- Dhaka Tribune May 24th, 2019
China and its neighbours have much to gain from making the BRI into a more inclusive enterprise
As we moved into the 21st century, a new more sustainable set of opportunities for the Third World to construct a more just and balanced global economic order has presented itself. The onward thrust of globalization has led to transformative changes in global comparative advantage.
In a wide range of goods and services, countries of the Third World, particularly from Asia, have established their global competitiveness to a level where China has emerged as the world’s largest economy in PPP terms with India in third place. Between 1990 and 2017, Asia’s share of global GDP increased from 23.9% to 35.8% while China’s share of GDP grew from 1.6% to 15.2%. In the area of global trade, Asia’s share increased from 22.7% in 1990 to 37.6% in 2017. China’s share of global trade in this same period increased from 1.6% to 11.5%.
As a consequence of Asia’s enhanced competitiveness, 61% of global foreign exchange reserves are now located in Asian countries, including Central, West, South, and East Asia, with China accounting for 27% of total global reserves. A further manifestation of the shift of global investment capacity is to be found in the Sovereign Wealth Funds (SWF) where 75% of global holdings originate in Asia with China accounting for 21% of global SWF capital.
Asia’s capital surpluses are now underwriting the balance of payments and budget deficits of the Western capitalist countries where 56% of US Treasury Bills are held by Asian countries with China accounting for 19% of these holdings.
These trends in global capital accumulation are not likely to change significantly in the years to come since they originate in the competitive strength of the Asian economies and not in the price variabilities of global commodity markets. The arguments now propagated by some of the wealthiest countries that this relocation of competitive strength and capital accumulation to Asia owes to malpractices in the global trading system appears to be a self-serving argument which fails to address the root cause of decline in the competitiveness of the West.
The enhancement of both economic competitiveness and capital surpluses in the hands of some Third World countries, particularly in Asia, provides a historic opportunity to use these strengths to promote South-South cooperation as a route to construct a new, more just international economic order for the 21st century. Central to any initiative to restructure the global economic order is the relocation of capital surpluses from the advanced capitalist countries of the West into Asia with China as the principal source of global capital.
This relocation of global surpluses from the West to Asia has also created conditions for challenging the monopoly of global capital flows and their management by Western and international finance institutions such as the IMF, World Bank, and ADB. This monopoly over capital underwrote the economic power of the West and empowered its institutions to write the rules for governing the global economy so as to perpetuate their hegemony over the global economic order. This relocation of global financial power into Asian hands, now drawing upon the services of some of the world’s largest banks and SWF to manage their funds, has created opportunities to re-write the rules for building a more just economic order. China’s vast foreign exchange reserves of $3.2 trillion and capital accumulated in its various sovereign wealth funds amounting to $1.7 trillion is specially provisioned to play a vanguard role in building a more balanced order.
BRI as an instrument of cooperation
The refusal of the US and Europe to relinquish their dominance over the management of the global financial institutions has encouraged some countries of the South to draw upon the relocated capital surpluses accumulated by the more advanced emerging economies. The BRICS bank set up by Brazil, Russia, India, China and South Africa was the first of these initiatives but its capital base and scope remains modest. China moved further in designing an Asia centric bank, the Asia Infrastructure Investment Bank (AIIB), in partnership with some other countries, with a strong enough capital base to challenge the monopoly of the World Bank and ADB over development financing.
The AIIB served as an important demonstration of China’s intention of using its capital surpluses to extend its economic reach across the global South and even into the developed world of Europe. The AIIB’s multilateral design and narrower focus on the infrastructure needs of the developing world did not fully capture China’s more ambitious vision to construct a new international order.
China therefore decided to autonomously move further through The Belt and Road Initiative (BRI) program by drawing upon its enormous financing capacity. Chinese commercial banks such as the Bank of China and the CITIC had already engaged themselves in funding large investment projects across the world. In 2014, for example, Exim Bank of China disbursed $80bn in project financing, more than the total disbursement of the seven largest development finance institutions. China has now set up a more dedicated BRI funding facility, the Silk Road fund.
Over the last two decades, China had steadily built up strong commercial ties across the world. Its growing economic competitiveness had ensured that by 2015 it was the largest trading partner of the US, a number of EU countries as well as many economies in Asia, Latin America, and SSA. The BRI must therefore be viewed as a continuum of China’s expanded global economic reach and resource base.
China’s financial capacity to underwrite the BRI program is backed by the availability of sizeable surplus capacity in its capital goods, engineering, and construction industries. Its mega construction companies have emerged as world leaders in the construction sector. These available assets invest China with the development capability to operationalize its BRI program. This opportunity to recycle its financial investments in large infrastructure projects, located in beneficiary countries, back into the Chinese economy will significantly reduce the opportunity cost to China for implementing the BRI.
China’s global expansion has stimulated growth across the Asian region. As a result, today Asia is the fasted growing region in the global system. Over the next 25 years, it will account for over 50% of global growth. Investment in this region and indeed in other fast growing economies of the Third World would both provide for higher returns on capital and also be safer sources of investment.
The global financial crisis of 2007, which has persisted over the last decade due to severe deficiencies in the direction and management of the financial institutions and system of a number of Western countries, indicates that the traditional overlords of the global financial system are no longer its most reliable custodians.
Furthermore, some of the most advanced economies have shown that incoming investments in their markets can be exposed to a variety of restraints on political grounds and also to the political hazard of being frozen or confiscated as part of wider strategic agendas.
Since capital surpluses of other Asian and some other Third World countries are also sizeable, there is scope for tapping into a much larger pool of investible resources to underwrite a large number of BRI projects not just in Asia but across the world in Sub-Saharan Africa, Latin America, and even Europe. China’s BRI program can play a catalytic role in drawing in countries with investible surpluses from Asia and the BRICS to participate in the development of the countries of the South.
As it stands, today a partial relocation of global surpluses away from Western capital markets to underwrite the large infrastructures deficit which hold back development in many developing countries can play a major role in accelerating both global growth and reducing poverty in the less developed countries. The improved economic linkages created by these investments will further stimulate South-South cooperation, both as a result of better connectivity as also through the enhanced transfer of skills and technology associated with major investment projects.
Ensuring economic sustainability of BRI programs
China remains the driving force behind Asia’s dynamic GDP and export growth as also the primary source of accumulation of capital surpluses. It can therefore not only sustain its commitment to the BRICS bank and AIIB but can also underwrite major commitments to the BRI. This is an awesome responsibility for one country.
China will therefore need to reflect on how it handles its global mandate. It will particularly need to exercise caution in relation to the terms on which it transfers its capital and skills. Under all circumstances China will need to avoid the prospect of BRI beneficiaries falling into debt and dependency traps once associated with the transfer of capital from the West. Debt liabilities of Third World countries accumulated to the Western colonial powers precipitated the era of colonization and later the construction of a global economic order based on domination of the North and dependency of the South which came to be known as neo-colonialism.
Today, some of the former colonial powers are proclaiming that China’s aggressive lending practices are contributing a form of debt trap diplomacy. In my view, much of these criticisms are overstated. China has little to gain from driving weaker partners into debt, thereby reducing their capacity to trade. China has indeed helped out many of its borrowers around the world through debt relief extended to more than 80 projects around the world between 2000 and 2017. But the risks of overindebtedness remain inherent in the circumstances of some of the weaker economies which have been prone to overdependence on external loans well before the BRI entered the global discourse.
Debt relief is at best a temporary solution. The substantive goal is to restore viability to loss-making investment projects. This has been tried by China in addressing the problems of some of the more talked about BRI debtors such as Pakistan and Sri Lanka. Both countries had been accumulating international debts not just from China but multilateral institutions as well as from the global capital market.
A recent article in the Economist (April 27) reports that Pakistan’s current levels of indebtedness amounted to about 80% of its GDP but China’s share so far contributes about an eighth of the debt. With further BRI loans being disbursed, China’s share of debt may rise to a quarter of Pakistan’s total debt. Sri Lanka’s debt dependence on China, according to a recent article by two of its leading economists, Dushni Weerakoon and Sisira Jayasuriya, amounted to 10% of its external debt. Much of this debt was accumulated independently of its BRI debts through borrowing on hard terms.
In these countries two much talked about projects associated with the BRI program are the Gwadar port, on the Arabian sea built by the Chinese at a cost of $8bn to connect Pakistan with the Silk Road and Hambantota Port, in Southern Sri Lanka built at a cost of several billion dollars by the Chinese. Both projects initially threatened to become losing concerns due to their inability to enhance capacity utilization and served as liabilities to the respective economies. The Chinese bailed out both projects by converting a large part of the debt into equity and taking over the management of both ports on a long lease. China has now assumed the risk of making both ports economically viable through superior management and bringing in further investments in the port region to increase capacity utilization.
The leasing out of national ports to foreign companies with strong management capabilities is common practice and has generated large global business for some of the leading port management authorities such as the Singapore Port Authority and Dubai Port Authority. A Chinese port authority has already taken over the management of Greece’s main port at Piraeus.
China has recently applied its model of swapping debt for equity in Laos where it has invested $6bn under the BRI in constructing a railway which connects the landlocked country to China to its north and the sea. China offered the loan on generous terms at 2.3%, with 35 years maturity with repayment after five years and has assumed 70% of the investment as equity. This idea of China, of converting debt to equity under the BRI, is sensible economics and makes it a stakeholder in the project’s viability.
The projection of China as a 21st century imperialist ensnaring poor countries in debt for nefarious strategic purposes is mostly propagated by erstwhile great powers struggling to retain their global hegemony without having to pay the price. However, China, as a newcomer to the big league of global investment finance will need to structure its terms for financing of its BRI projects so that recipients can sustain the debt and repay it through enhancement in their production base and its diversification.
Such a task would be made easier if China incorporated its experience in Gwadar, Hambantota, and Laos as a business model by re-structuring its BRI projects as partnerships with the host country rather than as exclusive loan-financed investments. To this end, China will need to restructure its own economy to create market space for a widening volume of exports from Third World countries which have benefitted from and been linked to China through the BRI.
The possible risks of investing exclusively in capital intensive infrastructure projects through the BRI have not escaped the attention of the Chinese leadership. In his recent inaugural address to the second BRI global forum in Beijing on May 6, 2019, President Xi Jinping projected the BRI as a comprehensive global economic partnership to build a more integrated economic order to promote trade, investment, and technology transfer. BRI investment by China which is projected at around a trillion US dollars may provide the physical manifestation of this order but the economic activity generated through the process will have an exponentially larger impact on not just China but its partners in the projects.
Possible areas of research collaboration between Think Tanks on the BRI agenda
We must recognise that the BRI, as it is conceived by President Xi Jinping in its totality, is much more than just a program to use Chinese capital to construct infrastructure projects across the world. The BRI is, indeed, a global initiative to construct a new international order based on enhancing development and ending poverty across the South within the framework of a more equitable world order. The scope of the BRI thus extends to agendas for comprehensive, deeper economic cooperation across the world.
The vision of a globally more cooperative order has traditionally been articulated in certain global fora convened by international institutions dreaming dreams about a more just, harmonious world. No country came forward to either take the lead in building such an order or in mobilizing funding for its realization. The BRI is unique because it is presented to the world as part of a national and foreign policy commitment by one country, China, which today presides over the largest, most competitive, economy in the world.
Furthermore, China has demonstrated what has never before been promised before by any collective of countries, let alone one country, that it is willing to invest part of its enormous wealth towards the realization of its vision. This again is not pie in the sky since the trillion or so dollars committed to BRI is just a quarter of China’s current capital surplus and can be replenished through further earnings through its global competitiveness. The BRI may not immediately take us towards the promised land of global peace and order but will at least demonstrate that at least one country is willing to move ahead in this direction. This initiative may now inspire other countries to join this ambitious enterprise but this is part of the future.
In the absence of any collective move to construct a new order, China will have to work out the specifics of its more comprehensive vision on a bilateral basis. Such exercises will need to study the scope and willingness of individual countries to engage with China in the project and politically decide how ambitious they will be in participating in such joint ventures.
Some of the think tanks in China which are already engaged in studying the BRI and its prospects may find it useful to enter into research collaboration with their counterparts in countries where BRI is making or may make significant advances. The focus of such collaborative research would be to study the current focus and impact of the BRI programs, including those funded by the AIIB and to examine the economic benefits and financial viability of these projects in the beneficiary country. Study would also be required as to the terms and condition of the loans appropriate for particular countries to ensure that they do not end up overburdened with debt.
Work on identifying project priorities will remain important. However, in some cases a Chinese think tank and its partner institution in a host country may review the broader agenda of the BRI to explore how far it is possible to work out a more comprehensive program for long-term cooperation with China. Such an exercise may also be extended to include countries which may partner with China in regional groupings, as for example in the Bangladesh, China (Yunnan), India, and Myanmar (BCIM) sub-regional group. Multi-national groupings involve more complex political and strategic issues which may also be examined in order to design a comprehensive regional agenda for cooperation which is mutually beneficial to all partners.
It is particularly important that Chinese and Indian think tanks come together to assess the concerns of the Indian government which have so far kept them out of the BRI process. So far, no plausible explanation has been forthcoming from the Indian side for keeping itself outside the BRI along with Trump’s USA and Japan. Both China and India as well as their neighbours have much to gain from making the BRI into a more inclusive enterprise. With both India and Japan as full partners in the BRI, such a pan-Asian grouping could once again recreate a bipolar global order which remains essential to the peace and prosperity of the 21st century.
Professor Rehman Sobhan is Chairman, Centre for Policy Dialogue, Dhaka.