The China–Pakistan Economic Corridor (CPEC) remains the largest bilateral arrangement under China’s Belt and Road Initiative (BRI).Footnote 1 Chinese President Xi Jinping 习近平 proposed building a new Silk Road Economic Belt in September 2013, when China’s neighbours and allies were variously welcoming and questioning its ascent as a world economic power. Xi extended a peaceful hand in soliciting support for building an economic belt stretching from East Asia to Europe. One month later, he suggested constructing the 21st Century Maritime Silk Road. Together, these projects came to be known as the BRI. It was a political, cultural and economic endeavour, as China’s then-ambassador to Kazakhstan, Yao Peisheng 姚培生 observed.Footnote 2
Some have argued that with the BRI, China has been pursuing primarily its own self-interest. To mitigate scepticism regarding the BRI, the National Development and Reform Commission (NDRC) released, in March 2015, a document entitled, “Vision and actions on jointly building a Silk Road Economic Belt and a 21st Century Maritime Silk Road.” This carefully worded document, aimed at building an environment of trust, forms the foundation of the BRI: “The Belt and Road Initiative is a common aspiration of all countries along their routes.”Footnote 3 No country is compelled to participate, and all are urged to enter into dialogue on an equal footing to iron out differences and worries and to jointly build the Belt and Road for the “benefit of all.”
Formal agreements establishing the CPEC as the flagship project of the BRI were signed in April 2015 during Xi’s official trip to Pakistan. Over Pakistan’s 70-year history, the CPEC stands out as an unprecedented symbol of bilateral cooperation. Various Pakistani leaders, including former Prime Minister Muhammad Nawaz Sharif, have, therefore, called the CPEC a “game changer” for the country.Footnote 4
Chinese leaders have expressed similar enthusiasm for the CPEC by labelling it the BRI’s “frontrunner” project. President Xi himself attaches immense importance to the CPEC.Footnote 5 In an interview with Pakistani media in 2015, he stated: “Our aim is to deliver even more benefits to both the peoples and realize brighter development prospects.”Footnote 6
At the other end of the spectrum, there is, however, a viewpoint that portrays the CPEC as the “New East India Company,” in reference to the name of a British joint-stock organization originally established in 1600 to manage trade in the Indian Ocean region. It later colonized India, parts of South-East Asia and Hong Kong. The proponents of this view offer several arguments.Footnote 7 First, Pakistan’s fragile economy will render it unable to repay the debt accrued through CPEC projects. China will, therefore, eventually meddle in Pakistan’s internal affairs to recover its liabilities.Footnote 8 Second, under the CPEC, the port of Gwadar will become a strategic Chinese naval base, providing access to the Arabian Sea and the Indian Ocean to counter the US–India alliance. The anti-CPEC rhetoric that focuses on Gwadar even implies that China may occupy this port entirely, as it has in Hambantota in Sri Lanka.Footnote 9 Third, Pakistan runs a huge trade deficit with China and, as both trading partners enter into deeper collaboration under the CPEC,Footnote 10 the Pakistani market, with a population of more than 210 million, will be swamped with Chinese goods and local Pakistani industries will suffer immeasurably.Footnote 11 Consequently, this will increase Pakistan’s dependence on China, turning it into a client or satellite state. According to Maryam Mohiuddin Ahmed, head of the Social Innovation Lab, “CPEC seems to be an exploitative framework.”Footnote 12
These diametrically opposing interpretations of this gigantic plan demand an in-depth analysis. The current literature and scholarship is divided into two strands, one concerned with showcasing the potentially positive impacts of the CPEC for China and Pakistan, and the other focusing on highlighting the negative repercussions, especially for Pakistan.Footnote 13 We find, however, that the CPEC is neither a game changer nor the New East India Company, as both China and Pakistan seek to promote their national interests. Both countries must, of course, approach their relationship cautiously, calculating their own national interests objectively as the CPEC is implemented.
We spent over two years interviewing relevant stakeholders – including government officials, politicians, private firms, scholars, members of think tanks and non-profit organizations, and military officers and workers on CPEC projects (see Appendix 1 for full details) – to understand whether the CPEC is a game changer or a manifestation of Chinese plans to colonize Pakistan. Documents published by various institutions such as the International Monetary Fund (IMF), the International Crisis Group, PricewaterhouseCoopers, Deloitte, the Association of Chartered Certified Accountants, the United States Institute of Peace (USIP), Columbia University, the Pakistan Institute of Development Economics, the National Development and Reform Commission of China, the State Bank of Pakistan and other entities were systematically examined.
We conducted 75 in-depth, semi-structured face-to-face interviews, totalling over 56 hours of interview time. Approximately half of the interviews were conducted in Urdu, with English as the second most common language, and a limited number (around five interviews) were conducted in Punjabi. Some interviews were conducted in a blend of Urdu and English, and a few in a mix of Urdu and Punjabi, reflecting each interviewee’s preference. Interview guides were shared in advance to provide ample preparation time and facilitate understanding of our research concerns. Consent to record the interviews was requested from each participant. In cases where recording was not permitted, meticulous notes were taken. Comprehensive details regarding these interviews are provided in Appendix 1.
Following the interviews, the data were transcribed into English, resulting in approximately 148 single-spaced pages, or nearly 80,000 words, of text. This corpus of data was then analysed using NVivo 10, a qualitative data analysis software, to derive relevant codes and themes. This analytical process enabled us to identify and categorize aspects of the CPEC that pertain to its game-changing and colonizing dimensions. To support our arguments, we have incorporated direct quotes from interviewees where relevant. While some interviewees requested anonymity, the dates and locations of the interviews are referenced when their insights are integrated into our analysis.
We conclude that critics of the CPEC are justified when they argue that Pakistan lacks the capacity to benefit maximally from the plan because of poor governance, substandard knowledge infrastructure, corruption, bureaucratic delays, red tape, the weak capacity of civil servants and the absence of an entrepreneurial ecosystem. This does not mean, though, that China will colonize Pakistan. Industrial cooperation seems integral to the CPEC and Pakistan has an opportunity to bolster its manufacturing capabilities by learning from Chinese businesses. Technology transfer from China should be discussed and an actionable plan devised and implemented soon if Pakistan is to benefit from industrial cooperation under the CPEC. Pakistan has lagged in technology catch-up and the CPEC can play a vital role in reversing its poor technological performance. Our analysis reveals as well that China is not laying a debt trap for Pakistan. Rather, it is helping the country remove critical bottlenecks that slow growth, such as insufficient energy and infrastructure, and could help the Pakistani economy stand on its own feet.
The remainder of the paper comprises six sections. Next, we present the developmental state argument that informs the framework for our analysis. Then, after discussing the background of the China–Pakistan relationship, we explain why the CPEC is seen as either a game changer or the New East India Company. Subsequently, we reveal the results of our analysis and finally present our conclusions.
Theoretical Framework: The Developmental State
By definition, a developmental state is a country that views economic growth and industrialization as its major goal. Based on this premise, in a developing economy, the state plays an important role by intervening in the market, implementing strategic industrial policies with deliberate plans to drive uncompetitive sectors, as well as active macroeconomic policy that includes reducing current accounts deficits, all with the support of a coalition of bureaucrats, entrepreneurs and other dominant groups that embrace a national development strategy.Footnote 14 A developmental state plays a pre-eminent role in interaction with the private sector to accomplish economic development objectives. The concept of the developmental state emerged in the late 20th century as a theoretical framework within which to explain the rapid economic growth and industrialization that East Asian countries, particularly Japan, South Korea, Taiwan and Singapore, were achieving. This model challenged prevailing neoclassical economic theories by emphasizing the crucial role of state intervention in guiding economic development.
The developmental state concept was most foundationally elaborated upon in Chalmers Johnson’s Reference Johnson1982 book.Footnote 15 Johnson used the term to describe Japan’s post-war economic model, which was characterized by strategic state intervention to promote industrial growth. Johnson identified key features of a developmental state.Footnote 16 Building on Johnson’s work, other scholars, such as Alice Amsden (on Korea) and Robert Wade (on Taiwan), expanded the concept to analyse the experiences of other East Asian countries.Footnote 17 The concept foregrounds the centrality of the state and coherent state intervention designed to address socio-economic challenges such as unemployment, poverty and slow economic growth. The concept gained significance as an alternative to neoliberal policies promoted by international financial institutions such as the World Bank and the IMF. While these institutions advocated market liberalization, privatization and minimal state intervention (the “Washington consensus”), the developmental state concept offered an alternative path based on the successful experiences of East Asian countries.
The concept also resonated with many developing countries such as Pakistan that were seeking to replicate East Asian success and maintain policy autonomy in the face of external pressures. It provided a theoretical justification for resisting certain aspects of neoliberal reform packages and pursuing more openly interventionist policies. Here, we adopt the developmental state framework to examine the web of political, bureaucratic and financial influences that structure economic life in Pakistan.
Assessing whether Pakistan fits the definition of a developmental state requires a nuanced understanding of both the theoretical constructs that inform the associated model and Pakistan’s specific socio-economic and political context, particularly in relation to its collaboration with China through the CPEC. Traditional developmental states, exemplified by Japan and South Korea, are characterized by governments that play proactive roles in economic planning and execute policies focused intensely on rapid industrialization. Such undertakings involve close partnerships with the private sector, where the state directs investment in key industries, often using tools such as tariffs, subsidies and state-owned enterprises. Moreover, these states are run by highly competent and insulated bureaucracies that can effectively design and implement policies without undue interference from political or private-sector interests. Their methods tend to enhance and conform to market dynamics rather than replacing or distorting market mechanisms, and they focus on promoting export-oriented industries to integrate their economies into global markets and drive economic growth.
In contrast, Pakistan’s alignment with these characteristics involves both similarities and significant deviations. Through CPEC, Pakistan exhibits strategic state intervention where both Pakistan and China engage collaboratively in extensive infrastructural projects, including roads, energy plants and industrial hubs. Unlike with the classic East Asian developmental state, however, such intervention is not driven solely by a purely economic agenda: institutional (namely, military) and political interests play significant roles. The bureaucratic structure in Pakistan does not fit neatly into the developmental state model. Often criticized for its inefficiency and susceptibility to corruption, Pakistan lacks the insulated, meritocratic characteristics seen in countries like Japan and South Korea. While the CPEC aims to enhance Pakistan’s industrial capacity, the focus has not been sharply trained on export-led growth as in the classic developmental state model. The projects implemented under the CPEC are more broadly aimed at infrastructural development rather than cultivating specific export-oriented industries.
Pakistan nevertheless exhibits certain characteristics of a developmental state, particularly in terms of strategic state intervention and aiming for broad-based infrastructural and industrial development. It diverges significantly, however, in bureaucratic efficiency, economic policymaking autonomy and adherence to market-conforming methods. The extent to which Pakistan can be considered a developmental state is thus limited by these deviations.
The economic model that Pakistan is pursuing through the CPEC represents a Weberian ideal type of interventionist state that is neither socialist (like the former Soviet Union) nor free market (having no plan, where private control coincides with private ownership) but rather something that falls between these extremes. In this “in-between” space, private ownership is conjoined with state guidance and state ownership. Unlike the classical concept of the developmental state, though, the idea as applied in Pakistan involves a neighbouring state, China, which intervenes in Pakistan’s model of public and private ownership. It is argued within this new framework that links between interventionism – both locally based (provided by the Pakistani state) and externally informed, by a friendly neighbour (China) – and rapid economic growth is the new nexus at which the developmental state concept has been revived.
Unlike in traditional developmental states, in Pakistan strategic interventions in industrial policy, coordination of public- and private-sector efforts, and investment in infrastructure and technology are not conducted independently. Instead, these interventions are executed collaboratively, blending Pakistan’s developmental initiatives with China’s supportive interventions. This hybrid model maintains the foundational objectives of a classical developmental state, such as rapid industrial growth and economic development, but achieves them through a bilateral approach.
As such, Pakistan’s experience can be reconsidered and recast against the backdrop of new theorizing about the state and the economy and against evidence obtained from developmentally similar states. Although the developmental state paradigm is thought to conflict with both neoclassical economics and rational choice theory, we believe that Pakistan’s experience justifies reconsidering this perspective. Industrial policy can be explained as rational and appropriate through evolutionary economics and transactions theory. Finally, the Pakistani case suggests a need to decouple the developmental state concept from economic performance alone. The CPEC, as we show in this paper, is as much about ambition – what Michael Loriaux terms the “moral ambition to develop” – as it is about economic growth.Footnote 18
Situating the CPEC within the developmental state framework, we seek to analyse key building blocks of the classical developmental state concept: finance, the big-business perspective in Pakistan, military interests, bureaucracy and politics. We untangle each of these features to assess the chances that the CPEC will become a game changer for Pakistani development or merely another manifestation of colonialism.
Background to the China–Pakistan Relationship
After the 9/11 terrorist attacks in New York, Pakistan faced a very challenging and sensitive situation, as the US-led coalition unleashed a “war on terror” in Afghanistan. The challenge of maintaining law and order in the context of the war on terror adversely affected investor confidence in Pakistan.Footnote 19 An ensuing volatile domestic situation affected foreign direct investment (FDI), which peaked in 2007 (US$5.59 billion) but nosedived after 2011 (see Table 1) following the May 2011 operation in which US Navy Seals killed Osama Bin Laden. Following that incident, Pakistan found itself bereft of FDI in a world reluctant to help.Footnote 20 Most developed countries began withdrawing investments from Pakistan and much-needed capital dried up quickly.Footnote 21 “Pakistan was at its lowest ebb from 2011 to 2013,” remarked Dr Safdar Sohail in an interview.Footnote 22
Then, against the backdrop of an economically fast-rising China, the CPEC was launched in 2013.Footnote 23 Initially, based on 51 agreements signed in 2015, it involved a massive commitment of US$46 billion, which increased to US$62 billion by early 2017.Footnote 24
China’s deep engagement with Pakistan is, however, not new. A very strong relationship between the two states has crystalized over seven decades and the magnitude of the CPEC indicates the importance China assigns to Pakistan. China–Pakistan ties encompass political, military and socio-economic affairs. Historically, Pakistan was the third non-communist country to recognize the People’s Republic of China (PRC), doing so on 4 January 1950. Their political relationship strengthened after the Sino–Indian war of 1962 and the India–Pakistan wars of 1965 and 1971. Pakistan has also frequently reciprocated China’s friendly gestures. It was one of two countries to protest the United Nations’ sanctions on China following the 1989 Tiananmen Square incident, despite Pakistan being a US ally at that time.Footnote 25
Critics regard the China–Pakistan relationship as a classic embodiment of the ancient maxim, “the enemy of my enemy is my friend.” They both share an ever-present mutual animosity towards India.Footnote 26 Ye Hailin 叶海林, a Chinese academic, has argued that Beijing’s objective “has not been to strengthen the two countries’ welfare interests but to strengthen them against common threats.”Footnote 27 Consequently, China has over the years emerged, along with the United States, as one of the largest defence suppliers to Pakistan.Footnote 28 Andrew Small has argued that China helped Pakistan develop its nuclear bomb.Footnote 29 Joint projects have produced armaments ranging from fighter jets to guided-missile frigates.
In the China–Pakistan bilateral relationship, social and economic ties have not been as important as political and military ones. The trade balance between the two countries heavily favours China.Footnote 30 In fact, Pakistani trade with China lags behind its trade with many equivalent or smaller economies such as the Philippines and Vietnam,Footnote 31 indicating that the full potential of the economic relationship between the two countries has yet to be realized.
The CPEC as a Game Changer
In its current form, the CPEC operates within a “1+4” framework wherein the economic corridor forms the core of the plan, with energy, infrastructure, the port of Gwadar and industrial cooperation constituting the four critical components.Footnote 32 The corridor runs approximately 3,000 kilometres, starting at Gwadar in the Pakistani province of Baluchistan and terminating at Kashgar in the restive western territory of Xinjiang, China. To understand how the CPEC can be a game changer, we have subdivided our discussion into energy, economic and social arguments.
Energy arguments
Since its deployment in 2015, the CPEC has benefited Pakistan most prominently by helping to ameliorate its acute vulnerability to power shortages.Footnote 33 Pakistan’s average energy shortfall in 2013 was 4,000 to 6,000 megawatts (MWs). This worsened to around 7,000 MWs in early 2017.Footnote 34 Supply shortages and distribution problems have caused frequent outages, costing Pakistan about 2 per cent in annual GDP growth.Footnote 35 Addressing such critical bottlenecks to enable economic growth is a key feature of the developmental state model. As discussed above, strategic state intervention in infrastructure and industrial policy is seen as crucial for driving economic development. The CPEC’s focus on energy infrastructure aligns with this approach, but the question remains whether these investments will translate into export-oriented growth and technological upgrading, which are also central to the developmental state paradigm.
Much of the money and support allocated under the CPEC are, therefore, going to the Pakistani energy sector. Approximately US$36 billion (about 58 per cent of the total US$62 billion) is expected to fund power projects. The energy sector has thus experienced the greatest short-to-medium-term impact from the CPEC.Footnote 36
Since launching the CPEC’s energy projects, installed generation capacity in Pakistan has risen. The total current energy demand in 2019 was about 25,000 MWs and the generation capacity was 28,000 MWs.Footnote 37 Early-harvest projects (2015–2019) supporting the CPEC have played a pivotal role in overcoming some portion of the shortfall. Outages still occur, although issues with the transmission and distribution capacity of Pakistan’s national grid are less often to blame.
Under the CPEC, 15 energy projects were prioritized, of which 10 were completed by 2021 (see Table 2). A senior government functionary explained that most of the energy projects were expected to have been completed by the end of 2019 or by early 2020.Footnote 38 These targets were, however, not met. The pace of the projects suffered a blow when Pakistan’s political regime changed in 2018 after the government led by the Pakistan Muslim League – the original signatory to the CPEC projects – was replaced by a new government under Pakistan Tehreek-e-Insaaf. The Planning Commission stated initially that the CPEC’s energy component would generate 17,000 MWs by 2020.Footnote 39 About 5,000 MWs were added, and the remaining energy projects were delayed well into 2024. In total, 11,110 MWs, not 17,000 MWs, in generation capacity will be added. Industrial production is, however, expected to rise as the energy shortage is overcome, which will in turn boost Pakistan’s GDP growth as manufacturing activities gain momentum.Footnote 40
The CPEC energy projects will help Pakistan reduce its dependence on oil and hydropower. According to the IMF country report, these projects will significantly alter Pakistan’s current fuel mix and reduce its current accounts deficit as its oil imports drop following the operationalization of non-thermal CPEC power projects (see Figure 1). Comparable projections regarding the Pakistani fuel mix have also been issued by the United States Institute of Peace.Footnote 41
Projected Evolution of the Pakistani Fuel Mix
Economic arguments
After 2013, China became the largest contributor to FDI inflows into Pakistan (Figure 2) after investors from advanced countries had shied away.Footnote 42 Chinese support through the CPEC was therefore welcomed.Footnote 43
FDI Inflows into Pakistan from Major Countries
The scale of China’s investment in Pakistan as a single country under the CPEC is unprecedented. Chih-yu Shih argues that “no other nation in human history has ever invested as much in another as China has, as part of the CPEC, in Pakistan.”Footnote 44 This claim may be debatable and would be hard to verify because of the absence of complete and authentic data over such a long period of time. As noted above, the project’s value increased from US$46 billion in 2015 to US$62 billion in 2017 and many social sectors have been added to the long-term CPEC plan. Recently, however, the slower-than-expected rate of progress on various projects has irked several Chinese companies.Footnote 45 The potential harm from tribal obstacles, religious extremism and other security risks to the CPEC projects has also been highlighted in relevant scholarship.Footnote 46
We note another reflection of the CPEC’s positive effects on Pakistan’s economy in its impact on the country’s stock market (Figure 3). The Karachi Stock Exchange (KSE) 100 index has been performing well since the initiation of the CPEC-related projects, indicating that investors have felt confident about the Pakistani market’s future.Footnote 47
Performance of the Karachi Stock Exchange, 2008–2020
In December 2016, a Chinese-led consortium comprising China Financial Futures Exchange Company Limited, the Shanghai Stock Exchange and the Shenzhen Stock Exchange bought 40 per cent of the strategic stock on the Pakistan Stock Exchange (PSX) for US$85 million.Footnote 48 This was the first time that Chinese companies had acquired stakes in a foreign stock exchange, demonstrating the two countries’ deepening links.
The CPEC can also help Pakistan metamorphose from an import-driven to an export-driven economy. The country now has a significant opportunity to become an exporter of high-value products – once Chinese industrial units are set up.Footnote 49 A very important component of the CPEC is the development in the medium term of at least nine special economic zones (SEZs) across Pakistan. Through these SEZs, Pakistan will be able to learn from China’s experience by following export-oriented free-market policies and implementing measures such as tax benefits and preferential treatment for foreign investors, introducing new and better ways of doing business in Pakistan.Footnote 50 A culture of entrepreneurship should flourish if the process is managed properly.Footnote 51 In addition, SEZs also have the potential to help Pakistan catch up in technology as firms will learn from Chinese producers through joint ventures and participation in supply chains.Footnote 52 The CPEC should push the corporate sector to embrace innovation and work hard to enhance the country’s competitiveness.Footnote 53
This potential for technological learning and industrial upgrading aligns with the developmental state concept’s emphasis on strategic industrial policy and the promotion of export-oriented industries to drive economic growth. As noted, however, the developmental state model also stresses the importance of a competent and autonomous bureaucracy to guide this process. The concerns raised by Pakistani businesses regarding lack of transparency and unequal treatment under the CPEC suggest that challenges may arise in this regard.
Many businesspeople eye the CPEC with suspicion. As a representative of the Lahore Chamber of Commerce argued, the “CPEC is mainly a political project. Economics are not really the core.”Footnote 54 During interviews, some business leaders complained about the preferential treatment being given to Chinese firms over local establishments as businesses in the SEZs are set up. Yet not all of those in business are sceptical. Pakistan’s economy is fragile and some think that the CPEC could have a useful “demonstration effect, signalling to other investors that Pakistan is a safe and attractive destination for [FDI].”Footnote 55 The apprehensions we observed in the Pakistani business community may have some validity, however, as the Chinese have superior managerial and technical capabilities and they may exploit Pakistan’s cheap and abundant labour to grow their businesses at the expense of local enterprises.
Social arguments
The median age of the Pakistani population is around 23 years, indicating that some 105 million people are below this age. This provides a timely opportunity to transform Pakistan’s considerable store of human resources and capitalize on its youth to reap a demographic dividend.Footnote 56 Industrial cooperation under the CPEC can play a critical role in generating employment, with Pakistani youth finding more jobs available.Footnote 57 Such an economic boon would be accompanied by a social dimension. Crime and deviant behaviour among the youth are quite common in the country. Frustration with unemployment no doubt causes crime.Footnote 58 The Applied Economics Research Centre at the University of Karachi and Deloitte have estimated that the CPEC could create more than 700,000 direct jobs between 2015 and 2030.Footnote 59
This social dynamic highlights a key challenge for Pakistan in leveraging the CPEC for developmental state-style industrialization. East Asian developmental states were able to harness well-educated, disciplined workforces to drive export-oriented growth. Pakistan’s youth bulge could generate a demographic dividend, but realizing such a benefit requires substantial investment in cultivating human capital and the creation of productive employment opportunities. Concerns over social instability and crime underscore the urgency of this challenge and the importance of ensuring that the CPEC’s benefits are widely distributed.
Moreover, the CPEC projects will also strengthen people-to-people exchanges, as the projects will necessitate cross-border travel both to launch successfully and to sustain their operations.Footnote 60 Easier cross-border travel will encourage more people to cross the borders and boost tourism.Footnote 61
China is also offering a large number of scholarships to bring Pakistani students to its universities and is setting up vocational training centres in Lahore, Quetta and other parts of the country. The Faqeer primary school, or the “China–Pakistan Friendship School,” was built in Gwadar by the China Fund for Peace and Development. The school opened in September 2016 and accommodates 500 students. An official at the Gwadar Development Authority suggested that Gwadar’s existing population of 90,000 people will be joined by another 2 million people over the next 20 years, including 20,000 Chinese residents.Footnote 62 In May 2017, a 500-square-metre CPEC emergency medical centre, donated and run by the Chinese Red Cross Foundation, was also established in Gwadar. It is staffed by a team of Chinese medical practitioners and provides first-aid treatment to local residents and free examinations for local primary school students.
The CPEC as the New East India Company
Above, we mentioned a school of thought that views the CPEC as the New East India Company – in other words, an initiative that would help China gain a strong foothold in Pakistan where it can promote its own geopolitical and economic interests. Pakistan may extract little value from the CPEC unless it makes clear what it wants, as shown by how Chinese economic intervention has played out in other economies such as Malaysia, Sri Lanka and countries in Sub-Saharan Africa.Footnote 63 Pakistan may be able to enjoy only a meagre transit fee from Chinese imports and exports in the absence of a concrete plan involving technology transfer or industrial catching-up.Footnote 64 “We are not prepared at all” to benefit from the CPEC, remarked the head of a private organization in Pakistan.Footnote 65 Some high-level officials and prominent voices in the Pakistani business community are concerned about the government’s failure to protect local economic interests, the high guaranteed returns on equity to Chinese investors and Pakistan’s unaffordable national debt.Footnote 66
Concerns regarding China’s potential to exploit its economic engagement for geopolitical advantage challenge the developmental state paradigm, which posits strategic state intervention as a means to achieving national economic development rather than facilitating external influence. The developmental state model emphasizes the importance of policy autonomy and a capable bureaucracy in guiding industrialization. The following arguments, particularly around the lack of transparency and unequal distribution of benefits, cast doubt on whether the CPEC fully embodies these principles or risks compromising Pakistan’s policy independence.
We have identified three areas – military, economic and social – where China may impose strong control over Pakistan to secure its own interests. This potential for external influence and limited policy autonomy conflicts with the developmental state ideal of strategic state intervention in the national interest. The developmental state model emphasizes the importance of instituting a strong, capable state bureaucracy that can guide industrialization and resist capture by narrow interests, whether internal or external.
Militaristic arguments
As China continues to enhance its economic power, the desire to control global regions through its military cannot be ignored. Closely associated with the military argument is the phenomenon of the “string of pearls.” Observers note that China has been building a ring of ports (the “string of pearls”) around the Indian Ocean, including in Sri Lanka, Djibouti and the Seychelles, which it hopes will enable it to outflank India for Asian supremacy.Footnote 67 China no doubt sees developing and controlling Gwadar as a critical addition to this string of pearls by providing China with a warm water deep-sea port on the coastline of the Arabian Sea. A June 2017 Pentagon report suggested that Gwadar could become a Chinese military base,Footnote 68 a conjecture that the Chinese Ministry of Defence has dismissed as “pure guesswork.”Footnote 69
Gwadar sits around 400 kilometres away from the Strait of Hormuz, an important route through which 35 per cent of global seaborne trade and approximately 43 per cent of the Chinese oil trade pass, facilitating China’s overall trading activity and reducing transit time for its imports and exports.Footnote 70 Those who view the CPEC with suspicion wonder whether trucking goods over one of the world’s highest mountain ranges on the border of Pakistan and China will ever be cheaper than using existing sea routes.Footnote 71 They suspect that in Gwadar China envisions the installation of a naval base, not a trading port, near Arabian Gulf oil supplies.Footnote 72 Others argue that China wants to use Gwadar as a “listening post” from where to keep track of Indian and US naval activity in the Indian Ocean region.
We see these concerns depicted vividly in Gwadar. Intelligence agencies and military forces exercise strong control and monitor movements in and around the city. This militarization of the CPEC process raises questions about the developmental nature of the project. The strong role the military plays in shaping and managing the CPEC, while potentially driven by security concerns, risks undermining the policy autonomy and institutional coherence needed for effective developmental governance. During our visit to Gwadar, we noticed city residents and even government functionaries being subjected to demeaning questioning by Pakistani soldiers. Even children have to face tough questions. One schoolgirl said, the “CPEC has curtailed our freedom of movement in our city.”Footnote 73 A Gwadar official added, “The so-called development plan has made life miserable for the people of the area and they are leaving this place.”Footnote 74
Economic arguments
Our fieldwork suggests that considerable suspicion of the CPEC within Pakistan originates in the business sector. “How are we going to survive when the Chinese pharmaceutical firms with better manufacturing technology and a low-cost advantage get relocated to industrial zones in Pakistan?” asked the director of a large local pharmaceutical company in Lahore.Footnote 75 An owner of a manufacturing facility that produces packaging machinery in Muridke, which is located about 35 kilometres from Lahore, expressed concern over the same risks for his industry, although he believed that Pakistan must prepare itself to learn from Chinese firms.Footnote 76
Leading economists and representatives of Pakistan’s business community see the free trade agreement (FTA) between the two countries that was implemented in 2007 as disproportionately benefiting China. The prospect of China swamping the Pakistani market with its goods, perhaps driving local companies out of business, fuels this fear.Footnote 77
Another line of reasoning supporting the New East India Company view of the CPEC is based on China’s very strong interest in Pakistan to overcome its “Malacca dilemma.” China, like all big global economies, depends heavily on oil imports and is seeking options to secure its energy supplies.Footnote 78 Some commentators have noted that, over the long run, a stable overland link across Pakistan to the Arabian Sea could help to alleviate China’s vulnerability, as approximately 85 per cent of its oil imports have to pass through the chokepoint of the Strait of Malacca, which is dominated by the United States and its allies.Footnote 79 Gaining a firmer grip over Pakistan and building and controlling a corridor there would enable China to secure its oil supplies during a conflict with the United States or its allies in the Indian Ocean region and the South China Sea.
Those wary that the CPEC will help China to colonize Pakistan also highlight the debt “trap” China has seemingly laid for its partner. IMF assessments show that Pakistan’s repayment obligations, including loan payments and guaranteed rates of return on equity to investors (17 per cent for power projects), “will likely offset a significant share of the inflows (foreign direct investment and other external funding), such that the current account deficit would widen.” The IMF has further warned that “Pakistan’s capacity to repay could deteriorate at a faster pace, with faster depletion of foreign exchange reserves and significant implications for economic growth.”Footnote 80
Another argument that the CPEC will result in China’s colonization of Pakistan notes the lack of transparency surrounding various projects. The general Pakistani public is not aware of the specifics of the arrangements and a closed bidding process has increased the difficulty of assessing whether the contracts reflect fair market costs.
To fund infrastructure projects under the CPEC, low- or zero-interest concessional loans are being granted by China’s Export-Import Bank and Silk Road Fund. This apparent largesse is, however, viewed with great scepticism. Even the payment mechanism for imports involved in Chinese projects in the CPEC was not known to the State Bank of Pakistan,Footnote 81 resulting in the significant underreporting of imports from China because many of the payments were not routed through the country’s banking system.Footnote 82
Societal arguments
Pakistan’s strategic geographic potential and Gwadar’s port attract Chinese policymakers interested not only in managing oil-supply challenges but also in opening up less developed western regions of China through regional and economic connectivity. The development of Gwadar and the opportunity to operate in the associated free economic zone was granted to a Chinese state-owned enterprise, the Chinese Overseas Ports Holding Company (COPHC), in November 2015.
In a November 2017 briefing before the Pakistani Senate, Hasil Bizenjo, then the federal minister for ports and fisheries, confirmed that China would receive 91 per cent of port-generated profits over 40 years, leaving the Gwadar Port Authority, controlled by the Pakistani federal government, with the remaining 9 per cent; Baluchistan’s provincial government would get nothing.Footnote 83 Overall, the province will receive only meagre financial benefits from the port of Gwadar, likely intensifying local anger. Instead of developing a sleepy fishing village into a bustling commercial hub, as promised by Islamabad and Beijing, the project is producing a heavily militarized and carefully regulated zone, displacing locals and depriving them of economic lifelines.Footnote 84 This displacement of local populations and apparent prioritization of security over economic benefits for residents raises further doubts about the CPEC’s alignment with the developmental state model. Successful developmental states have typically been characterized by a degree of embedded autonomy, whereby the state bureaucracy is connected to key social groups but not captured by the associated interests.
What is the CPEC?
Implementing a diversified portfolio of BRI projects under the CPEC banner in a country like Pakistan is not an easy task. Despite the extreme interpretations of the project, the CPEC does not represent either extreme: it is neither a game changer nor the New East India Company. We argue instead that it is in part a socio-economic development plan and in part a “strategic manoeuvre,” both of which we discuss below.
The CPEC as a social and economic development plan
Labelling the CPEC a “game changer” is extreme. As Jeremy Garlick notes, “the ‘game changer’ narrative [is not] supported by the empirical evidence concerning Pakistan’s economy and the implementation of [the] CPEC’s infrastructure investment projects.”Footnote 85 Our field research suggests that the massive project will help remove only the most critical energy- and infrastructure-related bottlenecks currently hampering social and economic growth in Pakistan. The longer-term benefits for Pakistan depend on how the government, the private sector and civil society gear up for the new realities, as industrial cooperation begins. In its annual credit analysis of Pakistan, Moody’s Investors Service concluded that, if successfully implemented, the CPEC could transform Pakistan’s economy by stimulating local and foreign investment.Footnote 86 But successful implementation will not be easy and will require much strategic thinking and planning on the part of Pakistani policymakers.
The key for Pakistan is to take advantage of Chinese help in building indigenous capacity for sustainable economic growth after the initial energy and infrastructure bottlenecks are removed. In essence, overcoming these bottlenecks is merely the first step. Pakistan’s industrial ecosystem needs to build its absorptive capacities to move up the value chain and become export-oriented, a transformation that the country likely needs to undertake independently.Footnote 87
The average financial inflow of capital to the CPEC through to 2030 has been estimated at approximately US$4 billion per year (recall that the total amount earmarked for the CPEC is US$62 billion). This is approximately 8 per cent of the country’s annual investment budget. While US$4 billion per year is no pittance, regarding it as a game changer exaggerates the impact.
The CPEC’s effects on Pakistan will depend on a range of domestic factors such as the strength of its federation, the stability of its politics, the status of law and order, the quality of governance and the ease of doing business within an investor-friendly regulatory framework. These factors indicate the institutional and governance challenges Pakistan faces in truly embodying the developmental state model. The concerns raised over the CPEC’s impact on domestic stability and political tensions suggest that its benefits might be limited in this regard.
The CPEC should position Pakistan to benefit from increased productivity, lower costs and better trade connectivity as new infrastructure is developed. Timely and proper policy measures will also reduce its debt burden. An IMF report shows that peak outflows accounting for CPEC debt servicing, profit and dividend repatriation, and increased imports would reach US$3.5–US$4.5 billion (1.6 per cent of GDP) in 2024–2025 while gradually declining over the longer run.Footnote 88
The SEZs, when they become operational, will create jobs for skilled and semi-skilled workers.Footnote 89 The Pakistani labour market offers wage-price competitiveness, making it economical to hire local workers. But the development of the SEZs needs to be matched with a focus on vocational training and professional development of the labour force to meet industrial demand. This emphasis on human capital development aligns with a key feature of the success achieved by the East Asian developmental states. These states invested heavily in education and skills development to create highly capable workforces that could support industrial upgrading and export-oriented growth. If Pakistan is truly to leverage the CPEC for developmental transformation, it must adopt a similar focus on building workforce capabilities.
The CPEC as a strategic manoeuvre
Our research indicates that China’s political and economic interests can to some extent be shielded from view by the CPEC. Gwadar occupies a pivotal place in China’s geopolitics and China’s interest in Gwadar raises suspicions about its real intentions.Footnote 90 In November 2015, control over Gwadar and its free-trade zone was given over to the COPHC. The favourable terms that China enjoys with respect to Gwadar raise concerns over the political and military advantages China may realize from leveraging the project in the port city. In this way, the CPEC represents strategic manoeuvring to the extent that it enables China to advance its political and military objectives under the pretext of economic benefits, specifically by capitalizing on the opportunities presented by the economic corridor via Gwadar. This is in line with Garlick’s argument that, “in the absence of significant commercial activity thus far, it is more likely that Gwadar … will be used as a base from which China will be able to protect its interests in the Indian Ocean and Persian Gulf … require[ing] the use of military vessels.”Footnote 91
Official documents suggest that, at first, both China and Pakistan properly detailed the precise terms of the financing arrangements, including designating the institutions involved and determining the length of build–operate transfer (BOT) contracts, the quantity of taxation and excise tariffs, projected return on investments, the schedule of repayments and sovereign guarantees offering assurance of returns, for both loan- and investment-based projects. Yet, in the November 2017 meeting of the CPEC Joint Coordination Committee, conflicting interests surfaced. The committee’s discussions reportedly suggested the possibility of shifting from energy and infrastructure projects that qualify for concessional loans to commercially viable projects that would not qualify for such loans.Footnote 92 The fear that Pakistan faces a huge impending debt obligation was further validated by this change.
The situation became all the more confusing when the Chinese embassy in Islamabad issued several “clarifications” in December 2018.Footnote 93 The embassy noted that US$5.9 billion had been provided to Pakistan in the form of concessional loans for transportation infrastructure at a composite interest rate of 2 per cent over a repayment period of 20–25 years. Chinese companies invested US$12.8 billion in the energy projects, with US$3 billion sourced from equity and the rest borrowed from commercial banks at 5 per cent interest over a repayment period of 12–18 years. These companies will be responsible for their profits and losses, and Pakistan’s government has no obligations. It was clarified that as of December 2018, Pakistan’s liability was only US$6 billion with interest, but these figures were not verified by the Pakistani government. The fact that only the Chinese embassy provided this clarification, without corroboration from the Pakistani authorities, lends further support to the notion that the CPEC represents strategic manoeuvring by China designed to advance primarily its economic interests. Meanwhile, silence from the Pakistani side on the confirmation of these figures may indicate the presence of underlying political and military objectives that remain unspoken.
Additional apprehension arises because Chinese businesses seem to be enjoying preferential treatment in the SEZs, potentially undermining local industry.Footnote 94 Information about how the SEZs will relate to the rest of the economy in the regions where these are created remains incomplete, hampering other investments.Footnote 95 Many Pakistani industrialists complain about the absence of mechanisms that are needed to drive information flows for decision-making purposes.Footnote 96 The government of Pakistan needs to provide a level playing field for Pakistani and Chinese investors in the proposed SEZs. Moreover, many observers already believe the 2007 FTA favours China heavily and that the CPEC puts China in a still more advantageous position.Footnote 97
All these concerns notwithstanding, these factors do not indicate that the CPEC is the New East India Company. They do, however, create suspicion. Under the garb of social and economic cooperation, China may focus primarily on guarding its long-term interests in the region.
Conclusion
The CPEC can be regarded as the frontrunner project of the BRI. Yet difficult political, social, cultural and economic realities in Pakistan make it a challenging project to implement. The CPEC can provide much valuable experience to the Chinese, given China’s interest in devising country-specific strategies for BRI projects. By operationalizing the rhetorical terms “game changer” and “New East India Company,” we have shown that the CPEC is neither. We instead call it in part a socio-economic development plan for Pakistan and in part a Chinese “strategic manoeuvre.”
The CPEC, however, risks exacerbating longstanding tensions between Pakistan’s federal government and the provinces over inequitable economic development and resource distribution. This explains the negative propaganda about the CPEC heard in some quarters of the country. For example, the previous Nawaz Sharif-led government was alleged to have changed the original route of the corridor to benefit the ruling party’s political base, the province of Punjab. Political parties from the smaller provinces of Baluchistan, Khyber Pakhtunkhwa and Sindh complained about this change (and a compromise was eventually reached).
Environmental pollution generated by newly installed coal-based plants in Sindh’s Tharparkar district is both damaging the atmosphere and displacing locals from their homes. Livelihoods are at stake. There are also concerns that under industrial cooperation agreements, China may be shifting its polluting industries to Pakistan while cleaning up its own environment.
Issues involving governance and decision making have also encouraged the anti-CPEC camp to portray it as a trap designed to colonize Pakistan. Input from key stakeholders such as the parliament, chambers of commerce and civil society organizations has been sparse.Footnote 98 The CPEC’s long-term plan was also formulated in Islamabad with little input from local leaders, business interests or civil society actors.Footnote 99
The CPEC may represent a critical juncture in Pakistan’s history as the country, which resides in effect between the Middle East and South Asia, has never experienced a project of this magnitude. The opportunities the project will generate are immense and the internal and external challenges are numerous. These challenges and opportunities underscore the complex reality involved in pursuing developmental state-style transformation in the contemporary global context. As outlined in this paper, the classical developmental state model was characterized by strategic state intervention, a capable and autonomous bureaucracy and a focus on export-oriented industrialization. Concerns over transparency, unequal benefits and social and political tensions suggest that, while the CPEC offers significant potential for addressing Pakistan’s infrastructure and energy bottlenecks, realizing a truly developmental transformation will require sustained efforts to strengthen institutional capacities, balance external engagement with domestic priorities, and ensure an equitable distribution of gains.
Supplementary materials
The supplementary material for this article can be found at https://10.1017/S0305741025000189.
Acknowledgements
This research project is funded, in part, by the Strategic Public Policy Research Funding Scheme from the Central Policy Unit of the Hong Kong Special Administrative Region Government (Project Number S2016.A7.003).
Competing interests
None.
Naubahar SHARIF is a professor in the Division of Public Policy at HKUST. His research focuses on the Belt and Road Initiative (BRI) and science, technology and innovation policy in the Greater Bay Area, especially Hong Kong. He has published extensively in top-tier journals and has been influential in shaping policy through substantial public service engagements.
Athar MANSOOR serves as a policy research consultant at the Business School, Hong Kong University of Science and Technology. His research specializes in fintech, regtech and insurtech ecosystems within Hong Kong and the Belt and Road Initiative. He has authored a book on Pakistan’s innovation system and has published several peer-reviewed articles in top journals.
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