PEF, CPFTA and CPEC

Lots of acronyms there! PEF is Pakistan Economic Forum whose fourth edition was show-cased last week. CPFTA is China Pakistan FTA now being 'renegotiated'. CPEC is the known unknown. PEF lacked originality, and not just in its name that clones the World Economic Forum. It also lacked 'newness' - what was said had been heard before.
The 'findings' -low investment, savings, and tax ratios; external sector threats (exports, FDI, short-term external debt liabilities, misaligned exchange rate); poor quality of human resource and high 'cost of doing business' -read like a page out of the IMF handbook.
The 'recommendations' too have a sense of déjà vu about them. We have already heard of the Vietnam and China models, Malaysian Khazana scheme and the Kenyan M-PESA. Platitudinous reiterations like "Balance of payment needs a measured response with fiscal, monetary, and exchange rate adjustments", that we need a "policy to attract FDI in value added sectors", or a "fiscal policy that promotes capital formulation, accumulation, and investments" don't really help, unless accompanied with an examination of why these same recommendations could not be acted upon by successive governments.
The tax policy part didn't say anything new either. The issues identified and solutions suggested have become part of taxation folklore - dreams that do not materialize. Some have been tried and reversed (separation of tax policy from tax collection) others met stiff resistance (documentation and filing of tax returns).
The bottom line is that good ideas are rarely found missing. More often, what is missing is a better understanding of the politics of policymaking. What is missing is connecting the now (when the roof is falling over your head) to the later (when you have accumulated enough to fix the house). What is missing is inclusivity - and rising above self.
'Make in Pakistan' is a seductive topline. The over-taxed and increasingly uncompetitive manufacturing sector is crying out loud for help. But would the kind of action proposed by the PEF rescue the sector? Or is it designed to further the fortunes of the corporate elite?
Boiled down to basics 'Make in Pakistan' implies import substitution, which comes on the stilts of protection (against imports) and subsidies (to 'level the field'). There is sufficient research available to establish import substitution (infant industry argument apart) doesn't work, and most certainly exacerbates balance of payments. And, notwithstanding PEF's implied contrariness, excessive protection and subsidies promote inefficiencies, thwart economies of scale, and make you less competitive.
Ironically, PEF cautioned against Free Trade Agreements (FTA) and singled out CPFTA in particular for 'damaging' domestic manufacturing. This betrays an extraordinary lack of understanding of FTAs' contribution to welfare, competitiveness, and reforms. The world, with more than 450 FTAs, couldn't have got it all wrong!
This is no place for a primer on benefits of Trade Integration but today the name of the game is global value chains. You can kiss GVC good-bye if you don't have interlocking FTAs. FTAs spur FDI in exports as well. And if you don't integrate the fourth industrial revolution (4IR) will pass you by and leave you an orphan of internet of things, robotics, and artificial intelligence.
It is a mistake to see FTAs through the narrow prism of trade gains, especially in these times of declining tariffs. FTAs are all about forcing reforms - actions to leverage your strengths and overcome your weaknesses. Competition can never be the cause of deindustrialization; lack of competition often is. Protection is a costly reprieve that becomes habit forming.
PEF was right in sharing its concerns on the role of CPEC - enhancer or extractor - and in seeking a national growth strategy around it. It was wrong in not focusing on how to get the most out of the infrastructure planned under CPEC and how it is now up to the private sector to build on it, through JVs, B2B alliances, and technology transfers.
PEF's base-line case - macroeconomic stability, a fair taxation policy, and safeguard action against unfair competition from abroad - is like stating the obvious. Equally obvious, but not touched upon, is consumer interest versus job creation; and the industry leaders' quid pro quo - what will they give in exchange for what they are asking?
We would be willing to give a pound of consumer interest- cars, steel, fertilizer, cement, financial services priced significantly above international levels - to get a penny of job creation. But is that the case? What our employment numbers tell us is that the formal sector does not produce that many jobs, and large-scale manufacturing's job elasticities will get lower as capital intensity gets higher.
How we wish PEF had situated its case in reciprocity. What it didn't say("If you give us a supportive policy environment we will give you so many more units of employment, revenues, and exports - and a greater welfare impact") said more than what it did.
What is quizzical is that the PEF panelists, each a well-respected name, have often been on record against rent seeking. In Islamabad did they unwittingly defy the rules of economics to make out a case that is rent seeking in all but name?
What is bothersome is narrowness of focus. PEF sponsors represent the best and the biggest, with a legitimate claim to leadership. Their market capitalization and their cross-sectoral sway (from textiles to cement to chemicals to food and beverages to power), entitles them to speak for national interest. Did they? Anything about Environment, for instance? What about the plight of the industrial worker and the state of 'social compliance'? Did they allow themselves to worry about the growing inequalities?
They did, however, talk about a 'law' for assets abroad, another way of suggesting amnesty for those who took the money out instead of employing it here to bolster investment, savings, and growth.
One understands where the corporate elite are coming from, but more than the message it is about the messenger - an exclusive club of some five dozen corporates, about half of them Multinationals and the other half family owned, making the kind of money that will be the envy of most here and abroad.
No one grudges them their riches. But isn't it in their own larger interest to welcome fair competition, including from abroad, and be more mindful of consumer interests?
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