Opportunities and Challenges for Constructing CPEC: Regional and National Economic Perspectives

As a major Belt and Road pilot project, the China-pakistan Economic Corridor has become the framework and platform for comprehensive bilateral cooperation. The two countries must share the opportunities of development while tackling challenges together.

The China-pakistan Economic Corridor (CPEC) is a major pilot project of the Belt and Road Initiative (BRI), which has become the framework and platform for comprehensive and substantive cooperation between China and Pakistan. Through collaboration on the Gwadar port, energy, transportation and industrial infrastructure, CPEC is a long-term and systematic project to promote economic cooperation. Currently, CPEC has gradually entered into the state of full implementation, and plays an increasing role in leading and promoting China-pakistan cooperation. Up to now, a series of major projects have been implemented in a generally steady and smooth manner. At the regional level, the construction of CPEC will meet the demands of regional economic integration and transportation connectivity, linking Central Asia with South Asia in particular. At the national level, CPEC will effectively promote the economic and social development of Pakistan and enhance the complementarity of development strategies between China and Pakistan, which serves the fundamental interests of people in both countries. However, at the same time, attention must be paid to both internal and external challenges, regarding which China and Pakistan have to make joint efforts to prevent them from developing into substantial obstacles.

Meeting the Needs of Regional Economic Integration and Connectivity

First, the present condition of economic convergence and infrastructure connectivity of South Asia lags far behind that of the world. For a long time, the heartland of Asia, which includes West, Central and South Asia, situated between the developed and prosperous “European Economic Circle” and “East Asia Economic Circle,” has been considered an “Economic Depression Zone.” Despite its important geographic position and rich natural resources, the region is characterized by its cumbersome transportation system and its backward economic development. The extent of economic integration and interdependency in South Asia is very low, with the volume of trade among the countries in the region only accounting for about 6% of their external trade. Compared with the figures of 63.1% for the European Union, 46.7% for the North American Free Trade Area, and 56.7% for East Asian countries,1 the South Asian Association for Regional Cooperation (SAARC)2 is one of the most backward regional organizations in economic integration primarily because of the complex geopolitical relations of the region. The poverty rate in the region remains high. More than 200 million people live in slums, and half a billion people go without electricity. Many countries in the region suffer from extreme forms of social exclusion and huge infrastructure gaps, and the larger countries there are experiencing increases in inequality.3 In addition, the energy and transportation connections among South Asia, Central Asia, West Asia and Southeast Asia lag well behind that of East Asia and the European continent, and cannot meet the requirements of regional countries’ development and regional economic integration.

Meanwhile, the strategic position of South Asia is rising and attracting more attention. Since the beginning of the 21st century, this region has become increasingly important with the fast and astounding adjustments in the international power structure. In 2011, the United States officially pushed forward their New Silk Road initiative, which intends to use Afghanistan as its basis for building an economic and transportation network linking Central Asia with South Asia. Afghanistan and its neighbors are leading the way in key areas, creating new North-south transit and trade routes that complement vibrant East-west connections across Eurasia.4 Russia is advancing its Eurasian Economic Union (EAEU) in order to realize the economic integration mechanism among former Soviet Union countries. The EAEU seeks energy and infrastructure interconnectivity cooperation between Central and South Asian countries. Japan has raised investment in South Asian countries, especially focusing on the industrial cooperation with India and pushed the construction of the Delhi-mumbai Industrial Corridor and the Western Dedicated Freight Corridor. The European Investment Bank (EIB), which is owned by the 28 EU member countries, is planning to open its first office in India in order to significantly expand its operations in South Asia soon. The EIB has provided financing support for the CASA1000 project, which will leverage Central Asia’s significant energy resources to help alleviate South Asia’s energy shortages. Therefore, it is apparent that the economic development and connectivity of this region has gained more and more regional and international attention.

Moreover, the demands for the economic integration and interconnection of regional countries are increasing rapidly. Along with the tide of economic globalization and regional economic integration, South Asian countries badly need to enhance cooperation and are under strong domestic pressure to do so. Most countries in the region are undergoing political and economic transition. In spite of different domestic situations, regional countries take economic revival as their priority and expect common

4 US Department of State, “US Support for the New Silk Road,” https://www.state.gov/p/sca/ci/af/ newsilkroad.

development and prosperity through regional cooperation. Actually, the tendency of regional economic integration is irreversible and would greatly benefit the local people. Take India, the largest economy of the region, for example. The Modi government regards infrastructure construction and manufacturing industries as the core of national reforms and the engine of economic growth. Meanwhile, India has paid more attention to connect with its surrounding areas through promoting the “Look East” and the “Act East” policy, strengthening ties with Australia, Japan, South Korea and ASEAN as well as restarting the North-south Transport Corridor along its western region in order to obtain energy supply from Central Asian countries and connect with the huge markets of Northern and Western Europe. Similarly, new visions or national development plans of most regional countries highlight the importance of economic integration and energy cooperation, while infrastructure construction and trade flows have become the priorities of their national strategies.

Enhancing Connectivity and Synergy of Development Strategies

First, CPEC serves as a new platform for regional integration complementary to China’s Opening to the West. As reform deepens, the competitive environment of the Chinese market will be much more equitable, open and transparent, and the Chinese economy will become more invigorated. China will continue to expand its opening up, especially strengthening mutually beneficial cooperation with the countries to its west. China has a desire to bring more benefits to its neighbors and contribute to common development through its own development. China is actively planning six economic corridors, namely China-mongolia-russia, China-central Asia-west Asia, China-indochina Peninsula, China-pakistan, Bangladesh-china-indiamyanmar (BCIM) economic corridors and the New Eurasian Land Bridge under the Belt and Road Initiative,5 two of which are located geographically

5 “China is Planning Six Economic Corridors under the Belt and Road Initiative,” http://world.people. com.cn/n/2015/0528/c1002-27069213.html.

in South Asian countries. CPEC plays a leading and exploratory role in their implementation and will have a huge impact on the construction of other projects along the Belt and Road.

For China, the creation of new trade routes as envisaged in CPEC has become imperative for the continued growth of the Chinese economy as CPEC can serve as a bridge between the Belt and Road. It is a megaproject and will considerably shorten the current sea routes from the Middle East and Africa to China. Thereby, the cost of western and central China’s international trade with Central Asia, the Middle East, Europe and Africa will be significantly reduced. The Gwadar port is the flagship project along the CPEC route due to its important geographical position, close to the Iranian border and only 400 kilometers from the Strait of Hormuz, the world’s key oil shipping route which accounts for more than 30% of the world’s seaborne oil exports. Gwadar will provide a crucial link between the Belt and Road projects. As CPEC starts to take shape on the ground, the cost of petroleum transportation from the Middle East to China will be dramatically reduced by about 85% through the land route of Gwadarkashgar instead of the maritime corridor through the Malacca Strait. In addition, better connectivity and easier sea access will favor the development of the western provinces of China like Xinjiang, Qinghai and Tibet. As China’s largest trading partners include EU, US, ASEAN, Hong Kong, and Japan,6 China can also find an easier and shorter access to the majority of partners through CPEC, which will link China with nearly half of the population in the world.

Second, CPEC will provide new impetus to help Pakistan achieve sustainable development. The package of projects contained in CPEC offers an exceptional opportunity for Pakistan to tackle some of the main barriers hindering its economic development such as energy bottlenecks, poor connectivity and limited attraction for foreign investors. A large amount of CPEC’S investment will be allocated to energy and transportation

6 “2015 Development Situation of China’s Foreign Trade,” http://zhs.mofcom.gov.cn/article/nocategory/ 201605/20160501314688.shtml.

projects which aim to improve energy system capacity and connectivity. The shortage of energy has cost Pakistan’s economy 2% to 2.5% of GDP annually, and only in the early harvest phases (2017-18), CPEC projects are expected to add 10,400MW to the Pakistan energy system.7 Under the CPEC framework, both China and Pakistan have identified 16 prioritized projects as well as 8 actively promoted projects. Construction is under way for projects such as Zonergy 300MW solar park, Dawood 50MW wind farm, Sachal 50MW wind farm, and the Port Qasim 2×660MW coal-fired power plant, etc.8 These projects would help Pakistan out of the energy crisis and lay a good foundation for national industrialization. Furthermore, up to 36% of CPEC’S funding will be devoted to infrastructure, transport and communication due to the poor performance of the transport sector, which has cost the Pakistani economy 4% to 6% of GDP every year.9 The improvement in transportation infrastructure will be of great benefit both for a greater integration of the domestic market and for reaping regional advantages. In addition to sharing the growth dividend of China’s economic development, the projects under CPEC will enable Pakistan to increase employment, alleviate poverty and improve the socioeconomic outlook and indicators such as education, health and basic amenities as well as contribute to improving security through development dividends. So far, more than 10,000 jobs have been created to local people directly. Chinese companies provide vocational training to Pakistani employees and sponsor their training in China.10 Local schools and hospitals have been integrated into surrounding facilities of many of these projects.

Third, Chinese and Pakistani economies are highly complementary with huge potential for further mutually beneficial cooperation. On the strategic level, China’s Belt and Road Initiative and Pakistan’s Vision

2025 are well matched and CPEC shares the same goal with Vision 2025, which is improving the sustainability and vitality of Pakistan’s economic growth and promoting the livelihood of Pakistani people. Pakistan also sees CPEC as a historic opportunity which could bring Pakistan into global economic mainstream as well as involve Pakistan in regional economic integration. Vision 2025 focuses on exploring Pakistan’s advantage of its unique geographic location and diverse workforce. Pakistan is located at the crossroads of South Asia, Central Asia and the Middle East and is thus the gateway to the regional market. Pakistan has a huge population of around 196 million, with a large percentage below the age of 25. Pakistan also has a large pool of trained and experienced engineers, bankers and lawyers. Prosperous IT engineers make Pakistan the third largest programmer supplier in the world,

which will be a potential field of cooperation within the framework of CPEC.

In terms of their respective stages of economic development, China and Pakistan smoothly complement one another. China is upgrading its industrial structure and optimizing the construction of key projects, while Pakistan is eager to develop the manufacturing industry and speed up its infrastructure construction. China has advantages in experience, technology, financing and industrial capacity while Pakistan enjoys favorable conditions in resources, labor force and market. By carrying out industrial cooperation, both sides will achieve mutual complementarity and win-win results. As agriculture is still the pillar industry of Pakistan and China has advanced experience and technology as a big agricultural country, the two countries can jointly reduce poverty and ensure food security.

The huge potential and bright prosperity of the integration between Chinese and Pakistani economies will be fully unleashed and will flourish with the implementation of CPEC. The current situation of such cooperation has not met the demands of economic development of both countries. Until the 1990s, the bilateral trade volume was stuck at $1 billion. With China-pakistan FTA, signed in 2006 and coming into effect in 2007, along with other mutually strategic measures and stimulus packages, the bilateral trade has increased significantly from $8.7 billion in 2010 to $16 billion in 2015. And Chinese FDI stock in Pakistan soared to $3.74 billion in 2014.11 According to Chinese statistics, for the first three quarters of 2016, bilateral trade volume between China and Pakistan has exceeded $14 billion. The value of newly signed project contracts by Chinese companies in Pakistan amounted to $7.1 billion.12 Some international organizations and agencies like the IMF and the World Bank commended CPEC as an important engine for the economic growth of Pakistan.

Therefore, the “1+4” cooperation format of CPEC with the priority areas of developing and making operational the Gwadar port, building

11 Foreign Investment and Cooperation Guidelines (Pakistan 2015), Chinese Academy of International Trade and Economic Cooperation, December 2015, p.24.

12 “Remarks by Chinese Ambassador H.E. Sun Weidong at the Round Table Session on CPEC.”

infrastructure, creating energy and trade corridors, and enhancing Chinese investment in Pakistan through construction of industrial parks and special economic zones, meets the demands of deepening and expanding Chinapakistan all-round cooperation, and plays a greater role in leading and promoting substantive cooperation between the two countries.

New Challenges Follow Opportunities

CPEC is admittedly a mega-plan and a new endeavor for which neither China nor Pakistan have practical experience. The two countries must share the opportunities of development while tackling challenges together. Apart from the security threat, the lack of experience in integrating these two countries, as well as the resistance and competition from external powers regarding this economic endeavor have to be taken into consideration.

Lack of experience in economic integration

For Pakistan, the conflict of interest among different regions has caused controversy due to imbalance in the country’s development. CPEC would be a catalyst of economic change in the country, and each province of the country hopes to be the first beneficiary and enjoy the priority of CPEC. A considerable number of parliamentarians hailing from Khyber Pakhtunkhwa (KPK) and Balochistan in April 2015 had taken the federal government to task for ignoring their concerns regarding the CPEC routes. They have demanded that the route must go through Balochistan and KPK so that the smaller provinces, neglected areas and backward communities could gain the benefits from CPEC.13 The threat posed by the dispute with the Pakistani government in the province of Balochistan where Gwadar is located is a major stumbling block that must be addressed in order for CPEC to move forward. The projects in Balochistan should boost the provincial economy to address the grievances of the Baloch about

13 “CPEC Route Controversy,” Dailytimes, http://www.dailytimes.com.pk/editorial/24-apr-2015/cpecroute-controversy.

being exploited and economically deprived of their due share of revenue by the central government. This in turn would drastically reduce the support of extremist groups by the locals. The construction of CPEC will provide a window of opportunity for a peacefully negotiated settlement of the insurgency. A number of local Baloch mid-level leaders and insurgents have laid down their arms. The Baloch National Party and the Baloch Republican Party have indicated their willingness to come to the negotiating table. However, much work remains to be done in order to involve all powers of Balochistan in the CPEC construction.

The location of Special Economic Zones (SEZ), which are under consideration during the latest meeting of the Joint Cooperation Committee on CPEC, would be another issue that could fuel suspicion within different provinces because of the obvious role the SEZ would play in increasing economic activity and reducing unemployment. Moreover, the transparency of funding and environmental protection of some projects can also easily arouse disputes or be used by irresponsible media or NGOS to mislead the public. Actually, the controversy regarding CPEC within Pakistan reflects the lack of a consensus about the function of CPEC for Pakistan: What kind role would CPEC play in reviving Pakistan’s economy? Should it work as a leverage to bridge the gap between the developed and backward regions of Pakistan? Or should it be the engine of economic take-off led by some developed regions? That would be a choice of the path of national development that can only be made by the Pakistani people.

For China, new and formidable tasks have to be accomplished in order that the construction of CPEC run smoothly and productively. With the implementation of CPEC, massive Chinese investments and enterprises will go into Pakistan. Many of CPEC’S key projects are currently carried out by state-owned enterprises of China. But companies from the private sector are also badly needed to meet the demands of integrated markets in order to invigorate Pakistan’s economy. Fortunately, many private companies with strong performance and good credit have shown interest in doing business in Pakistan under the auspices of the Chinese

government. Another problem is to balance short-term return and long-term benefits for Chinese investment. Many projects, especially in energy and transportation sectors, must be heavily invested in but without being able to reap benefits in the short term. Therefore, the companies should take this into full consideration and start their business only after thorough research and examination of the domestic situation and the business environment of Pakistan. Furthermore, with years of experience in the overseas markets, the relocated production capacity at this stage should be of high quality. The business should integrate construction with services and trade, bring jobs and vocational training to the local community and pay attention to environmental issues.14 Experience in hiring local people, providing vocational training, protecting environment and constructing livelihood projects obtained from previous cooperative projects should be improved in Pakistan. At the same time, most Pakistani people have too high expectations for CPEC and the prospect of rapidly accruing benefits from the project construction. Therefore, meeting the expectations of the Pakistani people and effectively managing the enterprises’ operations in Pakistan will be challenges accompanying the process of developing CPEC.

Competition and resistance from external powers

India has not accepted CPEC and is carrying out countermeasures to exclude Pakistan from the process of regional economic integration. India is the largest economy in South Asia and has a significant impact on regional peace and stability. There have been concerns in India about CPEC, and Prime Minister Narendra Modi has criticized the project as “unacceptable” during his visit to Beijing in June 2015. “India’s fears stem from the fact that CPEC will pass through Pakistan-administered Kashmir and could be used for military purposes in the future.”15 “This geographical

reality of CPEC could potentially impinge upon India’s geopolitical calculations and pose a strategic challenge.”16 Due to the hostility between India and Pakistan, India expects to remain in a more favorable situation in South Asia and does not wish to see Pakistan realizing any economic takeoff. India also worries about the increasing influence of China in the region politically and economically and will deter China from expanding military presence in South Asia and the Indian Ocean. Therefore, India has taken measures to counter the potential impact of CPEC on the region. First, India drew on Iran and Afghanistan to upgrade the construction of the Chabahar port which leads to competition with Gwadar. In August 2016, India signed a bilateral deal with Tehran and committed to spending about $500 million to develop the Chabahar port as a regional trade hub, which will allow it to open up an alternative land-sea route for trade with Afghanistan, and then with Central Asian and Middle Eastern countries. Second, India has utilized the “Balochistan gamble” to undercut stability in Pakistan and used the Kashmir issue as a hedge in that endeavor. Modi brought up Pakistani atrocities toward the people of Balochistan in his third Independence Day speech, which is the first time this area has been mentioned by any Indian Prime Minister during an Independence Day speech. It proved Pakistan’s contention that India has been “fomenting terrorism” in the province of Balochistan according to Pakistan’s analysis.17 Third, India tried to isolate Pakistan from India’s sub-regional integration. India has pushed forward the “SAARC-1” policy, which is to advance the Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation (BIMSTEC) as well as the Bangladesh, Bhutan, India and Nepal Initiative (BBIN) along the east border of Pakistan. Meanwhile, India is building the South-north Strategic Channel with the hub of Chabahar port on the west border of Pakistan. All the projects in India’s regional economic cooperation and connectivity

exclude Pakistan.

Actually, India would gain obvious economic advantages if it could abandon the mindset of a zero-sum game and support CPEC. India’s demand for energy can be largely satisfied through the facilities of CPEC, and its reach to Central Asian and Middle Eastern markets would become easier and less costly. Moreover, India’s western connection to Iran and other countries would run more smoothly with connections through Pakistan. More importantly, the promotion of economic interdependence between India and Pakistan might bring the two rival countries toward negotiation while regional cooperation in South Asia would also be improved.

The United States also has its own plan regarding this region’s integration and is still highly suspicious of the success of CPEC. The US officially launched the New Silk Road initiative in 2011, which intends to use Afghanistan as the basis for building an economic and transportation network connecting Central Asia with the South Asian subcontinent. However, the US was not ready to make a heavy investment on the plan due to the instability and remoteness of this region. It is interesting that China and Russia are excluded from this initiative. Although Washington has reason to welcome the economic dimension of CPEC to help promote Pakistan and even Afghanistan’s stability and security, the strategic rationale of CPEC and Beijing’s growing strategic weight in the pivotal region of Southwest Asia and the Gulf has generated considerable political concern in Washington.18 The US media is accustomed to portraying Pakistan as a failed state and hardly ever looks at the country beyond the security lens. The US is more skeptical of the success of CPEC since Washington even tried to help develop Pakistan’s economy through expanding civil assistance by the Pakistan Enduring Assistance and Cooperation Enhancement Act of 200919 but failed. Daniel Markey, senior research professor at Johns Hopkins University’s

School of Advanced International Studies, said that the worst scenario for CPEC would be to pull China deeper into Pakistan’s domestic politics, and create greater turbulence in the triangular relationship Delhi-islamabadbeijing.20

In addition, other regional powers like Afghanistan, Iran and Bangladesh have different concerns about CPEC. For Afghanistan, CPEC will integrate it with other regions and allow it to enhance its commercial activities with the Indian Ocean, and bring together the western and eastern alignments of the corridor through improved connectivity between Afghanistan and Pakistan. However, due to deteriorating relations between Afghanistan and Pakistan, bilateral cooperation under CPEC is not proceeding well. Although Iran initially worried about the competition from CPEC, particularly the Gwadar port which will become a threat to its Chabahar port which Teheran heavily relies on for the conduct of trade, it has now shown interest in CPEC. In May 2016 at the Institute of Strategic Studies in Islamabad, the Iranian ambassador to Pakistan said that the Chabahar port would not turn out to be an enemy port to Gwadar but would serve as a “friend” port.21 Iran realizes that Pakistan can become the transit point within the interconnection of CPEC, and therefore Iranian mega-oil and gas resources would have a more convenient route for reaching China and other places in the region. For Bangladesh, which has similar advantages of rich labor resources and a textile industry as Pakistan, the competition between these two South Asian developing countries may be inevitable in absorbing relocated capacity, attracting foreign investment and promoting market share. Over the past several years, 40% of Pakistan’s textile plants have been transferred to Bangladesh and one of the major reasons is the rising costs caused by Pakistan’s energy crisis.22

Conclusion

China stands ready to work with Pakistan through joint efforts to push forward the construction of CPEC, which will drive the common development and prosperity of the whole region by overcoming various difficulties. Both countries believe that CPEC can benefit all of the provinces and the entire population of Pakistan and are anxiously waiting to see the dramatic changes that CPEC brings to the two countries and the region. Alongside CPEC’S early harvests, especially in Gwadar, social welfare institutions like primary schools, vocational training centers and hospitals are being set up with Chinese government’s grants to deliver the benefits of CPEC immediately to local people. CPEC should not be understood as one road or one route, it is actually a comprehensive cooperation framework of “one corridor, multiple passages” and stepby-step implementation,23 which covers a wide range of different sectors including roads, railways, telecommunications, and people-to-people exchanges, etc. China believes the Pakistani people, through deliberations and consultations, can achieve a nationwide consensus on supporting and implementing CPEC.

China and Pakistan, as all-weather strategic cooperative partners, have complete confidence in pushing forward CPEC in spite of challenges or suspicions. CPEC can be a window of opportunity to strengthen the regional economy and increase the mutual reliance of the countries through providing a high quality of common goods. Fundamentally, the consistent interests of CPEC for China, Pakistan and the region are promoting the economic development and improving people’s livelihood, and as a result, it will be accepted and supported by all the people and countries in the region.

The Gwadar port of Pakistan, as a flagship project of CPEC, will connect the vast area of South and Central Asia with the Indian Ocean region, particularly the Middle East and Southeast Asia, providing a crucial link between the Belt and Road projects.