The CPEC: Corridor to Chinese Coffers

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 3rd 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

Carnage Ahead?

By

Vice Admiral (Retd.) Vijay Shankar

(This article was first published on the Institute for Peace and Conflict Studies website)

With the quickening of changed power relations, already apparent in the larger context of Brexit and the growing bonhomie between the US and Russia; the pulling away from multi-lateral alliances and the potential for new strategic orientation would appear to be the new norm. And lurking in the shadows is the real possibility of nuclear weapons falling into the hands of radical Islamic terrorists which along with the only comparable danger, in terms of scale of destruction, is environmental catastrophe; both must be seen for what they are, and perhaps, provide the imperative for unified response. All the while what appeared to be an accepted ‘post-internet globalized world view’ is rapidly confronted by an absolutist conception of national sovereignty.

Donald Trump in his inaugural speech, vowed “…this American carnage must stop here.” What preceded his vow suggested, with more intensity and less clarity, what the carnage was. Presumably he implied a host of current circumstances whose balm included the advent of an era marked by mass mobilisation,  bellicism, end of idealism, a blow out of the liberal left, abrogation of the spoils of the political and power elites, imposition of a draconian immigration policy, discarding multilateral alliances in favour of the bi-lateral, a baleful threat to eradicate radical Islamic terror and a promise to ease the agonizing ‘reality of the citizen’s state.’ His prescriptive mantra was simplistic; Nationalism, protectionism, a menacing portent of a war on radical Islam and the nebulous abstraction of “America First” (an odd declaration, were not American interests always first?!) And yet coming from the mouth of a democratically elected leader of the planet’s sole super power, it must indeed set the stage for serious debate of what foreshadows the immediate future. It is his mantra that will disproportionately influence any strategic prognostication. Global events such as Brexit and the rise of the far right in Europe, Russia and other parts of the world are symptomatic and a precursor of the geopolitical trends that Donald Trump articulated.

Clearly the challenges are complex and in an intertwined world of global economic and security networks the need for reconciling competing and often conflicting perspectives through empathy and compromise is on a collision course with insular politics. Given events that disparage (often correctly) established leadership as corrupt and the quest for mutuality involving far reaching alliances as acknowledgement of frailty; nationalism has been ignited to mould malevolent distinctiveness that threatens to derange the integrative forces that have brought North and South together in a beneficial embrace. All this has been fuelled by the rapidity of technological changes and the inability of leadership to fully come to grips with the reach of the individual which extends far beyond the ambit of the nation state. And yet, at a point in the evolution of a world order which begs for robust international institutions that manage and regulate current global shifts, we are faced with forces that unhinge existing systems.

Nationalism, as one such unhinging force, conventionally, snatches control from the ‘gilt edged’ and sets into motion undercurrents that progressively redistributes power. However, nationalism in the context of the masses damning-ruling-elites and challenging the beneficiaries-of-privilege has historically been double edged. While being a powerful dynamic of change, the history of the twentieth century has shown, it invariably is accompanied by anarchy in the absence of systems that serve to provide social solidity. Russia, China and Europe in the run-up to the First World War and in the frenzied interregnum between the two wars are all precedents that cannot be easily set aside. But 21st century citizens’ voluntary and non-violent electing for chauvinistic administration is different. It is, not only an indication of deep seated frustration that targets the status-quo, but is also an expression of “disruptive discontent” that is, a conception of the crisis without either the competence or the wherewithal to direct events. Paradoxically, it remains at odds with the gains of order, inclusive economics and globalisation. And because of the unique temper of contemporary times dominated by a cult of popular power laced liberally with nationalism; collaborative structures, both economic and security, that were hitherto evolving are severely undermined.

A quick geo-political scan will be helpful in putting the dangerous pall of instability in perspective. Russia, over the last quarter of a century since the end of the cold war and disintegration of the Soviet Union, has emerged out of strategic limbo and again transformed to a major global player. It is today expanding and assimilating the western confines of what was the erstwhile Czarist Empire and has, with relatively more success than USA and NATO, established its influence in West Asia. Eastward it is building bridges with Communist China. While, China on a winning march of influence over East Asia and the South China Sea, is yet to reconcile its autocratic rule with the aspirations of its people, leaving it a trifle inadequate to don the mantle of global or even regional leadership. Unfortunately, the tide of history is turning towards these authoritarian states. In the meantime, the promise of an Arab awakening in West Asia and North Africa has been belied. The stalled transformation has given way to implosions within and the rise of a host of medieval ‘jihadist ideologies’ bent on re-establishing a Caliphate through the instruments of terror and radical Islam. In what is historically an awkward irony, the very destruction of Saddam’s Iraq has paved the way for fragmentation of the Sykes-Picot borders and the tri-furcation of Iraq into a Kurdish enclave in the northeast, a Shia enclave in the south and the Islamic State running riot in the centre and in Syria. The delusion that a new West Asia was in the build flies in the face of the current situation. In the interim radical Islam has spread its tentacles from Pakistan through Afghanistan, into the Levant, Yemen, Somalia and all of the Maghreb. The Islamic State (IS) has swept from Syria into Iraq in a maelstrom of destruction. No political Islam or civilizational impulse here, just rabid intolerance. In its wake it has disrupted the correlation of political forces in the region as the US seek a quick blocking entente with Iran; Syria sees in the situation an opportunity to settle scores with the insurgency raging within; Shia organisations find common cause to offset the IS; Sunni States carry a cloaked bias towards the IS to the extent that recent reports suggest funding by Turkey, Saudi and Qatar; terror organisations in Afghanistan and Pakistan welcome the new leadership that has displaced al-Qaeda. As the fanatical outburst of xenophobia stretches south, west and eastward the IS’ influence has manifested in the fertile Jihadist breeding grounds of Afghanistan and Pakistan. Many perceptive analysts have noted that Pakistan today, represents a very dangerous condition as its establishment nurtures fundamentalist and terrorist organizations as instruments of their misshapen policies in Afghanistan and Kashmir; the essence of Pakistan’s rogue links will, unmistakably seduce the IS, underscoring the distressing probability of extending its reach into a nuclear arsenal. These anarchic conditions have set into motion a refugee crisis that, unfortunately, no nation is willing to provide permanent relief to or even recognise.

The linkage between extreme nationalism, protectionism and authoritarian government is historically unassailable and its impact on the world as a rising force of global disarray is unmistakable. Civil society in Russia, China, Turkey, Iran and elsewhere is in retreat, greatly pressured by governments fearful of an empowered citizenry and liberal thinking amongst them (the question is will the US take a slant in this direction?)  Disinformation is now galvanized by the use of social media and international relations are marred by large scale cyber-attacks. States, quite openly, “loan” tens of millions of dollars to nationalist parties in countries such as France, Hungary, Romania, etc. to dislocate politics through electoral means. Arbitrary laws constrain foreign entities into narrower channels of activity under increasing pressure. Misperceptions commonly provide the controllable framework not only for public discourse but also for, as recent history in Iraq and Afghanistan has demonstrated, intelligence services to weave “alternate facts.”

With the quickening of changed power relations, already apparent in the larger context of Brexit and the growing bonhomie between the US and Russia; the pulling away from multi-lateral alliances and the potential for new strategic orientation would appear to be the new norm. The strategic unleashing of Japan and its ramifications for stability in the Asia-Pacific could well re-define the power balance in the region. And lurking in the shadows is the real possibility of nuclear weapons falling into the hands of radical Islamic terrorists which along with the only comparable danger, in terms of scale of destruction, is environmental catastrophe; both must be seen for what they are, and perhaps, provide the imperative for unified response.

All the while what appeared to be an accepted ‘post-internet globalized world view’ is rapidly confronted by an absolutist conception of national sovereignty. The shaping influence of this complex of events that we have so far deliberated has just begun to loom large over the new century. More than anything else, it separates the world of the twentieth century from the twenty first. Efforts to cope with this globe splitting xenophobic embrace, particularly for a large developing nation such as India is not just to rapidly advance its internal pattern of growth, development, demand and consumption but also to ensure that its security is in no way jeopardised through either appeasement or due lack of preparation. This will remain an abiding balancing act to master in the remaining years of this century.

Perils of Nuclear Paranoia

By

Vice Admiral (retd.) Vijay Shankar

(This article was first published in the author’s weekly column on the Institute for Peace and Conflict Studies website.)

Nuclear Brinkmanship Plus

The late Thomas Schelling, remarking on how dangerously skewed a nuclear deterrent relationship could get, famously drew the analogy of “one driver in a game of chicken who tears out and brandishes his steering column.” Conventional wisdom suggests that nuclear brinkmanship is the deliberate creation of a recognizable risk, denoting intimidation of an adversary and exposing him to a mutual risk; and if that risk is slanted such as by tearing out and brandishing the steering column, then that very act has a high probability of unleashing a nuclear catastrophe. By dramatically tossing the steering wheel out of the driver’s window, the reckless motorist assumes that this act would force the other player to concede the tourney. But this is not necessarily so since removal of the steering wheel to the other protagonist may well constitute a breakdown in the deterrent relationship and therefore releasing the latter from nuclear restraint or any risk reducing obligation that the relationship may have notionally implied.

The Zhenbao Incident

On 02 March 1969, Chinese troops ambushed and killed a group of Soviet border guards on Zhenbao Island; one of the many (then) disputed islands on the Ussuri River. As Sino-Soviet tensions heightened in the 1960s, ownership of these tiny riverine islands designated as a boundary line between China and the Soviet Union by the 1860 Treaty of Peking, became an issue of grave contention. Beijing was convinced that ownership of the islands was symptomatic of forcing a weak China to submit to the Soviet Union. According to Moscow, the Treaty of Peking clearly identified the boundary line between China and the Soviet Union in this area as running along the Chinese riverbank. China saw in its military action resolve to deter future Soviet provocations partly aggravated by the Soviet invasion of Czechoslovakia in 1968 and further incited by the ‘Brezhnev Doctrine’ that gave sweeping rights to the Soviet Union to intervene in the affairs of Communist countries to strengthen Communism. Mao intended the limited attack to demonstrate that it could not be bullied. Moscow, however interpreted China’s actions as aggressive and characteristic of a revisionist tendency. By end March, the conventional battle escalated and was fought with increasing ferocity across a wider front. In the following months the tempo and scale of operations was upped.

On the diplomatic front each armed escalation was paired with threats of further increase in combat operations. So extensive was the intimidation that Mao feared a Soviet invasion preceded by a nuclear ‘first strike’. Behind the frontline USSR had been trying to warn the USA of China’s power aspirations and requested US neutrality in the matter. But unbeknownst to the USSR, there were other diplomatic manoeuvres afoot that sought to use China as a means of containing the Soviets. By August the USSR threatened to cross the nuclear Rubicon. For Beijing, the knowledge that Moscow had approached other countries for disposition and response   to a nuclear strike greatly increased the credibility of the impending Soviet nuclear attack. As such, this case stands out as a rare instance of the use of nuclear threats to attempt to compel a weaker adversary to the negotiating table (that eventually went awry). However, Beijing’s ensuing perception of the credibility of Soviet nuclear threats had unintended consequences that greatly increased the possibility of a nuclear exchange. China believed that negotiations were a thinly veiled mask for a nuclear “sneak attack.” By October 1969, so alarmed of an imminent Soviet nuclear strike, Chinese leadership evacuated Beijing, and placed its nuclear forces, a stockpile of between 60 to 80 warheads, on hair trigger alert.

Had China wrenched out the steering column? Had it arrived at a ‘Schelling Point’? There is much to suggest that it had. Kremlin, as more recent reports have pointed out, was stunned at the prospects now of a people’s war under the overhang of a steering-less nuclear arsenal. It would appear that the Soviets had swerved out of the path of an uncontrolled Armageddon and as in Schelling’s game of chicken conceded the tourney. The two nations, by end October, were on the negotiation table.

Skewing Against Gravity

A central argument in much of contemporary deterrence literature is that nuclear weapons induce predictable rationality in interstate relations and prompts mirror imaging in policy making; this in turn transforms national behaviour and reduces the likelihood of direct conflict between nuclear-armed states. Nuclear weapons, according to this school of thought, define the spectrum of acceptable policies and circumscribe the limits of conventional warfare. To the contrary, the substantiation from the Zhenbao war suggests that there can be conflicts and other armed actions that, for the initiator, have nothing to do with the military balance both conventional and nuclear. Critically it raises the probability of unintended consequences and the prospect that balance may indeed be skewed against gravity. The India Pakistan hostile correlation; China’s aggressive activities in the South China Sea and the North Korea nuclear standoff are stark reminders of this precept.

Differing Ideas of Deterrence and its Fragility

Strategic culture and the differing idea of deterrence characterise a key role in determining actions taken by international players. China’s traditional word for deterrence, weishe, quite bluntly means “to intimidate militarily” without nuances. While the Oxford English dictionary defines the meaning of the verb “to deter” as to discourage (from acting) or prevent (from occurring), usually by instilling fear, doubt, or anxiety; from this is derived the accepted idea that essentially upholds the status quo. What Pakistan understands remains blurred; whether it is to discourage all forms of armed conflict against India or to provide an umbrella for non-state actors to continue a war to bleed India is ambiguous. The introduction of Jihadists and non-state actors is unique in that it delivers an asymmetricity that keeps the level of warfare well under the nuclear shadow, is deniable and yet its impact can be as consequential as any act of war.

Indian strategic planners will do well to appreciate that the international nuclear milieu today is complex and multilateral in nature which increases the chances of strategic misunderstandings to the detriment of balanced decision-making. The demand is for explicit credibility if deterrence is to be functional and exertive. In addition, these issues also highlight an important dilemma: for deterrence to be effective, an opponent must fear the consequences of his actions; however, excessive anxiety is also a potential peril, as it can lead to paranoia and dangerous behaviour such as ‘tearing out the steering column’.