Phase-II of the China-Pakistan Economic Corridor: Dim Prospects
15 Apr, 2020 · 5675
Nowmay Opalinski argues that the second phase of the China Pakistan Economic Corridor might not catalyse industrial development in Pakistan and instead result in limited isolated cooperation projects
As the China Pakistan Economic
Corridor (CPEC)—which is part of China’s Belt and Road Initiative (BRI)—enters
its second phase, Pakistan’s new Special Economic Zones (SEZ) are now at the
forefront of the Sino-Pakistani industrial cooperation agenda. However, Beijing’s
cautious treading reflects its apprehensions regarding
the viability of the CPEC’s industrial component.
China Relevance for Pakistan’s
Industrial Ambitions
The first phase of the CPEC’s “early
harvest projects” was intended to overcome Pakistan’s shortcomings in communication
infrastructure and energy supply. The second phase is expected to catalyse industrial
take-off, and create over 575 000 jobs in Pakistan in the
coming years. On 3 January 2020, Pakistan’s Prime Minister, Imran Khan inaugurated the CPEC’s first SEZ, the Allama Iqbal
Industrial City, in Faisalabad.
This is one of the nine SEZs set to be
created along the Corridor. Under the Pakistan Vision
2025 plan, these SEZs are expected to complete the implementation of
industrial clusters across the country, and spearhead Pakistan’s overall
industrial development.
Chinese companies are the first
partners Pakistan seeks to attract for investment in these SEZs. Islamabad hopes
for its industries to utilise such investments for technology transfers to
eventually increase their productivity and diversify production. With Chinese financial
and material help, Pakistan aims to move away from its textile manufacturing-centred industry to a competitive technology-based industry involving engineering,
pharmaceuticals ,etc. This would necessitate substantial investment from China in
R&D activities, human resource development, and technical training.
China’s Apprehensions
In February 2020, China’s Consul
General to Karachi, Li Bijian, indicated
that Chinese companies are apprehensive of getting involved until Islamabad provides
better guarantees, such as on regulatory frameworks and political initiative. Learning
from its SEZ experiments in African countries where shortcomings in local administrative efficacies
often resulted in additional costs for Beijing, China is now expecting a degree
of preparation (basic infrastructure, energy supply, security arrangements, etc)
in the BRI target countries. However, Pakistan is falling short on most such
prerequisites.
Around mid-2019, reports emerged detailing inadequacies
in basic infrastructure and other requirements in three CPEC SEZs that were under development. In
November 2019, Pakistani companies complained about electricity shortages in SEZs
sites. Furthermore, Pakistan’s Special Economic
Zones Act, 2012, provides neither
protection against “rent-seeking” activities nor clear rules regarding foreign
labour importation. General shortcomings in regulatory frameworks are also
evident, given how multiple sectors do not meet
international health and safety standards. In addition to these, what
seems to most irk Beijing is the Pakistani administration's lukewarm political initiative. Islamabad has already decided to decelerate the remaining CPEC
infrastructure projects ito reduce the country’s debt burden, and
does not seem to have a clear stand on the CPEC’s second phase. Additionally, the
multiple amendments to the SEZ Act and the u-turns of the Pakistan Board of
Investment have given an impression of confusion to China.
Meanwhile, in November 2019, a Pakistani military-led CPEC Authority was created via a government
ordinance, presumably to project Pakistan’s capability to manage the situation.
However this could also have counter effects, given how the creation of such an authority contravenes the Pakistani Senate’s advice, and has the potential to fuel the debate around CPEC opacity.
The Conundrum
Overall, China seems unconvinced
about local capacities, and highly concerned about their implications for the image it seeks to project vis-à-vis BRI. CPEC’s second phase is crucial for BRI’s continuation as it reflects the potential
the project has to offer once infrastructure delivery is complete. At the
second Belt and Road Forum in 2019, China’s President, Xi Jinping, announced
that going forward, “people-centred development” was a priority. Given how CPEC
is being marketed as a flagship BRI project, China now has to prove that its presence
results in real job opportunities in Pakistan.
However, on the issue of
relocating production to Pakistan, there seems to be a mismatch between China’s
image-related communication objectives and economic rationale. Training the large pool of
unskilled workers in Pakistan would require substantial Chinese spending. However,
an economic slowdown is currently ongoing in China, and there is also growing discontent within
China, with increasing demands for investment in their own public
services and infrastructure instead of in BRI partner countries.
Finally, the incompatibility
of Chinese and Pakistani expectations for these SEZs continues to be a key
stumbling block. Over the past few years, Chinese investments in SEZs across
the world were targeting manufacturing
industries to sell lower quality products in the near
neighborhood of countries in which they invested. However, Pakistan intends to
benefit from technology transfers itself. Furthermore, Pakistan’s complex relations
with its neighbours complicate China’s objective of making Pakistani SEZs a platform
for selling Chinese products in the region.
Looking Ahead
It appears that CPEC will not be
the much touted 'game changer' for Pakistan’s economy as China is already
scaling down its involvement along the BRI. Pakistan’s
economic objectives also do not correspond to Chinese ambitions. Therefore, chances
are that going forward, China-Pakistan industrial cooperation might be limited to
isolated cooperation projects.
Nowmay Opalinski is a Research
Intern with the Centre for Internal and Regional Security (IReS), IPCS.