The Real CPEC Plan
28 May, 2017
As Prime Minister Nawaz Sharif stressed the need for a dialogue with countries outside One Belt One Road to dispel apprehensions about the initiative, national media in Pakistan revealed a ‘long-term CPEC plan’, which apparently had not been shared with the public so far giving rise to a number of unwarranted concerns and rumors. The critics questioned not only the document but also speculated about the ‘real’ objectives of CPEC. Many of these concerns however, were completely unfounded and have done more damage than good.
The CPEC plan shared by media was an outdated document. The actual plan that sets the foundation for China Pakistan Economic Corridor is a different document and has seven areas of cooperation.
There is a need to objectively look at what CPEC is and how it is being planned. It is true that CPEC goes way beyond infrastructure development. In fact, the actual CPEC plan aims at forming a “1+4” collaboration pattern with ‘CPEC and its four priorities, namely the Gwadar port, energy, infrastructure construction and industrial cooperation’. It must be understood that infrastructure development is just the start of CPEC, paving way for much broader cooperation for economic integration and growth, ranging from industrial collaboration to agriculture development and from tourism to financial integration.
Pakistan is at a transformative moment, where CPEC is expected to usher in a new era of economic development with a newly developing Belt and Road alliance. CPEC is likely to provide a powerful stimulus to our national economy. This however, would need building a national consensus, adequate preparation by the government and private businesses, anticipating and mitigating risks and reaping CPEC’s benefits beyond the infrastructure.
In 1960, if Lee Kuan Yew, with his tiny city state of Singapore and a population of merely 2 million poverty-ridden people, had feared the forces of globalisation, Singapore would still be ranking somewhere in bottom few countries of the world, if it all it had managed to exist. Instead Lee linked his country’s future to massive forces of globalisation, using foreign direct investment to stimulate growth. Singapore now has world’s highest trade-to-GDP ratio.
On the other hand however, history is marred with stories of failures, where countries refused to embrace opportunities coming their way or somehow failed to capitalise on them.
Recent media reports revealing a so-called CPEC plan caused concerns in many quarters and sprang a rumor factory in action. Pakistan, it seems, is at a similar crossroad of history. How the country will respond to the changing face of globalisation and new economic imperatives would define where would it end up a few decades down the road. CPEC is the litmus test of how we choose our future.
There is therefore a need to separate myths from realities. CPEC is not merely about ‘agriculture’, ‘surveillance of cities’ or ‘visa-free entry of Chinese nationals’, as quoted by media. CPEC is about trade, infrastructure investments and increased Pak-China cooperation in a number of sectors.
The Long-Term Plan Passé
China initially developed a detailed draft document, which was shared and discussed with Pakistan. From Chinese side, China Development Bank (CDB) was commissioned to develop this document, sponsored by National Development and Reform Commission (NDRC). This draft plan, a 239-page document dated December 2015, provided many details on Chinese perspective on CPEC. Although the plan was quite broad in its scope, it did propose some very specific details regarding a few sectors.
The New CPEC Plan
More recently however, a 30-page summary plan, dated February 2017, replaced this initial detailed draft and formed the basis of developing a formal agreement on CPEC between Pakistan and China. This summary plan was structured around five chapters. The long-term plan is effective until 2030, spanning short-term projects that will be completed by 2020; medium-term projects by 2025; and long-term projects by 2030 or later. The summary plan only provides broad principles of cooperation, to set the tone for working out the details in future.
The plan recognises that economic and social development ties between China and Pakistan have entered into a new phase in recent years, with both sides now developing “multiple wheels” to drive their bilateral relations forward. It states that ‘the China-Pakistan Economic Corridor, starting from Kashgar in Xinjiang, China, and reaching Karachi and Gwadar, southern coastal cities in Pakistan via the Khunjerab Pass and several other nodal areas, constitutes a key platform and a central task for cementing China-Pakistan economic relations’.
What is CPEC?
CPEC represents a portfolio of projects that are either under progress or will be undertaken as a result of China-Pakistan cooperation under the landmark Chinese Belt and Road initiative, deepening China’s connectivity with the world. Presently, the total size of the projects envisaged under CPEC stands at USD 54 billion, upgraded from USD 46 billion. The portfolio primarily includes major road and other infrastructure projects, establishment of special economic zones and an improved supply of electricity, besides an ambitious optical fiber cable project. It is expected that road network developed under CPEC will link China with Gwadar and other ports and will lead to development along the route and beyond. From within the China, the northwestern autonomous region of Xinjiang specifically is expected to immediately benefit from this improved connectivity.
While all these projects have varying timelines, some of the projects are categorised as ‘early harvest’ projects under CPEC that are being fast tracked. Five joint working groups have been formed under Joint Coordination Committee (JCC) of CPEC to drive their respective areas including: long-term planning, energy, transportation infrastructure, industrial cooperation and Gwadar port. On Chinese side, National Development and Reform Commission of China houses the JCC secretariat, whereas in Pakistan Ministry of Planning, Development and Reforms of Pakistan has taken over this role.
Areas of Cooperation Under CPEC
Key areas of cooperation under CPEC, as provided in the plan are outlined below to clear the myths around what it entails:
Connectivity forms the cornerstone of CPEC as Pakistan fits the puzzle perfectly due to its locational advantage, whereby China’s traditionally backward region of Xinjiang can be connected with Gwadar port, thereby improving trade relations with ASEAN Central Asian and European countries. Any industry where transportation costs matter, it would make business sense for Chinese to relocate their industry closer to the port, and presumably in Pakistan, if possible.
Moreover China is looking to deploy its capital in infrastructure investments around the world and Pakistan with its critical infrastructure needs makes a good candidate for such investments. It is important that Pakistan’s investment in infrastructure should keep pace with the stipulated growth in economy.
On e-government front, Pakistan has taken up a number of safe cities projects. Two of the projects, which are already initiated in Lahore and Islamabad, were won by a large reputable Chinese company through competitive tendering. Other global companies with similar technical offerings are more expensive and therefore Chinese involvement has resulted in more competitive tendering. China knows that there is an opportunity to deepen this investment as Pakistani government has shown interest to expand the network of safe cities.
Energy takes the lion’s share of the committed CPEC investments, much of which would be invested in power generation projects. However, CPEC also encompasses other critical areas such as alternative energy, power grids, etc. Bringing such areas in the fold of CPEC does not mean that these opportunities will only be available to Chinese and instead would qualify these for financing under CPEC, if required.
Industries and industrial parks is one area, where Pakistan has the greatest potential to gain but there is a need to proceed with cautious optimism. How does China see these opportunities unfolding in this area are through following the private sector. All the industrial and business ambitions highlighted so far are based on existing Chinese investments. In household appliance sector for instance, the Haier & Ruba Economic Zone provides a perfect example, which was established in 2006 and considered a remarkable success. In addition to Haier, other famous enterprises from the Chinese household appliance industry, like Gree and Changhong have also invested in Pakistan. These investments have been successful and Chinese know that there is a potential to deepen these investments.
Moreover, there is no denying that Pakistan, with a population of 200 million people provides an attractive market, not just for Chinese but for any international player. Any initial investments are likely to be in industries catering to local consumer markets to ensure safer returns for investors. Whether Pakistan will be able to attract Chinese and other international investors to set up industries for export will to a great extent depend on how well the government attract and facilitate these investors through providing health investment climate and appropriate skilled workforce. The concerns about local industry facing tougher competition are well founded to some extent but in the longer run, such pressures have been known to beneficial for local industry making it more competitive. This however, would mean local businessmen gearing up for this new scenario and look for new opportunities and partnerships to grow and transfer technology rather than be isolated, inward looking and rely on protectionist policies.
Agricultural development is a priority area under CPEC and there is a strong Chinese interest to invest in agricultural inputs production and agriculture infrastructure. Efficient logistics provide an essential pre-requisite for an effective participation in global agriculture value chains. Pakistan with its untapped agriculture potential provides a tremendous opportunity, where targeted investments can generate healthy returns for both sides. The priority interventions manifest areas, where Pakistan has long been trying to seek help from international donors.
Contrary to popular belief, there are no existing demands from Chinese to ‘give out thousands of acres of land’. Instead China wants to adopt a cautious approach in certain areas. That is the reason, why even the initial draft long-term plan mostly talked about ‘demonstration’ projects’ especially in areas of improved technological cooperation. Any future interest of China in agriculture would be contingent upon how Pakistani side responds these demonstration projects.
Tourism is likely to grow with opening up of national economy. Despite having numerous World Heritage Sites in the country, international tourism in Pakistan, unfortunately claims only 0.4% of GDP. Foreign direct investment in tourism sector is likely to place Pakistan on international tourist circuit.
Financial cooperation forms an important part of CPEC. Free and unrestricted flow of capital provides an important pre-requisite for attracting foreign direct investment. The proposed initiatives stress on reducing the reliance of both countries on dollars or euros, for bilateral trade as well as to create access for infrastructure projects in Pakistan to newly created institutions for Belt and Road like Asia Infrastructure Investment Bank.
CPEC – The Future
Pakistan is a developing country, which has long faced economic constraints limiting its growth. China, our next-door neighbor, on the other hand is well on its way to becoming world’s largest economy. Fortunately, the world offers relevant precedents on what happened to countries in similar situations.
Mexico, a few decades ago, wrestled with the decision to join NAFTA, anticipating the adverse consequences of opening up to a mammoth economy like that of USA. History however, provides evidence that within twenty years after signing of NAFTA, US imports from Mexico grew by 500 percent.
Turkey is another example that signed Customs Union Agreement with EU in 1996, subjecting its industry to far superior European quality standards. The country ended up gaining immensely from this economic integration. The McKinsey Global Institute (MGI) has shown that openness to global cross-border flows of goods, services, finance, people, and information promotes faster GDP growth, accounting for 15 to 25 percent of world GDP growth every year.
Economic isolation has rarely helped any country to grow. Nobody is expecting Pakistan to open the ‘floodgates’ and it is up to us how we plan to benefit from CPEC and the opportunity to integrate within a newly developing massive trade network. If China has laid out its objectives on how it intends to benefit from CPEC, it is very well within its legitimate rights. Now it’s our turn to stipulate how we envision our industry and economy to benefit from CPEC.
The CPEC plan lays out a number of important steps that need to be undertaken. These include making full use of existing arrangements such as Bilateral Investment Protection Agreement, Free Trade Agreement, Agreement on Service Trade in Free Trade Zones, Agreement on Expanding and Deepening Bilateral Economic and Trade Cooperation, and Framework Agreement on Energy Cooperation, which need to be re-worked in the light of opportunities offered under CPEC.
Such association at government-to-government level must be complemented with business-to-business partnerships and joint ventures between Pakistan and Chinese enterprises. There is a need to promote more meaningful collaborations, where Pakistani businesses can provide access to local market, trained workforce, licensing, existing supply chain, etc. and in return should look for sophisticated technology, newer capabilities and increased share in the global trade pie.
A private-sector led strategy, with a focus on economic integration with the Belt and Road network, is what Pakistan needs to stimulate it’s economic growth.
The writer is a policy analyst, development practitioner and an honorary fellow of Consortium for Development Policy Research. He advises governments, donors and non-profits.
Published in ‘Daily Times’, 28 May 2017