Will Chinese Money Transform Pakistan?

The development of the China-Pakistan Economic Corridor (CPEC) has spurred debate in all quarters. Some perceive it as a form of neo-colonialism and criticize Pakistan’s government for promoting unethical business practices at the cost of ordinary citizens’ livelihoods. Others see the CPEC as an unprecedented opportunity for economic revival, with potential for positive spillover effects including stronger local institutions.

The CPEC is a package of infrastructure projects worth U.S.$46 billion (308 billion yuan). About two thirds of this funding, U.S.$33 billion (221 billion yuan), is committed towards establishing energy and power projects in Pakistan. Ahmed Zulfiqar Siddiqui, a senior executive at China Power, says these projects will help alleviate the country’s chronic energy crisis that cost the nation 7 percent of its annual GDP last year. “The Chinese have invested in power generation from coal and LNG as well as hydro, wind, and solar power. A new transmission line funded by them will carry electricity from new power generation units in Sindh to load centers in Punjab. Shanghai Electric, a sister company of China Power, has also expressed interest in acquiring a major stake in K-Electric, which is the main provider of electric power to over 20 million people in Karachi. The Chinese are therefore covering the entire power sector value chain, from fuel extraction (mining) to end-user distribution.”

Best Outcomes

Improved energy supply could enable Pakistan to boost its flagging indigenous industries such as textiles, agriculture, and manufacturing; increase exports; and ultimately lead to sustained economic growth in the long term.

A Deloitte study predicts that if everything goes according to the plan, the combined value of the CPEC’s infrastructure projects would be equivalent to 17 percent of Pakistan’s GDP in 2015. Moreover, the project is expected to create at least 700,000 direct jobs and serve as a springboard for the development of industries such as retail, tourism, hospitality, health, and education. The expansion of these industries could potentially lead to synergies among various downstream sectors, with benefits accruing to the larger population. But Siddiqui stresses the need for policies to ensure involvement of local unskilled labor and small contractors since the mega-construction projects will predominantly be executed by Chinese labor. He also highlights the need to protect established local industries against price competition from China because local firms may be unable to compete with cheaper Chinese industries.

The CPEC project may also benefit the real-estate industry along the trade route. In Gawadar, property prices have more than doubled in recent months due to demand for housing. Atif Alam, owner of RB Associates, a real estate agency that deals in property across the country, believes that demand for quality housing and recreation facilities will sky-rocket as more Chinese expats move to Pakistan and infrastructure development enables access to previously isolated areas of natural beauty or historic significance.

CPEC could catalyze Pakistan’s gradual shift from an agrarian economy to a logistics hub for the transport of goods from China to emerging markets in the Middle East and Africa and vice versa. With the development of emerging market economies, demand and supply have started to shift to the South. China has already surpassed the United States as Dubai’s largest trading partner and imports more oil than any other nation in the world. Singapore is another major bilateral trade partner for China. Dubai and Singapore have both evolved into major transport hubs for both passengers and cargo, due largely to their strategic geographic locations, robust infrastructure, and strong leadership, serving as gateways to emerging markets in Asia, the Middle East, Africa, and Western Europe. Today, these cities connect cultures and commodities, deriving most of their earnings from external trade, tourism, aviation, real estate, and financial services. Pakistan is strategically positioned to follow this model. However, in order to ensure long-term sustainability, it must avoid some of the common pitfalls of foreign development.

Unfinished Projects, Uneven Outcomes

Sabrin Aziz Beg, Assistant Professor at the University of Delaware, focusing on Development Economics and Political Economy, views the CPEC as a “promising” arrangement that could mutually benefit both countries. But she emphasizes the need for more rigorous research and documentation in order to evaluate whether the economic benefits of large-scale infrastructure projects outweigh the social and environmental costs in the long term.

Beg cautions that “long-term investments in infrastructure projects in developing countries are subject to the whims of political leaders. This means we risk having unfinished projects; resources are already expended, but the expected benefit is not realized, leaving the host country mired in debt.” Based on research in Ghana, she says, “a third of development projects that begin are never completed.” Greater transparency and accountability is required to minimize risk of corruption and ensure that the sanctioned funds are used for the intended projects.

Juan Pablo Cardenal and Heriberto Araujo, co-authors of China’s Silent Army: The Pioneers, Traders, Fixers and Workers Who Are Remaking the World in Beijing’s Image, find that Chinese state-owned corporations employ many of the same exploitative business practices overseas as they do at home. Forms of exploitation include illegal natural resource extraction, environmental pollution, human rights abuses, and perpetuation of an (already damaged) status quo for economic gains.

While white-collar executives are well-compensated and enjoy improved living standards, the disenfranchised factory workers, laborers, and low-skilled workers have to deal with minimal wages and abysmal living and working conditions with little hope of breaking out of the vicious cycle of poverty. Pakistani society already harbors vast disparity between wealthy and poor citizens, promulgated by a culture of feudalism. A foreign investor uninterested in increasing the well-being of the marginalized is likely to further exploit their vulnerabilities without fear of reprisal. There is no technology transfer or skill development focus by Chinese projects so far. The CPEC is currently an investment and employment opportunity for the Chinese rather than Pakistan, and the “P” is largely missing from CPEC.

Environmental Concerns

Compared to international best practices for sustainable development such as the IFC Performance Standards and the Equator Principles, developing countries’ environmental and social standards are relatively lax. Without third-party oversight to ensure that the project is environmentally and socially sustainable, and stricter monitoring and law enforcement, abuse of authority will be difficult to prevent. The International Union for the Conservation of Nature has expressed concerns about the potential environmental impacts of the CPEC projects, but local authorities have yet to take concrete action. Yawar Herekar, a sustainability expert with experience at the World Bank, suggests inserting environmental and social clauses into the contracts to minimize the projects’ negative impacts with independent agencies monitoring the projects at all stages to ensure compliance. Currently there is no substantial collaboration in policy reform.

The CPEC’s energy projects, which include several coal-fired power plants, will also contribute to a significant increase in greenhouse gas emissions. Ironically, under the CPEC agreements, China and Pakistan have also signed a memorandum of understanding to address global threats such as climate change.

Earlier this year, Pakistan and China both experienced unprecedented rainfall, which has been linked to climate change. The resultant flooding killed over 150 people in China and caused economic losses worth U.S.$3 billion.While a collaborative approach to adaptation planning is certainly the correct way forward, policymakers from both countries appear to be going around in circles when it comes to addressing the root of the problem.

Agha Ali Akram, an environmental economist and Visiting Fellow at Yale University, feels that, “Sacrificing Pakistan’s welfare to mitigate climate change is not so simple an equation. Countries like Pakistan that are especially vulnerable to the impacts of climate change need to think about adaptation options rather than focusing on mitigation efforts.” In order to incorporate environmental and social costs into the decision-making process, Akram recommends conducting a complete cost-benefit analysis that accounts for environmental and social costs that might not necessarily be captured in market transactions. For example, “When we build a highway, we must account for not only direct pecuniary costs [such as building and maintenance] but also costs to the environment in the form of damages.”

The Way Forward

Pakistan is standing on the cusp of economic revival. Strong leadership is required to steer the country through the path of sustainable development. It is the Pakistani authorities’ responsibility to ensure that worker’s rights are protected, environmental and social externalities accounted for, and the affected parties duly compensated for damages.

First and foremost, the government should prioritize investment in its own people and empower them through access to education, employment, and equal opportunities to become active participants in the economy. Vocational training and Chinese language training will equip people with the basic skills required to establish businesses, participate in infrastructure development projects, and use the CPEC to their own advantage. Government-mandated audits of infrastructure projects by third-party international environmental accreditation bodies such as the International Organization of Standardization (ISO) or ASTM International could help prevent human and environmental exploitation. An overarching policy framework is urgently required to manage the progress of the CPEC and ensure that its benefits trickle down to the masses and uplift the entire country as opposed to enriching a select few.

Ultimately, economic revival could reduce socioeconomic inequities among ordinary citizens, create a more level playing field for all the provinces, and stamp out extremism, which feeds on poverty and unemployment.