Evaluating the Effects of China-Pakistan Economic Corridor (CPEC) on Income Inequality, Household and Economy-wide Welfare in Pakistan: A Computable General Equilibrium (CGE) Analysis

Abstract

Income inequality threatens long-term socioeconomic development and poverty reduction programs worldwide. The UN Sustainable Development Goals of the 2023 Agenda emphasizes that governments address poverty and income disparities to achieve SDG 10. Foreign direct investment is an important tool in combating poverty and income inequality. Currently, Pakistan is dealing with socioeconomic difficulties. China’s direct investment in Pakistan, which accounts for 41 percent of total foreign direct investment (FDI), could help boost the country’s socioeconomic development. It can provide several advantages, such as creating jobs, generating tax revenues, and transferring managerial and technological know-how. This study uses Computable General Equilibrium (CGE) modelling to examine the effects of China’s investment in Pakistan under CPEC on income inequality, household welfare, and economic welfare. Contrary to previous studies on the topic, this analysis considers several transmission pathways that were previously ignored in analyses of how FDI affects household incomes in urban and rural areas. The simulation analysis indicates that Chinese FDI benefits the nation’s GDP, welfare, and income and may help narrow income gaps between all household types. China’s emergence as a significant economic player has enabled Pakistan to attract more foreign investment, which will help secure further investment from other nations.