he first outgoing shipment of containers carrying Chinese goods departed

from Gwadar port on November 13, 2016. The media event was attended by
Pakistans top policymakers as well as a high-level Chinese delegation. Despite
this important first step for the China-Pakistan Economic Corridor (CPEC), many
people in Pakistan still approach this project with a sense of cautious optimism.
Nearly all will say CPEC is a game-changer, but some will ask for whom?
Others will flag that CPEC is the largest foreign investment into Pakistan, but
many will question whether the country will be able to bear the debt burden
resulting from it. Some will talk up how the various sub-routes could lift
under-developed cities and towns, but others will question whether these subroutes will even materialise as China is really only interested in the direct
route from Kashgar to Gwadar.
To understand the policy motivation behind OBOR, one must realize that China
is desperate to maintain its growth momentum, especially with the uncertain
outlook for the global economy
This confusion exists because fresh information on CPEC is mostly anecdotal,
rather than from a credible official source. People will highlight the increasing
number of Chinese in the country (on flights, hotels, shopping malls, etc); the rapid
pace of development at Gwadar port; and how the first Chinese shipment moved
through different ports of Pakistan to reach Gwadar. Other than the recent
shipment, concrete details are scarce.
Even so, Pakistanis feel the partnership with China is critically important for the
country, though they are unsure whether it will materialise fully. On the other
hand, the global reaction to Chinas One-Belt-One-Road (OBOR) of which
CPEC is a part falls into one of two categories: those who think the project is
simply not feasible in terms of scale, or the resources needed or the timeline; and
those who fear that OBOR is Chinas master plan for global domination in the 21st
century (see map below).
Observers concerned about OBORs feasibility flag the sheer scale of this
undertaking, and the apparent disconnect with available funding sources. Bankers
will highlight the inherent risks in long-term infrastructure projects, which are
compounded by the large number of participating countries. They will focus on
financial/trade guarantees, regulatory reach/enforcement, and legal cover and
recourse.
While none of these misgivings are unreasonable, we believe they fail to consider
several key points. But the basic issue raised by sceptics is entirely legitimate.

So the 46 billion dollar question is whether these fine-print concerns could sink the
project. Is the devil really in the details?
Map by Essa Taimur

What China seeks from OBOR

To understand the policy motivation behind OBOR, one must realise that China is
desperate to maintain its growth momentum, especially with the uncertain outlook
for the global economy. In fact, if Chinas economic growth slows significantly,
there are legitimate fears this could spark social unrest and political instability.
In our view, the challenges facing Chinese policymakers could be ranked as
follows:
1.

Secure shipping lanes. As the worlds largest importer of oil and gas, China
needs to ensure that its shipping routes are not vulnerable at the choke point
the Malacca Straits. Hence, Corridors 1 and 2 of OBOR have immense
strategic value for China, not just for fuels and minerals, but also to access
Central Asia, the Middle East and Africa.

2.

Develop Western China. While the coastal areas are largely developed,
Western China is somewhat neglected. For political harmony, policymakers
need to focus on Western China, which explains why Corridors 1, 2 and 3 of
OBOR originate out of the Western provinces.

3.

Use Chinas spare capacity. Building physical infrastructure has fueled

Chinas economic growth. With growing concerns that policymakers may
have over-invested, Chinas installed capacity in steel, cement, bulk chemicals
and heavy machinery, is now under-utilised. Building infrastructure in
neighbouring countries would be a convenient way to use this spare capacity.

4.

Create new export markets. China perhaps realises that exports to the
member countries of the Organisation for Economic Co-operation and
Development (OECD), which have been driving its economic growth, may
continue to fall. In effect, it needs to cultivate new markets in Africa and
Central Asia, which have significant growth potential.

5.

Create goodwill with neighbouring countries. OBOR entails establishing

training institutes and schools in participating countries, which should support
the project and be mutually beneficial.

While it is clear that China has to be ambitious, OBOR may not be quite as
ambitious as it appears. For example, China may not deliver all six corridors, these
corridors may not extend as deeply as envisaged, and each corridor may not
include roads, railroads and pipelines as currently planned. But even half of the
currently planned OBOR network would go a long way towards securing what
China needs.

In fact, we believe there is a latent priority within the six OBOR corridors, with
Corridor 1 and 2 on top of the list for strategic reasons. This may be why Corridor
1 (CPEC) has been the first order of business for China under OBOR. Taking a
staggered approach makes sense, as it limits the resources that have to be
committed upfront. Furthermore, negotiating the first two corridors is likely to be
less problematic for the Chinese (compared to Corridors 5 and 6) as there are fewer
participating countries in Corridors 1 and 2 (Pakistan, Kazakhstan, Uzbekistan,
Turkmenistan and Iran) -- and some of these countries do not enjoy close ties with
the United States.
Chinas unique approach to economic reforms
Many third world countries were more developed than China in the 1970s. In light
of this, Chinas current standing in the global economy clearly reveals why its
economic transformation is considered a miracle. After Tiananmen Square in 1989,
China embraced economic reforms with even greater fervour.
The architect of this accelerated growth was Deng Xiaoping. In 1978, Deng
challenged the Chinese to double Chinas economy by 2000 and make China a
middle-income country by 2050. China far exceeded his expectations when it
overtook Japan to become the second-largest economy in 2010. Dengs heuristic
(learning-by-doing) approach to economic reforms defied the collective wisdom of
the World Bank and the International Monetary Fund (IMF).
It is somewhat ironic that the development strategy advocated by the Washington
Consensus, under which the World Bank and IMF operate, is far more
ideologically burdened than the one used by Communist China to reform its own
economy. Compared to Pakistan, the Chinese were far more practical and resultoriented in their approach to economic reforms.
Most importantly, China displayed the political will to change. But political will,
while essential for the success of reforms, is not enough. An effective strategy is
also needed and China used a novel one that yielded unprecedented results.
Bo Qu, a visiting scholar at Princeton University, highlights two key characteristics
of Chinas economic reforms since 1978.
It is somewhat ironic that the development strategy advocated by the Washington
Consensus, is far more ideologically burdened than the one used by Communist
China to reform its own economy.
First, economic reforms do not proceed according to a well-defined blueprint. Qu
states that experimentation is a fundamental part of Chinas policy formulation,
and the process is primarily driven by specific problems encountered during
implementation. In effect, the real focus should be on solving practical problems,

instead of persisting with ideologically appealing, but ineffective institutional

arrangements.
Second, Chinas reforms were gradual and incremental, without hard timelines. Qu
states that incremental reforms reduce adjustment costs as policymakers are able to
balance the pace of reforms with social stability.
Despite starting as an under-developed agrarian economy in the late 1970s, China
did not approach the international financial institution (IFIs) for policy advice or
financial assistance. The stark contrast between this approach and Pakistans
experience since the late 1980s cannot go unnoticed. Although Pakistan has been
working to restructure its economy for the past 25 years, many would argue that
little has been achieved.
Chinas Family Production Responsibility System (FPRS) is a good example of the
heuristic approach to economic reforms. Before this, China had communal farms
with strict production quotas, where even meals were a group activity. The FPRS
(which is still in force) allowed individual farmers to rent arable land from the
government, in exchange for a specific quota of produce/crops. The rent was paid
to the local government.
This simple idea, which effectively permitted farmers to sell surplus produce in
village markets, was first implemented in specific provinces in the mid-1970s.
When positive results were realised, these experiments were carried out with
different crops, and then replicated in other provinces of China.
The FPRS was formalised as policy in 1978 by 1984, 99 per cent of Chinas total
agricultural production was incentivised by the private gains of individual farmers.
The scale of this change can only be appreciated when one realises that Chinas
rural population was about 800 million to 850 million people at the time.
This policy alone lifted most of Chinas population out of poverty.
Chinas success with large-scale economic transformation suggests that it would be
an ideal partner to execute CPEC. But even more importantly, Chinas tried-andtested approach to reforms, which is incremental and open to change as the
situation evolves, suggests that a lack of concrete details is not cause for alarm.
This appears to be how the Chinese prefer to work.
Illustration by Sana Nasir

Is OBOR a plan for global domination?

We disagree with the perception that OBOR aims for global domination. First, the
specific focus on Asia (effectively ignoring Africa and Latin America) does not
reveal global ambitions; and, secondly, since China is the third-largest country by
landmass and the second-largest economy in the world, any of its long-term
strategy by definition will be on a global scale.

What is harder to explain is Chinas policy in the South China Sea. For a country
trying to downplay the perception that it seeks to challenge the US for global
domination, Chinas strategy in Asia Pacific is surprisingly aggressive. However,
changing ones perspective could explain Chinas orientation on this issue.
The Asia Pacific region has a significant US military presence. American bases in
Japan and South Korea can be traced back to WWII and the Korean War, but have
lost their tactical importance with the end of the Cold War. Furthermore, the
continued US presence in Australia, the Philippines, Thailand and the Indian Ocean
has the potential to disrupt trade flows destined for and originating from China.
Since Chinas hard power comes from its trade flows, the Chinese are justifiably
concerned that a stand off with the US, on any issue, could easily strangle its
domestic economy.
The geopolitical dimension of CPEC
While OBOR may not be a plan for global domination, it does seek to change the
global status quo. Creating a physical corridor to the Arabian Sea will give China
direct access to a deep-sea port that is close to the largest hydrocarbon exporters
and a shortcut to Europe, the Middle East and Central Asia.
One must consider how this project challenges the global status quo, the US
control of global shipping lanes and Indias ambitions to control the Indian Ocean.
The growing tension between the Asian giants (China and India) and the hostility
between Pakistan and India explains why CPEC is so strongly opposed by India.
The resistance to Gwadar becoming a fully functioning port is perhaps being
reflected by the troubles in some parts of Balochistan specifically targeting the
Pakistan Army and local law enforcement agencies. These terrorist attacks may be
an effort to undermine CPEC.
For a country trying to downplay the perception that it seeks to challenge the US
for global domination, Chinas strategy in Asia Pacific is surprisingly aggressive.
Although Pakistans support for CPEC is clear from the armys active role in
guaranteeing security and the endorsement by Pakistans main political parties, if
the placement of the various routes is hampered by bureaucratic red tape and
provincial self-interests, the key Gwadar-Kashgar corridor could be the only route
that will be built.
This CPEC-lite will fulfill Chinas needs, but will not create the economic
spillovers the other routes promise.

n the context of the geopolitical prize that is Gwadar, the following is a

simplistic assessment of CPEC: China finances and builds the project, while

Pakistan pays in terms of social and political disruption, and the loss of innocent
lives. Given the strategic importance of the Gwadar-Kashgar corridor to China, this
component of OBOR will surely be completed because it is motivated by more
than just economics.
This is about securing Chinas trade routes and allowing it to position itself in the
Arabian Sea.
We believe this partnership with China could be the key factor that will place
Pakistans economy on a more sustainable path forward. As China targets Central
Asia, the Middle East and Africa as part of its strategy for the 21st century, it
simply cannot afford to have an economically unstable partner in CPEC.
This geopolitical compulsion should generate the political will to undertake tough
economic reforms in Pakistan and also ensure that CPEC is sustainable and
profitable for the country.