economic development

 by Arman Sidhu

Progress or Plight?: CPEC & Baloch Separatism in Pakistan

With a valuation pegged between $50-60 billion USD, the China-Pakistan Economic Corridor, most commonly referred to as CPEC, presents Pakistan with one of its greatest developmental opportunities in the country’s 73-year history. Despite US backing during the Cold War, and early economic liberalization efforts in the 1980s, Pakistan’s economy has floundered in the era of globalization in large part due to two tenets that remain extant today: ubiquitous insecurity and political instability between the state’s civilian and military authorities

While much of South Asia has seen its political and economic clout grow in international relevance over the past three decades, Pakistan has lagged its regional neighbors on a number of socioeconomic indicators. In addition to the growth witnessed in India, the likes of Bangladesh, Myanmar, and Nepal have also eclipsed Pakistan in average GDP growth over the past 5 years. Chronic debt woes have compounded problems related to tax revenue collection, a dearth of foreign direct investment (FDI), and soaring unemployment that has increased nearly fivefold over the last decade.

Nevertheless, much of Pakistan’s economic revitalization ambitions remain pinned on the projects that comprise CPEC’s portfolio, most notably the construction of overland and maritime transport networks, coupled with the urgent need for quality energy infrastructure. Financed by a mixture of Chinese loans and Sino-Pakistan joint ventures, CPEC’s success is not only a priority for Pakistan but a crucial harbinger of China’s vaunted Belt-and-Road Initiative (BRI) that promises to scale similar initiatives throughout Asia, Africa, and Europe.

Such improvements, if implemented, will undoubtedly alter the commercial landscape within Pakistan. However, given the poor quality of Pakistan’s institutions and the present power dynamics that favor the country’s military and security establishment, CPEC’s fruition depends on far more than capital or manpower. The country’s chronic security woes continue to hinder developmental efforts in all 4 provinces, with the province of Balochistan, Pakistan’s poorest province, particularly salient for the viability of CPEC’s construction and operating efforts.

In addition to being one of 2 Pakistani provinces with a coastline, Balochistan’s abundance of natural resource wealth figures prominently into CPEC’s plans. The maritime port of Gwadar, located in Balochistan, is seen as a linchpin for CPEC given its proximity to markets in Central Asia as well as Iran, with which the province shares a border.

Yet, Balochistan’s restive history with separatism remains a considerable threat, not just to the port of Gwadar, but to all CPEC projects within its provincial borders. A perfunctory review of conflict history in Balochistan offers a microcosm into a similar group of issues that defined, and continue to inform, political challenges in Pakistan, Afghanistan, and India. The gradual accession of the province to Pakistan in 1947-1948 by princely rulers has since been complicated by the intricacies of tribal politics, the desire for autonomy from central authorities, and the preservation of ethnic identity, in a fashion not too dissimilar to other regional areas of contention like Kashmir. Attempts to channel these grievances in the Baloch context has largely relied on engaged conflict with the Pakistani military.

At present, active armed groups in Balochistan view CPEC as an attempt to further relegate ethnic Balochs to an inferior economic, political, and social position in Pakistan. The significant involvement of the Pakistani military in the management of CPEC has confirmed such sentiments in the eyes of Balochs, who have subsequently targeted military convoys, the Karachi Stock Exchange, and even Chinese workers, who have filled the majority of CPEC jobs as per the financing arrangements cinched between Pakistan and China. The extraction of Balochistan’s natural resources has further irked militant groups, who claim the resources should be harnessed to generate Baluchi wealth instead of benefiting Pakistani or Chinese entities.

Much of the ire expressed by these groups view the Pakistani government as representing the agenda and interests of the Punjabi population, whom make up over 40% of Pakistan’s total population. Once more, regional parallels can be seen in the accusation of Punjabi majoritarianism, whether through the religious brand of Hindutva in India, or through latent anti-Pashtun sentiment in Afghan provinces that have a sizable population of minority ethnic groups. Following its inception, CPEC had and continues to be widely heralded by the civilian government as an opportunity to reinvigorate industrial activity to generate jobs, tax revenue, and improve the provision of public services. Yet, the opacity surrounding CPEC’s financing terms, tenders, and job growth has yet to enact the transformational change

Thus far, kinetic efforts by the Pakistani government to resolve the insecurity has led to accusations of human rights abuses by the military, which controls much of the oversight bodies and exerts significant influence on the project when compared to provincial, or even federal, civilian authorities. Pakistan’s characterization of the Baluch separatist movement tends to concentrate on allegations that Baluch militants enjoy political and financial backing from India, dismissing genuine grievances and regarding their actions as a foreign plot to subvert the nation-state.

Given CPEC’s stature and the strategic value of Balochistan, attacks by Baluchi militants are likely to go unabated in the absence of reforms that address the demands delineated by both armed and non-armed organizations based in Balochistan. By incorporating more local participation by Balochs, either through dialogue and/or job quotas in the CPEC initiative, both Pakistan and China can begin to allay these concerns before they escalate and evolve into a full-scale conflict, a scenario that portends less progress, low growth, and high insecurity for all Pakistanis.

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 by Arman Sidhu

Reforming Afghanistan’s Higher Education Institutions

Among the institutions most affected by Afghanistan’s incessant conflict over the past four decades, few have endured as much damage as the country’s educational system. Throughout King Zahir Shah’s 40-year reign and the subsequent Communist governments that ruled Afghanistan after him, the country’s higher education system was lauded for the quality of its institutions and the high representation of females, both within the student body and faculty ranks.

The invasion by Soviet forces in the late 1970s led to an exodus of teachers, coupled with the physical destruction of schools and universities, which were often used as bunkers during the war. Throughout the Taliban’s tenure, changes in curriculum and the practice of barring females from educational opportunities reversed much of the hard-fought progress that had at one point, made Afghanistan’s higher education system one of the most advanced across Central and South Asia.

Today, efforts geared toward restoring Afghanistan’s higher education infrastructure require capital investment in facilities, specifically for labs and research centers, in addition to recruiting and retaining high-quality faculty. Whereas most contemporary higher education systems typically require a Master’s degree as a minimum requirement for faculty, survey data over the past decade reveals that well over half of Afghanistan’s higher education faculty possess just a Bachelor’s degree.

Though offerings of graduate programs have grown, they still lag considerably, compelling many of Afghanistan’s brightest minds to continue their education abroad in neighboring countries. India, as one example, remains a predominant destination for Afghan students. India’s geographic proximity, affordability, and exponential growth in postsecondary institutions make the country an attractive option. Yet, while many of these graduates often return with aspirations of joining Afghanistan’s civil service, the double-edged sword of Afghans seeking an education abroad has led to the chronic issue of “brain drain”, where young, high-skilled Afghans depart the country, with no intent to return.

Building capacity in Afghanistan’s colleges and universities is an integral part of the country’s reconstruction efforts. In just the first decade after the collapse of the Taliban government, enrollment in Afghan tertiary institutions increased by 115%, showing the domestic appetite for quality education. Yet, with just under half of the country’s territory occupied or under threat, most of Afghanistan’s higher education institutions remain heavily concentrated in just a handful of areas.

Given the correlation between geography and ethnicity, diffusing educational opportunities across Afghanistan’s most insecure provinces will be critical to preserving harmony between the majority Pashtuns and the various minority ethnic groups. Though admission quotas exist for disadvantaged students, they are not enough to remedy the acute economic and political disparities that exist between ethnic groups. In addition to filling the gaps between ethnic groups, Afghan females are also poised to benefit from expanded access to higher education. At present, females already have begun to outnumber their male colleagues in some university departments. Unlocking further opportunities would provide a boost to the female labor participation rate and provide additional economic security for Afghan households.

Given the implications of its expansive mandate, the Ministry of Higher Education’s post-peace plans will have to prioritize the expansion of institutions, while also ensuring quality control. Privatization in Afghanistan’s education system has incentivized investment and expansion, yet in the absence of a rigorous accreditation system, private institutions may offer substandard quality at a higher cost. Ensuring managed growth and a quality educational experience will yield the best results in the long-term.

Furthermore, a functioning higher education system is essential for industrialization and retaining homegrown talent. Universities can serve as useful hubs for agglomeration, where businesses and institutions cluster to collaborate and benefit from nearby talent. The opportunity for enterprising Afghans is laden in the country’s erratic, but substantial growth that has taken place in the last 20 years. Opportunities in the extractive, manufacturing, and services sectors will all necessitate domestic know-how to generate the optimal return-on-investment for Afghanistan’s economy.

Given Afghanistan’s youthful population, where over 40% of the population is under the age of 15, the future outcomes of the intra-Afghan talks will have implications for generations to come.  Providing an accessible and rigorous education provides the best path toward reconstruction and the prevention of future conflicts.

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 by Arman Sidhu

Remittances: Reverberations for Conflict-Ridden Regions

Since the start of the 21st century, the world economy’s reliance on remittances has risen sharply as globalization enabled growth that created favorable incentives for migration through several emerging markets. Remittances, which refer to transfer payments made by foreign workers to their families back home, have benefitted both the likes of high-growth economies, like China and India, as well as weaker states that failed to attract investment due to incessant conflict and instability. In total, remittances (as a % of Gross Domestic Product) have increased by 105% since 1999, fueling household consumption and stepping in as a guarantor of financial security for vulnerable families located in fragile and/or underdeveloped states.

Yet, with lockdowns across the globe interrupting economic activity, the flow of remittances that sustain countries rife with crime, terrorism, and violence has been disrupted. As a result, countries with a high dependency on remittances will be forced to rely on the decisions made by foreign governments, of which they have no influence over. In addition, state-sponsored efforts to monitor and impose mandatory quarantines have disproportionately targeted migrants, limiting their movements, and in many cases, using the opportunity to impose draconian immigration reform to placate political aims.

As one example, Malaysia, which hosts nearly 5 million migrant workers (documented and undocumented), has been particularly aggressive in its COVID-19 response. As a popular destination for workers from a variety of South and East Asia countries, Malaysia’s raids of areas filled with migrants has attracted scrutiny. An Al-Jazeera documentary featuring the experiences of migrants was subsequently responded to with a police investigation of the journalists, followed by accusations of sedition and defamation. One migrant in particular who chose to share his experience with the Al-Jazeera journalists was the subject of a 2-week police manhunt that culminated in his arrest and planned deportation. Similar state-sponsored efforts targeting migrant workers have been cited in other popular migrant destinations like the United States, United Arab Emirates, Saudi Arabia, Bahrain, Kuwait, Qatar, and Lebanon, among several others.

With migrants unable to earn, the potential economic reverberations will extend far beyond the borders of states that employ, and depend upon, migrant labor. Though several variables can be used to describe remittance-dependent economies, these countries tend to fall in one (or both) of the following categories:

  1. Countries that have struggled to industrialize, leading to a weak manufacturing base. This is often due to, or followed by poor job growth and a lack of diversification beyond the agricultural sector. Examples of such countries would include Tonga, Haiti, Tajikistan, and Kyrgyzstan.
  2. Countries that are ridden with incessant conflict and chronic crime & terrorism. Such conditions drive the labor supply (particularly younger workers) to work abroad, either in nearby regional hubs or on other continents. Example countries in this category include Yemen, Palestine, South Sudan, and El Salvador.

Should remittance volumes continue to recede in the developing world, the consequences could be vast. Data compiled by the Global Knowledge Partnership on Migration and Development (KNOMAD), estimates that global remittances could drop by as much as $110 Billion USD, or 20% of the annual total. Sixty countries, ranging from low-income to middle-income, depend on remittances for at least 5% of their respective GDP. Furthermore, remittances are responsible for contributing tax revenue for governments, which in turn, provide funding for varied public services, many of which have become only more integral during the COVID-19 pandemic.

In the absence of substantial foreign direct investment or multilateral aid, the timeline for recovery will last longest in the countries with the most acute needs. Though aid and investment remain vital sources of capital for low and middle-income countries, they are both dwarfed by the substantial inflows brought in by remittances. In the last year alone, remittances have accounted for $550 billion USD worth of funds in such countries.

Regardless of the circumstances, the consistent flow of remittances is vital for sustaining consumption and keeping businesses afloat in remittance-dependent countries. The inability to maintain remittances can result in cascading economic damage. A failure to induce job creation is one of the most oft-cited conditions that can foment, or accelerate, violence through spikes in crime and terrorism. Conflict hotspots in the Sahel region, Gulf region, East Africa, and South Asia are particularly vulnerable, given their outsized regional dependence on remittances to fulfill the most basic living standards.

To help pare the ripple effects that a drop in remittances would create, a handful of solutions could prove useful. First, governments with the capacity to enact stimulus efforts can indirectly assist migrant laborers. Stimulus programs can boost consumption, incentivizing companies that employ migrants to maintain their payrolls to meet market demand. Second, the costs associated with transferring funds across borders can amount between 7-10% in fees. State-led efforts to reduce these cross-border transfer fees ensures that more money reaches the intended recipient(s). Though efforts to establish a global compact are underway, more collaboration is required between those nations that send remittances, and those that receive them.

Ensuring that migrants are equipped with the tools needed to weather the pandemic is not just a humanitarian issue, but an economic one that sets the stage for a quicker post-pandemic transition. Businesses located in migrant-dependent economies, like those found in Southeast Asia and the Gulf region, will not be able to fulfill their workforce needs from domestic labor. Instead, these countries may find themselves competing for the very same migrants they turned away, delaying the opportunity for a global economic recovery.

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 by Arman Sidhu

Trade, Aid, and a Self-Reliant Afghan Economy

At first glance, a chart depicting Afghanistan’s annual Gross Domestic Product (GDP) figures since 2001 could be characterized as a series of peaks and valleys. Though the imagery may be fitting with the country’s landscape, probes into why Afghanistan’s year-to-year growth is erratic necessitates a deeper look into the country’s trade practices, as well as the management and deployment of foreign aid.

While incessant conflict with the Taliban certainly plays a formidable role in deterring investment, it is far from the only ailment afflicting Afghanistan’s path toward economic independence. As one example, foreign aid still accounts for nearly 77% of the government’s budget, and that includes an assumption of a best-case scenario involving collected revenues.

Furthermore, Afghanistan’s increased engagement in global trade has yet to materialize any substantial capital investment, which is necessary for industrializing the economy and building a sufficient manufacturing base. The country’s trade deficit has also widened considerably in the last decade by nearly 25%.

Such conditions suggest that even in the event of successful intra-Afghan talks, the country’s development agenda will still rely heavily on substantial foreign aid inflows, with the World Bank estimating between $6-8 billion USD will be needed annually over the next several years. In order to best facilitate the use of that aid, both donors and the government will need to be selective in projects that incorporate broader participation from Afghans and put the country on proper footing for self-reliance.

To achieve this, Afghanistan’s economic policy will have to focus on three key prerequisites. These include an emphasis on export-led growth, diversification of trade partners and investors, and improvements toward tax revenue mobilization.

Export-Led Growth

Export-led growth is a strategy that concentrates on boosting the export potential of domestic businesses that specialize in certain goods and services. Assuming a comparative advantage for developing these certain products exists, the revenues and profits earned from exports are then to be reinvested in the country to expand production capacity and nurture the development of supporting industries. This method of economic policy was principally responsible for the rapid expansion of East Asian economies and remains in favor today among emerging markets across Southeast Asia and Sub-Saharan Africa.

For Afghanistan, exports have historically been limited to agricultural products (mainly fruits) but given the country’s vast reserves in minerals and natural resources, the opportunity for industrialization will be contingent upon proper management of the extractive sectors. The benefits would include the absorption of labor from agriculture as well as a diffusive investment that would support infrastructure projects and generate demand for businesses and employment across the manufacturing and services sectors.

In the past, several donor-led initiatives focused on the establishment of “resource corridors” have been put forth but have been shelved as a result of insecurity and dampened foreign investor sentiment on the country’s prospects. Nevertheless, should intra-Afghan talks prove fruitful in resolving the insecurity, it would clear the most significant obstacle for the extractive industries.

Diversification of Trade Partners and Investors

Currently, Afghanistan ranks 173rd out of 190 countries on the World Bank’s Ease of Doing Business, an index that uses indicators including the time required for permits and licenses, access to credit, and the enforcement of contracts, among other criteria to gauge the business/investor climate. As a result, inflows of foreign direct investment (FDI) in the country remains scarce and concentrated among a handful of nations, most of them neighbors. Afghanistan’s export destinations are in a similar position, with India and Pakistan accounting for a combined 75% of all Afghan exports. Imports are more diversified in terms of sourcing, but the trade imbalance has been costly in the absence of any progress on an import substitution strategy.

While the debate on the harmful effects of a trade deficit remains unresolved, curbing Afghanistan’s import reliance could help it bolster homegrown industries. Agricultural products and textiles makeup a significant portion of Afghan imports, yet domestic potential already exists in these sectors. Hence, these sectors, if prioritized, could rank among one of the simpler transitions available to the country’s economy.

The textile industry is also a common and vital source of employment for female labor and allowing wider participation by females can pay dividends by providing additional economic security for households, a boost in consumption, and accelerated growth via a larger labor pool for the country.

Ensuring quality over quantity in FDI is commonly overlooked by recipient nations, particularly those endowed with natural resources. Oft-cited criticism of foreign investor practices include employing or awarding contracts to the investing nation, with little to no benefit for the domestic workforce or businesses. Stipulating stringent quotas for the contracting and employment of Afghan businesses and nationals is a crucial tool that can be leveraged when vetting potential foreign partners.

Given Afghanistan’s strategic (and volatile) location, diversifying the country’s trade partners and investors remains in its best interests for long-term growth. This directly ties in with a balanced foreign policy based on non-alignment. Given the competing interests of regional hegemons like Russia, China, India, and Pakistan, the ability for Afghanistan to deftly balance external relations without committing to a single side ensures sovereignty and self-reliance.

Mobilization of Tax Revenue

At present, the shortfall between the Afghan government’s annual budget and its revenues stands at roughly $8.5 billion USD, which is covered by foreign aid. A gradual paring of that figure will necessitate a more efficient collection and allocation of tax revenues. In tandem with taxes, Afghanistan’s role as a transit hub for pipelines and infrastructure that transports resources (like natural gas) is another opportunity to improve revenues.

In a scenario where peace is established, ensuring that the Taliban’s arbitrary tax regime is dismantled in favor of a government collection system will be vital to increasing government revenues. In addition, the ability to safely access and incorporate swathes of Afghan territory under the government’s jurisdiction will present new opportunities to improve the fiscal situation of the government and locals. However, the notion of a “peace dividend” will not be without costs. As exhibited by US troop withdrawals throughout the Obama Administration, any additional drawdowns could once again trigger economic consequences for businesses that engage with or rely upon foreign forces.

It remains pertinent that the government learns to wean itself off of foreign aid and prove to its donors it is capable and sophisticated enough to budget and allocate aid funds efficiently. Doing so would contribute positively to what will be a long, but viable, route toward genuine independence and lasting stability.

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 by Arman Sidhu

A Road to Everywhere: Afghanistan’s Role in the Belt and Road Initiative

Nearly seven years after it was first announced, China’s Belt and Road Initiative (BRI) continues to endure a barrage of setbacks that have called into question the feasibility of President Xi Jingping’s signature economic plan. Prior to the COVID-19 pandemic, criticism of the BRI included accusations of “debt trap diplomacy”, environmental concerns, and the lack of benefits for local populations in the form of no-bid contracts and job opportunities.

Furthermore, among the defining moments of the BRI’s short history was the fallout associated with Sri Lanka’s Hambantota port, a maritime port that was largely constructed and financed by China. At a cost of nearly $1.5 billion USD, the port struggled to generate the level of financial return needed to service the debt to China. With few options available, the Sri Lankan government was compelled to enter an agreement with a partially state-owned Chinese firm, which granted the company a 99-year lease on the port, essentially ceding Sri Lanka’s control and day-to-day management of the port.

The Hambantota debacle has increased the level of scrutiny paid toward other BRI projects, which span parts of Asia, Africa, Europe, and South America. Yet, for many developing nations, the BRI presents an intriguing opportunity to access the requisite financing to establish and upgrade infrastructure networks.

For a landlocked country like Afghanistan, overland infrastructure remains a core priority within the government’s economic agenda. Incessant conflict has eroded what was once Afghanistan’s natural advantage: its geographic location. By constructing transportation networks, such as roads, railways, airports, etc., Afghanistan would be well-positioned to benefit as a conduit for transporting physical goods and natural resources in a region that features some of the fastest growing economies in the world.

Thus far, attempts to include Afghanistan in the BRI have been frustrated by the vagaries of the country’s internal conflicts. The results of the peace talks between the Afghan government and the Taliban will provide investors, donors, and state entities with the necessary signals and guidance needed before launching additional economic programs in or near territories contested or controlled by the Taliban.

In particular, the Sino-Afghan Special Railway Transportation project is one of a handful of infrastructure initiatives that could bolster Afghan exports of minerals and agricultural products to China, via Central Asia. The ability to transport high-value input commodities, such as copper and rare-earth elements, safely and securely, is crucial to China’s decision-calculus when choosing where to invest in Afghanistan.

Supplementing the BRI is the “Made in China 2025” plan, which envisions Chinese production evolving toward advanced industries like semiconductors, which necessitate consistent access to a specific set of raw materials, many of which Afghanistan is heavily endowed with.

A favorable outcome in the peace talks with the Taliban could also extend Afghanistan’s BRI participation to its southernmost regions, where it shares a border with Pakistan. As one of the more active nations in the BRI, Pakistan has pinned its hopes of economic revitalization through the China Pakistan Economic Corridor (CPEC), a microcosm of the broader BRI strategy.

Valued between $50-$60 billion USD, CPEC’s portfolio of massive infrastructure projects includes power and transport projects, the establishment of special economic zones (SEZs), and Gwadar Port, the deepest seaport in the world. Extending Afghanistan’s connectivity with CPEC projects would be pivotal to expanding export destinations for Afghan goods. This in turn could create a productive business climate in Afghanistan, one that is conducive for job creation and economic diversification away from subsistence agriculture.

However, reversing Afghanistan’s status from a bottleneck to a transit hub will involve far more than the accession of policymakers in Kabul or Beijing. The looming question regarding the prospect of lasting peace is still the greatest hurdle in Afghanistan’s reconstruction plans. The Taliban’s tendency to intentionally target infrastructure or other foreign projects has given pause to plenty of investors in sectors like oil & gas, construction, and mining.

Even if peace can be attained, the track record for foreign investment in Afghanistan is littered with corruption, graft, and cronyism as a consequence of poor institutional capacity. In addition, other stakeholders and key Afghan partners such as the United States and India continue to view the BRI with suspicion, and the prospect of a trilateral partnership between Afghanistan, China, and Pakistan is likely to arouse concern.

Lastly, in the wake of the COVID-19 pandemic, the appetite for Chinese-led investment has hit a significant snag. Local attitudes toward the BRI have become polarized, and vocal opposition has risen as a consequence of China’s lending practices, which are often characterized as predatory, and its management of projects on the ground, which have gained a reputation elsewhere for environmental destruction, forced relocation of residents, and an unwillingness to engage local contractors and/or labor.

In an optimal set of circumstances, Afghanistan’s BRI projects could help restart growth and diffuse benefits to the local population. Yet, given the murky track records of both the BRI and Afghan investment at-large, the consequences of overpromising and underdelivering could enable greater unrest, without providing tangible benefits for the broader Afghan population.

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