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Andrew Small on China’s growing economic engagement with Pakistan

Headshot of Andrew SmallAndrew Small is a senior transatlantic fellow with the Asia program at the German Marshall Fund of the United States, which he established in 2006. He was based in GMF’s Brussels office for five years, and previously worked as the director of the Foreign Policy Centre's Beijing office; as a visiting fellow at the Chinese Academy of Social Sciences; and was an ESU scholar in the office of Senator Edward M. Kennedy. He is the author of The China-Pakistan Axis: Asia's New Geopolitics (Hurst / OUP / Random House, 2015). On Sept. 20, 2016, he spoke with Aleena Ali CMC '17.

Photo and headshot courtesy of Mr. Small


How does the China-Pakistan Economic Corridor (CPEC) mark an evolution in China-Pakistan economic relations? 

Economic relations have been the weakest dimension of China and Pakistan’s relations. There have been a number of strategic economic projects in the past, such as the building of the Karakoram Highway and the nuclear power plants, and there have been examples of military industrial cooperation. But despite the close friendship that exists between the two countries in other respects, general economic cooperation has been weak. There have been previous efforts to privilege the economic relationship for the sake of strategic and political ties, and deals between the two sides have been fast-tracked where possible. Pakistan has been prioritized in a lot of areas. However, there has been substantial reluctance on the part of China over the last decade to commit to the sort of investments that Pakistan was seeking. As a result, the Pakistan People’s Party government, which was particularly solicitous of Chinese firms and government investment, was unable to secure significant investments. Between 2001 and 2011, a total of $66 billion were committed in investments, out of which 6 percent materialized. 

A number of challenges remain regarding China-Pakistan economic relations, such as the complementarity of the two economies and security concerns that derailed a number of projects in the past. The fact that CPEC went ahead on such a large scale was therefore something of a surprise. Initially, when investment figures such as $46 billion were being quoted, there was an understandable level of skepticism regarding whether this initiative would proceed, or whether it would mirror the last attempt at a trade and an economic corridor. The last attempt shared various similarities with CPEC, but failed to eventuate and translate on the ground. 

Bilateral economic ties seem to be entering into very different zone. The distinguishing feature right now is that the impetus from higher political levels to proceed with projects and resolve any hurdles or problems that may arise in executing them is much greater. Previously, projects would either be abandoned or slowed down in the face of any implementation problems. The level of comprehensiveness of the economic engagement that is now underway is also of a completely different order than what transpired before. 

This shift in approach is related to China’s own economic transition, and its need for investing in such overseas projects. The level of private sector engagement from China is unprecedented, as is the level of support from up and down the Chinese system. It is approaching a national consensus in Pakistan too, at least with regards to the overall thrust of CPEC, if not with regards to the details of CPEC itself. 

How central is CPEC to China’s One Belt, One Road initiative and its efforts to reduce dependency on existing trade and transit routes?

CPEC is in the position of being the flagship project for the One Belt, One Road initiative, but that is partly by default. It was not envisioned as the flagship project when the One Belt, One Road initiative was initially conceptualized. 

If you examine the projects being put forth in the first phase and the logic that underlies them, you’ll see that they are oriented more around addressing some of Pakistan’s internal economic challenges than around providing routes from Xinjiang to Gwadar. At this point, energy investments occupy the largest share of the package, followed by infrastructure. 

On the Chinese side, it is quite important that the project is not perceived as a transit route, and there has been some debate within China about whether it should be called a corridor at all. Rather, the Chinese perceive it as a broad-based investment package to address some of the economic challenges that Pakistan faces. Pakistan is currently the only destination for such a broad-based Chinese investment project on such a large scale. 

It is also one of the first initiatives marking China’s new phase in outbound investments, the previous one being largely based on natural resource investments. This new phase is critical to the transition in China’s economic model. A lot of large Chinese firms cannot rely on large industrial projects within China and are having to look outside the country. Many of these firms have had to cut workers and are facing an overcapacity problem, furthering the need to invest externally. Pakistan has been particularly receptive to this shift in Chinese investing, and has welcomed the shift in focus to energy and infrastructural projects. 

CPEC is quite attuned to Pakistan’s economic needs and its current economic agenda. This has not always been the case with other countries that are a part of the One Belt, One Road scheme. Many other countries have shown a considerable degree of reluctance in accepting investments of this scale and the level of involvement of Chinese companies. 

How central is CPEC to China’s Western Development Strategy (WDS)? 

In the context of China’s Western provinces, CPEC is somewhat important. However, China’s Belt and Road Initiative is centered more broadly around stabilizing its entire western periphery. Some of the economic investments that directly involve China’s interior provinces are central to that agenda, but the Belt and Road Initiative goes beyond creating cross-border economic linkages. It entails transforming activity and stimulating growth in the entire neighborhood. CPEC does matter for Xinjiang and China’s western regions, but to a limited extent, as much of it goes beyond the cross-border dimensions to involve development in Pakistan more broadly, and even for bilateral trade, the maritime linkages are still likely to be more important.  

Does Pakistan have the absorptive capacity or competitive advantage to be a suitable destination for the incoming Chinese FDI? 

There are a few questions to consider regarding Pakistan’s absorptive capacity. First, are CPEC projects germane to Pakistan’s specific economic needs at the moment? At least in some respects, the answer is yes. Although there are a number of reform challenges that Pakistan’s economy faces, capacity certainly matters too. CPEC is likely to address and enhance this in the energy sector. 
    
There are questions about the financing of some of the projects, which is still quite opaque, and about the rate of return on the investment. The hope is that once this kind of package of infrastructure and energy investments materializes, then economic growth rates in Pakistan will increase. If successful, the energy and infrastructure projects will create the necessary preconditions for Pakistan to achieve growth rates of 7 to 8 percent, rather than the levels thus far, which have been around 4 percent or lower. There is also a sense that the close political ties between China and Pakistan, and the strategic importance of these investments, will lead China to be accommodating towards any financial problems that arise. 

Although very large investment figures have been flashed around to depict the transformative potential of CPEC, the investment on the ground is incremental and thus much smaller. If you put any large investment package together over any period of time, in this case until 2030, the actual investment that manifests itself initially is much more modest. According to the estimates I have received, officials are confident about $10 billion of investments going ahead currently. Therefore, Pakistan’s absorptive capacity will be able to facilitate CPEC, as the investments will be carried out in a more incremental and gradualistic manner than the big numbers suggest. 

In addition to the economic dimension of Pakistan’s absorptive capacity, its political and administrative capacity also deserves consideration. There are a substantial number of projects that have to be dealt with simultaneously on a scale that is quite unusual for any country, including China. Although the Chinese have undertaken such a large task within China, their external investments have not been on this scale thus far. They will have to engage in a lot of arduous tasks simultaneously, such as land acquisition, assessments of projects and the like, with a bureaucracy that is not accustomed to dealing with the scale, scope and diversity of projects being proposed. Thus, the issues surrounding Pakistan’s absorptive capacity center more around its bureaucratic capacity, and center less around whether its economy will be able to absorb the sorts of investments being proposed. 

For a number of years, China and Pakistan have been engaged in talks to develop overland routes from Gwadar to Xinjiang, China, and to transform Gwadar into a transport and energy corridor. To what extent have Chinese commitments to develop Gwadar translated into on-the-ground improvements? What are the factors influencing the degree of progress thus far?

Gwadar was one of the four early pillars of CPEC. Part of the reason to develop it was to deal with capacity constraints in Pakistan’s major port city, Karachi. Gwadar has never been effectively connected by road to the rest of the country, with the exception of the Makran Coastal Highway. Thus, it has never been a commercial route in its own right. Some of the necessary road-building has already taken place in Balochistan, thus connecting Gwadar to the rest of the country. The new airport is also under development, which is projected to function as an international airport. A new highway is also being constructed, which runs around Gwadar, and thus provides a smoother route than the existing one. Therefore, a number of on-the-ground developments have taken place. The development of Gwadar as a strategic port is proceeding, and dramatic improvements will be made to Gwadar’s functionality over the next couple of years. 

Photograph of Gwadar Port“Gwadar Port” by Paranda — Own work. Licensed under CC BY-SA 3.0 via Flickr Creative Commons — https://commons.wikimedia.org/wiki/File:Gwadar_Port.jpg

 

How will the development of Gwadar port impact Chinese investment decisions? Is Chinese investment in Pakistan contingent upon the development of Gwadar as a strategic port city? 

Chinese investment decisions are not dependent on the development of Gwadar as a strategic port city. Even if Gwadar proved not to be a very successful commercial venture and operated in much more limited terms, that would not change the nature of many of the other projects in the rest of the country. The development of Gwadar has become a symbolic part of the project, but its development as a strategic port through which an alternative Chinese transit route can be facilitated has not been accorded as much importance, both due to the logistical difficulties involved in maximizing its potential in that regard and due to China’s own needs. The route is not a very heavily-trafficked one. 


Land routes between the two countries have seen modest traffic even when the route was functioning normally. Of course the route will improve further when the all-weather surfaces are finished, but there are climatic and topographical difficulties that prevent it from being a reliable route. Although Gwadar’s functionality as a transit route is limited, it can certainly function as an alternative port for Pakistan itself to use. Perhaps China can also use it as a naval facility further down the line. Gwadar’s importance lies in its ability to boost Pakistan’s economy and to bolster Pakistan’s strategic situation, rather than in its function as a transit route for China. 

Gwadar’s commercial uses for China are still uncertain. If Gwadar can be turned into a port that is commercially useful for Pakistan, that would be a success in its own right. Gwadar may prove to be useful to China in terms of naval cooperation, but this requires critical infrastructure development first. At the moment there is no functioning water supply, so a desalination plant is being set-up. At the moment, Karachi has facilitated naval cooperation between China and Pakistan, but considering that naval cooperation is going to be an important growing dimension of cooperation between the two, there is hope on both sides that Gwadar will be helpful there as well over the longer term. 

Gwadar’s function as a strategic transit route is not the most salient feature for the Chinese, as their ability to utilize it as both a port and for naval purposes is not contingent on it functioning as a transit route. Therefore, Gwadar certainly matters for China, but not necessarily in the way that it is portrayed. 

What are the implications of improved economic relations between China and Pakistan for Pakistan’s economic relationship with India? Is progress in one trade relationship likely to depress and negate positive developments in the other? 

I am optimistic about the long-term impact of CPEC on Pakistan’s economy, which has been functioning almost as a war economy since 2001. CPEC may enable Pakistan’s economy to transition out of this mode and to transform itself into the kind of emerging market that it has the potential to be. If Pakistan begins functioning more normally on an economic dimension, then ultimately you would expect more normal ties with neighbors generally, and with India especially. In the long-term planning phase for CPEC, the details of which will be released soon, the potential for trade with India and enhanced economic cooperation with India has already been envisaged, but the extent to which the final documents will formally reflect that is uncertain.

China has always encouraged Pakistan to benefit from trade with India, just as China itself does. It views some degree of conflict and strategic rivalry as something that can co-exist with benefits gained from mutual economic ties. 

China had hoped that India would see some benefits from CPEC’s strengthening of Pakistan’s economy and view it as a catalyst for greater regional connectivity. India currently views CPEC through a geopolitical prism, and is concerned about various routes within the agreement going through disputed territory. However, concerns on India’s part are broader and pertain to the role of CPEC in deepening China’s backing for Pakistan, and whether that will enable destabilizing behavior in the region on the part of certain actors within Pakistan’s security services. Unfortunately, tensions between India and Pakistan have recently escalated, which has led to CPEC being discussed in securitized and politicized terms, rather than as a more normal economic project.  

There is also potential for deeper economic cooperation between China and Pakistan to be to India’s benefit, and there is debate in India about whether that is possible. However, it seems that the consensus emerging in India is antithetical to CPEC. Given the history of China-Pakistan cooperation, it is understandable that India is viewing these developments in securitized terms; but unfortunately the dynamics that are unleashed at the moment are militating against some of the more positive-sum benefits that might accrue from the entire scheme for all three countries. Thus, the picture looks a little less optimistic than it might have when this scheme first emerged. 

Do you think China has adequately factored in political risks such as terrorism and internal instability in Pakistan?


They are certainly uppermost amongst China’s concerns. There was a period, around and before 2008, when Pakistan was considered the most dangerous country in the world for Chinese workers working overseas. The Chinese are aware thus aware that projects might be the focus of attacks, and have placed emphasis on the capacity of Pakistan’s security services to raise a special security force to protect both workers and infrastructure. 

The CPEC-related projects build on new security arrangements that were put into place in 2008, and they have worked relatively well. Successful attacks on Chinese workers have significantly decreased, and there haven’t been any Chinese workers killed in the last few years, at least that we know of. Although there have been incidents involving academics and mountaineers, there has been a tangible improvement over the last eight years. 

The context prevalent right now is quite different from when China was considering investment decisions earlier, when there was an insurgency in Swat valley and a number of large-scale terrorist attacks in Islamabad and Lahore. 

China would also consider the situation to have improved and for protection extended to Chinese workers to have been largely successful in recent years. 

The confidence level in Pakistan’s ability and capacity to protect Chinese workers is somewhat higher than it was back then, otherwise they would not be proceeding with projects in the manner that they are.     

However, the Chinese do expect that there will be threats and cannot guarantee that workers will not be attacked, but they are definitely more resilient about what threats amount to. I suspect that even if there were one attack on a modest-level, they would continue to proceed with the project unless external conditions were deteriorating as well. They are very concerned about tensions between Pakistan and India at the moment, as well as the deteriorating relationship between Afghanistan and Pakistan. Moreover, they are keen to ensure that the external environment is maximally conducive to Pakistan’s internal stability, and there are questions and concerns right now about whether that is the case. 

Author: 
Aleena Ali