Thursday, 19 May, 2022
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Two phrases critics of China’s BRI must not use – debt trap & threat to sovereignty

The debt trap argument overlooks a range of short to medium-term economic problems that BRI creates for host countries.

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Detractors of China’s ambitious Belt and Road Initiative see it either as a debt trap or a threat to sovereignty of other countries.

The recently-concluded BRI summit in Beijing tried assuaging these fears and re-launched the project, with an emphasis on respect for sovereignty, “extensive consultations” and “shared mutual benefits”.

But both arguments against the BRI by the detractors are limiting as well as misleading.

Look beyond debt traps

The most common criticism against China’s Belt and Road Initiative (BRI) is that it pushes countries into debt traps. The argument is that Beijing issues expensive loans to host countries and when they are unable to pay back these loans (as expected), the former steps in with a debt-equity swap. This is how Beijing, say critics, takes control of specific assets in strategically located countries.

Also read: How China is defending its detention of Muslims to the world while selling the BRI dream

The fundamental problem with this claim is that there is scant evidence to back it. Sri Lanka’s Hambantota port seems to be the only example, which adheres to the logic of a debt trap. A recent report by a consultancy, the Rhodium Group, looked at 38 cases of BRI debt renegotiations and found that most were resolved in favour of the borrowers. In addition, debt had been written off on 14 occasions.

This is not to say that BRI cannot generate debt problems for some countries. A report by the Centre for Global Development, a US-based think tank, shows that eight of the 68 potential BRI borrowers could face serious challenges in repaying their loans.

But the debt trap argument currently overlooks a range of short to medium-term economic problems that BRI creates for the host countries, such as acute fiscal issues, balance of payments crises, and a dramatic fall in foreign reserves.

For instance, let’s look at the China-Pakistan Economic Corridor (CPEC) – a showcase project of the BRI – and its effect on Pakistan’s economy. The massive amount of debt repayment is the main reason for the country’s ever-widening fiscal deficit. Pakistan’s recent balance of payments crisis was also primarily caused by the project. Under CPEC, Pakistan was forced to import a lot of capital goods from China that exhausted its already meagre foreign reserves.

BRI projects are cut-off from local economic and developmental needs of the host country. A recent report by the Centre for a New American Security, a US-based think tank, notes: “Belt and Road projects often involve the use of Chinese firms and labor for construction, which does little to transfer skills to local workers, and sometimes involve inequitable profit-sharing arrangements.”

The term debt trap fails to explain the overall macroeconomic ill effects of BRI-led investments on smaller economies. The problem isn’t that China will acquire key assets in these countries, but that BRI has the capacity to ruin these economies.

Gains for the global economy

If one looks beyond BRI’s effect in specific countries, there is evidence to suggest that the Chinese project may have a positive impact on the global economy as a whole.

Also read: China’s BRI begins to faces resistance from Pakistan, Sri Lanka & Nepal

study by World Bank researchers argues that the project will have a positive effect on the world economy as it will reduce the costs of trade. Thanks to the ongoing infrastructure projects, BRI countries will see a reduction in shipment time by 3.2 per cent with the rest of the world and 4 per cent with other BRI countries – this will lead to a considerable drop in trade costs.

The report also notes that if complementary policy reforms are initiated, it can lead to a further drop in shipment time and trade costs.

Beyond the macro effects, the dramatic economic revival of the Piraeus port in Greece highlights how deft use of Chinese investment can result in huge economic gains for the host economy.

The port’s two docks were initially leased out to Chinese shipping company COSCO in 2010; in 2016, the company bought majority stake in the port.

And in just eight years, Piraeus has jumped from 93rd to 38th largest port in the world. Today, it is fastest growing port in the world.

It’s not China’s Marshall Plan

Many scholars and experts tend to look at BRI as China’s Marshall Plan. The Marshall Plan was America’s post-war strategy whereby it extended economic assistance to war-torn allies and helped them develop. The US also extended help to former enemies such as Germany.

There is a fundamental reason why it’s misleading to consider BRI as China’s Marshall Plan. All the economies, which were assisted by the US, had already been major global powers in the past. The US just helped them regain that status.

The Chinese strategy, in contrast, seems to have two components.

On the one hand, we see China adopt a classic sphere of influence strategy, which is aimed at establishing the country as the predominant power in South East Asia and weakening America’s control over Latin America.

On the other hand, it is also working towards creating an alternative global order. China is assisting a lot of smaller and, some would argue, inconsequential powers in Africa and Latin America. The goal is not only to attain strong strategic leverage in these small countries, but also develop them as vital geo-strategic powers in the future.

Also read: Don’t panic yet, China’s Belt & Road project doesn’t mean it’ll boost Beijing’s power

In this sense, China seems to have adopted a new bottom-up strategy, which involves taking big risks but can also be equally rewarding. If China does succeed, it will end up creating a new, competing world order to that of the US.

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  1. The BRI will no doubt improve connectivity and boost the world economy. For India the development of the region which fotuitously motivates us to develop our own neglected borders will reduce the threat of terrorism by increasing livelihood opportunities definitely in the long run. The only rogue country Pakistan, may benefit strategically but this is where Chinese cooperation, not just non interference, for mutual benefit can play it’s part.

  2. Srijan Shukla seems to be myopic while approaching the various dimensions. Say for example:
    1) Hambantota is not the only example of China taking over strategic assets. There is the example of Port of Doraleh in Djibouti & then the CPEC through Gilgit region because of its geographic locations gives an unique advantage to whoever uses it against India. If 3 out of 5 countries whom China initially helped seems to be taken advantage of by this way, then I have to say this is a design.
    2) Yes the Debt Trap problem happens in the long run and the problems the author wrote about happens in short to medium term. But these are the initial signs of the long term problem. Pakistan in last 5 years had to take loan from IMF for 13 times. We can easily understand which direction the economy is going to. And by the way, the extent of crisis is more severe than what has been comprehended by the author.
    3) Yes, the BRI project is advantageous for the world economy in the long run. Yes the Chinese have very carefully crafted it to be so because they want the world economy to prosper but under their command, replacing USA’s hegemony it should be them. And there would be no place for countries like India and Japan. As for the connectivity issue, yes it is advantageous and reduces time. This was also suggested by Asian Development Bank when they prepared the ‘logistics survey report’ for BIMSTEC in 2007. Which finally India pursued under it’s bilateral initiative, whether with Myanmar, Bangladesh or Sri Lanka.
    4) lastly, I’m absolutely in agreement with the observation of the author in respect to China propping up the inconsequential powers in Africa and Latin America as its stooges. It needs countries like Pakistan, who would do the bidding for the Chinese, just the way West Germany and Britain did for USA.

  3. BRI is on a learning curve. Some serious limitations are showing up, which need to be addressed. However, recipient countries are guided by self interest. They will not deliberately enter into investment agreements that blight their long term financial position or compromise their sovereignty. For India not to participate in BRI is fine. However, it does not help to berate it publicly, as happened two years ago. Not one South Asian neighbour shares this sentiment.

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