Corresponding author: Michael Baltensperger ( michael.baltensperger@bruegel.org ) © 2019 Non-profit partnership “Voprosy Ekonomiki”.
This is an open access article distributed under the terms of the Creative Commons Attribution License (CC BY-NC-ND 4.0), which permits to copy and distribute the article for non-commercial purposes, provided that the article is not altered or modified and the original author and source are credited.
Citation:
Baltensperger M, Dadush U (2019) The Belt and Road turns five. Russian Journal of Economics 5(2): 136-153. https://doi.org/10.32609/j.ruje.5.38704
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China’s Belt and Road Initiative (BRI) is an international trade and development strategy. Launched in 2013, it is one of the ways that China asserts its role in world affairs and captures the opportunities of globalization. The BRI has the potential to enhance development prospects across the world and in China, but that potential might not be realized because the BRI’s objectives are too broad and ill-defined, and its execution is too often non-transparent, lacking in due diligence and uncoordinated. This article documents the background and context of the BRI, recounts what is known about the extent of the initiative and specifies its various motivations. It highlights that the initiative meets very large infrastructure investments gaps, which is welcome and needed, and that China’s goal of forging stronger links with its trading partners around the world are legitimate, so long, of course, as the underlying intent remains peaceful. Though many observers welcome the BRI, many others oppose it for good reasons, while others misunderstand it and oppose it for bad reasons. The paper identifies and discusses concerns about the initiative that relate to its geopolitical objectives, its priorities, its geographic scope, the role of state-owned enterprises, the allocation of resources, issues of transparency and of due diligence. Particularly, it shows that this initiative deals with a vast number of countries that are in very different states of development and that an apparent lack of well-defined priorities is holding the initiative back. The paper also highlights the issue of debt overload which is distressing several BRI countries and discourages further projects. It points briefly to possible improvements that China and the other stakeholders in the BRI can make to get the most out of their investments. The BRI, to be effective, needs to meet the basic conditions of a trade and development strategy, which are clear objectives, adequate resources, selectivity, a workable implementation plan, due diligence and clear communication. Involvement of multilateral lenders could help with this. Finally, China has to improve the evaluation of project’s risks and costs and step up its due diligence approach to demonstrate that it respects the long-term interests of those countries that are at the receiving end of its BRI projects.
China, international trade, trade agreements, development, globalization.
Over the last four decades world trade, spurred by advances in information, transportation and communication technologies, as well as liberalization policies, has come to play a central role in countries’ development strategies. A far greater share than before of the world’s GDP is traded, China is the biggest trading nation and developing countries as a group now account for more than 40 percent of world trade. Meanwhile, in 2016 just one quarter of world merchandize trade took the form of consumer products (
To capture these opportunities, and to consolidate friendships and enhance security, policy-makers in China, the EU and the US have promoted economic integration in their regions (“the near abroad”). Each has taken a different path, reflecting their priorities and histories. The most ambitious of these endeavors has been the progressive enlargement of the European Community from six original members to a European Union of 28 countries, which have put into practice the four freedoms, namely the movement of goods, services, capital and people, across their territory. The EU has also forged Economic Partnership Agreements, which include a mix of aid, trade and policy coordination, with several dozen countries in its near-neighbourhood in eastern Europe, the Middle East and North Africa and sub-Saharan Africa. Less comprehensive in scope and more tightly focused on international trade is the network of Free Trade Agreements orchestrated by the United States and encompassing nearly all countries in North, Central and South America, with Argentina and Brazil as notable exceptions. Meanwhile, to widen their circle of friends and to strengthen their position in global value chains in sectors such as automobiles, electronics and food processing, the US and EU have increasingly reached beyond their immediate regions, striking trade and investment deals with countries on the other side of the world.
While the EU and US have reached out to partners in their different ways, Chinese economic diplomacy has not been passive; in fact, reflecting China’s comparatively recent opening 40 years ago, the contrary is true. Even before the BRI was launched in 2013, China had concluded some twenty trade agreements, started negotiations on a regional trade agreement with 15 other Asian nations,
The Belt and Road Initiative (BRI) was the latecomer in China’s extensive set of international economic initiatives, but might well turn out to be the most ambitious. Just six years after its launch, the BRI has become the organizing framework for China’s economic relations with about half of the world’s nations of any size.
The earliest mention of the BRI was in a speech given by Chinese president Xi Jinping in Astana, Kazakhstan, on 7 September 2013 (
The fundamental motives of the BRI are like those of US and EU international economic diplomacy, namely to consolidate friendships and to capture commercial opportunities. However, the BRI is different in both design and execution, reflecting China’s development path and the global outlook of its leaders.
It is important to note that, while the BRI, differently from the EU and the US, emphasizes infrastructure rather than trade agreements, that does not mean that trade agreements are neglected. In recent years, a considerable effort has been devoted to establishing a global network of agreements which are clearly intended to be complementary and synergistic with the BRI. In Table
The effect of the trade agreements with the 28 BRI countries in Table
China’s trade agreements (BRI countries in gray).
Partner country | China’s exports in US$ billions (rank) | China’s imports in US$ billions (rank) | Trade agreements | ||
in force | being negotiated | under consideration | |||
Hong Kong, China | 287.3 (2) | 16.7 (24) | 1 | ||
Japan | 129.3 (3) | 145.7 (2) | 1 | ||
Korea, Rep. | 93.7 (4) | 159.0 (1) | 1 | 1 | |
Vietnam | 61.1 (6) | 37.2 (12) | 1 | 1 | |
India* | 58.4 (7) | 11.8 (28) | 1 | 1 | |
Singapore | 44.5 (10) | 26.0 (14) | 1 | 1 | |
Malaysia | 37.7 (12) | 49.3 (8) | 1 | 1 | |
Australia | 37.3 (14) | 70.9 (7) | 1 | 1 | |
Thailand | 37.2 (15) | 38.5 (11) | 1 | 1 | |
Indonesia | 32.1 (17) | 21.4 (18) | 1 | 1 | |
United Arab Emirates | 30.1 (18) | 10.0 (31) | 1 | ||
Philippines | 29.8 (19) | 17.4 (22) | 1 | 1 | |
Canada | 27.3 (20) | 18.3 (21) | 1 | ||
Saudi Arabia | 18.7 (25) | 23.6 (15) | 1 | ||
Pakistan | 17.2 (26) | 1.9 (64) | 1 | 1 | |
Bangladesh | 14.3 (31) | 0.9 (75) | 1 | ||
Chile | 12.8 (33) | 18.6 (20) | 1 | ||
Myanmar | 8.2 (37) | 4.1 (46) | 1 | 1 | |
Israel | 8.2 (38) | 3.2 (52) | 1 | ||
Colombia | 6.8 (43) | 2.5 (55) | 1 | ||
Panama | 6.3 (44) | 0 (144) | 1 | ||
Peru | 6.0 (46) | 9.5 (33) | 1 | 1 | |
New Zealand | 4.8 (51) | 7.1 (34) | 1 | 1 | |
Sri Lanka | 4.3 (53) | 0.3 (103) | 1 | 1 | |
Cambodia | 3.9 (58) | 0.8 (76) | 1 | 1 | |
Switzerland | 3.2 (62) | 39.9 (10) | 1 | 1 | |
Macao | 3.1 (63) | 0.1 (117) | 1 | ||
Kuwait | 3.0 (65) | 6.4 (36) | 1 | ||
Norway | 2.6 (71) | 3.2 (51) | 1 | ||
Oman | 2.1 (78) | 12.0 (27) | 1 | ||
Qatar | 1.5 (95) | 4.0 (47) | 1 | ||
Costa Rica | 1.5 (96) | 0.7 (79) | 1 | ||
Mongolia | 1.0 (110) | 3.6 (48) | 1 | ||
Lao PDR | 1.0 (111) | 1.4 (71) | 1 | 1 | |
Nepal | 0.9 (116) | 0 (155) | 1 | ||
Bahrain | 0.8 (118) | 0.1 (134) | 1 | ||
Mauritius | 0.8 (120) | 0 (158) | 1 | ||
Georgia | 0.7 (121) | 0.1 (137) | 1 | ||
Papua New Guinea | 0.6 (124) | 1.6 (65) | 1 | ||
Brunei | 0.5 (127) | 0.2 (105) | 1 | 1 | |
Fiji | 0.4 (137) | 0 (163) | 1 | ||
Iceland | 0.1 (157) | 0.1 (131) | 1 | ||
Moldova | 0.1 (168) | 0 (154) | 1 | ||
Occ.Pal.Terr | 0.1 (175) | 0 (183) | 1 |
Related to trade and to the objective of improving understanding among nations, the BRI also places considerable emphasis on the temporary movement of people. China is already the largest source of students and tourists abroad, mainly in the direction of Western nations. In 2017 there were 847,000 Chinese students abroad,
Parties to the BRI have reason, on security and geopolitical grounds, to befriend China, or at least not to alienate it. Home to 1.3 billion people, and already the world’s largest economy by some measures, it is both a source of fear and attraction. On narrow commercial grounds alone, China’s offer to participate in the BRI is one that many countries cannot refuse.
To start with, China’s rise as an importer acts as a powerful incentive to join the BRI. China’s imports of goods and services in 2017 amounted to $2,208 billion, third in rank after the US and the EU (intra-EU imports excluded). Since 2007 these imports have grown at an annual rate of 8.8 percent compared to 3.9 percent in the US and 3.2 percent in the EU (intra-EU imports excluded). Over the same period, China’s economy is less reliant on exports as its exports as a percentage of GDP have declined from 35 percent to 20 percent, and its current account surplus in percent of GDP has declined from 9.9 percent to 1.4 percent (
Second, China has become a large foreign investor and finance provider. Since 2007, China’s outward FDI flows increased from $27 billion to $125 billion, ranking fourth in the world, after the US, EU and Japan (
Third, insofar as the BRI is seen as an infrastructure arrangement, it fills a large unmet need. The Global Infrastructure Outlook (
The need for infrastructure in developing countries is unmet for many reasons, the most important of which is the high-risk and uncertain return associated with long-term investment in environments with weak governance, volatile macroeconomic and political conditions, and fragile public finances. Compounding these deterrents to infrastructure investment, foreign creditors, beginning with the multilateral development banks, have been led by a combination of unhappy experience and the pressure of civil society to adhere to extensive conditions. These come in four main types: a) safeguards relating to sustainability, impact on the environment and on communities; b) conditions relating to governance and macroeconomic stability; c) conditions relating to the financial sustainability of the project; d) procedures relating to procurement, such as open competitive bidding. A pervasive concern about corrupt decision-making underpins the adoption of several of these safeguards. While many of these precautions are clearly necessary, their cumulative effect can result in extremely long project design, approval and execution times. For example, the average duration of all World Bank projects (not just infrastructure), from board approval to conclusion is 5.6 years.
Fourth, initial participation in the BRI requires only the signing of a brief four or five page confidential memorandum of understanding, which commits the country to very little beyond agreeing to work with China in line with Xi’s framework to identify specific infrastructure projects that might or might not materialize.
It is thus not surprising that many countries near and far from China’s neighbourhood have expressed a strong interest in the BRI, and that the Chinese have responded. Since its formulation as a proposal to nations in Central Asia, the BRI offer has been extended to South East and South Asia (The “Maritime Silk Road” sailing south from China along the Indian coast onto the coast of Eastern Africa and onto Europe), and then to eastern and southern Europe, Russia, the Arab countries, East Africa and, most recently, Latin America. In a short time, the BRI has become the touchstone of China’s bilateral economic diplomacy and central to its foreign policy. It is Xi’s signature initiative and China’s Communist Party formally adopted the BRI under its Party Constitution at the National Party Congress in 2017.
The BRI is a young initiative. But, after five years, enough information exists to provide an initial assessment of the strategy. As more data becomes available on the performance of BRI projects, it will be possible to produce a more rigorous evaluation of its progress.
The BRI responds to the unfilled need for investment in infrastructure across the developing world and offers improved access to the world’s fastest growing large market. As such, it should be viewed benignly, but it is not. Many observers view the BRI with suspicion. Official donors in Japan, the European Union and the United States have been especially active in voicing concerns. In this section we identify both those concerns that we believe reflect misunderstandings or that are, to a lesser or greater degree, exaggerated, and — crucially — those that reflect the BRI’s genuine shortcomings.
Many critics claim that the BRI is not really a trade or development initiative but a drive to extend China’s influence. This charge is partly true but is also disingenuous. From the Marshall Plan to the European Coal and Steel Community and to the (ill-fated) Trans-Pacific Partnership, initiatives such as the BRI have been motivated by geopolitical and security considerations as much as by economics.
Undoubtedly, China’s heft and the rapidity of its rise present a unique challenge to the established powers. It does not help that the BRI is gaining traction at a time when the United States and the European Union are on the defensive. The US Administration has embraced protectionism. The EU is reeling from Brexit and from the advance of national populism across the continent. To assuage worries about its growing weight, China’s leaders never tire of declaring that they have no ambition to dominate or to replace the United States in its global leadership role. But should China be believed?
At the core of the debate over China’s influence are vastly different perceptions about what China is trying to do. For example, Yan Xuetong, a prominent Chinese political scientist wrote that China believes countries should follow their own paths: “[China] views national sovereignty, rather than international responsibilities and norms, as the fundamental principle on which the international order should rest ” (
To these political debates must be added the hand-wringing over China’s “Made in China 2025” plan,
Valid as these geopolitical and macroeconomic concerns might turn out to be — a matter on which we choose not to deliberate here — it is important to judge the BRI on its merits as a trade and development initiative.
The world is by now familiar with the EU’s and the US’s trade agreements. Stakeholders might accept or object to specific provisions in the US and EU agreements, or they might accept or reject them outright, but they know quite precisely what they are dealing with. Similarly, the World Bank’s approach to lending and the conditions associated with it are clearly spelled out, as, typically, are the Bank’s priorities in engaging with specific countries. In contrast, the BRI’s objectives as stated, for example, in Xi’s Astana speech and as subsequently applied in practice, are extremely broad and its modalities are undefined.
For some observers, this passes as pragmatism (“The Chinese Way”), but in reality, it reflects China’s difficulty in coordinating such a vast overseas enterprise. As a result, many inside and outside China are confused about the scope of the BRI. Thus, international observers such as the World Bank, the Center for Global Development and the Center for Strategic and International Studies, describe the BRI differently as “an ambitious effort to improve regional cooperation and connectivity on a trans-continental scale” or as a “vast investment scheme,” or as “an infrastructure financing initiative for a large part of the global economy.” In the 2015 white paper (
The lack of clarity has political consequences since those who oppose the BRI can define it pretty much as they wish. It also has economic costs since those tasked with executing the BRI can assume that “everything goes” and pick and choose those projects or activities that suit them best, rather than those that correspond to well-defined development priorities.
If the BRI’s objectives are not clearly communicated and understood, its geographic priorities are even less so. Intended to replicate the “Silk Road” in Xi Jinping’s original formulation, in the 2015 white paper the BRI is described as covering, but not “limited to, the area of the ancient Silk Road. It is open to all countries, and international and regional organisations for engagement, so that the results of the concerted efforts will benefit wider areas” (
Even the largest development programmes are normally directed at specific regions, or at countries belonging to a well-defined group (e.g. the least-developed countries). These programmes also provide some sense of country priorities within them. Not so the BRI. For example,
It is difficult to identify a shared agenda among BRI countries, even within the same geographic corridor. Clearly the needs of poor nations such as Pakistan, Myanmar and several in Central Asia and East Africa, are very different than those of EU members such as the Czech Republic, Portugal and Greece, which the BRI supposedly aims to reach. Countries within the same corridor have world-class infrastructure; in others infrastructure is inadequate. In the same corridor there are countries with good and bad logistics, liberal and restrictive trade policies, and strong and weak business climates (Fig. 1). No guide is available from the BRI on how interventions across such a diverse group will be identified and prioritized.
Countries within same economic corridor show significant differences in terms of logistics performance, trade policy and business environment.
Note: Bars show the range of scores attained by countries within each economic corridor. All scores were rescaled to a range from 0 (lowest) to 100 (highest). BCIMEC: Bangladesh-China-India-Myanmar Economic Corridor; CCWAEC: China-Central Asia-West Asia Economic Corridor; CICPEC: China-Indochina Peninsula Economic Corridor. Source: Bruegel based on
China’s state-owned enterprises play a major role in the BRI. These firms certainly display genuine advantages, such as low costs and well-honed skills in their areas of specialization, but they also often benefit from subsidized financing, soft budget constraints, monopoly or oligopoly positions at home, privileged supplier and customer relationships, an implicit or explicit state guarantee and various forms of other non-transparent subsidies. These SOEs will also tend to favour Chinese suppliers.
Here is yet another indication that China’s state capitalism and its one-party political system sit uneasily in a liberal-democratic world order. The US Congress agrees on little nowadays, but there is consensus across the political spectrum that Chinese policies have to change and that if they do not “something has to be done about China.” This view is shared to a greater or lesser degree by the US’s major allies.
These criticisms of China are well-grounded as they relate to the internationally most competitive products, such as steel, aluminium, solar panels, semiconductors and the already mentioned high-tech sector. But it is unclear whether this argument also extends to the kind of infrastructure projects being realized under the BRI. If Chinese firms withdrew from the infrastructure sector in developing economies, would others take their place? A dataset
The BRI is also often criticized inside China. The main objection is that it is a waste of resources in a country that is still relatively poor and requires more investment in its own backward regions. Estimates by Dreher et al. (2017) suggest that total official finance given by the Chinese government could amount to $350 billion between 2000 and 2014, equal to approximately 0.5 percent of GDP generated in that period in China. This is a significant sum for a developing country and compares favourably with the $360 billion of official development aid (ODA) and official development finance that was spent in the same period by the United States government. However, most of China’s estimated $350 billion outlay consists of export credits and loans extended at market rates. Counting only official finance granted on ODA-like terms, Dreher et al. (2017) estimate Chinese foreign aid between 2000 and 2014 to amount to at least $75 billion, an amount similar to ODA disbursements from the Netherlands in the same period (
Lack of transparency is perhaps the defining trait of the BRI and the projects carried out under its umbrella. For example, the BRI is undoubtedly a very large programme, but how large? The amount China has committed under the BRI is unknown and the additional amount envisaged is vague. Numbers mentioned, which may include projects launched before the BRI, range from $1 trillion over an unspecified period to $8 trillion over 20 years (
The discrepancy in these numbers reflects the fact that China’s finance comes principally on commercial terms from its state-owned infrastructure firms and development banks, the China Development Bank and the Export-Import Bank of China, and that the grant element in most loans is small or non-existent. These banks do not disclose their lending sums and precise terms are difficult to identify.
The situation is especially murky for those projects that are non-debt generating and take the form of BTO (build, transfer and operate) arrangements, where the main obligation is to buy the product (e.g. electricity) at a predetermined price. Other projects are paid off in the form of natural resources according to agreed price formulas, and some are carried out in exchange for a share of ownership in the mine, port or facility in question. How the cost and risks of BRI projects are shared between China and partners and according to which criteria, is not specified.
This lack of transparency in projects financed contrasts with the way in which development finance is normally provided through multilateral channels and most bilateral ones. The provision of aid and the clearance of a World Bank or, say, United Kingdom Department for International Development investment project is subject to a well-defined and transparent review process. In contrast, deals struck under the BRI and involving Chinese commercial banks are not.
Another criticism levelled at the BRI is that some projects, such as a $12 billion refinery in Ecuador
The possibility that over-eager lenders can push unwary borrowers into bankruptcy or default is not new and not limited to China — as shown by the collapse of banks and companies during the Asian financial crisis, the sub-prime crisis in the United States, the sovereign debt crisis in the euro area and the large official lending to poor countries that eventually had to be forgiven (with stringent conditions) under the Highly-Indebted Poor Countries Initiative and the Paris Club. Nor is the build-up of unsustainable sovereign debt usually associated with a single project. Still, the fact remains that some BRI projects are very large compared to the size of the economies of the countries where they are implemented, as in the case of Laos and Montenegro, and that, moreover, projects tend to come in bunches (port, airport, road, all to develop in the same region), which can make the overall package too large for the recipient’s GDP.
There are well-known examples of Chinese lending proving unsustainable. An international airport and a deep-sea port near Hambantota in Sri Lanka, financed largely with loans from the Export-Import Bank of China, have been running large losses since completion. To escape mounting debt, the maritime port has since been leased for 99 years to China
China’s efforts to forge stronger links with its neighbours and more widely with its trading partners around the world are legitimate, so long, of course, as the underlying intent remains peaceful. The same can be said of any other country. The focus on infrastructure is welcome and needed. Enhancing bilateral trade by building transport infrastructure and concluding trade agreements will ultimately have the effect of stimulating global trade as well. The infrastructure investments under the BRI could reduce global trade costs by between 1.1 percent and 2.2 percent (
Two facts are clear. First, China, the world’s most populous nation, is not ready for a wholesale departure from the state-capitalist development model that has worked so spectacularly for it, and of which the BRI is in some sense an offshoot. Second, China is fully committed to the BRI and, one way or the other, it is going to continue along that path.
But the BRI, to be effective, needs to meet the basic conditions of a trade and development strategy, which are clear objectives, adequate resources, selectivity, a workable implementation plan, due diligence and clear communication. The established donors are right to be concerned that some of these conditions are not met, especially regarding issues related to due diligence and, more specifically, fiscal sustainability.
Detailed proposals for revamping the BRI are beyond our scope. But it is obvious that the BRI needs a better articulated, coordinated and more transparent plan that identifies objectives by corridor and by country and in each case specifies modalities. Clear communication is important given China’s size and the challenge of coordinating such a broad endeavour within and outside of China. In a politically-charged environment, a failure to clearly define the BRI risks inflaming and empowering the opposition. Most importantly, China has to do a better job of evaluating the risks and costs of projects. Chinese firms and banks have plenty of bad domestic loans to worry about; they do not need a set of international debt crises to deal with as well.
The BRI is and should remain primarily a Chinese initiative to retain its advantages in terms of access to financial resources, speed and execution. However, a more systematic effort to collaborate with multilateral institutions and learn from accepted standards where it is possible to do so — such as is envisaged in the memorandum of understanding signed in 2017 with the multilateral development banks, could help overcome some of the BRI’s shortcomings. A more transparent approach is likely to help Chinese and international firms to decide where their investments should go. And if China envisages a BRI that will require several trillion US dollars of investment, it would surely benefit from leveraging its own efforts using other funds from bilateral and multilateral donors, and from the international private sector.
For many developing countries and even for some relatively wealthy nations such as Australia, New Zealand and EU members to the south and east, the BRI could represent a significant commercial and infrastructure investment opportunity and should be viewed as such. But, considering the preceding discussion, these nations should take special care in evaluating the projects and the commercial conditions attached to them. They should not rely on their Chinese counterparts for ad hoc project proposals, and should instead develop their own infrastructure strategies based on a benefit-cost analysis of the main projects, yielding clear priorities. Obviously, money must be repaid, and the ability to pay for a large project must be evaluated based on the overall national fiscal condition, not just on the project’s intrinsic profitability.
The Great Powers that vie with China for influence and for markets would be well advised to adopt a constructive stance toward the BRI. While insisting that China reforms its initiative along the lines of greater transparency, improved due diligence and safeguards, the EU and US should also acknowledge that there are very important areas of synergy between their own efforts and those of China. The BRI is consistent with their development efforts. It should be easy to see that infrastructure investment in Africa and expanded African trade can also improve the EU’s commercial and investment prospects, and might even be in Europe’s security interest writ large. The EU also has an interest in a Eurasian land bridge, which could provide a non-trivial boost to Europe-Asia trade (
A notable effect of the BRI is to pose a challenge to the established donors to increase and accelerate their provision of infrastructure in developing countries and even within their own borders. Insofar as the BRI represents increased competition for stodgy development banks in infrastructure provision, that is all to the good. The Compact with Africa (CwA), a G20 initiative that began under the 2016–2017 German G20 presidency, is intended to stimulate investment in African infrastructure by improving macroeconomic management, strengthening the business environment and attracting private sector interest. About a dozen African nations have joined the CwA and initiated a wide range of reforms. The CwA is an example of the kind of response that is needed, though one that remains untested for lack of enough private sector response to date.
Very helpful comments by Otaviano Canuto, Jean Dong, Alicia Garcìa-Herrero and Guntram Wolff are acknowledged, as are informative discussions with Homi Kharas and with participants in a China Centre for International Economic Exchange Seminar held in Beijing in November 2018.