Wednesday, May 10, 2017

The Economic Doubts behind the “One Belt One Road” Initiative

Turn to any non-entertainment TV programs in China these days, and most inevitably touch on a common theme: that of the “One Belt One Road” initiative.  Endless interviews with experts and common people across countries that will benefit from the initiative, coupled with news stories and detailed analyses of the latest projects coming online, give a strong indication that the government, and the government-owned media sources, wants the initiative to be the defining economic and political movement of the country and the wider region in the next decades.

For those who are unfamiliar, the “One Belt One Road” Initiative is a regional economic cooperative program launched a few years ago by the government to promote economic integration across the Eurasian continent through mostly infrastructural investments.  With setup of new multilateral lending organizations such as the Asian Infrastructure Investment Bank and the Silk Road Fund, the Chinese government has earmarked dedicated resources to invest in the development of roads, railroads, energy corridors, and ports across some 70 countries in Asia, Europe, and Africa.

The practical goals of the Imitative are three.  One is to export China’s excess industrial capacity at a global scale.  Heavy industries in China, particularly cement, steel, and construction, face massive supply glut that greatly outstrip slowing domestic demand.  To ensure these firms remain financially robust and avoid massive layoffs that undoubtedly would lead to social instability, China has decided to deliberately increase foreign demand for Chinese heavy industries via infrastructural investment, stipulating that foreign countries must use Chinese firms to construct Chinese-funded projects.

The second goal is much more strategic.  The Chinese government is seeking to reorient global trade patterns away from the oceans to land routes.  Given the overwhelming power of the US Navy, oceanic trade routes remain firmly under the control of the US, making China prone to disruptions during times of political and military crises.  This is especially problematic considering China’s reliance on imported resources, such as oil, minerals, and increasingly, food, to power its economy and maintained living standards of the common people. 

However, in contrast to the US Navy’s firm control of the seas, the failures of the US to maintain order and political coherence in both post-war Iraq and Afghanistan has shown US to be a weak land power.  If China is to build land-based routes to import its needed resources, the likelihood of their being disrupted in times of crises is much less.  Even when disrupted, they are much more likely to be restored quickly.  Permanently shifting main trade routes to overland ones greatly benefit China’s geopolitical positions vis-à-vis the US. 

And finally, in terms of domestic economics, the Initiative creates a window of opportunity to reduce regional imbalance within China.  Given the outsized importance of seaborne international trade today, China’s eastern seaboard has greatly benefited from economic liberalization and global commerce, while the western interior has not.  If land trade routes moving west to Europe from China become more dominant, China’s western reaches would have similar commercial advantages to replicate the eastern seaboard’s economic success.

These political and economic advantages are greatly promoted in these TV programs and news reports, and they are certainly not lost on the common people.  If successful, the Initiative is bound to completely change the directionality of global trade and bring tangible economic benefits to landlocked countries of the Eurasian landmass that are today the economic fringes of the global economy.  Many of the happy foreign faces shown in these TV programs are more than just propaganda; they represent genuine hopes of economic benefits that come from the lofty idea of restoring the ancient Silk Road.

But speaking to businessmen and the intellectual class here in China, the author has heard much direct criticism of the One Belt One Road Initiative.  Most has to do with the financial calculations behind it.  As things usually are in China, the decision-making behind what projects and how much to invest remain highly opaque, and there are speculations that most of them are not chosen for their financial or economic viability but purely political ones.  Many are afraid that taxpayer money is being wasted on projects that only carry some short-term political favors with little lasting impact.

Interestingly, one historical precedent is often cited to back up such opinions. It is that of the Tanzania-Zambia Railways built in the 1970s to export Zambian copper while bypassing apartheid South Africa.  Financed entirely with Chinese money, this particular railway fell into massive financial losses after apartheid is lifted in South Africa, making it a highly uneconomical option to export copper.  Today, the railways is ill-maintained, sparsely used, and face an uncertain future.  The Chinese public believes that most One Belt One Road projects will go exactly the same way as Tanzania-Zambia Railways.

Indeed, after having watched Chinese infrastructural investments in Tanzania firsthand, the author can tell with confidence that while many of the roads and power lines built with Chinese money are beneficial now, their future is uncertain.  The sad reality is the Tanzania does not have the financial capacity to repay the loans used to construct them and do not have the technical capabilities to keep them in working order over the next decades.  They may look nice and work nicely now, but there is a good chance that they will be inefficiently used in a few decades, just like the Tanzania-Zambia railway.

Thought this way, the Chinese public’s doubts that some One Belt One Road projects are a gigantic waste of money is understandable.  However, the public may be underestimating the potential political leverage that the Chinese government gains by holding billions of dollars in sovereign debt across the world.  But ensuring that these debts are paid in some form or the other, whether it be economic concessions, political agreements, or a combination of both, China may in the long-term formulate a new kind of diplomatic relationships with these foreign countries.

This is particularly true in much of the Sub-Saharan African region.  Given the local economy’s low levels of industrialization, weak economic governance, dependence on commodity export, and unsophisticated financial systems, if the Chinese, through individual and state-level actors, are to seek controlling stakes in these countries’ financial, real estate, and resource management sectors, China may receive amplified benefits from any future economic developments in these countries, much more than they can be calculated just in terms of debt repayment.

Indeed, if almost monopolistic control of Southeast Asian economies by the ethnic Chinese serves as any reference, dominance of the local economic infrastructure through control of banks, real estate, trade networks, and retail space is pivotal for ensuring wealth remain concentrated within Chinese families despite waves after waves of anti-Chinese regulations, protests, and violence.  China’s leveraging of sovereign debt stemming from infrastructural investments may greatly accelerate this process and deepen the economic control to one less politically toxic than the Southeast Asian case.

Either way, to say that most One Belt One Road projects are money-losing ventures is still a little too early.  Yes, impoverished countries where investments will be received will not be able to repay loans in cash even decades down the line.  But to equate success with financial returns is shortsighted.  The Chinese government and its arsenal of state-owned firms certainly do not think in this particular manner.  Historical experiences have equipped with them the expertise to leverage economic positions for political gains that will prove much more important than money in the long-term.  

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