This article was first published on the Institute for Peace and Conflict website. 

Is it to China that the economic benefits from CPEC are destined and is this another lease-for-debt deal?

By

Vice Admiral (retd) Vijay Shankar

Misshapen Marshall Analogy

Deceptive arguments are current that urge that the China Pakistan Economic Corridor (CPEC) finds historic equivalence in the Marshall Plan. The Plan was an American Congressional Act legislated on April 3^rd 1948, in the immediate depredations of post-World War II Europe. It sought “to promote world peace (?)…, national interests, and foreign policy of the United States through economic, financial, and other measures necessary for…free institutions to survive consistent with the promotion of the strength and stability of the US.” The key phrases of the Plan were “strength, stability and national interests of the US.” Underlying it was the clash of two opposing ideologies, Communism versus Western Capitalism.

By 1946–1947, the fear of the spread of Communism among the collapsed economies of Europe, spurred the US Congress to approve funding of $13 billion ($189.35b in 2016) over a period of four years for the rebuilding of Western Europe. This life-saving transfusion generated a resurgence of West European industrialization and opened extensive markets that in turn stimulated the American economy. The strategic economic recovery programme quite deliberately precluded any involvement of either the East European economies or the Soviet Union. It resulted in a re-structured economic order that promoted European integration; it also created a vast system of commerce that complimented the domestic economy of the United States. The assertion that the Plan represented American altruism has long been debunked, as the investment in Europe not only kept the United States from regressing into depression, but also set the stage in 1949 for the creation of the mother-of-all military alliances, the North Atlantic Treaty Organisation (NATO). The gargantuan nature of NATO may be gauged by the fact that it’s combined military spending even today accounts for over 70% of global aggregate.

China: No Altruist

In this context, the CPEC is not a bulwark against an ideology; neither does it presage the threat of global armed confrontation between competing blocs, nor does China have the economic muscle to promise rapid materialization of a dominant economic confederacy. So then what is it all about? Pakistan, given the precarious internal security situation that prevails, teamed with venal politics and crumbling infrastructure, hardly provides the inducement for long term massive investment. The Wold Bank’s current economic outlook concludes that Pakistan faces,

“significant economic, governance and security challenges to achieve durable            development outcomes. The persistence of conflict in the border areas and security challenges throughout the country is a reality that affects all aspects of life in Pakistan and impedes development. A range of governance and business environment indicators suggest that deep improvements in governance are needed to unleash Pakistan’s growth potential.”[1]

While short term forecast have registered growth in the region of 4.2 per cent; given the scale, magnitude and expanse of the project the financial hazard of plunging into a debt trap is real, while falling victim to fugacious investors riding sub-sets of the project already appear to be an actuality. After all, the Chinese in their financial dealings have not shown themselves to be altruists. Several contemporary China driven international projects illustrate their covetousness:

Woes of the non-performing Hambantota port project in Sri Lanka, built with a Chinese loan of US$ 1.4 billion, have not come to an end. Even after 80 per cent stake being appropriated by China, a lease charter leading to erosion of ownership of the seaport and loss of ‘sovereignty’ over 15,000 acres of land, neither dividends nor revenues are apparent. It would be interesting to establish how ‘win-win’ the Lankans feel about the project.

Mozambique was promised more than $5 billion from China in two years 2016-18. Loans were funnelled to big construction projects. However, economists point out “projects financed by China do not contribute towards growth. Highways, power projects and railway tracks are built by mandated Chinese firms who bring own workers and materials down to the nails and hammers; credits thus flow directly back to China.” This model that neither invites local participation nor generates wealth within has left the country crippled by a debt payment crisis compounded by economic slowdown, renewed violent conflict and drop in commodity prices (main source of revenue).

Lease-for-Debt

And what of debt repayment? In both cases there appears to be a lease-for-debt deal afoot. The story of China railroading Kenya into arrears and the floundering fate of Tanzania’s $10bn Bagamoyo Port follows the same pattern.

In form, the $50bn CPEC is not just a transportation network. Comprising a portfolio of projects, the physical “corridor” consists of highways, railways, and pipeline systems running along energy nodes driving special economic zones (SEZ) intended to attract investors and entrepreneurs. The North East-South West orientation from Gwadar to Kashgar spans near 3000 kilometres. Three transportation arteries are planned for the project: a western route through Balochistan and Khyber Pakhtunkhwa; an eastern route through Sindh and Punjab and a central route crisscrossing the other two. A northern highway route connects to Kashgar, via the Karakoram. Implementation is in four parts which include: development of Gwadar Port, investment in road infrastructure, rail and air hook-ups to service the corridor and the creation of energy nodes and SEZs. $35bn is allocated for energy projects while $15bn for the other three elements. The entire portfolio is to be completed by 2030. Here again Chinese companies enjoy priority of mandate in all projects. Infrastructure and energy sectors, the backbone of the project, are government-led initiatives. They are characterised with numerous procrastinations: persistent terrorist attacks in Baluchistan, Sindh and Punjab inspire little confidence in investors while, partisan federal control is making for discord among provinces. Opposition parties suggest, with some veracity, that the government neglects the Western and Central Routes and are focused on the Punjab province.

A Conclusion: China’s Blueprint

For China, the project grants, a much hankered for, 40 years operation rights to Gwadar port, assuring a long-term strategic base in the Arabian Sea that reduces Chinese dependence on the Malacca Straits while addressing the imperative to stimulate pace of development in their restive western region (largely subsidised by the project). Availability of ‘exclusive’ zones for Chinese companies along the corridor may even suggest arrogation of prime economic spaces in what can only be termed as “neoteric mercantilism”. Financially, as suggested by columnist Khurram Husain, the $50bn investment (75% loan and 25% equity) demands debt servicing to the tune of $3.5 to 4bn annually which in turn urges an improbable 7% year on year growth. Already China, exercised by Pakistan’s inability to attract investments, has fashioned a consortium of Chinese companies that has bought out 40 per cent ownership of Pakistan’s only stock exchange. This is possibly the first big price Pakistan is paying in return for investments.

Considering all this, the question then becomes: is it to China’s coffers that the economic benefits from CPEC are destined and is this another lease-for-debt deal? Time will very soon tell.

[1] http://www.worldbank.org/en/results/2013/04/26/pakistan-achieving-results-in-a-challenging-environment