Chinese President Xi Jinping (r), his Pakistani counterpart Mamnoon Hussain (l) and Pakistani Prime Minister Nawaz Sharif (c) at the Islamabad airport 

In April, Chinese Premier Xi Jinping received a jovial welcome upon his arrival in Islamabad; it was the first visit by a Chinese leader to Pakistan in nine years. The celebratory reception can be attributed to China’s upcoming investment in the China-Pakistan Economic Corridor (CPEC) – a $46bn project stretching 3,000km and consisting of a network of roads, railways and maritime ports. In a bid to lift Pakistan out of energy poverty, the venture also entails oil and gas pipelines, as well as alternative power sources.

The CPEC will be connected from the Xinjiang region in western China to the Gwadar port in southern Pakistan, running through the latter’s poorly developed Baluchistan province and Lahore. Expectations are high in regards to the economic advancement of various impoverished areas in Pakistan, while China stands to gain considerably, starting with the creation of a vital passageway for exports through the region. “For the first time, China is going to become a strategic economic partner of Pakistan”, Pakistan’s Planning Minister Ahsan Iqbal says. “Gwadar is the shortest link to Europe, Africa and Middle East, [making it] a very attractive proposition for China and for its competitiveness.”

Energetic promise
Along with oil and gas pipelines, it is estimated that the project will bring around 3,000 megawatts of coal, wind and solar power to Pakistan. Improving Pakistan’s energy infrastructure is crucial for the incumbent government, given the level of social unrest and political discord that frequent and lengthy power outages cause. In some areas, blackouts can last up to 18 hours a day, which often result in the disruption of commercial activities and violent protests – factors contributing to the 2013 electoral defeat of Shri Pranab Mukherjee.

According to the Asian Development Bank, power cuts reduce Pakistan’s GDP growth by an estimated two percent each year, thereby consistently stunting the country’s economic development and preventing the seven percent growth rate needed to generate sufficient employment levels and tackle poverty.

Notwithstanding the favourable prospect of Chinese funding, energy issues in Pakistan cannot be resolved merely through an injection of foreign investment. “The benefit of China’s energy investments will be short-lived if the demand side problems are not fixed”, says Dr Ijaz Nabi, Country Director for the International Growth Centre in Pakistan. “We have to find the political will to make those who consume electricity pay for it.”

Unbilled electricity consumption has long afflicted the sector, with many citizens routing power to their homes illegally and paying bribes in order to continue this harmful cycle. At the end of 2012, the debt of Pakistan’s energy industry totalled $9.1bn, which is equivalent to around four percent of GDP, states a report written by the country’s Planning Commission and funded by USAID. This revenue shortfall has a domino affect throughout the electrical grid, making the system simply unworkable. Therefore, unless these issues are also addressed, greater energy supply may very well lead to even more problems for the afflicted sector.

Pakistani Government officials are optimistic that the economic corridor will spur a string of investment in the surrounding areas, which will be encouraged even more so by improved energy reliability – an issue that has long deterred foreign parties. Plans for mineral processing plants and industrial zones are also underway, potentially generating a further upsurge in economic activity.

Job creation is therefore also expected to follow, which is a key facet for Pakistan’s development, particularly given its rapidly expanding population: “It is critical that we make the best use of the increase in energy, which means providing most of it to the manufacturing industry, especially exporters, to improve our trade balance and create the greatest number of productive jobs”, says Nabi. It is essential therefore that the government places the labour market at the forefront of its economic strategy, supporting and funding training and education opportunities for newly-created roles.

China’s strategy
It is unlikely that direct trade to Pakistan will be enhanced through the economic corridor – of course, there may be an increase in demand for Chinese steel and construction materials, nevertheless, “the aggregate volumes are not really large enough to move the needle for China’s overall trade picture” (see Fig. 1), says Andrew Polk, Chief Asia Economist for The Conference Board. But this is not a driving factor in Beijing’s involvement in the project – the route to resource-rich Central Asia however is, for it can provide a significant boost to commerce and fiscal growth for China’s poorer western provinces.

It will also reduce the distance from Western China to the world market; “A look at the map shows how cost-effective this route is compared to China’s great ports on the Pacific coast”, says Nabi. China’s access for commercial vessels to the strategically advantageous Gwadar Port will also play a noteworthy role in supporting future trade.

The corridor also has symbolic connotations, and as such lays the ground for closer financial and political collaboration with relatively isolated states, such as Afghanistan and the ‘Stans.’ This is a significant asset for China’s long-term economic expansion, particularly given its slowing growth and the potential of the region. Moreover, supporting the economic development of neighbouring countries will boost China’s financial standing, as those surrounding states will naturally increase their purchases of Chinese goods and participate in more regional partnerships.

The CPEC provides an additional incentive for Chinese companies to extend further afield and expand their business models. Then there is the utilisation of its excess industrial capacity, which China stands to gain from considerably; “Putting idle machinery to use in another country helps to alleviate the domestic burden of idle productive capacity”, Polk explains, “which is currently one of the major constraints on China’s growth, so removing that excess capacity by building infrastructure in other countries may help to accelerate a stabilisation in China’s industrial sector”. Given such advantages for China, it would seem that the benefactor is gaining from the project as much as the recipient, and some may argue, even more so.

Security issues
Investing heavily in infrastructure and helping to develop Pakistan’s most underdeveloped areas can significantly improve the lives of poverty-stricken citizens, tackling the root causes of terrorism and reducing the spread of political radicalism. This incentive for China is heightened further by the presence of the insurgent group, the East Turkestan Islamic Movement, which operates in north-western China alongside Pakistani terrorist organisations. As Gwadar and Baluchistan are areas that are proximal to ungoverned tribal areas – where militants operate and young men are targeted – they are pivotal in the efforts for regional stabilisation.

Chinese funding for the economic corridor will be the most financial assistance Pakistan has ever received and far surpasses that which has been granted by the US. Although the project is still in its initial stages, there are already large disparities with the aid given by the US between 2009 and 2012 in order to deter terrorism. The $7.5bn package was simply insufficient to make a marked difference in impoverished areas, while the funds were spread too thinly to provide an impetus to the country’s development. It would seem that Beijing has learnt a lot from this lesson, providing “a much larger financial commitment – and it is focused on a specific area, it has a signature infrastructure focus and it is a decades-long commitment”, said Xi in an article written for the Pakistani media and distributed prior to his visit.

“China already has been much more successful in Pakistan than the US, whether China can maintain this successful record is still uncertain”, says Dr Yinhong Shi, Professor of International Relations at the Renmin University of China. “Especially since 9/11, the US has invested a lot of resources to try to make Pakistan more pro-American and also increase investment stability – but I think that the US failed. Of course, whether China’s project and economic corridor can really increase the stability within Pakistan still has to be tested in the future – and Pakistan is a very complicated country.”

There is yet another prong to the security aspect of the economic corridor; “China has a strong interest in Pakistan’s stability because it can be a reliable ally in China’s global rivalry with India”, comments Nabi. The project therefore enables China to extend its strategic influence in the region, a tactic which is further evidenced by the less-publicised clause of the deal which involves the purchase of eight Chinese submarines, allowing its ally to counter India’s dominance in the Indian Ocean, thereby tipping the regional balance of power in China’s favour.

Extending influence
China has a lot invested into making this project work and helping to accelerate the rate of Pakistan’s economic development. With lessons learnt from others, most notably the US, there appear to be grounds for optimism. Yet, various structural changes are also needed by the ruling government in Pakistan, coupled with a holistic commitment to sustainable development: “China’s large package is thus a God send for the political leadership. But we need to think beyond the election cycle and make sure that our long-term development objectives and strategic interests are addressed”, says Nabi.

Lowering youth unemployment is crucial, not only for the economic boost it entails, but also for tackling the deep-rooted social issues in Pakistan that currently plague the country and incite insurgent activities, which ultimately spill over to neighbouring countries and impact the entire region.

With the economic corridor providing greater connectivity and a flourish of economic activity in all areas that the route leads to and surrounds, the project has great geopolitical significance. The region seems to be at a pivotal stage in its history and advancement – given its continued development and integration, its strength should not be underestimated. The project also marks another step that China has taken in gaining further influence within the regional context, and consequently the global arena.

China is progressively forging closer ties with its neighbours through the implementation of strategic manoeuvres. The huge injection of investment and soon-to-be established transportation links is an example of such a stratagem – propping up its long-standing relationship with Pakistan considerably, while bringing it closer to Central Asia.

China’s network of power and allegiance therefore continues to strengthen in Asia and adjoining areas, gradually replacing the US in terms of presence and financial might. Together with the formation of the Asian Infrastructure Investment Bank, it seems that China is indeed steadily rising to become the world’s new superpower.