Indian Defence Review

Growth of its economy is the ultimate goal of any policymaker across the world. Growth makes the economy stronger, creates more efficient and content society producing more, which in turn allows for a larger military. The military, on the other hand, is used to produce something hardly measurable – security. That, in turn, has various aspects – access to necessary strategic resources or securing land, free from foreign or local shocks, where the population, not worrying about basic survival threats, can thrive and produce.

There is only one problem here – the military does not produce anything tangible. It is only a cost incurring part of the society and larger spending as percent of the GDP slow the economy, because less resources are used for reinvestment and improvement of production capabilities. The economy can theoretically exist without the military, but realistically, in the long run it cannot withstand the internal and external shocks. The military, understandably, cannot survive alone as the people in it have to live somehow. Because of all this, both sides are interconnected and need each other.

As a result, any strategic plan of a nation would require strategic steps in both directions- such paving the road for economic growth and such securing the growth by appropriate military backing. Ironically, wealth production of the nation comes at the cost of its trading partners or neighbors as it is something man made, not God granted.

Meet China in late 2012. The party has to elect a new General Secretary and later a new President of the country. A low key, quiet and determined character is chosen – Xi Jinping. Over the course of the next couple of years, a new foreign policy is crafted – harder line on security issues and foreign affairs, a more nationalistic and assertive China and one that is united and confident of its value system and political structure.

The building of a stronger and more confident China, however, would require something that would secure the growth of the nation, the production of the resources and possibly the expansion of the country. The later might sound outrageous to many, but considering the communist roots, it would be foolish to ignore it as the whole communist idea is based on the premises of expansion. “The Communist Manifesto” by Karl Marx and Friedrich Engels and “Das Kapital” by the former, talk about a society, which aside from everything else, has to expand until there is only one republic left in the world – the communist republic. Because of the fact that it is such a central concept to the whole ideology, one cannot rule it out without ruling out the ideology itself. As such, this concept has to be included in the Chinese doctrine for the upcoming decades and Xi Jinping would be just part of that path trying to pave it and push the country in that direction.

In order to achieve this, the Belt and Road Initiative was established – an elaborate plan, fundamental to the new foreign policy, which would develop several huge infrastructure networks aiming to give China better access to the world. Those included roads, highways, electricity grid, maritime lines and similar, together with forming the appropriate trading partnerships in the countries in the region, as well as the development banks needed to finance the projects that form it and link them with the corresponding businesses. The main part of it is the China-Pakistan Economic Corridor – a massive project, viewed extremely positively from China and Pakistan, but also one creating very questionable risks for local ethnic groups, India and even international partners and allies.

What is CPEC and what is its importance to the stakeholders?

CPEC is currently a $62 billion collection of projects connecting western province of Xinjang of China with the newly built deep water Gwadar port in Pakistan. It includes a number of transportation networks (highways, roads, railways, etc), numerous energy projects and special economic zones. The unique feature about it is that it goes through some of most unfriendly mountainous terrains on the planet, such as the Khunjerlab Pass at nearly 5,000 m altitude (4,693m to be exact), which have acted as a natural separation zones for thousands of years.

The main idea is to offer an alternative for the transportation of China’s energy imports. Energy – oil or LNG – is vital to the growth of any economy and it is even more important in case of a war. Oil is often referred to as the “blood” of war as it makes all equipment operational and lets it be transported to desired locations. This is why, establishing access to energy supplies has always been number one priority of any growing economy or expanding nation.

Currently, the majority of the energy imports for China are done via tankers, which have to pass through the Malacca Strait – a long and narrow stretch between Indonesia and Malaysia. China’s implied risk in this situation is that, in case of international disagreement, this strait could easily be closed, a crisis event known as the “Malacca Dilemma”. This scenario would put China’s economy and population in a serious situation without many options and prone to influence. Bypassing would require rerouting through Java Sea or Timor Sea, which would increase prohibitively delivery times and most importantly – risks for tankers capture and cargo loss.

Discussing the possible risks and their mitigation is natural. However, in order to implement any project, the opportunities have to come to focus. The main selling points of CPEC is that it is similar to the Marshall Plan in Europe after WW2 or the Eisenhower’s Federal Aid Highway Act of 1956 in the US. Those networks played a paramount role in laying the foundations to long term growth in both European states (to rebuild them after being ravished in WW2) and the US (for bearing the largest portion of the economic cost of the war for the allies).

It is true that the plans look similar. Both the Marshall Plan and the Highway System in the US created the opportunities for business development – decreasing transportation cost for local and inter-state businesses, opening new markets, etc. CPEC, however, does none of that. It is claimed that it will be a natural boost for the economies of Pakistan and the Xinjiang province of China, but a closer look at the facts only raises eyebrows.

Xinjiang province is the largest by territory administrative division of China occupying over 17% of its territory. Its population, however of ca. 25 million is around 1.7%, of China’s (resulting in one of the lowest population densities of the country) and produces less than 1.2% of China’s GDP. Even though this is a very beautiful region, it does not produce anything economically significant compared to the other parts of the country. The sheer lack of population also makes future growth unimaginable. This is why, arguments that growth in this region is sought lack substance.

Oil transportation could also be a costly business. Even though the distance between Gwadar and China looks significantly shorter on the map than the marine route, it costs subtantially more to transport oil via pipeline through it, rather than loading it on a tanker and ferrying it to Chinese ports. The marine routes from the Persian Gulf cost China between $2 and $3 per barrel, while the cost of transportation via CPEC would easily reach or surpass even $8 per barrel. At the time of writing, this difference of $5 between both routes amounts to 12% of the price of a barrel from the Persian Gulf. Needless to say, price differentials of this magnitude are more than substantial and do not justify financial logic.

What is worse – the higher cost is associated with the terrain and this is something that nobody can change. The oil has to go from sea level to nearly 5,000 m altitude. This alone is a serious engineering challenge because the pressure cannot be avoided.

Another factor, which cannot be bypassed is the temperature. Temperature greatly affects viscosity and that is the measure that represents oil’s resistance to flow. For this reason, thermal methods are used in oil transportation. They, however, have their limitations as there are temperature losses along the length of every system. The lower the outside temperature, the higher the losses. Thermal solutions are used even in the hottest areas of the planet, while the Himalayas offer exactly the opposite environment – the high altitudes have evening temperatures ranging between minus -2C in the hottest summer months, while in winter periods they drop all the way to -40C. The solution to that are many heating stations. In ideal conditions they work for up to 30km. This distance, however, has to be significantly lower in the unfriendly cold environment of the highest mountain range on the planet.

We should not forget that CPEC is still far from finalization. Budgets for mid and long term projects tend to differentiate from actual costs, especially in negative direction, because various unpredictable and hard to quantify obstacles usually appear. CPEC itself was initially valued at $46B, but was later increased with whopping 35% to $62B. Considering that a pipeline there will be pushing the engineering boundaries of human knowledge, it is safe to assume that the current budget estimation might turn out to be conservative in the future.

As mentioned earlier, CPEC is supposed to provide economic boost to Pakistan by providing jobs and stimulating the local economies. Number of factors, however, are against it. First, many of the promised jobs are simply not there. As these are viewed as Chinese projects lead by Chinese companies and management, local engineers seem to not be in favor. Chinese companies have simply employed Chinese workers in their companies. This has resulted in negative opinions and even minor clashes.

Second, the macroeconomic situation of Pakistan is far from perfect. The initial stages of CPEC increased demand for inert materials, small machinery and other construction related materials and equipment. Later stages required various machinery, which had to be imported and that put a huge stress on the Pakistani rupee (PKR). As per data from The World Bank, Pakistan’s imports are more than 2.5x the exports. Naturally, any decrease of the PKR resulting from the increased imports would have adverse effect and lead to a slowdown. The World Bank also predicts a negative growth (the economy is shrinking) of 1% for 2020 – 2021. The problems inevitably will become bigger by the decreased ability of Pakistan to pay and the refusal from the Chinese side to renegotiate the terms of the financing. The political dependency on China, the economic woes and the severely increased risk of moral hazard on the side of Pakistan would additionally put a halt on any opportunities for financing by international organisations, such as the IMF or the World Bank.

Third, the project has generated significant resistance from local ethnic groups in the two provinces giving Pakistan sea access – Balochistan and Sindh. While they are minorities in the big picture of Pakistan, for these provinces they are a majority – Baloch, Pashtuns and Sindh represent nearly 90% of the population of Balostichan and 70% of Sindh. The disagreements have grown in terms of events occurrence and intensity in recent years so much so that organisations consisting of insurgents, such as the Balochistan Liberation Army, have sufficient local support to organise and claim responsibility for various large scale attacks, including such on the Chinese Consulate in Karachi, targets around Gwadar and even the Pakistan Stock Exchange. The increased tensions and insecurity have created negative response from higher Chinese representatives, such as Beijing’s Consulate General in Karachi Li Bijan, that Pakistan does not provide the necessary security for developments of such magnitude and that it is, in fact, a “sensitive issue” for the Chinese government. The poor handling of the events by the Pakistan government, has multiplied the security tab more than 3 times since the creation of the task force, which currently has 9,000 Pakistan Army soldiers and 6,000 para-military hired to deal exclusively with threats to CPEC.

Last, but not least, it is telling how the people in command react to changing circumstances. In the beginning of July, Pakistan’s Prime Minister Imran Khan declared that the government would complete the project at any cost. This brazen statement shows clear determination, but maybe also that all other ways are exhausted and perhaps signs of desperation. It is clear that the financial logic is nowhere to be found and that CPEC will be leading Pakistan and its people to longer and tougher indebtedness. Any financial project, which has to be completed at “any cost” will surely get into the red very rapidly and will become a disaster soon. If it does not make sense economically, then what is its purpose other than an alternative for a Plan B scenario in dire circumstances?

So what is the push for? Local hubris or part of a Chinese grand expansionary plan? We should not forget that, while for the last 15 years the world has looked at the growing China appetite overseas with interest, now it takes specific and hard steps to counter it. US started relocating major parts of its personnel from one of its largest military bases in Europe to the South China Sea region. It also banned equipment produced by one of the largest Chinese manufacturers, Huawei, based on its infrastructure, citing major security breaches and cooperation with PLA. The security agencies of number of other countries, including India, Great Britain, Canada, Australia, some in EU and Japan did the same. The argument that this is a massive world conspiracy to limit the growing financial prowess of China does not hold ground, because there were no limitations for the other computer and networking manufactures from China, which shows that there are specific technical issues associated with Huawei products, which pose risks for the western markets. A number of software products and apps were banned as well in various countries.

CPEC is a massive project, which surely has the potential to bring benefits to the local population. However, it also paves the ground for certain risks, which are hard to ignore. Its projected economic benefit seems harder to be found in recent years and the reactions of the leaders on both sides – China and Pakistan – leave more questions than answers. The other world powers should also look into this cooperation as the consequences can have significant impact way beyond the borders of Pakistan and China.