PAKISTAN IS BECOMING A CHINESE SHOW ROOM?
By Dr AMANAT ALI JALBANI
Aug 11 - 17, 2003
The developed world has transformed itself from the industrial age to the digital age; but even after 55 years of independence, Pakistan economy continues to be primarily agricultural in nature, and even it has not reached to a self-sufficiency stage. Pakistan, an impoverished and underdeveloped country, suffers from internal political disputes, lack of foreign investment, and a costly confrontation with neighboring India.
As far as the foreign investment is concerned, it has foreign investment and a significant role in quickening and diversifying economic growth in developing countries. It not only supplements domestic savings and the country's foreign exchange earnings for achieving a higher rate of output growth but also facilitates the importation of new technology as well as modern management and marketing techniques. It helps in raising productivity and hence the real wages of local labour. If foreign investment is in export oriented industries, it leads to a strengthening of balance of payments; and if export industries are labour-intensive, they also provide lager employment opportunities. Again, foreign investment places less of a burden on the balance of payment of a low-income country in the early stages of development insofar as the time lag between the starting of new projects and the reaping of benefits is considerable. Foreign investment also brings revenues to the government when it taxes profits of foreign forms or gets royalties from concession agreements.
Pakistan is a country with 147 million people, with growing markets and indications that their growth may accelerate. Pakistan offers an opportunity for low cost products particularly in labour-intensive industries, from which regional exports markets can be developed and supplied. Moreover, the country is well situated for the trade with the Middle East, Central Asian states and China. The government's foreign policy is moderate and positive, and Pakistan continues to enjoy a privileged relationship with China. Pakistan's economic potential lies in the expansion and diversification of its industrial base.
The importance of the foreign investment can be determined as an example from on of the Multinational Corporations performing in Pakistan. For example, Lever Brothers [Unilevers] in Pakistan. Its growth is closely linked with the economic development of the country. This MNC had its humble beginning in a small town of Pakistan. As far as its contribution is concerned, its edible oil business alone contributes about Rs 700 million to the exchequer in the form of taxes and duties. And from the tea business, Lever generates about 300 million in taxes for the government, which makes it the highest taxpayer in this sector.
FOREIGN INVESTMENT TRENDS IN GENERAL
It is necessary to understand the key factors influencing the flow of FDI globally. According to the United Nations Conference on Trade and Development (UNCTAD) report for 1998, the quantum of annual flow of FDI has reached US$ 450 billion. Traditional determinants of FDI are still key to attracting the investment. The size and growth of domestic market, geographical proximity and access to key potential markets, including large regional markets, play the key role. At the same time, the existence of created assets is of mounting significance as a magnet for FDI inflows, especially from major transitional corporation (TNCs).
In recent years, developing countries have become progressively more integrated with international financial and capital markets. The fastest growing regions in the mid-1990s were East and South-East Asia and Latin America as most of the economies of these regions showed largest advances in integration with the world economy, as measured by either size of capital inflows or growth of exports. The Asian countries have established their role as the largest recipient of FDI during 1990s. The success of Asian Countries in attracting FDI lies in investment climate, characterized by the growing markets and favorable regulatory framework. The increase in FDI inflows to developing countries accounts for 44.4 percent of the average annual increase of global FDI flows during 1992-97. The FDI flows to developing countries increased manifold, rising from US$ 33.7 billion in 1990 to 172.9 billion in 1997. The trend was reversed in 1998 and the flow of FDI registered a decline of 4 percent to 165.9 billion.
PAKISTAN'S FOREIGN INVESTMENT POLICIES
Pakistan offers a bright scope of foreign investment. There is a wide field open for foreign investors and many areas to choose from. The areas in which foreign investors would find attractive opportunities include export-oriented, import substitution, agriculture-based, electronics, engineering, and high-tech industries. There is also an extensive network medium and small engineering units spread all over the country, serving as vender units of heavy engineering.
In Pakistan since independence, the thrust of macroeconomics policies has been towards promoting the stable and attractive milieu of foreign investors. With this end in view, Pakistan has provided a package of guarantees, assurances and incentives including commitment to adhere to the principles of free market economy, legal guarantees regarding freedom from nationalization, unfettered repatriation of capital and profit earnings, flexibility regarding the extent of capital.
Participation, generous depreciation allowances, tax exemption for foreign technicians and tariff protection appropriate cases. In sanctioning procedures and fiscal and monetary incentives, foreign investment is not given any discriminatory treatment.
Board of Investment as a body responsible for investment in last couple of years has tried some sincere efforts towards Pakistan's investment policy that can help to ensure the promotion of foreign investment in the country. The consistent trends of them are liberalization, de-regulation, privatization and commitment to market-led economy, fostering open trade. Moreover, there is no need for obtaining NOC from the provincial governments for locating the project anywhere in the country except the areas, which are notified as negative areas.
FOREIGN INVESTMENT IN PAKISTAN:
For foreign investment to take place, it demands number of prevalent conditions. Presence of blessings in the areas of natural resources, exploration opportunities, and best type of land, history of successful business cases, and cheap labour and productive facilities are the major attractions for the foreign investors. Looking on these parameters, a feeling of Pakistan being the ideal country for the foreign investment emerges but as the facts are it is not the case. This essentially means that foreign investment actually seeks for reasons beyond that. It is the positive global image and perception of the country and friendly international relations followed by the present political situation, economic management and indicators and congenial home environment in terms of investor's confidence and the law and order situation that ultimately determines the foreign investment potential in the respective country. And obviously, when Pakistan's snapshot on these grounds is taken, it gives answer in more than one way about why Pakistan lacks so behind in the world foreign investment race.
Pakistan stands nowhere in attracting foreign investment in recent years. The share of FDI, flowing into Pakistan, is negligible when compared with the opportunities and economic fundamentals of the country. The inflow into the country is less than one per cent of the total FDI, made globally. It accounted for 0.2 percent of world FDI flows, 0.5 percent of developing countries, less than one percent of Asian countries in-spite-of various incentive packages for foreign investors and removal of obstacles in foreign investment. Annual average FDI inflows of Pakistan for the period 1985-95 [UNCTAD report] is 0.156% of the annual world investment.
The table, shows the trends of foreign investment in Pakistan:
FLOW OF FOREIGN INVESTMENT IN PAKISTAN.
(in million US $)
Source: State Bank of Pakistan.
Foreign investment is continuously declining since 1996-97. The highest, Pakistan received, was the amount of a little over one billion US$ in 1995-96. This was mainly because of FDI dominated by the Power Sector. Even since it has been experiencing a declining trend. Under the prevailing circumstances there is a need that economic managers should take cognizance of the factors which are responsible for pushing the foreign investors away from Pakistan.
Moreover, plenty of data is available as far as inflows are concerned, but one does not find the outflow statistics. UNCTAD deserves a due credit for at least highlighting the meager state of affairs for Pakistan's FDI outflows i.e 0.002 % of the average annual world outflows of $ 199.5 billion during 1985-95. It is pity that the Central Bank of Pakistan does not have documented data for the same. On the contrary, SBP personnel believe that there is big chunk of foreign investment outflows going through unofficial channels. Such investors could be expected to have invested in IT industry, software houses, engineering plants, ownership in service sector e.g hospitals, stock trade etc.
PROBLEMS FOR FOREIGN INVESTMENT IN PAKISTAN:
Theoretically, Pakistan places no restrictions on the percentage of foreign equity. Foreign companies may hold 100 percent equity but in practice, however, officials discourage majority foreign ownership and 100 percent ownership.
The principal impediments for the foreign investment in Pakistan are: inadequate and run down infrastructure, cumbersome procedural delay, limited supply of skilled labour force [despite of having vast resources of manpower], saturation in investment in power sector, the East Asian financial crises, IPP [Independent Power Producers] and the HUBCO issues, particularly the way it was handled in the past. Economic sanctions in May 1998 further accentuated the problem and foreign investors were reluctant to come to Pakistan. Freezing of foreign currency accounts has also played an important role in keeping investors as well as ex-patriate Pakistani investors away. The US Ambassador observed that inconsistency in Pakistan's policies was hindering US investment in Pakistan. A glaring example of inconsistency in policies is the abrupt withdrawal of incentive package for special industrial zones which were announced with great fanfare at the advertisement cost of Rs 12 crores. Last but not least is the political instability and unsatisfactory law and order situation.
Political instability has discouraged world powers to chip in aid. And there is no North Korea next door. Pakistan cannot become South Korea overnight with a $10,000 per capita income; Pakistan's per capital income is less than $500.
Bad politics cannot help economy as witnessed during the budget speech of the finance minister in the National Assembly. The message from the National Assembly was not of economic stability, but of political instability enough to shy away all prospective investors, foreign or domestic.
Political instability, slow economic growth, unsustainable debt and corruption are among the many challenges facing Pakistan's economic and social development, [the Asian Development Bank, report]. The report also criticized weak governance, which it says has contributed to poor economic performance and dire social development. In the latest quarterly survey by The Economist which assesses the risks of investing in 100 countries, Pakistan is rated as the fifth riskiest country to invest in, preceded only by Iraq, Myanmar, Kenya, and Indonesia. Besides the political instability in Pakistan, with the army rule in force, the latest reports of Shari or Riba banking law as mandated by Shariat court is also inhibiting the already scared investors [The Nation, 27 April, Thursday, 2000].
The WTO has noted that the political instability and weak governance have had an adverse effect on Pakistan's economy along with other structural problems [The Hindu, online edition of India's National Newspaper, Friday, February 10, 2002]. As the law and order situation in the country is not satisfactory, hence not only the foreign investors but also local investors are reluctant to invest with in the country. In this regard, the business community has apprised the President Pervez Musharaf about the deteriorating law and order situation threatening their investments and lives. The business community has also informed the authorities that a new breed of dacoits has been on the loose in both rural and urban areas. Circumstantial evidence reveals that the gangs are not only equipped with sophisticated weapons but also skilled to take away costly machinery installed in factories. The incidents of kidnapping for ransom dacoits and robberies have touched an alarming level [Daily, The News, May 12, 2003]. Authorities are themselves dissatisfied over the law and order situation [Daily Dawn, Dec 31, 2002]. Instead of lot of attractive policies, Pakistan is not in a position to pull in the foreign investment because it is mainly diverted to China, Korea, Malaysia, India etc mainly because of their economic, political and social environment. Keeping in view these situations, it looks like that Pakistan will become the outlet of Chinese and Korean products.
Foreign investment plays a crucial role in uplifting the economy of any country. It does not only brings in dollars and create employment opportunities but entrance of MNCs also brings in new working methods, marketing strategies, human resources practice giving a real learning opportunity and competitive environment to local business. But without creating proper environment, it would be difficult to attract the foreign investors. In Pakistan, to some extent, the foreign investment has been protected and enjoys high return. Pakistan would have continuously attracted the substantial foreign investment, but along with other obstacles, the most important factors that hamper the foreign investment in Pakistan are: law and order situation and political instability. Keeping in view the present investment atmosphere, it is very widely believed that Pakistan looks like a place of outlet mainly for Chinese product in future.
Here, it is concluded that, in Pakistan, the Government has always given the top priority to the foreign investment as far as investment policies are concerned but is not hat much successful. If the foreign investment is required, then Pakistan has to offer a conducive internal and external environment for the investors. In this regard, along with other factors, mainly if the political stability and the law and order situation are not improved, Pakistan will not acquire the attractive location in Asia from investment point of view. Moreover, the volume of foreign investment in Pakistan and the pace at which it may come also depend on how the Western world led by the US accepts Pakistan.
No one can deny the fact that the country needs foreign investment. But, if the country wants to achieve a respectable position among the nations, it has to follow the policies, which can put the country and economy in order. If the other things are not under the control of State, at least it has to maintain the law and order situation on top priority.