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The many problems with China Belt and Road Initiative

China’s Belt and Road Initiative is designed in such a way that Beijing would end up with effective control over critical infrastructure assets in faraway lands

Last Published: Sun, Aug 05 2018. 05 32 PM IST


Illustration: Jayachandran/Mint

China’s belt and road initiative (BRI) has seen multiple speed-breakers of late. The story of Sri Lanka being saddled with great amounts of debt to China was well known. Last month, the Malaysian President Mahathir Mohamad suspended work on a few BRI projects in his country. The government in Myanmar is significantly scaling down the Kyaukpyu port over concerns of mounting Chinese debt. The number of voices against the terms of Chinese projects and loans have increased in Pakistan too. Meanwhile in Montenegro, a Chinese loan has sent, a Reuters report summarized, “debt soaring and forced the government to raise taxes, partially freeze public sector wages and end a benefit for mothers to get its finances in order”.

India had taken an early stance against the BRI. Refusing to participate in the inaugural Belt and Road Forum in May last year, India had emphasized that connectivity projects should respect sovereignty and territorial integrity, should not create unsustainable debt burden, must involve transparent accounting and create benefits for the local economy. Several countries are now coming around to a similar view. India and Japan have unveiled their own development cooperation with third countries under the banner of Asia-Africa Growth Corridor. The US and Australia have joined Japan to announce their plans to provide an alternative to BRI.

However, these countries will not be able to match China penny for penny. None of them enjoy Beijing-like state control over large banks and companies that carry out massive infrastructure projects. The state-backed Chinese firms can invest in markets where private companies from other countries hesitate to enter. Ultimately, it is up to the recipient country to decide the role of Chinese loans in its domestic development.

China’s BRI should also be examined within the parameters of the historical debates on development lending. One group of economists—led by Jeffrey Sachs—has always been a great votary of external aid in bringing countries out of poverty. Market economy and liberal democracy, they contend, are not enough. Poor countries, according to them, need a bout of external capital to push them into a virtuous cycle of higher investments and greater productivity. Some others aren’t really impressed with the idea. The opposing group of economists—led by William Easterly—have argued that poverty is a trap made of poor leadership, poor governance and poor institutions. Foreign capital, in fact, they argue, can tighten this trap by discouraging investment in better institutions.

Those who oppose external aid as a form of poverty eradication tool also aver that external aid contributes to building up of a political economy where corrupt and venal politicians flourish. China’s BRI shows that all these criticisms are indeed accurate. In Sri Lanka, some of the high-profile Chinese projects were reserved for Hambantota—the political base of former president Mahinda Rajapaksa. In Pakistan, BRI projects worth around $19 billion are either completed or underway but that has not provided impetus to structural economic reforms. As a result, Pakistan’s economy is teetering on the brink of a default with high amounts of debt, an ever-growing current account deficit and very low foreign exchange reserves.

Chinese investments come with a greater number of problems than the intellectual critics of external aid were focused on. A failure to pay back loans implies accepting Chinese control over strategic assets in one’s country. For instance, Sri Lanka has handed over the Hambantota port to Chinese firms on a 99-year lease. Sri Lankan officials insist that the leased port will not be used for military purpose but few buy that.

The tension between asserting sovereignty and attracting foreign capital is not restricted to BRI loans. Even the International Monetary Fund (IMF) demands painful economic reforms from countries it bails out of crisis situations. These demands—originating from what is commonly referred to as the “Washington consensus”—infringe, some argue, upon the sovereignty of the recipient countries. Even India has gone through the Cold War period when both the US and the Soviet Union used development aid as a bargaining tool to influence New Delhi’s economic, and sometimes foreign, policies. India’s experience is brilliantly detailed by the historian David C. Engerman in his book The Price Of Aid: The Economic Cold War In India.

While China does not demand structural economic reforms, its projects are designed in such a way that Beijing would end up with effective control over critical infrastructure assets in faraway lands. If it does demand reforms, like in Zimbabwe, those are aimed at making the environment easier for Chinese companies. When the former dictator of Zimbabwe, Robert Mugabe, went out of line, he was overthrown in a coup, the plot of which was hatched in China.

There is little that the US, India, Japan and Australia can do to save other countries from BRI and its ill-effects. The citizens of loan-recipient countries have to recognize the problems associated with easy capital coming from China. They have to put pressure on their leadership to make decisions in the country’s long-term interests and not be swayed by temptation of large Chinese loans that only lead to short-term economic and political windfall.


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