Time to go back to import substitution

Globalization has lost its shine for the rich countries which in the first place had been its promoters as they went around the world looking for cheap labour in the 1980s. East Asia and then in a big way China became their sweatshops.

The result was, not only millions were lifted out of poverty in these regions, but the transfer of manufacturing to these regions had brought them stunning economic advancement bringing in the process China almost at par economically with these rich countries.

Now China is seriously challenging the US for the top position in technology, trade and geo-economics.

Meanwhile, as markets expanded and prosperity arrived in these regions labor started becoming dearer and as costly as in the US, Europe and Japan. On the other hand, artificial intelligence (AI), meanwhile, had started taking firm roots in these rich countries displacing labour slots in the manufacturing process by the hundreds, thus making it economically possible for these countries to bring manufacturing back to their own shores.

One more thing. AI has also made it possible for shorter supply chains, meaning thereby manufacturing at the doorsteps of the consumers—no need to wait for weeks for the shipments to arrive at the importing destinations from the far off exporting regions.

So, in this backdrop, the decision to establish markets along Pakistan’s borders with Afghanistan and Iran to boost trade looks logical. Pakistan has remained out of the regional markets all these years. And this has happened in spite of Pakistan’s strategic location in the region and its links through surface routes with India in the east, and Afghanistan and Iran in the west. Moreover, across Afghanistan are the Central Asian Republics. And we continue to have a significantly large untapped market beyond India.

The increase in regional economic integration will lead to greater interdependence and faster growth, and ultimately create a strong constituency for peace across the region. But this does not appear feasible in the foreseeable future.

Therefore, Pakistan needs to explore the possibility of adapting to a fairly liberal import substitution policy to enable the country with a market of 200 million plus (sixth largest in world ranking) to achieve a modicum of self-sufficiency without, of course going into complete isolation.

And the China-Pakistan Economic Corridor (CPEC) has already made the choice for Pakistan as to on which side of the fence it would find itself, in due course of time, in the escalating geo-economic confrontation between the US and China.

And with the chances of CPEC, led by Gwadar Seaport, merging with the massive $45 billion infrastructure and communication investment of China in Iran looking more than assured it would take some doing on the part of Pakistan to keep its historic, traditional master-client relationship with the US from fracturing for good.

Meanwhile, an opportunity is opening up for energy deficient countries like Pakistan as the world is reorganizing itself around a new imperative for clean, electric energy. As a result, supply chains for things like wind-turbine and solar-panel components will gain primacy.

China, which currently makes a large share of them, could reap a huge advantage. Chinese companies have invested in mines from the Democratic Republic of Congo… to Chile and Australia, securing access to the minerals needed for solar panels, electric vehicles and the like, it is becoming what one might call an electrostate, investing strategically all along the chain from mine to meter.

The cost of solar power has been declining dramatically for years, and it has now become the cheapest option in many economies. China, Europe, India and the United States have driven solar’s rise in recent years. But solar projects are now springing up fast in many countries across the globe, ranging from Vietnam to the United Arab Emirates, and from Egypt to Brazil. Meanwhile, offshore wind has achieved game-changing technological leaps and cost declines that give it the potential to become a key source of clean power in many parts of the world.

Over the past few years, Pakistan has added extra generation to counter blackouts – but not much attention has been given to energy infrastructure, efficiency, and improving the recovery of electricity dues – one of the key reasons for Pakistan’s huge circular debt pile-up. At the same time, the new added generation has been primarily fossil fuel-based.

The government now is committed to improving the country’s World Economic Forum Energy Transition Index (ETI) score of 46% – and one initial step is the development of an Indicative Generation Capacity Expansion Plan (IGCEP) that runs until 2040.

According to Ayla Majid, Managing Director, Financial Advisory Services, Khalid Majid Rehman (Can Pakistan make its energy sector greener, cheaper and more reliable? Published in weekly agenda of World Economic Forum on Sept 16, 2020) to plug the generation gap caused by growing demand for energy in Pakistan, installed generation capacity was increased from 23,000 MW in 2014 to 33,744 MW by 2019. However, overall energy planning remained fragmented across the energy value chain, with little focus on improving the energy mix and upgrading transmission and distribution capacity.

“It is supremely important that an integrated power sector planning approach is adopted to adequately achieve balance in the energy triangle. This approach must include accurately forecasting demand, adding generation capacity, improving transmission and distribution systems, bringing costs down and ensuring sustainability.

“These important factors do one very important thing for economic growth and improving investor confidence: they provide predictability around the availability of affordable energy. For the first time, comprehensive planning has been conducted in Pakistan in the form of the IGCEP, which includes expansion planning studies that will be updated annually in order to retain accuracy in the wake of changing dynamics.

“The aim of the IGCEP is to optimize energy generation costs in order to ensure that adequate generation is added at a least-cost basis to meet future energy demands.

“At present, Pakistan’s expensive power generation mix consists mostly of imported coal (8%) and re-gasified liquefied natural gas (R-LNG – 23%).

“Local resources, although abundant, are not utilized to their full capacity. Local coal, for example, makes up just 0.1% of the power generation mix. The threat of climate change has led to a drive toward de-carbonization; IGCEP takes this into consideration and therefore includes a planned increase in capacity from renewables and hydro sources. While this plan indicates a desire by the government to improve the overall energy mix and reduce costs for its citizens, it is also an area of opportunity for investors who can benefit from investment-friendly policies, and invest in the provision of sustainable, affordable energy as well as earning respectable returns.

“As per the IGCEP, Pakistan’s energy mix will become more sustainable and more reliant on local production than imported energy. By the year 2040, hydro-generation will have a 40% share, while renewables and local coal will have 16% and 25% shares, respectively. The dependency of imported fuel including imported coal and R-LNG will be reduced from the present figures of 7% and 23% respectively to 5% and 6%.

“In addition to enhancing the optimal energy mix and planning, it is fundamental to reduce electricity losses, which currently stand at 18.3% for distribution losses and 2.4% for transmission losses.

“These losses contribute to Pakistan’s much-talked-about circular debt, which stood at PKR 1.6 trillion ($7.2 billion) by the end of June 2019. Technical and governance interventions are required to reduce the losses – and, as a consequence, the circular debt. The government is also making out-of-the-box financing solutions by working with key energy stakeholders (including independent power producers) to reduce the fiscal burden.

“In addition to the IGCEP’s planning and reducing losses, there is a great need to improve transmission and distribution systems, reduce subsidies, improve governance and create an open energy market platform for long-term competitiveness, sustainability and transparency in the electricity business. This improvement of ecosystem and system performance will be a sure-shot formula for fueling economic growth led by domestic and export-led businesses.

“Following global best practices, fossil fuels will play a limited role in the future of energy in Pakistan. New innovations, renewables (wind, solar, geothermal) and nuclear power will dominate. Our goal as an emerging economy should be to attract more investment in the renewable energy sector, both on-grid and off-grid, and to adopt solutions for enhanced efficiency that reduce our dependency on public finances and make the regulatory process friendlier for stakeholders who can bring in new tools and technologies.”

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