By Angela Tritto, Postdoctoral Fellow, Institute for Emerging Market Studies, Hong Kong University of Science and Technology

KEY POINTS

• The BRI has led to institutional responses that have increased policy capacity in host countries in Southeast Asia
• Most effort has focused on creating policy frameworks to direct and negotiate projects. Less attention has gone to strengthening management and monitoring capacity, and providing greater voice to civil society, which may be more crucial to ensuring project sustainability
• The sustainability of BRI projects benefits both China and the host country. Hence, the Chinese side also should improve its due diligence to ensure that projects do not lead to unsustainable outcomes

Issue

Many of the narratives about China’s Belt and Road Initiative (BRI) have been polarized and lacking empirical foundations. Most importantly, analyses have often neglected the role of host countries’ agency in negotiating, selecting, managing, and monitoring BRI projects. China’s BRI presents a set of options for host countries to engage with China and to attract its capital and technology. On the one hand, Chinese State-backed companies and banks provide resources and, on the other hand, host countries employ these resources according to their needs and their development frameworks.

Institutional quality is widely regarded as a crucial determinant for attracting foreign direct investments (FDI). Critics of the BRI have argued that by targeting developing countries with weak institutions and rule of law, the BRI could lead to an increase in corruption and to poorly conceived infrastructure projects. Indeed, without proper governance and oversight from states and corporations, the BRI could also contribute to environmental degradation and undesirable health and social outcomes. As an example, China has already become the largest source of financing for coal power plants globally, which will not only lock host countries into fossil-dependent futures, but also contribute to rising emissions of pollutants and carbon that will harm population health and contribute to climate change. Such investments of course are made only at the request or with the assent of host governments, who prioritize short-term growth objectives and may be influenced by rent-seeking opportunities in the mining sector.

But can the BRI also act as a positive catalyst for institutional development? Is there evidence that host countries can, through their agency and by introducing new institutions and policy frameworks, leverage the BRI for thier sustainable growth? If so, the BRI could become a vehicle for improving a country’s business environment, for rebalancing its development by directing infrastructure and other investments to under-developed regions, for introducing new technologies to the country, and for creating new jobs and knowledge skills.

After all, the development benefits of this initiative heavily depend upon the actions and agency – of key actors (both government and enterprises) on both sides.

Assessment

To investigate the implementation of the Belt and Road Initiative, five field research trips were made to Indonesia, Malaysia, and Myanmar in which interviews with policy-makers, business executives, and leaders of chambers of commerce were conducted. The interviews revealed that all three countries have devised new policy frameworks aimed at leveraging Chinese capital and technology to support their nations’ development agendas. Indonesia and Malaysia have instituted a dedicated China desk within their investment promotion or coordination agencies, and Myanmar has BRI Committee led by Daw Aung Sang Suu Kyi herself. Some governments have established new regulations or improved mechanisms to attract more FDI. The additional volume of State-led capital mobilized by the BRI in such a short time has prompted countries to make their investment process more efficient, creating sufficient institutional and policy capacity to be able to attract, manage, and monitor large-scale projects. At the same time, each country continues to face institutional challenges in developing governance systems that promote sustainable development outcomes and reflect the concerns of all stakeholders.

Indonesia

Indonesia is an example of a host country taking a very proactive approach to the BRI. Despite strong anti-China public sentiment, President Widodo followed his predecessor and continued to court medium to long-term Chinese investments to fulfill national development goals. In 2014, he launched his Global Maritime Fulcrum Initiative (GMF), which in many aspects mirrors China’s Maritime Silk Road. In 2017, he unveiled a plan to direct Chinese - and subsequently other foreign investments to four Indonesian provinces: North Kalimantan, North Sulawesi, North Sumatra, and Bali. The aim is to increase infrastructure and FDI in these relatively underdeveloped areas, and to connect them to the rest of Indonesia, improving land and maritime connectivity.

The Indonesian government also started a considerable institutional restructuring. The creation of the Coordinating Ministry of Maritime Affairs addressed the need to oversee the implementation of the GMF and lead relevant bilateral negotiations and projects, coordinating internally and externally with China's National Development and Reform Commission. Led by a Chinese expat who lived in Indonesia for over twenty years, the newly established China desk of BKPM, the Indonesia Investment Coordinating Board promotes the country to potential Chinese investors and explains all investment-related regulations to existing businesses. Indonesian government agencies implemented numerous reforms to improve the business environment and accelerate investment realization, such as upgrading the Online Single Submission for business license application, also by consulting the growing number of Chinese companies.

Indonesia’s policy capacity and institutional restructuring have been among the most impressive; however, the largest BRI-facilitated deals are concerned with the exploitation and development of mineral resources. While these investments led to increased energy capacity – albeit using fossil fuels, and to more value-added exports, a recent report exposed the corruption and rent-seeking behaviour by local and top-ranking politicians into the mining sector. Hence, despite Widodo’s anti-corruption campaign, powerful interests and families still dominate the country, and bribery is still far from eradicated. Moreover, the government is taking an increasingly confrontational stance towards local environmental groups, cutting them out of consultations.

Malaysia

Malaysia is the quintessential example of how, if not adequately managed, governments can use BRI-linked capital unproductively. Under the government of PM Najib Razak (2009-2018), Chinese-backed projects were often negotiated in closed-door meetings and underwent minimal scrutiny. Later, investigations alleged that some of these deals such as the TSGP oil and gas pipeline connecting Borneo to peninsular Malaysia and the MPP Malacca-Johor pipeline were used as vehicles to cover impending debt payments for the 1MDB – Malaysia's strategic development fund. Embezzlement of the fund became one of the largest graft scandals in modern history, leading to active mobilization against Najib’s corrupt regime, and eventually to his demise. The return of his opponent, Dr. Mahathir Mohamad, saw for the first time in Malaysian history an opposition coalition rise to victory. The new government remains supportive of the BRI, but it has promised a much more transparent and cautious approach, canceling and re-negotiating projects with overinflated costs.

The tendency of Chinese companies to go ‘incentive shopping’ in different Malaysian states is pushing the federal government towards the implementation of stricter requirements on transparency, stronger monitoring of the FDI approval process, and towards the re-drafting of investment incentives. This shift has led to a higher emphasis on localization and on prioritizing high-tech investments to develop Malaysia as one of the digital and automation hubs in Southeast Asia. Furthermore, the country is increasingly turning down investments related to polluting industries while implementing stricter environmental requirements and providing incentives for green FDI. The Malaysian Ministry of International Trade and Investment (MITI) established the Belt and Road Initiative National Secretariat (BRINS) right after the signing of the BRI Memorandum of Understanding between Malaysia and China. In 2019, BRINS was renamed China Section to reflect better the work of the department, which also encompasses other non-BRI related bilateral matters.

Myanmar

Being one of the least developed countries in Southeast Asia, and caught in a prolonged humanitarian crisis that is eroding not only the country’s international reputation but also the government’s ability to function effectively, Myanmar is in a state of limbo. In recent years, the bitter controversy over the Myitsone dam, which mobilized thousands of people against the potential environmental damage of a large hydropower project to be built by China Power, froze the long-established China-Myanmar diplomatic relations. The case also set a precedent for other civil society-led environmental movements against large-scale hydropower dams in the region. Nevertheless, Chinese investments in the country are set to rise. After the last Belt and Road Forum for International Cooperation, the two governments resumed their collaboration and signed an MOU to move forward with construction of the China-Myanmar Economic Corridor (CMEC). Before signing, the government of Myanmar asked China to agree to three essential conditions, in line with the country's sustainable development plan. These are that China must allow Myanmar to seek financing from international institutions, to invite other tenders, and to have the last say in which proposed projects can go ahead. China proposed 38 projects under the CMEC, and so far, Myanmar approved nine of them that are currently being reviewed by the relevant ministries. In November 2018, the country also inked a framework for the development of the Kyaukphyu deep seaport and Special Economic Zone (SEZ) in Rakhine state, which will bring USD 1.3 billion in Chinese investment in its first phase.

Myanmar instituted a Steering Committee for the implementation of the BRI, chaired by State Counselor Daw Aung San Suu Kyi to align BRI projects with national plans, policies, and internal procedures. The committee comprises 18 Union ministers, five chief ministers, the foreign affairs permanent secretary, and the chairman of the Naypyitaw Council. At the same time, an institutional restructuring of the investment-related authority is underway, with a PPP (Public-Private Partnership) office being set up to deal with the task of coordinating large scale projects in which national or state governments are participating. However, the strong power of the ruling military junta, and their complicated relationships with the independent armies fighting for more independence or secession, are weakening Myanmar’s governance capacity. Caught between this internal struggle and the possibility of incurring international sanctions if the Rohingya crisis is not resolved, the Burmese government is trying to move things forward through the CMEC to boost economic growth through much-needed connectivity. However, a key point of complaint coming from the vibrant civil society groups in the country is the lack of transparency, as the government has disclosed very few details of upcoming BRI projects. While the State Councilor is known to avail herself with international counsels, her closed-door, one-to-one meetings with President Xi draw suspicion, and the centralization of power and lack of engagement with local civil society may pose challenges to future BRI projects.

Recommendations

The research shows that countries are instituting local BRI policy frameworks and institutions in response to the opportunity to attract large-scale BRI infrastructure projects and FDI. The increase in investments and the tendency of Chinese companies to lobby local governments to receive better conditions are leading to governments reforming the investment process, and centralizing approval authority. In addition, governments are trying to improve the business climate by making licensing and approval processes more efficient, in consultation with business associations and large foreign investors.

In Indonesia and Myanmar, governments are mostly creating institutional structures and processes to optimize the selection and planning stages of large investment projects. They have established frameworks for the negotiation and directed investments towards specific industries or geographical areas. However, host countries also should prioritize strengthening their management and monitoring mechanisms, as well as appropriate regulations, especially in three areas: transparency and corruption, environmental sustainability, and social sustainability (i.e., localization and transfer of skills). Indonesia is doing well with respect to localization and transfer of skills, while Malaysia is prioritizing environmental sustainability and transparency mechanisms. Myanmar is still at an early stage, but already has institutionalized the prioritization of environmental and social goals.

Maximizing the sustainable benefits of BRI projects requires joint efforts by host countries and China. Institutional development that results in stronger institutions and better governance will ultimately benefit China by increasing the positive impacts of the BRI. However, institutional change takes time and where local governance remains imperfect, Chinese government officials and investors should strengthen their own due diligence to avoid projects that lead to unsustainable outcomes. If China indeed aims to achieve a sustainable Belt and Road Initiative, it should not adopt a “pollution first, fix later” model of economic development, nor replicate it in other countries. If curbing corruption and promoting green technologies are now priorities in China, Chinese companies should abide by the same standards abroad, and strive towards meeting international standards. Likewise, if China truly aspires to become an internationally recognized leader, and promote people-to-people bond, adopting a more transparent approach and opening a meaningful dialogue to respect other nationalities and ethnicities should also be a priority.

This article was first published in the publication “Thought Leadership Briefs” No. 30 (Sep 2019) of Institute for Emerging Market Studies of HKUST. Please click to read the full article.

By Naubahar Sharif, Associate Professor of Social Science and Public Policy, and an IEMS Faculty Associate, Hong Kong University of Science and Technology

KEY POINTS

• The China–Pakistan Economic Corridor (CPEC) is a key component of the Belt and Road Initiative (BRI) through which China aims to connect East Asia with Europe through connected land and sea routes.
• Defenders of the CPEC argue that it is a ‘game changer’ that will transform Pakistan’s struggling economy.
• Critics of the CPEC describe it as a modern-day New East India Company, implying that its purpose, and likely effect, is to turn Pakistan into a Chinese client state.
• Neither of these extreme views is accurate; Pakistan should be able to benefit from attractive features of the CPEC while mitigating the disadvantages.

Issue

While China finds itself ever more deeply embroiled in a trade war initiated by the United States, the world’s second-largest economy is busy launching a major global trade project that has come to be known as the Belt and Road Initiative (BRI). The BRI is designed to link East Asia with Europe through a series of overland and sea routes, passing through the Middle East along the way. Launched officially in 2013, the BRI’s major components include the 21st Century Maritime Silk Road and the longest segment, the New Eurasia Land Bridge Economic Corridor, but the component that China has called the ‘flagship’ BRI project is the China–Pakistan Economic Corridor (CPEC). The CPEC connects western China directly to the new Silk Road Belt, and China characterizes it as the culmination of nearly 70 years of warm relations between the two countries, as Pakistan was the first country to recognize Communist China’s government.

Pakistan’s economy has struggled in the twenty-first century, as foreign investment has waxed and waned in response to the West’s “war on terror” in Iraq and Afghanistan. The killing of Osama bin Laden, the leader of Al Qaeda, in Pakistan discouraged foreign investors once again, so it was only natural that Pakistan saw the 2013 launch of the CPEC as an opportunity to improve its economic fortunes at the same time that China was eager to initiate the BRI.

The CPEC has, however, generated considerable controversy. Those who view the CPEC favorably from the Pakistani point of view agree with China that it will be a ‘game changer’ for Pakistan’s economy, stimulating industrial and technological development and boosting Pakistani firms up the global value chain. Others take the opposite view, seeing ominous signs in the design of the CPEC that China will use the project like a ‘New East India Company’, a reference to the British organization that oversaw its rise as a colonial power. On this view, Pakistan is likely to become a client state of China, unable to free itself from massive foreign debt and subject to exploitation for China’s own military and political purposes. The question that this brief addresses is, therefore, whether the CPEC is a positive game changer for Pakistan or a New East India Company.

Assessment

To address this question, we conducted a study that used a combination of documentary research and interviews with individuals representing key stakeholder groups that are involved in or likely to be affected directly by the CPEC (citation). We assessed the competing claims regarding the CPEC to see how much truth we could find in the game-changer versus client-state arguments.

We discovered three layers of arguments supporting the view that the CPEC could be a game-changer for Pakistan’s economy: energy-based, economic, and social. We also found three layers of arguments supporting the view that the CPEC will make Pakistan a Chinese client state: military, economic, and social. These arguments are summarized below.

Economic development in Pakistan has been slowed by difficulties delivering reliable energy across all areas of the country. Power outages occur frequently, especially in areas located far from urban centers. The CPEC has included no fewer than nine completed energy-related projects with more to come, which should go far towards alleviating Pakistan’s energy shortages. The CPEC also seems likely to stimulate many sectors of Pakistan’s economy (including banking, automobiles, insurance, and refineries) and, perhaps more importantly, help it catch up in technological development. Among the indicators of the CPEC’s potential to boost Pakistan’s economy is that since it began the Karachi Stock Exchange has experienced rapid growth, doubling in value between 2013 and 2018. Finally, the CPEC will open new avenues for cross-border cultural and social exchange, but more importantly generate jobs to employ Pakistan’s relatively young population, transforming idle youth into productive members of society and thereby reducing crime rates. For the period from 2015-18, Pakistani estimates show creation of 40,000 direct jobs in six critical infrastructure projects. The Chinese embassy in Pakistan has given a figure of 75,000 direct jobs created for Pakistani nationals over the same period, but that figure combines jobs in power as well as infrastructure projects (with no breakdown given between the two). Finally, China is also investing in Pakistan in ways that improve social welfare by building schools and medical facilities. All told, those who tout the benefits of CPEC for Pakistan can make a fairly strong case.

Now consider what some see as the dark side of this initiative for Pakistan. The argument is that the CPEC has been conceived to support China’s strategic interests in the region while also leveraging considerable economic advantages to make it a largely one-sided proposition.

First, China’s designs on Pakistan may have more to do with enhancing its already strong military presence than with boosting Pakistan’s standing in the world. A critical element of this argument is the Pakistani port of Gwadar, which China has marked for development into a major seaport that gives it much easier access to the Strait of Hormuz through which much of China’s oil imports pass. The plan is to turn Gwadar from a minor fishing village into a bustling city of some 2 million people, but many worry that China’s ultimate goal is to create a naval base from which to launch military operations when necessary, or at least to assert its presence aggressively in South Asia and the Middle East. Second, it is argued that opening Pakistani markets to Chinese firms—reflecting a balance of trade that heavily favors China over Pakistan—will expose Pakistani industries to technologically and organizationally superior Chinese firms that will flood Pakistani markets with Chinese goods while creating few opportunities for Pakistani industries to export to China. Finally, if the hoped-for economic benefits of the CPEC for Pakistan do not materialize, much of the potential for positive social change will be lost. Moreover, it seems likely that China has much more to gain from a social and political standpoint through this initiative as it struggles to develop its Western provinces while containing unrest among the Muslim Uyghur community. China has already made goodwill gestures to the less discontented Muslim Hui minority, so the CPEC provides it with an opportunity to demonstrate its tolerance of Islam even as it strives to stifle dissent among the Uyghurs. Whether all this means that the CPEC will operate like a New East India Company remains to be seen, but skeptics of this massive project can muster their own strong arguments to make their case. Our interviews revealed both sides: We found skepticism for CPEC stemming predominantly from the business community (in sectors such as light manufacturing, pharmaceuticals, textiles, as well as office bearers in the Karachi Chamber of Commerce and Industry) as well as certain academics. On the other hand, our interviews also revealed support for CPEC from government ministers (i.e. the Minister of State for Investment, Minister of Labor and Industries. and Minister of Science and Technology) as well as government bureaucrats at various levels—specifically, in departments of Planning, Development and Reform, Finance, Commerce and Industries.

Recommendations

The above arguments that the CPEC will be either a game changer for Pakistan or turn it into a client state of China may seem compelling but, in our research, we found good reason to doubt that either of these extreme views will prove true. Although China can leverage major economic and military advantages while it implements the CPEC, Pakistan need not passively accept whatever fate China’s efforts consign it to. Instead, Pakistan must control what it can control, and in so doing it stands a good chance of benefiting from the CPEC even if the initiative does not make it a formidable global power on par with major developed countries.

The key to understanding this point is to view the CPEC as part socio-economic development plan and part stratagem. Both China and Pakistan will face challenges as they work to implement the plan, so China must manage risks and Pakistan must closely monitor how elements of the plan are implemented.

Pakistan can benefit from the CPEC if it takes advantage of assistance from China in building its own capacity for sustainable economic growth, but it should not count on China to support these efforts to any great Naubahar Sharif is Associate Professor of Social Science and Public Policy, and an IEMS Faculty Associate. He has published numerous articles in leading academic journals and has been awarded external funding from the Research Grants Council (RGC) of Hong Kong under the Collaborative Research Fund (CRF) scheme, the General Research Fund (GRF) scheme, and the Public Policy Research (PPR) scheme. Under the auspices of Hong Kong’s Central Policy Unit, Prof. Sharif has received funding as a co-investigator, for a Strategic Public Policy Research (SPPR) proposal to study the potential of China’s Belt and Road Initiative to benefit Hong Kong through trade and investment. Prof. Sharif consulted for the Innovation and Technology Commission (ITC) of the HKSAR Government from 2006 to 2010. His current research focuses on innovation and technology policymaking in Hong Kong, the impact of the China’s Belt and Road Initiative in Pakistan, and the process of industrial automation and robotics in Southern China. extent. After all, the CPEC may eventually bring in nearly US$ 100 billion in investments, so Pakistani industries must absorb industrial knowledge and technology to enable their firms to compete with Chinese firms. To the extent they succeed, Pakistan will enjoy stronger economic growth and development.

Finally, China may be considerably more powerful than Pakistan, but the latter is a large country in its own right with a strong military and common interests with China as rivals of India. This makes it very unlikely that China can dominate Pakistan so thoroughly that it will have become a client state when the CPEC is fully implemented. China may well hope to leverage its advantages to benefit from the CPEC, but its interests may be served best by leaving Pakistan a strong but independent partner.

This article was first published in the publication “Thought Leadership Briefs” No. 31 (Sep 2019) of Institute for Emerging Market Studies of HKUST. Please click to read the full article.