phytosanitary (SPS) measures and technical barriers to trade (TBT) can limit participation of potential exporters who may otherwise have produced competitively-priced products ready to be exported. SPS measures are typically applied on agro-based food products that are produced for human consumption.

The purpose of SPS and TBT measures are not only to regulate the markets and protect consumers but also to protect domestic industries from foreign producers that may flood the domestic market with substandard and cheaper goods. These measures require exporters to harmonize their products according to standards laid out by the importing countries. This can be particularly challenging if the standards are difficult to comply with. The ADB has supported a national SPS/TBT diagnostic study in Nepal and a formation of SPS/TBT subgroup in order to share information, build capacity and conduct analytical work on the impact of SPS and TBT measures. Similar programmes have also been launched in Bangladesh. Such measures should be replicated in Pakistan in order to improve the ability of Pakistani exporters to participate in international trading activities. The ADB can enhance the role of Pakistan Standard and Quality Control Authority (PSQCA) in ensuring Pakistani products meet international standards and are not constrained by SPS and TBT measures imposed by the importing countries.

Pakistan has also lacked foreign direct investment (FDI) in export-oriented sectors. This has deprived technological advancement and spillover effects on local firms that are often associated with an increase in FDI inflow. FDI played a crucial role in the industrialization of several East Asian economies. Japan shifted several of its industries that had lost their comparative advantage to the more recently industrialized East Asian economies. The CPEC provides Pakistan an opportunity to upgrade its industrial capability. Today, China is upgrading its production from low and medium tech industries towards high tech industries. Therefore, ‘sunset’ labour-intensive and agro-based manufacturing industries in China that are losing their comparative advantage due to rising costs can be shifted to Pakistan, where the labour and agricultural inputs can be obtained at a competitive price. Although China will be a major investor in Pakistan, such cooperation must not be limited to this country only. The industrialization process can become ineffective if it does not lead to sufficient accumulation of knowledge and improvement of technological capabilities if gaps between the supply and demand of inputs and the needs of the industries are not properly identified.

In essence, Pakistan and the ADB have a long-term relationship that has supported development across several sectors in Pakistan. However, the advent of the CPEC has changed the dynamics as Pakistan now has an opportunity to improve its economic linkages with China and the rest of Asia. Therefore, trade and industrial development must be ensured in order to maximize the returns from the CPEC. The ADB has always been an important partner in the development of Pakistan, particularly in the industrial sector. With newer opportunities, it is crucial to determine avenues to enhance this partnership and realize the goal of transforming Pakistan into an ‘Asian tiger’ as specified in Vision 2025.

The writer is an Assistant Professor of Economics & Research Fellow at CBER, Institute of Business Administration (IBA), Karachi.
 
 
 
 
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