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Economic Prosperity Through Diplomacy

by Riaz Khokhar

Banaras Khan—AFP

Pakistan stands to gain much by focusing on its economic diplomacy

Pakistan’s economic diplomacy currently starts with, and ends at, seeking foreign loans and assistance from ‘friendly’ countries and multinational financial institutions. Much ink and energy has been spent on discussing the many ways through which Pakistan can improve its domestic economic structure and reform its civil service, but economic diplomacy—encompassing the full spectrum of diplomatic tools available with a state to achieve its national interests—remains a critical aspect of the country’s foreign policy that has long been ignored.

As stated by newly elected Prime Minister Imran Khan on several occasions, Pakistan is currently in dire need of attracting foreign investment and tourism, exploring new markets for its exports and promoting the country’s economic value proposition across the world. Economic diplomacy is all about that. However, before the government can undertake the steps required to achieve these goals, it is prerequisite that we set our own house in order.

Since attracting foreign investment is an essential component of economic diplomacy, it is no surprise that various analysts and foreign diplomats visiting Pakistan have urged the country to strengthen its institutions and energy infrastructure, reform economic and tax structure and improve its trading policies. Foreign investors, before deciding to invest in a country, often refer to its standing in the Ease of Doing Business (EDB) index of the World Bank and the Global Competitive Index (GCI) of the World Economic Forum. Pakistan’s standings in these comparative analyses shed some light on the challenges facing us.

Pakistan ranks 147 out of 190 in the 2018 EDB index compiled by the World Bank, largely due to the higher costs required to conduct business here. In the GCI report of 2017-18, in which the WEF compares states on the basis of governance, Pakistan stood at 115 out of 137 countries. The main factors responsible for such poor standing on these two fronts is Pakistan’s rampant corruption, macroeconomic instability, higher and convoluted tax code, unreliable electricity supply, poor health and education ranking (8th from the bottom out of 137 countries) and inefficient labor force (9th from bottom).

As Islamabad works to improve Pakistan’s investment climate and strengthen its competitiveness globally, the Foreign Office can help by creating awareness about the investment opportunities and tourist destinations within the country. Pakistan’s diplomats, in collaboration with central and provincial governments, need to communicate to multi-national companies their in-depth knowledge about the domestic market and business conditions. The Foreign Office should also engage with developed economies such as the United States, Canada, Britain, the European Union, Japan and South Korea, among others, to attract more companies to invest in Pakistan, which would help enhance our labor market efficiency by creating knowledge economy, while also boosting our industrial and energy infrastructure.

Another aspect of economic diplomacy is integrating the ministries of trade and foreign affairs. Many developed countries, including Canada, Britain, Australia, Norway, Denmark and Japan, have engaged commercial diplomats and trade industries to carry out their economic relations with the outside world.

Strengthening economic diplomacy as a means of driving economic growth is one of the three main pillars of Japan’s foreign policy. Pakistan can learn from this. The Japanese economic diplomacy model of supporting overseas business expansion of local companies in collaboration with diplomatic missions overseas has helped Tokyo achieve a truly global footprint. To encourage similar progress in Pakistan, evaluations of diplomatic missions must take into account their performance in achieving desired economic goals.

Norway is another country whose economic diplomacy strategy Pakistan can emulate. Two Norwegian strategies are especially worth noting: one, Oslo encourages high-growth companies by internationalizing their outreach; second, it seeks to increase its exports and market share in the global market through cooperation with government officials and “sector-specific specialization.”

According to Abdul Razzak Dawood, founder of multinational engineering and construction works company Descon and the current adviser on commerce and investment to Pakistan’s Prime Minister, internationalization of industries leads to an increase in exports, brings efficiency and productivity, infuses international competitiveness and results in further expansion of businesses in the domestic market. Pakistani companies, due to poor economies of scale and the resulting lack of competitiveness, are loath to expand their business outreach to overseas markets. The few companies that do have an external outreach tend to focus primarily on the domestic market.

Under the Norwegian strategy, Pakistan’s global network of diplomatic missions can utilize their vast experiences of engagement with foreign government officials and multinational corporations to promote Pakistan’s economic value proposition. Our diplomats can provide local manufacturers with sector-specific, customized advice, including analytical insight about foreign markets and the specific opportunities that can be availed to facilitate Pakistani businesses’ entry in international markets and eventual integration into the global supply chain. This can be undertaken in multiple phases.

In the initial phase, Pakistan’s Foreign Office could seek to apply these strategies in markets where it faces lower competition or may have a comparative advantage over rival states. Pakistan’s Foreign Minister Shah Mahmood Qureshi’s mention of exports to the African continent could prove a good test case in the short-term.

As a long-term strategy, under the Norwegian model, Pakistan can form a “Strategic Business Alliance of small, medium and large-scale enterprises,” in which enterprises such as Descon, which have vast international experience, could help bring less experienced businesses at par with international standards. The companies involved in such an alliance would add complementary products in a value-added production chain for exports surpluses.

Pakistan must also reconsider trade agreements that do more harm than good to local manufacturers. One such pact is Islamabad’s Free Trade Agreement with Beijing. Currently, Pakistan imposes no import duties on 3,000 items of Chinese origin. Consequently, we have a bilateral trade deficit of $14 billion with China, with our exports to the northeastern neighbor totaling a mere $2 billion. Pakistan must urge Chinese contractors, operating here on the China-Pakistan Economic Corridor, to employ local laborers and raw material in addition to collaborating with local manufacturers, including in Exclusive Economic Zones. Here, once again, Pakistan has an example it can emulate: Colombia. The South American state provides equal opportunities and terms and conditions for national and international investors to carry out businesses in the country; it ranked 59th in the Ease of Doing Business Index 2018.

Fortunately, there is some welcome news from the newly elected Pakistan Tehreek-e-Insaf government. Finance Minister Asad Umar has stated that the government would improve ways to increase the flow of remittances through formal channels rather than through the informal and unregulated hawala and hundi networks. In addition to this much-needed reform, Pakistan must invest in the potential migrant workforce in enhancing their skills in various fields to bring them at par with international standards and explore possibilities of their employment in countries like South Korea and Japan, which require skilled foreign laborers.

Under the Employment Permit Scheme, South Korea has made an agreement with 16 countries, including Pakistan, to hire foreign workers through the government. According to a report published in Business Recorder last year, Pakistan has sent 9,000 workers to South Korea under that agreement thus far. Japan, meanwhile, has been welcoming skilled I.T. professionals from India. Pakistan’s Foreign Office can similarly engage professionals from Pakistan’s I.T. sector and find them employment with Japan’s I.T. corporations thereby facilitating skilled labor export. This will help reduce the unemployment burden as well as augment foreign remittances, helping to bolster our foreign exchange reserves.

The success of Pakistan’s economic diplomacy must be measured by how it engages with international trade corporations in securing investments for the country and pursuing an export-driven growth strategy through internationalization of local manufacturing industry. With the newly elected government pledging to boost Pakistan’s economy and improve our international standing, there is no better time to focus on economic diplomacy as a key plank of our Foreign Office.

Khokhar is a research officer at the Center for International Strategic Studies (CISS), Islamabad, and works on Pakistan’s foreign policy and international politico-economic affairs. He can be reached at riazkhokhar11@gmail.com

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