Nader Habibi

The Gulf Cooperation Council (GCC) and Central Asian republics are strengthening economic and diplomatic ties, evidenced by increased bilateral relations, ministerial gatherings, and a 2023 GCC-C5 summit with a follow-up planned for 2025. Despite currently low trade volumes, both regions aim to expand trade and investment, particularly as they diversify their economies. A key challenge is transportation, with three potential land routes: the North-South Transport Corridor (NSTC) via Iran, the Development Road Project (DRP) through Iraq and Turkey, and the Trans-Afghan Corridor. While the NSTC via Iran is currently operational and the most cost-effective, US sanctions pose a challenge. The DRP and Trans-Afghan Corridor offer alternatives but face their own hurdles, including geopolitical issues, security concerns, and funding needs. This transit corridor competition is expected to improve connectivity options between the GCC and Central Asia, mitigating risks associated with reliance on a single route.

This article uses statistical analysis to explore the correlation between the quality of governance in a host country and the size and nature of China’s investments in that country, based on the available data for 2005-2020. We focus on two types of Chinese economic engagements with each host country: direct investment by Chinese firms and the volume of service contracts awarded to Chinese firms for construction projects. Overall, our statistical analysis demonstrates that China’s direct investments and service contracts both show significant correlations with the governance characteristics of the host country. At the same time, we observe a large degree of diversity in the significance of specific governance indicators across regions and economic sectors. The Regulation Quality indicator, for example, has a strong positive correlation with total investment and total service contract, but the significance is lost when the sample is restricted to the Middle East or South Asia. The most intriguing finding of our research is that in some sectors, the correlation between governance indicators and China's direct investments and service contracts varies significantly. The Voice and Accountability indicator has a positive correlation with China's direct investments but a negative correlation with China's service contracts for the entire sample. This suggests that China is awarded more service contracts in less democratic countries of these regions. An alternative explanation is that Chinese firms prefer to invest directly in more democratic countries and operate as contractors in less democratic countries. Similarly, we find a positive correlation between the absence of corruption and China's service contracts, but no significant correlation with its direct investments.