Pakistan’s Geoeconomic Delusions
The country says it wants to pivot from hard power to economic power, but its economy begs to differ.
In recent weeks, senior Pakistani officials, including the country’s powerful army chief, have signaled or outright said that, from now on, their country’s foreign policy will emphasize geoeconomics. This is a welcome rhetorical shift. Decades of bartering Pakistan’s geostrategic value—including as a “front-line state” in the Cold War and war on terror—has contributed to the loss of countless lives, stifled human development, and turned Pakistan into a heavily indebted security state.
Geoeconomics would flip that script. Definitions of the term vary, but Pakistani officialdom uses it to connote something akin to an end to war. In a public address last month, Pakistani Chief of the Army Staff Gen. Qamar Javed Bajwa offered a “geo-economic vision” that centers regional integration and the collective pursuit of sustainable development in an environment of peace and stability. The upside for one of the world’s poorest and least integrated regions would undoubtedly be tremendous.
But good intentions aside, Pakistan’s pivot toward geoeconomics is likely to hit a brick wall of reality—and fast.
For starters, the country cannot easily escape geopolitics. And the regional outlook portends conflict, not connectivity. Neighboring Afghanistan could see civil war as the United States departs. And despite the restoration of a cease-fire with India along the Line of Control, there are no signs that either side will make the kinds of concessions on the Kashmir dispute that would be essential for lasting normalization.
Then there’s the U.S.-Chinese cold war, which shows no sign of abating in the Biden er—as the war of words between U.S. and Chinese delegations at last month’s bilateral talks in Alaska shows. Pakistani officials say they want no part in it, but they may get dragged in. Islamabad depends on Beijing for essential military hardware to deter New Delhi as Washington arms New Delhi to counterbalance Beijing. Although the United States has provided Pakistan with more than $3 billion in arms since 9/11, those transfers have dropped significantly since 2016, according to the Stockholm International Peace Research Institute.
Meanwhile, Washington seems to have not only lost interest in Pakistan but also sees the country as firmly in China’s sway. A U.S. Institute of Peace study group report released last year, for example, argued that the “China-Pakistan axis is strengthening.” Among its policy options, it included “demanding suspension of Chinese arms transfers to Pakistan” and “matching Chinese diplomatic support for Pakistan with a U.S. tilt toward India.”
Balancing all this would be complicated enough, but also enacting the tough policy reforms key to making geoeconomics work in its favor seems beyond Pakistan’s grasp. The case of the China-Pakistan Economic Corridor (CPEC) illustrates why.
In 2015, Beijing and Islamabad launched the Belt and Road-linked CPEC, billed as a connectivity initiative linking China’s western landlocked region of Xinjiang with Pakistan’s Arabian Sea ports. It was, in other words, a grand geoeconomic project.
Through the CPEC, Pakistan was able to fast-track $19 billion in electric power, road, and other infrastructure projects. But Pakistan bled foreign exchange as imports of machinery and material surged and exports lagged. Ultimately, poor planning by the then-Nawaz Sharif-led government (motivated in part by electoral pressures) drove Pakistan back into the arms of the International Monetary Fund.
Six years since its launch, CPEC is nowhere close to a functional economic corridor. It may never become one. Today, the Gwadar port sits idle. And overland Sino-Pakistan trade remains very modest despite an increase before the pandemic. An economist with the previous Pakistan Muslim League (N) government in Islamabad projected that Pakistan would earn $6 to 8 billion in tolls and other revenue annually through CPEC by 2020. Those numbers were and remain fantasy.
The 2018 elections brought a new government to Islamabad, led by ex-cricketer Imran Khan. Although economic growth has come to a standstill, exports have steadily improved under Khan. And there have been efforts to address logistics bottlenecks, including at the border with Afghanistan.
But for Pakistan’s leadership, geoeconomics largely remains drawing imaginary lines on a map. As part of Islamabad’s push, for example, Khan’s administration invited Sri Lanka to join CPEC. Yet it’s unclear what “joining” CPEC actually means. Pakistan’s two main ports, Karachi and Mohammed Bin Qasim, are already connected via many shipping lines to Sri Lanka’s Colombo port. And Colombo is a regional transshipment powerhouse—a role Pakistan aspires to. In other words, it’s a competitor.
Even if there was conceptual clarity on the Pakistani end, its connectivity dreams look more like logistical nightmares. With great fanfare, Pakistan’s commerce advisor, Abdul Razak Dawood, announced in early March the reboot of a freight train service connecting Pakistan with Iran and Turkey. A week later, the relaunch was postponed, in part due to the abysmal conditions of Pakistan’s railway lines.
Khan and others tout Pakistan ports as offering the shortest routes to sea for landlocked Central Asian republics. And although that is indeed true for many of these states, Pakistani routes, according to the Central Asian Regional Economic Cooperation Program and Asian Development Bank, are the slowest and costliest because of a time-consuming border-clearance process and its heavy dependence on road transports. For example, in 2019, it took an average of 45.6 hours for freight to clear a Pakistani border crossing, compared to around nine hours in Kazakhstan, Uzbekistan, and Turkmenistan. Border-clearance costs in Pakistan in 2019 were 34 percent to 220 percent higher than in these countries. These are among the reasons why Karachi and Mohammed Bin Qasim witnessed declines in transshipment volumes from 2016 to 2019, even as they expanded handling capacity.
Infrastructure and transit trade could never be the be-all and end-all of Pakistan’s geoeconomic pivot. Pakistan will not prosper solely by transporting the goods of other countries. That economic model may have worked at one point for city-states like Dubai and Singapore, but it won’t for a country of more than 220 million people that sees a million-plus young people enter its labor force annually.
Exports are the missing piece of Pakistan’s economic puzzle and a big reason why sustained, high-level economic growth has been elusive. Geoeconomic instruments—including trade pacts, tariff policies, and transport agreements—must be leveraged to get more Pakistani goods out to more markets. But improving export competitiveness also requires disrupting Pakistan’s political economy. And the problem is the country’s elite, both civilian and military, benefits from the status quo.
Despite Pakistan’s endless political turmoil, its civilian and military elite has collectively cartelized major industries, such as automobiles, fertilizer, and sugar. Their profitability stems from anti-competitive import tariffs and generous, distorting subsidies. Competition would force Pakistani companies to innovate and increase productivity—gains that could propel some of them to go global. Instead, they take the easier path, enabled by public policy, of selling substandard goods at inflated prices to a captive domestic market.
Given their predatory behavior, Pakistan’s elite are likely to cannibalize the gains from a modest economic opening, preventing them from reaching common Pakistanis. Elite capture could even render Pakistan’s geoeconomic pivot a non-starter.
Many of these same civilian and military cartel players have also benefitted from Pakistan’s binge on electricity, investing capital in building power plants and selling electricity to public utilities at some of the highest rates in the region. Unsurprisingly, after a government-induced electricity gold rush, Pakistan has an excess of electric power, although its grid remains in terrible shape. Public arrears owed to these private electric power producers continue to mount due to high rates of power lost from the grid’s inefficiency and rampant theft of electric power. Pakistan struggles with paying for expensive energy, which will only get costlier.
Electricity rates paid by ordinary Pakistani consumers are projected to climb by 36 percent in the next two years as Islamabad starts to pay debt owed to private power producers, including companies owned by the army’s welfare trust and members of Khan’s own government. High utility rates will hurt Pakistan’s export competitiveness. And domestic industries are likely to persist in demanding protections to stave off foreign competition. A genuine economic opening seems improbable.
Like Pakistan’s electric power woes, an ongoing cotton crisis threatens to do serious damage. Raw and value-added cotton products make up the majority of Pakistan’s exports. But cotton output has plummeted by 34 percent in the past year alone, falling to the lowest level in three decades. To be sure, some of this is attributable to the pandemic. The early lockdowns drove cotton prices downward, sending some farmers to other cash crops. But Pakistan’s cotton crisis preceded the pandemic. The industry faces more enduring structural challenges. Yields have declined significantly due to climate change. In 2019 nearly 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 crop’s importance to Pakistan, one would think the government would redouble its support for local research institutes to improve cotton seed quality. But instead of resolving its own problems, Pakistan outsources the solutions to others. In this case, it’s asked Uzbekistan for help. Indeed, the cotton crop, which has been in decline for years, seems to be an afterthought for Pakistan’s leaders. Their indifference should be a dose of reality for anyone who believed Pakistan can integrate into the global economy as a major geoeconomics player.
A true pivot to geoeconomics must start with reforms at home. Until the rules of the game are changed, Pakistan will simply lurch from crisis to crisis as most of its citizens suffer and the elite laugh all the way to the bank.
Arif Rafiq is the president of Vizier Consulting, a political risk advisory firm focused on the Middle East and South Asia. Twitter: @arifcrafiq