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Can the Belt and Road Help Countries Replicate China’s Development Successes?

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Can the Belt and Road Help Countries Replicate China’s Development Successes?

Ironically, the solutions proposed by the BRI contradict China’s own development model.

Can the Belt and Road Help Countries Replicate China’s Development Successes?

A worker stands near a tunnel during a ceremony to relaunch of East Coast Rail Link project in Dungun, Terengganu, Malaysia, July 25, 2019.

Credit: AP Photo/Vincent Thian

China’s top leaders have recently begun to tout China’s own development success as an example for others to replicate. Former Chinese Vice Minister for Foreign Affairs He Yafei, for example, has claimed that “the success of the ‘Chinese model’ … offers other developing countries an option different from the ‘American model’ for economic development.” In his address to the 19th Chinese Communist Party Congress in October 2017, President Xi Jinping argued that China’s successful development experience was “blazing a new trail for other developing countries to achieve modernization.”

China’s Belt and Road Initiative (BRI), launched in 2013, is commonly viewed as the primary vehicle for promoting a China model of development. Encompassing 123 countries, the BRI commits China to provide $1 trillion in financing over the next decade for hundreds of infrastructure projects – roads, railways, ports, pipelines, electrical grids, and energy plants – designed to connect both land and maritime networks stretching from Southeast Asia to Europe.

But will it work? Can other developing countries emulate China’s own economic success by riding the BRI train?

Probably not. This is because the development path promoted through the BRI is fundamentally different from China’s own experience. And where there is overlap, the BRI emulates the most problematic aspects of Chinese political economy by externalizing opaque, crony-like relations among policy banks, large state-owned construction firms and local politicians. The following comparisons underline these conclusions.

While the BRI promotes an infrastructure-first model, China’s heaviest period of infrastructure investment followed rather than preceded its most rapid era of growth.

BRI boosters view scarce infrastructure as a key bottleneck that holds back rapid development. China is offered as an example of how an infrastructure-first approach can release the genies of economic growth. In fact, however, China’s heaviest period of infrastructure spending followed, rather than preceded, rapid growth and was only possible due to earlier development successes.

To be sure, China has massively invested in network of roads, rails, airports, seaports, electrical grids, dams, and pipelines. Yet state-controlled infrastructure has been less central to China’s development than the private sector, which, economist Nicholas Lardy describes as playing “a dominant role in China’s economic transformation.” As Yasheng Huang has documented, rural entrepreneurship fueled economic growth during the 1980s, well before later waves of infrastructure spending began to swell. If there was a China model during the first decades of reform, it lay in a localized, constantly evolving and experimental process that Yuen Yuen Ang has labeled “directed improvisation.”

The heaviest infrastructure spending in China came over the past decade, during a period of declining economic growth. Beginning with the global financial crisis of 2008, Chinese leaders have relied upon construction as a prop for employment. But this overinvestment led to diminishing returns – the incremental capital-output ratio fell by half in the decade after 2007 – as infrastructure approaches a point of saturation. Indeed, a major motivation for the BRI is to put China’s construction assets to work abroad as the need for new projects recedes at home.

A study conducted by Oxford economists recently concluded that China “is headed for an infrastructure-led national financial and economic crisis” as a result of wasteful and inefficient infrastructure spending. They also warned: “China is not a model to follow for other economies – emerging or developed – as regards infrastructure investing, but a model to avoid.”

In sum, the narrative that state-led infrastructure provided the special sauce of Chinese growth – and one that can be exported abroad – is flawed.

In contrast with the BRI model, Chinese growth was fueled by internal savings rather than external borrowing.

China’s extraordinarily high savings rate, accounting for close to half of GDP in recent years, has financed high levels of investment in industry and infrastructure. In contrast, infrastructure investment under the BRI is explicitly linked to high levels of external borrowing. As in Latin America and Africa during the 1980s and ‘90s, the current buildup of international debt by many developing countries may prove unsustainable.

In 2017, Bloomberg reported that of 68 countries listed as BRI partners, the sovereign debt of 27 was rated as junk or below while another 14 were not rated by the top three international rating firms or had withdrawn requests for ratings. The Center for Global Development has identified eight countries whose high level of debt distress is directly tied to Chinese lending. And two dozen countries owe China an amount exceeding 10 percent of their GDP.

BRI loans from the China Development Bank or the China Export-Import Bank typically carry tougher terms than those from the World Bank or other international financial institutions. Interest rates are higher and payback periods are shorter. Contracts are withheld from public view. Loans are typically tied to no-bid contracts with Chinese state-owned enterprises (SOEs), which rely principally upon Chinese inputs and workers. Borrowers are required to pledge existing assets as collateral and to place significant sums in escrow accounts located within China.  Disputes must be taken to Chinese arbitration courts that apply Chinese law.

Since 2000, Chinese banks have restructured or written off 140 loans to developing countries. As the grace periods on many of the large loans of recent years expire, the need for debt restructuring will likely grow. Some recipient governments, including those in Tanzania, Malaysia, Nepal, and Pakistan, have pushed back against the tough terms demanded by China by canceling or renegotiating contracts. Recipient governments have also become bolder in demanding concessions as they realize that China has few means to compel payments from reluctant borrowers.

In short, debt-fueled development is not only risky, but also the opposite of China’s own path.

The political conditions that support infrastructure development in China do not exist in many BRI countries.

Dams, ports, highways, and the like run up debt, displace people, damage the natural environment, and invite corruption. For these reasons, infrastructure projects often produce popular resistance despite potential economic payoffs down the road.

An authoritarian, single-party state has certain advantages in managing such resistance. Lee Chih-horng, a research fellow at the Longus Institute in Singapore, observes that Chinese officials “can easily stifle public debate and concerns about infrastructure projects.” Legal challenges are limited by the Communist Party’s ultimate control over the court system. The state owns major media outlets and both traditional and new media are subject to various forms of censorship. Non-governmental organizations are limited in size and scope, heavily regulated, and incapable of directly challenging state priorities. Grassroots protests mounted by those negatively impacted by infrastructure development are managed through a combination of repression and cooptation.

Political conditions are very different in many of the countries hosting BRI projects. Few developing country governments possess such extensive capacities to control the political risks of infrastructure development. As a result, many BRI projects have become embroiled in controversy, resistance, and delay.

Popular protest has hindered some BRI projects, as in Indonesia, Myanmar, and Bangladesh, perhaps due in part to the fact that, as journalist Tom Miller notes, “Chinese firms … are happy working with local elites and unelected officials, but much less adept at dealing with civil society.” In other cases, such as Kenya, courts have suspended projects for inadequate social and environmental assessment. In Pakistan, the $54 billion China-Pakistan Economic Corridor (CPEC) has been threatened by Baloch separatists, who have blown up gas pipelines, assaulted Chinese engineers, and attacked the Chinese consulate in Karachi. The Pakistan army has deployed 10,000 troops to protect CPEC projects.

Given this track record, it is perhaps not surprising that one survey of Chinese firms found that the number one concern about investing abroad – cited by 71 percent of respondents – was political risk. Yin Yili, vice president of China Communication Construction Company, has remarked that Chinese firms  “lack the ability to discern where to invest or effectively manage overseas risks.” An American Enterprise Institute study of unsuccessful overseas Chinese investment projects found that one quarter failed due to political factors. The state-owned China Export & Credit Insurance Corporation that covers government seizures, nationalization, political violence, and other risks has paid out $1.73 billion on claims related to BRI investments and exports since 2013.

As projects struggle in areas of strategic interest, China will be tempted to intervene in order to safeguard its investments, its people, and its political influence. The People’s Liberation Army has been instructed to develop options for protecting “overseas interests.” In some cases, China may seek to shore up repressive regimes or bypass democratic institutions in order to avert lost investments and influence. In general, China’s oft-touted foreign policy principle of noninterference in the political affairs of other countries has become increasingly untenable.

Rather than boosting developmental states, the BRI is strengthening rentier states.

Like its East Asian neighbors, China pursued rapid, export-led growth built around increasingly diverse and sophisticated manufacturing sectors grounded in close public-private partnerships led by a  “developmental state.” In China’s case, state industrial policies and the persistence of a highly concentrated state-owned sector were combined with a competitive private sector, significant foreign-owned enterprises, and growth-oriented local governments.

The design of the BRI, by contrast, supports a very different model: the rentier state. Rentier state elites profit by using state resources to siphon riches from narrow flows of commodity exports. Rentier states are typically authoritarian or semi-authoritarian, rife with corruption, and spend little on the supply of public goods.

A recent study released by the United Nations Conference on Trade and Development found that two-thirds of developing countries remain heavily dependent upon commodity exports, including agricultural goods, energy, and minerals. Rather than helping these countries to escape the economic and political burdens of dependence upon extractive industries, the BRI is serving to more deeply entrench rentier states that enrich elites via profits from commodity exports while providing few incentives for economic innovation or diversification.

Despite widespread expectations that the BRI would allow China to export labor-intensive light manufacturing to recipient countries as wages rise in China itself, this effect has mostly been limited to a few Southeast Asian countries. In Africa, by contrast, one study finds that “few African countries have been able to benefit from large-scale Chinese investment outside the resource sector.”

This rentier state model is unlikely to yield the rapid, diversified growth that China’s developmental state achieved.

Where the BRI model does replicate aspects of Chinese political economy

The BRI has served as a transmission belt for the export of a particular and relatively recently consolidated fragment of China’s political economy. According to Andrew Batson, China research director for Gavekal: “The Belt and Road is really the expansion of a specific part of China’s domestic political economy to the rest of the world. That is the nexus between state-owned contractors and state-owned banks, which formed in the domestic infrastructure building spree construction that began after the 2008 global financial crisis…”

According to Batson, the local governments that borrowed heavily for internal Chinese infrastructure development are mirrored within the BRI by developing country recipients, which play a similar role. China’s large policy banks, such as the China Export-Import Bank and the China Development Bank, are under enormous pressure to maintain growth at home by juicing credit and to recycle China’s dollar surplus by lending abroad. Meanwhile, China’s enormous state-owned enterprises need a constant stream of infrastructure orders both at home and abroad in order to avoid mass layoffs.

Lee Jones and Zizheng Zou have argued that the BRI is less a grand strategic gambit than a response to SOE pressures as they attempt to overcome overcapacity, resource constraints and declining profits at home. As a result, central authorities struggle to exert control over banks, SOEs and local governments or to lessen the gap between broad policy pronouncements and on-the-ground realities.

The result is that the unbalanced and excessively infrastructure-heavy patterns of investment that have distorted China’s own economy over the past decade are being promoted abroad through the BRI. That is not exporting success but rather replicating risk.

David Skidmore is a Professor in the Department of Political Science at Drake University in Des Moines, Iowa (USA). Skidmore is author, co-author or editor of six books including a monograph titled The Unilateralist Temptation in American Foreign Policy (Routledge, 2011). Most recently, his co-authored article on the Asian Infrastructure Investment Bank appeared in The Chinese Journal of International Politics (March 2019).