PrintFriendlyBy Claude Arpi
In recent months, the One Belt and One Road (OBOR) initiative and its avatar, the China Pakistan Economic Corridor (CPEC) have received a tremendous coverage in the Indian and Foreign press.
In India, the question has been: should India participate in the Belt and Road Forum organized by President Xi Jinping in Beijing in early May.
Prime Minister Narendra Modi finally declined the invitation, for the good reason that the CPEC passes through part of Indian territory; further, it is often perceived as a project which first and foremost serves China’s interests; Beijing has so far been unable to dispel this feeling.
What is the OBOR initiative?
In 2013, when President Xi first spoke of a project “envisioning a trade and infrastructure network that would connect Asia with Europe and Africa along the ancient land and sea routes,” very few realised that the OBOR ‘initiative’ had many similarities with the ‘Great Game’ of the 19th century.
At the time of its new birth, the OBOR’s declared objective was to increase connectivity with Europe. However, a simple look at a map showed that practically, India was left out of the scheme, while the creation of several economic corridors mainly benefited China.
In June 2015, Steve Levine wrote in Quartz magazine that the infrastructure that the British built everywhere during the 19th century “enabled their power like bones and veins in a body. …Great nations have done this since Rome paved 55,000 miles (89,000 km) of roads and aqueducts in Europe. In the 19th and 20th centuries, Russia and the US established their own imprint, skewering and taming nearby territories… Now it’s the turn of the Chinese.”
For Xi, the OBOR is an essential part of the great rejuvenation of the Chinese nation, the ‘Chinese Dream’; though Xi states that the OBOR “will serve the long-term interests of all countries involved in the Belt and Road Initiative.” But have not trade and geopolitical control always worked hand in hand.
And as for Pakistan, the CPEC, a crucial constituent of the OBOR, will be a game changer …if it happens. The CPEC architects are aware that Pakistan is the plaque tournante for controlling the Belt and the Road; the 2,700-kilometre corridor stretching from Kashgar to Gwadar which will link two worlds: Central Asia (via restive Xinjiang) in the north and Europe and Africa (via the maritime route) in the south.
A dream come true
When President Xi Jinping visited Islamabad in April 2015, he pledged an eye-popping 46 billion dollars (today upgraded to 62 billion) for the CPEC. While for Beijing the mega project was a vital element of the OBOR, for Pakistan the ‘game-changer’ could bring prosperity to the entire region.
It is true that Xi brought with him munificent gifts for Pakistan: the Chinese billions would boost Pakistan’s flagging economy with massive energy and infrastructure projects. This included an additional 12,000 megawatts to Pakistan’s national grid through coal, hydro and renewable energy projects.
The Corridor would have railways, roads, optical fiber cables, dams, pipelines! Observers marveled at Beijing’s generosity, but lately, the ‘beneficiaries’ have started realizing that the project may first benefit Beijing!
OBOR, doomed to fail?
Already in August 2016, the South China Morning Post wrote: “Eerie similarities with Japanese scheme 20 years ago suggest a future of white elephants, wasted money and corruption on a scale never seen before.”
Columnist Tom Holland commented: “Facing a deep slowdown after years of investment-fuelled growth that culminated in a huge property and stock market bubble, the leaders of Asia’s largest economy come up with a cunning plan. By launching an initiative to fund and construct infrastructure projects across Asia, they will kill four birds with one stone.”
He cited (1) using China’s excess steel mills, cement plants and construction companies to preserve jobs at home; (2) bringing neighbouring countries more closely into China’s economic orbit; (3) promoting China’s currency as an international alternative to the US dollar thereby undermining the influence of institutions based in Washington and (4) leading to China’s regional hegemony.
This defines quite precisely Beijing’s objectives.
The economy of the corridor
Is it a boon for Islamabad? Even in Pakistan, some have doubts. Salman Rafi Sheikh, a research analyst wrote in Asia Times: “The CPEC continues to look like a mystery, wrapped in an enigma. In the absence of agreements stipulating and documenting both countries’ interests, the CPEC is creating problems that would strip Pakistan of whatever benefits the multi-billion-dollar project promises.”
The author certainly has a point. There is a lot of secrecy around the project. For example, Pakistan’s Public Accounts Committee (PAC) was recently curious to know the details of rate of interest for the loans obtained from China.
The secretary of the Ministry of Water and Power gave some figures: there were 19 power projects under the CPEC with the capacity of 12,114 MW; of which 3,960 MW were from coal, 2,714 MW from hydro projects, 900 MW from solar projects and 4,260 MW from imported coal.
The amazing part is that after the COP21 accords, while the planet is abandoning coal as an energy source, China is financing new coal projects in Pakistan ….in some cases with Chinese coal!
Beijing has agreed to provide a US $ 6 billion loan for road infrastructure and 2.8 billion for railways ‘on lowest interest rate’. While these loans are at a reasonable 1.6% interest, in some other cases, they can be as high as 6 or 7%. Will Pakistan be able to repay these loans?
By including the cost of insurance, also paid to a Chinese insurance company, the cost of borrowings could surge to 13%: “Adding insult to injury, the government has already exempted income of Chinese financial institutions from dividend income tax,” said The Pakistan Herald.
In March, The Nikkei Asian Review mentioned that two international lending institutions (IMF and World Bank) as well as Pakistan’s Central Bank raised serious concerns about the debt burden of the mega China-led infrastructure program.
High cost of Security
There is a serious security issue too. Suppose the scheme becomes ‘unstable’ due to terrorism (presently localised in Pakistan, but which can be easily exported to Xinjiang), the cost of the project would tremendously shoot up. This deeply worries Beijing.
In January, The Dawn reported that Pakistan has deployed 15,000 military personnel to protect projects under the CPEC.
Senator Mushahid Hussain Sayed, chairman of the Parliamentary Committee on the CPEC noted: “Both forces will work under the interior ministry, in coordination with the provinces.”
Pakistan’s Chief of Army Staff (COAS) General Qamar Javed Bajwa claimed that there is a ‘hostile agenda’ against CPEC; but he affirmed that the Pakistani security forces were ready to counter any threat.
Islamabad has deployed troops of the newly-formed Special Security Division (SSD) to provide protection to CPEC projects, and it has created a special Maritime Security Force unit to defend Gwadar.
The question is who will pay? Pakistan for the time being, but many in Pakistan realize that the Chinese ‘gift’ is in fact a costly one.
Will Chinese forces participate in the protection of the corridor?
Chinese troops in Gwadar, the maritime entry to the CPEC, is worrisome, to say the least.
Other aspects of the project
An example, many Pakistani companies expressed strong concerns over Chinese companies dumping cheap goods in Pakistan. These companies get heavy tax exemptions, which gives them an advantage vis-a-vis local entrepreneurs, and once the CPEC is functional, Pakistani markets may be flooded with Chinese goods.
Another issue, a study recently published in the Oxford Review of Economic Policy and conducted by the Saïd Business School has found that “low-quality infrastructure investments pose significant risks to the Chinese and the global economy.” The authors argued that over half of the infrastructure investments in China have destroyed rather than generated economic value.
This is valid also for future OBOR projects. The study authored by Atif Ansar, Bent Flyvbjerg, Alexander Budzier and Daniel Lunn is based on the large database, which analyzed 95 large Chinese road and rail transport projects, and 806 other transport projects.
Dr Ansar commented: ““It is a myth that China grew thanks largely to heavy infrastructure investment. It grew due to bold economic liberalisation and institutional reforms, and this growth is now threatened by over-investment in low-grade infrastructure. The lesson for other markets is that policy makers should place their attention on software and deep institutional reforms, and exercise far greater caution in diverting scarce resources to large-scale physical infrastructure projects.”
The conclusion is that massive infrastructure investment programmes are not a viable development strategy for developing countries such as Pakistan, Nigeria or Brazil, which dream of using China’ model of economic development. But it is perhaps too tempting for Pakistan.
India’s position
When Prime Minister Narendra Modi met Chinese President Xi Jinping at the G20 Summit in Hangzhou in China, he raised the topics of terrorism originating in Pakistan, as well as the CPEC project. Modi told Xi that New Delhi and Beijing must be sensitive to each other’s ‘strategic concerns’, which include terrorism from Pakistan, the CPEC crossing through Pakistan-occupied-Kashmir (PoK) and India’s membership in the Nuclear Suppliers Group?
As the project crosses Indian territory in PoK, the CPEC is unacceptable for India. Delhi cannot pretend that nothing is happening and forget about the legality of the accession of Jammu & Kashmir State to India.
Conclusions
The Corridor is first and foremost a vital investment for Beijing, which is slowly ‘buying’ the strategic link between the Belt and the Road; Beijing could soon control its new dominion, Pakistan. For India, it will be a game changer as it will then directly face China on two fronts, the northern and the western.
What looks like a masterstroke on paper could turn into a nightmare for both China and Pakistan. Regarding India’s participation at a time Pakistan continues to fuel unrest in the Kashmir Valley (with the silent consent of China), how can China get Delhi’s blessings for such an unsuitable project?
Today China and Pakistan are gambling, India need not rush into the ‘initiative.’
(The author is a veteran columnist, sinologist and has been living in India for more than four decades)