Can Chinese FDI Accelerate Pakistan’s Growth? (Working Paper)

Pakistan’s GDP growth has slowed to a barely 3 percent rate that is economically and politically unacceptable. The country’s technological backwardness, its low-level of industrialisation, the scale of its domestic market and the youth bulge all suggest that it is punching much below its weight. There is economic potential that is not being exploited if a virtuous growth spiral could be catalysed through policy action that attracts much needed foreign direct investment into industry and infrastructure that promotes the diversification and technological upgrading of exports and helps integrate Pakistani firms more closely with global supply chains. Although the flow of FDI from China has been modest to date, once China begins offshoring more of its labour-intensive manufacturing activities, Pakistan’s textile, leather, white goods and auto industries could stand to benefit. During the medium term, China’s FDI can indirectly assist Pakistan’s industrialisation by helping to ease transport and energy constraints. However, by the second half of the decade, increased Chinese FDI in light manufacturing could be induced if much needed policies are implemented.