An expert's point of view on a current event.

Italy Should Learn a Thing or Two From Pakistan

Rome just signed on to become part of China’s Belt and Road Initiative. It should learn from Islamabad’s experience.

Italian Prime Minister Giuseppe Conte and Chinese President Xi Jinping meet during a ceremony to welcome Xi to Rome on March 23. (Christian Minelli/NurPhoto/Getty Images)
Italian Prime Minister Giuseppe Conte and Chinese President Xi Jinping meet during a ceremony to welcome Xi to Rome on March 23. (Christian Minelli/NurPhoto/Getty Images)

In late March, the government of Italy signed a memorandum of understanding to join China’s Belt and Road Initiative, Beijing’s $1 trillion plan to develop land and sea trade routes from Asia to Africa to Europe. Italy is the first large European economy to do this, agreeing in principle to deals with China worth about $2.8 billion in investment in a variety of sectors.

This set off alarm bells in the White House and groans in the European Union. While the Trump administration fretted about yet another Chinese attempt to expand its sphere of influence, the EU stressed that Italy was undermining Europe’s ability to engage with China as a single bloc.

Italy’s rationale for joining the Belt and Road Initiative is straightforward: An influx of Chinese investment could help push Italy out of its economic doldrums. Meanwhile, Italian exporters could gain access to China’s massive domestic market. That sounds attractive enough, but Italy would be wise to look to other countries that have signed up for the initiative and the challenges they’ve faced. Pakistan’s experience in particular is telling.

At first blush, the two countries seem wildly different. Italy is a member of the G-7 and the world’s eighth largest economy. Pakistan, despite having more than triple the population, barely cracks the top 40. It has also been bailed out by the IMF nearly 15 times.

On closer inspection, though, the two countries share important similarities.

Both Pakistan and Italy are heavily burdened with debt: As of 2018, Pakistan’s debt was 73 percent of GDP, and Italy’s was an eye-popping 132 percent. Each is reliant on external help: Pakistan has required a combination of IMF loans and the support of the Gulf states and China to keep it in the black. Similarly, since the 2008 financial crisis, Italy has relied on bailouts from the European Central Bank. To compound matters, Italy’s growth rate has been near zero.

As a result, both states have been hungry for external capital, both are in search of new markets for their exports, and both need to claw their way out of debt. In Pakistan, former Prime Minister Nawaz Sharif decided that Belt and Road fit the bill, and he opened his country up to a wave of Chinese investments in 2015.

The results have been mixed. China has indeed poured money into Pakistan, but it’s been in the form of loans to Pakistan that it must then give to Chinese firms to set up shop there. Those firms have invested in equipment bought in China—not Pakistan. With little capital going into Pakistan, the country’s debt burden has only shot up. Pakistan is now negotiating with the IMF for a new bailout, but the IMF’s concern about the lack of transparency of Pakistan’s debts to China has complicated matters.

One can foresee similar tensions arising in Italy: a European Central Bank that is reluctant to come to the aid of an Italy that takes on greater debt in exchange for less transparency. The United States has advanced the argument that the IMF and its donor states shouldn’t subsidize Pakistan’s dealings with China. Italy could find itself in a similar position with the European Central Bank.

Turmoil in Pakistani politics also offers a lesson for Italy. Pakistan has a history of unexpected twists and turns in its administrations, and its most recent changeover of power was no different. Sharif was jailed on corruption charges and then was succeeded last year by the former cricket star Imran Khan. Upon assuming office, the Khan government struck a more cautious approach with Belt and Road, with ministers calling for a full review of projects, putting some on hold, canceling others, and diverting funds from the initiative to other activities.

That should sound familiar to Italians, whose country has averaged one government turnover every 14 months since World War II. Italy’s current coalition government of the League and Five Star Movement parties is divided over the Belt and Road Initiative, and the strain is starting to show. Five Stars has backed the MOU enthusiastically, while League Deputy Prime Minister Matteo Salvini (who warned of foreign companies “colonizing” Italy) pointedly skipped the state dinner held for Chinese President Xi Jinping in celebration of the agreement.

It’s not difficult to envision opposition abroad, skepticism at home, and a new successor government that reverses course. And that should worry Italian Prime Minister Giuseppe Conte and his coalition partners.

Dan Grant served as USAID’s deputy assistant administrator for Pakistan and is a specialist on post-conflict states, stabilization, and economic development.