Hi, Today we will discuss some aspects of FDI and Economic Development.
The Big Question – “Can Foreign Direct Investment (FDI) bring Economic Development?” Most of the economists will say in one word – Yes! However, I choose to differ from this opinion. Along with the abundance of capital, other factors like infrastructure, regional peace, and human capital are equally important.
If money only can solve the problem – then why the most of Middle Eastern countries have terrible economic development?
Let’s take an example of CPEC to study further on this subject.
We will discuss CPEC in relation with China and Pakistan but before that let’s see what happened in Sri Lanka last year.
Sri Lanka: The Pearl of Indian Ocean:
Have you heard of Mattala Rajapaksa International Airport or HRI? It’s in Sri Lanka! Obviously, you will say No! Because there are no flights that go there! It’s a 21 Century Airport without a flight!
Here is the reason why – Almost three decades of civil war within the country, Sri Lanka finally found the peace as Tamil insurgency was brutally crushed by the military. The LTTE leader Prabhakaran was shot dead and there is a sign of peace on this beautiful island. Sri Lanka’s leader Rajapaksa felt that Sri Lanka need to focus on economic development as civil war had ripped apart the entire economy. The problem is: economic development needs money and how to get it? Years of civil war had hit hard on the government’s financial health. Also, serious war crimes were committed by the military during the civil war; therefore, no international institution wanted to lend money to Sri Lanka.
The major side effect of Sri Lanka’s war was that the war had created dependency on the foreign aid.
Rajapaksha felt that it’s okay to seek credit from China for the development of Southern Sri Lanka. Under China’s “One Belt, One Road” economic policy, Sri Lankans decided to build “Hambantota Economic Corridor ” in the city of Hambantota. China invested billions of dollars in the form of various loans to Sri Lanka.
Amazing! A brand new Sea Port and Air Port were built spending trillions of dollars. But the problem is you can’t make an airport in the jungle and expect people to use it!
After completion, the project seems to be failing. The port is empty and there are no flights at the airport. Sri Lanaka realized that the dream sold by China of an Economic Corridor does not exist! If it does it will take years for that!
On the other hand, China demanded the capital and interest portion on the re-payment.
Sri Lankan authorities have almost tripled the debt during the project and now debt to GDP ratio is almost 90%!
Sri Lankan president offered to sell the airport to China. China said – “We don’t need your empty airport, we need our money!”
Finally, in January 2017, two Chinese private companies ended up taking 90% equity in the airport – technically Sri Lanka sold its airport to the Chinese. Sri Lanka became a chienese colony.
Now, let’s take a look at $65 billion project – China- Pakistan Economic Corridor known as CPEC.
The entire nation is celebrating that CPEC will bring prosperity. I decided to search a bit about CPEC.
CPEC is an economic corridor in which China will connect to the Gwadar Port through road lines. China is selling the loan by stating that they are concerned about the South China Sea and wants an alternative route for the Middle Eastern oil supply.
Let’s take a look at the key actors in the project.
China: “Ghost City Economic Policy”
China’s economic growth has been tremendous in past decade. However, because of the world recession; China’s growth rate has been slowing down in past few years.
To keep the economy running, the Chinese government is promoting consumption within the country. The government is promoting consumption by providing loans to its people. For an example, a cheap car loan will promote people to buy a car. Chinese people are traditionally savers and don’t believe in borrowing. The government is also sitting on huge foreign exchange in form of US Dollars. Now, with the inflation and global recession, China is losing its money by sitting on it. In order to avoid the money depreciation, the government has invested in huge residential projects.
If there is no need, people won’t buy products. China ended up with so called “Ghost- Cities” where huge Industrial Park like infrastructure is just empty. The initial purpose was to create jobs and fuel economy. However, this paradoxical mixture of Capitalism and Chinese Socialism didn’t work. Today China has thousands of “Ghost Cities” where trillions of dollars were spent.
Oh, Shit! It doesn’t work at home! Let’s export it and give it a try!
Pakistan: A Failed State
Since its creation, Pakistan has a rivalry with India. It’s an official policy to compete with India. India, on the other hand, is a gigantic economy and to match India’s military might, Pakistan needed a huge amount of funds.
Instead of focusing on economic development, Pakistan joined NATO to fulfill its military requirements. After the fall of Soviet Union and the end of the Afghan war, Pakistan was no longer required for Americans.
What did Pakistan do with all those rogue elements that were created as an extension of state policy? Nothing, unleash them towards India and bleed India. Oh great! But wait a sec! 9/11 happened! Republican Bush threatened Pakistan to take actions on Jihadis or US will bomb Pakistan and send them to stone age.
Pakistan! scared from the old master, started to attack the Islamic Jihadis that they themselves created, funded and trained. The reactions from Jehadis were harsh as they turned against the state. Now, Pakistan became a nation with both borders at war, internal terrorism, extreme interference of military in governance and political hijacking of policies.
A nation hanging between military dictatorship and corrupt politicians seek hope in the miracle image of CPEC. Desperate citizens are seeing “Messiah” in China. It’s the nature of subcontinent people, they don’t want to work but hopes that one day one God will come on earth to fix their problems.
However, there are few questions that I don’t understand.
Are Chinese really dumb? Why throw down billions in a region where even their own government says that they have administratively failed?
Anyone who has a slight knowledge of the logistics understands that road transport is 6 times expensive than shipping. Why the Chinese are willing to invest in Gwadar port and make roads through Himalayan Mountains all the way to China? Also, more than 90% of China’s population lives on the Eastern Cost line.
China says that they want to cut down the transport time. Come on! Then why don’t you do that from Thailand to China? Or Burma to China? They are closer allies and Thailand is even a member of ASEAN.
No one will buy this argument but Pakistanis did.
It was an election promise for the Nawaz Sharif Government that he will resolve the policy issue of the lack of electricity. Therefore, the most of the CPEC funds about ($45 billion) are to establish power plants.
Amazing! Isn’t it? Wait a minute – but these are old coal-based power plants that China wants to get rid of to overcome its pollution problem. Pakistani leadership is setting up these coal-based plants in the fertile agricultural lands of Punjab. The environmental damage will kill agriculture in Punjab.
Are you out of your mind? After Paris Summit everyone is giving up coal based power plants and Pakistanis want to create new ones!
The truth is; pollution is a huge problem in China, therefore, China is replacing entire coal-based power system with hydro and nuclear energy. China is selling off old machinery to Pakistan by an instrument called as FDI with 9% interest rates.
Pakistani politicians are glorifying China for help at 9% interest rate. The reason is Pakistan needs money because they have created a dependency that they need Foreign Aid.
Please note that after Bin Laden and split with the USA, no one is willing to lend money to Pakistan because Pakistan’s debt to GDP ratio is super high. If you add another $65 billion at 9% interest rate (world bank has only 1%) to existing debts that will rocket Pakistan’s debt servicing!
Pakistani politicians are advocating CPEC as a “game changer”. It’s said that within the next 30 years of time, a total of 65 billion will be invested in Pakistan. However, 45 billion are for the coal-based power plants and the rests are for the infrastructure development. The Government of Pakistan is fighting allegations domestically about corruption. This is an act to divert public’s attention towards a big vision. (What big vision??) No documents, no clarifications on interest rates is made to the public. The Government says that all these are FDI and soft loans! Oh really? How come 9% loan is a soft loan?
That’s a credit card interest rate! In other words, Pakistan is putting a debt of 65 billion on a credit card! Insane! Isn’t it? but that is the truth!
What I see is the current political leadership will facilitate corruption in projects and when next government will come they will follow the trend in Pakistan government and flee Pakistan after a great loot and left the people behind to repay the capital and interest at 9%!
I predict that it will be another Ghost City – There is a port but no one wants to use it. There are roads but no one wants to use it! Above all, Gwadar port – the heart of the entire project is a disputed territory and Baluchistan wants freedom from Pakistan.
Is this the last spike in a failed state’s coffin box?
Let’s sit back and watch; Will this so-called Trans Syberia railway line kind of adventure takes to Pakistan?
The “Game Changer” is the ultimate “End Game” for an already failed state – Pakistan.
Second, the Chinese are not generous like World Bank, IMF, or the even USA. Pakistan simply can’t hide OBL to take more money from the USA.
RIP – Pakistan! You were a nation once! But to facilitate corruption in government spending, your Public Servants killed you!
Rest in Peace!
Thanks for reading!