THE TELEOLOGY OF CPEC PHASE II: KEY CHALLENGES IN PAKISTAN’S INDUSTRIAL TRANSFORMATION AND WAY FORWARD

Abstract

China-Pakistan Economic Corridor (CPEC) Phase II carries huge potential for Pakistan’s industrial development. The article explores the potential of CPEC Phase II to achieve the country’s economic transformation, turning it from a transit hub into a productive industrial node within Asia's emerging economic order. Based on the theory of developmental state, the study analyzes the dynamics of Pakistan's domestic political economy and macro-economic constraints, contending that CPEC Phase II provides a contingent opportunity for the country’s late industrialization instead of self-driven structural transition. The study explores Pakistan’s CPEC-enabled transition into a modified developmental state (MDS) marked by strategic reorientation from infrastructure to industrialization via SEZ-led development; development of institutional nervous system; strategic coordination with China; and prioritization of sustainable regional development. It also highlights key barriers to Pakistan’s industrial take-off, demonstrating how the pressure for fiscal stability and ad-hoc policy choices have curtailed the state's capacity for regulating capital; coordinating institutions; and accumulation of productive capabilities—ingredients considered essential in case of successful developmental states. The article argues that Pakistan’s industrial potential, as envisaged through CPEC Phase II, depends upon the recalibration of state capacity towards a modified developmental state by ensuring institutional coherence, regulatory predictability, capability upgrading, and strategic public-private partnership and coordination. With such reforms, CPEC Phase II has the potential to be a geoeconomic instrument of national industrial transformation, rather than merely a conduit of transnational connectivity. The paper concludes with presenting policy pathways aimed at aligning CPEC's industrial ambitions with Pakistan's long-term developmental needs.