China’s One Belt One Road policy is destructive for the beneficiary countries and is headed towards eventual failure.
Xi Jinping has adopted the One Belt One Road initiative (OBOR) as the defining policy reformulation under his Chairmanship. OBOR has been imagined as a grand exercise in influence generation culminating in China becoming the next global superpower. Parallels have also been drawn to the Marshall Plan, which was a policy to reconstruct post-war Europe and Japan by the United States. Except, OBOR is at least ten times in magnitude. But there are some key problems with OBOR which will lead to its doom. To start with, it is important to understand what OBOR is and the economics behind it.
Economics Behind OBOR
Under OBOR China seeks to invest appx. 1.2 trillion dollars around the world creating an inland, a maritime and a digital route connecting China to countries across Asia, Africa and Europe. The investments will be in the nature of infrastructure projects. But why would a country, a majority of whose own population is yet to enjoy a quality life, invest its money in foreign nations? There are multiple reasons:
- China is an export-oriented economy. Almost 60% of its growth post-2000 can be attributed to exports. But post-2008 growth in global demand has remained cold. By investing money, buying influence and improving connectivity in emerging countries, China seeks to enhance the demand for its goods. Further, Chinese companies like those in construction, transport, technology, etc. will also benefit.
- China has created huge internet companies, but they are limited to Chinese borders. Within OBOR these companies will start having a global footprint by controlling data and network around the world.
- Post a construction boom in China, the country is burdened with excess production capacity of construction materials like cement, steel, etc. As most of the contracts under OBOR go to Chinese companies these can be utilized.
- China has huge currency reserves. These are generally used to buy low-interest paying bonds. By investing this reserve under OBOR China can reap much higher returns.
- Ensuring access to energy and mineral resources of Asian and African countries.
If the Economics is in Place, Why is the Policy Doomed
There are no free lunches under OBOR
There can be no comparisons between the investments made under OBOR and those made under the Marshall Plan, the soft loans given by countries in general or those extended by organizations like the World Bank. OBOR investments are made in the nature of loans, mostly by Chinese state companies and banks. But these loans come with a very heavy interest rate, which few of these countries can pay back. Below is a sample of interest rates charged by China for the loans extended by it:
- Hambantota Port Project, Sri Lanka: 6.3%
- Norochcholai Coal Power Plant Project, Sri Lanka: 4%
- Nairobi-Mombasa Railway: 3-4% Percent
- East Coast Rail Link, Malaysia: 3.25%
- Malaba-Kampala Railway, Uganda: 3%
- China-Laos Rail: 3%
- China-Pakistan Economic Corridor: 2-8%
- Loans to the Philippines: 2-3%
- Ethiopia-Djibouti Rail Project: 3.1%
- Hwange Power Project, Zimbabwe: 2.5%
- Soubre Power Project, Ivory Coast: 2%
- Loans to Central Asia: 2%
- Loans to Cambodia: 2%
As against the high rates charged by China, funds disbursed under Marshall Plan were grants, with only 10% of the total fund extended as loans. Soft Loans extended by IBRD, ADB and other such agencies range from 0.25-3%, taking into account various economic metrics. Credit lines extended by India come with an interest rate of less than a percent to 1.75%. Loan granted by Japan to India for the bullet train project costs us just 0.1%.
The problem of high-interest rate is further extenuated by the fact that most of these countries are already economically unstable. They are burdened with huge foreign loans, most of them Chinese and an increasing share of their budgets are going towards servicing these loans. Pakistan, Sri Lanka, Kenya, Nigeria, South Africa, Ghana, Tajikistan, Laos, etc., major beneficiaries of OBOR, are all looking at looming debt crisis.
Chinese Loans are Ineffective
When the IMF granted loans to India in 1991 it asked for a slew of reforms in return. So did the grants under the Marshall Plan. In general, most of the loans by international agencies and democratic countries come with requirements of institutional and economic reforms. Further, such loans are often monitored by observers and corruption is generally inexistent.
As against this, Chinese loans are infamous for their comfortability with grafts and corruption. Most of the Chinese investments with uncomfortable terms are willingly supported by dictatorial leaders and officials. The Kenya train investment by China has been mired in a huge corruption scandal. Similarly, Malaysia has halted Chinese investments signed by Najib Razak, with charges of corruption as one of the key reasons. Bangladesh too has scrapped multiple Chinese investments because of graft charges.
Moreover, the Chinese do not demand any reforms to be undertaken while granting loans and aids. Thus, while huge sums of money flow in, there is no commensurate improvement in transparency, accountability, efficiency and human rights in the receiving country. This leads to wastage of resources, labour exploitation, environmental disasters, corruption and mismanagement. As a result, the real cost of Chinese investments is much higher.
Further, China requires that a majority of the projects be granted to Chinese contractors. Almost 89% of the economic value of OBOR projects are captured by Chinese firms. As such, most of the workers employed, materials and services used are Chinese. As a result, the money fails to create income for the natives and countries fail to get the best value for the money they will eventually have to pay back.
China Takes Back Every Last Penny
It’s not just that Chinese loan come with a heavy price tag, China makes sure they are repaid. Such repayment, if not in the form of money is to be repaid in the form of assets. The case of Hambantota is a glaring example. China will now control the port for the coming 99 years as Sri Lanka was not in a position to pay back the debt. In Zimbabwe, the Chinese secured non-compliance with labour laws, first rights to mineral exploration and control over many mineral assets. In Tajikistan, they took control of around 1158 km of disputed territory and gold mines. Angola has been servicing its loans by supplying natural resources to China.
Chinese investments are a perfect recipe for economic and sovereign disaster. Populations across nations have also started to realize this. As a result, there is growing public resentment in most OBOR partner countries against China. This is evident in the multiple Chinese investment projects being stalled or cancelled. Those in Malaysia are a recent example. Simultaneously, economic woes within China are escalating and trade war is taking its toll. Thus, China, if it wants OBOR to survive, must bring reforms in the way it works and stop using colonial tactics.
 http://www.atimes.com/alert-central-asias-china-debt-mars-uzbekistans-bri-debut/; https://foreignpolicy.com/2016/01/22/a-perfect-storm-in-central-asia/; https://www.moneyweb.co.za/news/economy/is-south-africa-heading-for-a-debt-crisis/; https://punchng.com/debt-overhang-is-nigeria-the-next-greece/; https://www.standardmedia.co.ke/business/article/2001270355/fear-as-kenya-s-borrowing-hurtles-towards-greece-like-debt-crisis; https://www.ft.com/content/baf01b06-4329-11e8-803a-295c97e6fd0b; https://qz.com/1317234/chinas-debt-trap-in-sri-lanka-is-even-worse-than-we-thought/.
Image Source: China Daily