Tuesday, January 12, 2016

The China – Pakistan Economic Corridor: India’s Dual Dilemma - read more >>

The Chinese commitment to invest US$46 billion into Pakistan is driven by two main considerations. China’s current $4 trillion foreign trade and 7 million barrels of daily oil imports are largely dependent upon sea-lanes that can be choked by competing powers. Convinced that the U.S. is seeking surrogates to contain its rise, China is seeking alternate and less vulnerable routes. Second, China has finally decided that its troubled but reliable (even dependent) friend, Pakistan, has problems that can best be handled by investing in its power sector and infrastructure development. In the process, as a part of its larger One Belt, One Road (OBOR) strategy, the China-Pakistan Economic Corridor (CPEC) gets a priority because this is the only network that connects China to the Arabian Sea –shortening its maritime distance with the energy rich Persian Gulf market by over 10,000 kilometers.

China – Pakistan Economic Corridor

The extent of China’s commitment betters the US$12 billion (estimated to be $120 billion in 2015 dollars) Marshal Plan used to rebuild several European countries after World War II. Some on-going Chinese aided projects are now incorporated into the CPEC. This large infusion of capital, if utilized properly, can potentially change the regional power equation.

The CPEC will be developed in 15 years, along three corridors – western, central and eastern, connecting the two cities – Kashgar in China’s Xinjiang Uyghur Autonomous Region with Pakistan’s deep water Chinese-built Gwadar Port, just 400 km from the Straits of Hormuz. Twenty percent of world’s oil passes through the Straits, much of it destined for China.

Following a strong Chinese urging to depoliticize the project, an All-Party Conference in Pakistan decided that the western route be developed first.

Elements of the CPEC were already being discussed during the President Pervez Musharraf era (1999-2008). The Chinese, as far sighted as they are, encouraged the Pakistani political leadership across the party lines, to reach out to potential Chinese partners in lesser-known places.

The Chinese leadership therefore, not only built a top-down, but also bottom-up support from Chinese industrial and financial houses, for the CPEC. Almost all the money is in commercial loans, negotiated between respective entrepreneurs. A robust and active participation built by the Chinese state itself underscores China’s deep commitment towards Pakistan’s growth and stability. Consequently, Chinese influence will increase in Pakistan and will spread beyond.

Since Pakistan continues to face crippling power shortages, which causes at least 2 percent GDP loss, almost $34 billion are to be spent in setting up new power plants. The early harvest power projects will yield 10,400MW of electricity by 2017-18. This will spur much of the latent industrial and agricultural activity, thus improving the lives of ordinary citizens. Pakistan estimates that there will be a 15 percent increase in its GDP by 2030, when the CPEC is due for completion. The rest of the money will be spent on fiber optics links, roads, Gwadar Port, and energy supply lines.

This huge investment can be transformational if Pakistan can improve upon its lackluster performance in FDI absorption. It is a challenge for Pakistan to devise a seamless mechanism to realize the CPEC ambitions. In process it helps improve Pakistan’s abysmally poor governance standards too.

Pakistan, locked in a self-destructive parity mindset, seems to have understood that to deter India’s power projection, military prowess alone will not do. Pakistan needs an economic muscle to match India’s growing clout in the region and afar. Pakistan’s military understands the need for this new equation even better than the oligarchic civilian leadership.

Following this major investment, China will be more inclined to protect Pakistan’s security interests. And, with projected increase of 15 percent in GDP, this investment will start narrowing the economic gap between India and Pakistan. Other countries in the SAARC region will inevitably look to China for project support and money, which India cannot hope to match.

The CPEC is unique in the sense that it connects China and Pakistan only, and also connects China to the sea through the quickest route. It could be a pivot to China’s One Belt, One Road (OBOR) concept that aims to connect 60 countries on the Asia and European land mass. To realize this plan, China intends to build a web of networks such as the Southern Silk Road, the Central Asia Silk Road, the 21st Century Maritime Silk Road, and the CPEC.

A fully operational Gwadar Port and the CPEC, providing land based security, will shift the pattern of China’s maritime trade links and reduce volumes to and from China through the Malacca. China’s energy supplies will be less vulnerable to the ‘Malacca Dilemma.’ To protect its own supply chain, Chinese naval presence in the Indian Ocean could increase. Given long standing relations and the emerging power blocs, Pakistan will be happy to open Gwadar facilities for China’s naval usage.

The U.S. is courting India with the declared purpose of assigning the lead role in the Indian Ocean, which is unacceptable to both China and Pakistan. In fact, India’s cozying up to powers that China is suspicious of, compels China and Pakistan to strengthen their alliance further. China-Pakistan strategic naval partnership centered on Gwadar will scuttle the Indo-U.S. ambition of dominating the Indian Ocean.

Consequent to the emerging mistrust with the West, Russia and China have agreed to create a dialogue mechanism to integrate the Russian sponsored Eurasian Economic Union (EAEU) and OBOR. The agreement marks an end to Russia’s hesitation about China’s OBOR. Also, in the current state of belligerence, Pakistan is not going to give overland connectivity to India through Afghanistan and Central Asia. This shuts India out of the Central Asian Silk Road. With India distancing from Russia and aligning with the U.S. aims, India faces mistrust in its own backyard – much the same mistake Pakistan made in aligning with the extra regional powers – to the detriment of its own future.

For India, a major economic engagement between two of its adversaries – China and Pakistan – is a double dilemma. The economic reality of rising China compels India to support the various sections of road connectivity, like in Central Asia, East Asia and also connecting China with Myanmar, Bangladesh and India through the Southern Silk Road. Yet, India could not overcome its deep anathema towards Pakistan by objecting to the project, even though on the question of its passage through the disputed territory of Jammu and Kashmir, during Mr. Modi’s China visit in May. These Indian prejudices do not contribute to rapprochement between the two.

There are opportunities for India in the CPEC and in the OBOR. Once sanctions over Iran are lifted, the Iran-Pakistan-India (IPI) gas project can be revived. And with the CPEC in place, it is likely that the pipeline will also feed into the EUEA link. Joining an energy supply arrangement with China, Russia, Iran and Pakistan will only reinforce regional connectivity and interdependence amongst adversaries. This could be the economic bridge between South and Central Asia.

The Chinese economy is five times bigger than India’s. Even with higher growth rate this year, India will need more than 50 years to catch up. India needs to loosen up while coming to terms with China’s strategic rise and engage actively with China in OBOR. This will only help yield a more peaceful world.



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