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South Asia

As Pakistan Gallops Towards Debt Default, Its 'Unbreakable' Bond With China Is Under Stress

Europe was ruined by war, but Pakistan fell on its knees because of its own doing.

An exam question for Central Superior Services aspirants: what’s higher than the Himalayas, deeper than the seas, stronger than steel, and sweeter than honey? Well, dear candidate, any hesitation suggests your patriotism level needs checking in Rawalpindi or Aabpara.

Every flag-waving Pakistani knows Pak-China friendship is the only answer. Next, what makes the China-Pakistan Economic Corridor a game changer? Obvious! New industries will sprout, existing ones will hum away, exports will shoot through the roof, Gwadar will become the next Dubai, all debts will be paid off, jobs will be galore, and the sun shall shine forever.

These dreams lie punctured as Pakistan gallops towards debt default. CPEC started in 2013, with $62 billion spent to date. But now debt-ridden Pakistan is casting around for loans to pay older loans. Whoever will give – and on whichever terms – is to be heartily embraced. The ‘unbreakable bonds’ of Pak-China friendship are under stress.

According to IMF data, China holds roughly $30bn of Pakistan’s $126bn total external foreign debt. This is thrice its IMF debt ($7.8bn) and exceeds its borrowings from the World Bank and Asian Development Bank combined. So why is mighty China awaiting the green signal from American-led IMF before releasing some relief? Shouldn’t it at least reschedule Pakistan’s debt? Or, better, wipe it off?

Let’s face it: these are naïve hopes. Chinese capitalism – like any other capitalism – is about profit, not philanthropy. In Marketing-101, a budding businessman learns how to sell water to a drowning man. Banking-101 tells you how to identify desperate debtors. Law-101 is about dealing with defaulters.

Chinese companies, state or private, are like other companies. Being under their government’s instructions to view Pakistan as a strategic ally, they understand Gwadar gives entry to the warm waters of the Persian Gulf – those which allegedly attracted USSR into invading Afghanistan. But they tread cautiously; Pakistan is not the world’s best place to park your capital.

New ventures are therefore few and even these are low-tech. A plant in Hub manufactures excellent Hui Cheng beer. Elsewhere: a cellphone assembly plant, automobile spare parts made here and footwear made there, a microfinance bank, etc. Plus, farmland has been acquired for vegetables to be shipped to the Chinese market.

Ah, but what about hi-tech stuff like nuclear technology? There’s a 50-year history of Chinese nuclear help to Pakistan, both open and clandestine. Without that, Pakistan’s atomic bomb and the 1998 nuclear tests wouldn’t have happened. Still, there was a substantial Pakistani element to the bomb.

That’s not so for nuclear power reactors! Bombs were hi-tech until the 1960s, but not thereafter. Reactors, however, are complicated beasts. The two Hualong HPR-1000 plants ($7bn apiece) known as Kanupp-2 and Kanupp-3 have all their core components designed and manufactured in China. Even the fuel comes from China. PAEC’s role is merely supportive. Under Chinese supervision, it undertook the civil works, installation and operation of the plants.

Compare with Chinese involvement in Singapore which, like Pakistan, is a former British colony. This island is 42 times smaller population-wise and 1,093 times smaller area-wise. But last year, FDI in Singapore was $92bn compared to $2bn for Pakistan. Its economy attracts American and Chinese giant companies for semiconductor design and manufacture, communications, robotics, financial technologies, business and professional services, etc.

These staggeringly large differences cry out for an explanation.

First, Singapore is peaceful while Pakistan is violence-wracked. Terrorism – a byproduct of earlier official encouragement to ‘jihadi’ groups – is sweeping through the country once again. Notwithstanding a special force of 10,000 for protecting Chinese workers in Pakistan, they live in fear.

A string of blasphemy-related lynchings – including that of a Sri Lankan factory manager – has increased their worries. When added to the cultural distance and language barrier, this severely limits mingling between Chinese and locals.

Second, Singapore’s laws are obeyed in letter and spirit, whereas in Pakistan laws are made to be broken. In this low-trust business environment, under-the-table deals are as common as legal ones. Since opacity in CPEC dealings is justified as a national security need, we cannot know the level of kickbacks.

Graffiti celebrates CPEC on the walls of Pakistan. Credit: Zofeen T Ebrahim

Graffiti celebrates CPEC on the walls of Pakistan. Photo: Zofeen T Ebrahim/File

Third, Singapore has a workforce that is hard-working, highly skilled, and adaptive. This is untrue for Pakistan. Hence the virtual exclusion of Pakistanis at the design and engineering level from major CPEC projects executed on Pakistani soil. Earlier promises crumbled away for this reason.

CPEC was built around a fatally flawed premise. It presumed that infrastructure – roads, bridges and electricity – alone will create growth and jobs. This is like assuming abundant water, soil, and fertiliser will yield a rich harvest. But the crucial input is seed – human capital. And here’s where things went awry.

Pakistan certainly has people as bright and talented as anywhere. But because of an education system gone berserk, it offers only low-grade human capital to industry. Because indoctrination was promoted over knowledge and skills, we are stuck with an ocean of unemployable youth.

Sending 30,000 Pakistani students to China for higher studies has failed to generate human capital. From former students who have returned with a degree in hand, I hear shocking stories. Most Pakistani students in China opt to game the system and cut corners, not learn or achieve.

In engineering and hard sciences, few are properly equipped for any but the shoddiest of Chinese universities. Of course, there are always honourable exceptions.

As talk turns towards debt traps and comparisons with Sri Lanka, anxiety and anger is growing. But calmness is needed lest an earlier folly be repeated. Delusions that Pakistan’s staunchest friend was America – and the supplier of its every need – ultimately shattered the relationship with its “most allied ally” of yesteryear. That need not – should not – have happened.

China is probably guilty of short-selling us – most independent power producer deals are considered a scam. So are tax exemptions to Chinese companies. Duty-free imports from China have driven many local manufacturers to bankruptcy. But it was our trumpet blowers who sold to us the nonsense of CPEC as a Marshall Plan for Pakistan. Europe was ruined by war, but Pakistan fell on its knees because of its own doing.

Pervez Hoodbhoy is an Islamabad-based physicist and writer.

This article was published in Dawn on February 18, 2023, and has been republished with permission. Read the original here.