View of Sri Lanka's Hambantota Port, operated by China Merchants Group
View of Sri Lanka's Hambantota Port, operated by China Merchants Group | Atul Loke/Bloomberg
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New Delhi: The drive of developing nations to attract greater foreign investment can turn them into battlegrounds for global powers at the cost of their economic interests, a report by the US-based Centre for Strategic and International Studies (CSIS) has warned.

The report cites Djibouti, a tiny impoverished nation on the Horn of Africa, as a prime example, pointing out how it now hosts military bases for China, France, Japan and the US.

But there are several other examples: South Asian states such as Sri Lanka, Nepal and the Maldives have emerged as sites of geopolitical competition between India and China, and the Non-Aligned Movement took shape during the Cold War precisely because countries wanted to escape joining the two big power spheres of the time, led by the US and the erstwhile USSR.

“With a few important exceptions, little has been written about infrastructure as a foreign policy tool,” writes Jonathan Hillman, the chair of political economy and director of Reconnecting Asia Project at the CSIS.

“This report takes a small step toward filling that gap by illustrating how states use foreign infrastructure to advance strategic objectives.”

The report

The CSIS is a US-based not-for-profit policy research organisation that was founded in 1962.

The report comes at a time when foreign infrastructure is emerging as a contentious force on the geopolitical stage in light of China’s Belt & Road Initiative (BRI), which has been widely denounced as a debt trap for developing economies.

As he sets out to explain the role of infrastructure in foreign policy, Hillman breaks down the subject into three separate stages — finance, design and construction, and ownership and operation. Each stage, he says, has a distinct set of geopolitical payoffs.


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Financing

According to Hillman, “infrastructure financing is the broadest avenue for exercising influence”.

The first and most important phase of financing, he adds, “is the negotiation of terms, through which a lender can extract political concessions, shape project specifics, and set repayment terms”.

Talking about this stage, he writes that bilateral funding provides greater scope for strategic influence than multilateral aid, adding that the more a host country needs funding, the greater is the lending country’s influence.

He then cites China as an example. “A CSIS analysis found that Chinese-funded infrastructure projects disproportionately favoured Chinese contractors at the expense of local contractors. This can shift the project’s economic benefits towards the lender, benefitting foreign contractors and leaving the recipient country dependent upon the foreign lender’s capabilities and expertise,” writes Hillman.

China’s foreign-exchange reserves are believed to total around $3 trillionthe highest in the world, which means no other country has as many resources to spend globally as the Asian behemoth.

With this edge, its positioned in a continent where, according to the report, developing nations need to invest $26 trillion by 2030 to sustain their growth momentum and adapt to climate change, placing China in a position of power.

The second stage of using financing as a strategic tool, Hillman writes, is the terms of fund disbursement. According to Hillman, the lender can use funds as a carrot or a stick by either expediting or delaying them.

However, Hillman notes, the third stage of financing is the most overt way of achieving one’s strategic objectives: Repayment. In case the host country is unable to pay back, lenders can ask for financial and non-financial concessions — as happened in 2017 with Sri Lanka’s Hambantota Port.

Unable to pay back China, Sri Lanka gave Beijing a 99-year lease to the strategically-located port for a part waiver.

Design & construction, and ownership & operation

The second and third stages of foreign-infrastructure-building are design and construction, and ownership and operation, Hillman writes.

States designing and building infrastructure in foreign states can achieve their strategic objectives in three ways — standard-setting, technology transfer and intelligence collection, says Hillman.

The greatest advantage of designing and operating a project is that it allows a state to collect intelligence, he adds.

Hillman argues that, in such situations, the contractors on the ground play a massive role, as they can act as intelligence gatherers for the lending state.


Also read: Beijing’s calculus on Masood Azhar goes through the China-Pakistan corridor


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