Considering possible advantages and disadvantages to the Pakistan's economy of China's Belt and Road Initiative, assess whether it is likely to be of overall benefit to Pakistan. (8 marks)

The ‘Belt and Road Initiative’ can bring advantages such as higher economic growth and employment to the Pakistan economy. With reference to extract 6, a number of projects such as the US$62 billion China-Pakistan economic corridor which involves a network of motorways, power plants, factories and railways in Pakistan has realised with the ‘Belt and Road Initiative’. These increase in investments in Pakistan will increase her AD from AD1 to AD2 as shown in Figure 1 below. The increase in production will result in an increase in hiring of workers. Actual growth is achieved while cyclical unemployment falls. In the long run, these infrastructure developments increases the productive capacity of Pakistan, LRAS increases from LRAS 1 to LRAS 2. Potential growth is achieved with increase in RNY from Y1 to Y2 and GPL falls from P1 to P2. Sustained economic growth can be achieved.

However, there could be problem of overheating in the economy in the SR should there be a large rise in consumption and investment due to the extensive investments. This can bring about high demand pull inflation. Once the economy reaches Yf, high rise in GPL leads to large rise in cost of living and MSOL may fall. Also while there could be rise in exports for Pakistan when more factories and railways allow higher production and sale of the goods to connected neighbouring countries. Pakistan can also be importing large amount of goods and services from the neighbouring countries or from China since the objective of the ‘Belt and Road Initiative’ is to create new markets for China goods when China’s economy is slowing. Should import expenditure be more than export revenue, BOP can worsen for Pakistan.

In the case of Pakistan, where the level of economic development is low, the problem of overheating is unlikely to happen since the economy is likely to be operating close to the excess capacity of the AS curve. The investments also bring about increase in LRAS in the LR, hence, inflation problem can be managed.

Overall, the advantages will outweigh the disadvantages to Pakistan economy as the investment from China greatly outweigh what the government has in terms of resources to develop the economy as one which has been plagued with challenging problems such as terrorism, illiteracy and corruption issues.

Most candidates responded well to this question. They made good use of aggregate demand and aggregate supply analysis to show the possible impact of China’s ‘Belt and Road initiative’ on Pakistan’s economy. Most responses were balanced, looking at both the advantages and disadvantages of China’s policy. These responses then arrived at a conclusion on whether the initiative was likely to be of overall benefit to Pakistan.