The Political and Economic Externalities of CPEC

The China-Pakistan Economic Corridor (CPEC) has brought a massive influx of much needed infrastructure aid and investment to Pakistan, a nation that has faced chronic electricity shortages and crumbling infrastructure leading to economic stagnation. Yet, Pakistan’s leaders need to be more mindful in balancing the negative externalities of the project for its population, the impact it may have on the economy, and how the project should be understood.  The corridor stretches from the now completed port of Gwadar, in Pakistan’s least developed province Balochistan, to the Karakorum Highway further connecting Pakistan to Western China.

The title given to the project as an economic corridor appears to be slightly misleading. The Asian Development Bank’s recent working paper on the impact of ‘economic corridors” states that:

Economic corridors connect economic agents along a defined geography. They provide important connections between economic nodes or hubs that are usually centered in urban landscapes. They do not stand alone, as their role in regional economic development can be comprehended only in terms of the network effects that they induce.”

Most of Pakistan’s urban centers are located in the east not the west. The port of Gwadar is an ‘island’ isolated in an arid landscape with roads and railways linking it to the rest of the nation. There are no major hubs of industry or manufacturing in Balochistan that would truly constitute the linking of economic hubs into an economic corridor. The majority of Pakistan’s economic base resides in the provinces of Punjab and Sindh and those residing in the west of the nation have decried outrage at the blatant favoritism of the eastern portion of the nation. This division may fuel further inter-provincial resentment as certain parts of the country, already at a stronger economic position, reap greater benefits from the projects.

The central government has made past guarantees of investment within the supposed provinces but delivery has historically been lacking. As a result of chronic electricity shortages and inadequate investment in infrastructure, factories in KP have been closing down over the past few years. The current PML-N government, led by PM Nawaz Sharif, has promised to construct 12 out of 48 special economic zones to be built in Khyber-Pakhtunkhwa (KP) and Balochistan after mounting criticism of unfair treatment from opposition parties in KP and Balochistan.   

The construction of future economic zones further fuels the position of CPEC opponents that declare that it is not the linking of economic hubs into a corridor but rather a series of projects simply undertaken to assist Pakistan in exchange for Chinese access to the Arabian sea. This is not a bad thing as these projects would be crucial in assisting Pakistan escape its current bout of economic stagnation and strengthen bilateral relations. Yet, what must be considered is the level of commitment needed to create an ‘economic hub’ and the social cost to the nation. If successful, these hubs would be a significant addition to Pakistan’s capital stock and provide stimulus to the manufacturing, industrial, and services sectors of the economy. If they are unsuccessful, the reputation of the central government that currently stands, as one that is unable to deliver on promises, will continue to plummet wasting precious political capital and deter future investment, as these projects will be seen as a waste of economic resources.

Within Balochistan, opponents of the project have stated that the project is harming their sense of identity with their historic homeland. Allah Baloch, leader of the Balochistan Liberation Front, has called the Gwadar project fake and a conspiracy against the Baloch people. The Balochistan National Party, Baloch National Front, and the Baloch Republic Party have also echoed opposition to the project. Furthermore, it has been estimated that by 2048, the native Baloch population will be outnumbered by an influx of Chinese and migrant workers from Pakistan’s other provinces. The native Baloch people’s sense of marginalization is further fuelled by governmental actions. The president of the Gwadar Educational Welfare Society stated that, “Gwadar fishermen are not allowed near the port boundaries. Thousands of fishermen have been asked to leave the harbor." These concerns of marginalization have also been shared by residents of Gilgit-Baltistan, in Pakistan’s north, who say “we will become a minority and economically subservient.”

Disregarding the discontent of the domestic population, the economic viability of the project has also come into question. The majority of the financing for CPEC projects has come in the form of loan based financing, not unconditional grants by the Chinese government. But more importantly, the loans are not given to the government of Pakistan but rather to individual companies that are responsible for the construction of the projects, a seemingly no risk scenario for the government. Yet, the risk for the central government is actually quite significant as many of the power projects are under the umbrella of sovereign guarantees. If these companies were to fail on their debt obligations, this would directly harm the government’s economic position, as it would be responsible for repayments if the firms were unable to do so.

Currently, Pakistan’s liabilities (debt), both private and public, have reached a staggering 75% of GDP (Rs. 22.5 trillion). Pakistan’s circular debt, primarily within the energy sector has also reached new highs.  In 2015, the energy sector saw circular debt rise 23% to a figure of Rs. 633 billion. In November, Pakistan was unable to repay Rs. 136.5 billion in bank loans stemming from the energy sector and postponed payment for another two years. The dangers stemming from Pakistan’s debt-to-GDP ratio and the Sharif administrations short sightedness at the prospect of CPEC projects can pose significant dangers to the economy as a whole. Pakistan is taking a gamble and going ‘all in’ with CPEC hoping that the benefits will be able to outweigh the risks but there does not seem to be a ‘Plan B’ if things were to go awry.

Economic analysis of the project is difficult to conduct as much of the project lacks transparency. The State Bank of Pakistan’s Governor, Ashraf Wathra, has even stated that “CPEC needs to be more transparent” and that he does not “know out of the $46 billion how much is debt, how much is equity and how much is in kind.” Sentiments of caution have also been echoed by the IMF that has warned Pakistan on the possible economic externalities that may occur as a result of the project. Much of the criticism of CPEC is based purely on hypotheticals and ‘what-ifs’ but the lack of a contingency plan continues to be a source of anxiety for observers.

Furthermore, the success of the ‘corridor’ is entirely dependent on Pakistan’s ability to export its goods and services. This is a crucial caveat for the success of the project as a whole because a strong rise in exports would signify that Pakistan’s sectors of the economy (manufacturing, industry, agriculture, and services) are performing well, passing on the benefits to the overall population. However, these sectors of the economy would also have to compete with the influx of cheaper Chinese imports that have the ability to strangle the domestic market. Chinese imports have increased from their prior position of 4% in 2010 to 9% in 2015. If a downward trend of exports and increase in imports continues to occur, Pakistan would face a serious balance of payments crisis with some experts suggesting that it already is on the verge of experiencing one. On the other hand, if Pakistan were able to carve out a position for its self in the international market and link its sectors to Chinese sectors, for example producing parts in machinery or products that would then be either assembled in China or vice versa, Pakistan would greatly improve its economic position.

Pakistan must be cautious in how it implements and administers the completion of CPEC with China for both its domestic population and its future economic state. But more importantly, it must be honest with itself about the nature of Chinese investment in the nation itself. Pakistan risks losing its sovereignty and being beholden and exploited by China for its natural resources and geostrategic location. The upgrading of Pakistan’s infrastructure and power-generation abilities is a much-needed venture but Pakistan must make sure that it does not lose its self in the process. 

 

Image Source: umairadeeb (Flickr)