In January 2021, Pakistan released its first-ever National Security Policy (NSP), shifting its focus from geopolitics to geo-economics. Pakistan’s renewed interest in industrialization and regional connectivity with Central Asia, the Middle East, Africa, and Eurasia is due to past failures to prioritize these goals due to its preoccupation with the fight against terrorism. The growing push towards industrialization through investments in Special Economic Zones and Special Technology Zones holds the promise to bring about a strategic shift away from great-power competition. Although the NSP does not explicitly discuss great-power competition, it operates under the assumption that Pakistan will not subscribe to either the United States or China during competition or conflict.
One way that Pakistan can avoid great-power competition is by becoming a hub of technology-based cooperation for leading tech corporations, including those in the United States and China. However, uncertain policies of the current federal government, an unpredictable global economic outlook, and a reluctance to unroll a sustainable economic roadmap complicates Pakistan’s efforts to achieve this goal.
New Milestones in the Tech and Start up Sectors
The former PTI government, led by Imran Khan and Abdul Razak Dawood, attempted to make Pakistan part of the global supply chain. There have been breakthroughs on two fronts: the local assembling and manufacturing of electronic products, especially cellphones, and the mushrooming of successful start-ups, growing IT exports, and freelancing services.
One way that Pakistan can avoid great-power competition is by becoming a hub of technology-based cooperation for leading tech corporations, including those in the United States and China.
From historically being a net-importer, Pakistan has produced over 22.12 million handsets and imported only 9.95 million between January and November 2021. Most players in their manufacturing units include Chinese handset manufacturers such as Itel, VGO Tel, Infinix, and Vivo. Compared to 2020, the industry experienced a growth upward of 122 percent in 2021. Additionally, Samsung, the South Korean tech giant, has set up a TV manufacturing unit in Karachi and entered a joint venture with Lucky Motor Corporation, a Pakistani automobile manufacturer, to assemble Samsung handsets. Another Chinese smartphone manufacturer, Xiaomi, commenced cell phone production with its joint venture partner, AirLink Communications, in Pakistan. Xiaomi plans to invest USD $500 million to export handsets out of Pakistan.
Start-ups in Pakistan raised an unprecedented USD $365.87 million in 2021, compared to USD $66.4 million in 2020, and freelancers brought in $360 million in exchange for services. Pakistan’s IT-exports are not lagging either. IT exports in this fiscal year are expected to grow by 66 percent to $3.5 billion, up from $2.1 billion between 2020 to 2021. Lastly, Pakistan’s growing digitally-savvy population has led to $6 billion in e-commerce revenue during 2021. These indicators, including the growing market for auto-makers, indicate that Pakistan may be in a suitable position to provide an equally promising market to businesses from China, South Korea, the United Kingdom, France, Japan, and the United States.
Notwithstanding the recent populist anti-American rhetoric by former Prime Minister Imran Khan, Pakistan is growing its trade volume with the United States due to a pronounced focus on geo-economics and a growing industrial and export base. With bilateral trade worth $6.6 billion, the United States is one of Pakistan’s major trade partners. The United States also expressed interest in increasing its Foreign Direct Investment (FDI) in Pakistan by USD $1.5 billion between 2018 and 2020 in industries such as information and communications technology, thermal and renewable energy, and healthcare. By expanding its economic relationship with the United States, Pakistan seeks to avoid placement in one geopolitical “camp” despite its existing ties with China.
The ongoing expansion of trade and investments from different countries points to the possibility of scaling these investments into tech-driven cooperation, especially in Special Economic Zones. This cooperation would include SEZs and Technology Parks developed under the China-Pakistan Economic Corridor (CPEC). China’s Special Technology Zone Authority and Zhongguancun Belt and Road Industrial Promotion Association (ZBRA) are also collaborating to promote commercial applications of emerging technologies. While the technology zones are being set up in cooperation with China, Pakistan’s reluctance to welcome investment from non-Chinese businesses will impede competition. Keeping SEZs and STZs open to investments from other countries will promote inclusivity and avoid Chinese monopolization. However, Pakistan must first overcome bottlenecks to investments and enable a business-friendly environment.
A Balancing Act between the United States and China
Under President Trump, the United States initiated a technological decoupling, reducing reliance on China for software, hardware, and cloud-based services. This policy is likely to continue under President Biden. Simultaneously, smaller states may fill this manufacturing gap while also playing a balancing act between the U.S. and China. With growing economic ties with China, a recurring export surplus with the United States, and a history of strategic confluence with both countries, Pakistan is compelled to play a similar act to avoid getting caught in great-power competition through economic and technological cooperation. In addition, as highlighted in the NSP, Pakistan is shifting away from its decades-old policy of harnessing its geopolitical position for international influence.
Pakistan also has other motivations behind its decision-making: the affordability of low-quality technology by consumers and the possibility of attracting technology transfer and production units with a variety of options from global partners. The changing manufacturing and start-up landscapes provide an opening for Pakistan to build on its existing outreach with both China and the United States, apart from ongoing partnerships with European and Asian businesses.
Sectors that increase exports offer promising dividends for Pakistani businesses. Traditional sectors – such as the textile, pharmaceutical, surgical, and sports industries – can innovate to scale exports and boost recent value-added products. To combat ongoing inflation and recession due to decreased consumer demand in the short-term, Pakistan should collaborate with U.S. and Chinese businesses to produce cell phones and supply-chain components. Furthermore, U.S. investment in tech-based and value-added agriculture, pharmaceuticals, medical services, and chip designing services will aid in Pakistan’s supply chain diversification and thus are potential areas of cooperation.
The changing manufacturing and start-up landscapes provide an opening for Pakistan to build on its existing outreach with both China and the United States, apart from ongoing partnerships with European and Asian businesses.
In its military domain, Pakistan has procured weapon systems from both the United States and China. Existing oversight between Pakistan and the United States on the use and access to platforms and sensitive information – despite closer Pakistan-China defense cooperation in arms procurement – suggests that Pakistan can replicate similar lessons in the commercial domain.
What challenges lie ahead?
Pakistan still has a tall order to fill before expanding economic cooperation with the United States, or even with China. Ongoing domestic and global economic challenges will offset the current trajectory due to three factors: the ongoing global liquidity crunch, unpredictable economic policies of the Pakistani government, and the reluctance of banks to clear payments for exporters to buy parts due to a forex deficit.
Proponents of creating a business-friendly environment, such as Haroon Sharif, have argued in favor of Pakistan’s International Financial Center establishing a common legal framework, a tax-friendly regime, and a dedicated and insulated judicial system for foreign businesses. While Pakistan has introduced a ‘single window’ operation under Pakistan Customs, reforms for grooming a business-friendly ecosystem—under the Pakistan Regulatory Modernization Initiative—are yet to be fully implemented. Additionally, by adopting equally competitive terms with U.S. businesses, Pakistan can create a business-conducive environment by addressing concerns such as intellectual property theft, poor dispute resolution mechanisms, and data protection issues, all of which deter FDIs.
Pakistani policymakers must build a dispassionate and long-term consensus to overcome such hurdles. Economic reforms from political leadership divorced from political agendas are essential for enabling an investor-friendly ecosystem. This will require commitment by the successor government, even after the general election in 2023. Unless reforms are fast-tracked, investors will tread cautiously, and the policy of avoiding participation in great-power politics will be an elusive rather than a serious policy goal.
Note: This article appeared in SAV, dated 11 October 2022.
Disclaimer: The views expressed in the article are of the author and do not necessarily represent Institute’s policy.