Over two millennia ago, merchants from China and the rest of the Orient traveled to Europe on camels and ships in what we know today as the Silk Road. The flow of millions of goods across the continent lasted for over 16 centuries, helping China become the largest economy in the world at the time. Despite its economic dominance, as the western powers sought to expand, China failed to modernize. Due to its inept military, the nation experienced centuries of humiliation and economic decline as they were subservient to the whims of colonizers and occupiers. However, China now has an opportunity to make a comeback. China has experienced an immense economic boom in recent decades and propelled its economy to become the second largest in the world. Due to the recent economic successes, its government, as well as its leader Xi Jinping, is more ambitious than ever to create the modern silk road and bring back the days of economic glory and dominance it once experienced.
The System
The Belt and Road Initiative is the construction of both maritime and land-based infrastructures spanning across 65 nations. The total population of the 64 participating nations (excluding China) accounts for 43% of the global population while their economies account for just 16% of the global GDP. The initiative is set to take 10 years, and will be led by the Chinese government and is set to be the largest infrastructural project ever conducted. The total cost of the initiative is set to be approximately 1.5 trillion USD, which is 12% of China’s GDP. Most of the investments will be made by the Chinese government, but the nation’s banks will contribute over 200 billion USD while a few billion more will be provided by international entities. The investment will act as a long-term loan where the recipients will return the costs of the construction over a set period of time. In addition to the loan, the receiving nations must use Chinese companies or its associates for the construction.
For the BRI, the Silk Road is not just a metaphor, but rather a predecessor. In 2017, at the Belt and Road forum’s opening ceremony, the Chinese leader Xi Jinping stated “I proposed the building of the Silk Road Economic Belt and the 21st Century Maritime Silk Road, which I call the Belt and Road Initiative.” This statement clearly displays Xi Jinping’s ambition of making the BRI, his brainchild, an immense global network of both land-based and maritime infrastructures that brings immense prosperity to the participating nations.
Copyright by World Economic Forum / Mattias Nutt
The Benefits
While investments of such scale carry large risks for China, the BRI is by no means an ill-timed stunt to inflate the nation’s economic capacity as its success will have several major benefits to its economy and will facilitate its path to overtake the US as the global superpower. First of all, the initiative will alleviate many of the strains and concerns that looms over the nation’s economy. As the nation’s middle class expands, it is imperative for China to relocate low-cost manufacturing jobs while expanding its more skilled occupations. The BRI would allow low-cost manufacturing businesses to relocate from China to a more developing economy, thus opening up more room for higher paying occupations and facilitating the nation to climb up the global value chain. In addition, as the recipients will use Chinese companies for the project, China can directly use the domestically produced high-value products such as high-speed railways in the projects.
The initiative will also drastically alter how China trades natural resources such as oil as the initiative will decrease its dependency on the Malacca Strait while helping to diversify the mode of trade. Currently, around 80% of the nation’s oil imports go through the Malacca Strait. As the nation would practically become dysfunctional without the crucial resource, the current dependency on the Malacca Strait is a major concern. However, the BRI would allow China to diversify its mode of trade. Through various infrastructure constructions, China plans to form two economic corridors: The China-Mongolia-Russia Economic Corridor(CMREC) and the Gwadar-Xinjiang/China-Pakistan Economic Corridor(CPEC). CMREC would allow China to secure the supply of vital natural resources from Russia while expanding the economic tie with its northern neighbor. As most natural resources from Africa and the Middle East passes through the Indian Ocean, CPEC would allow China’s industries to directly obtain key resources through the port of Gwadar and networks of highways that cut through Pakistan and China instead of depending on maritime routes through the Malacca Strait. The CPEC would also help expand the economic activities between China and Pakistan even further, as the bilateral trades between the two nations increased by 15.1% last year.
The two economic corridors would also offer a more balanced regional development across the inland regions of China, which is experiencing immense wealth inequalities and outflow of the population due to the lack of economic activities and opportunities. First of all, the CPEC would vastly improve the infrastructures and the access to Tibet and Xinjiang, regions bordering Pakistan. The regions would see massive increases in economic activities due to the rise in trade, thus attracting workers and businesses which will propel its economy even further. In addition to the economic benefits, the increase of workers from across China in these regions would help integrate them further with the rest of China. While regions involved in CMREC are already quite prosperous, there are high demands of many western goods from its sizable middle class. Upgrades in infrastructures would increase the access of Western Russia such as Moscow to Chinese cities, allowing Chinese businesses to access European goods more easily and encouraging economic activity.
For China to truly become the global superpower, it requires an ability to exert influence across the globe and give the nation’s industries and businesses competitive advantages. As most nations involved in the initiative are of developing nations, Chinese loans will account for a major portion of their GDP and can be greater than the receiving nation’s fiscal budget. Although the loans would be applied for infrastructure developments that the receiving nations desperately need, such investments would not provide its governments with immediate increases in tax revenues, thus making them susceptible to fall behind in its payment to China. This would in return increase the Chinese government’s ability to intervene in the recipient’s economy as the receiving government must seek assistance from China for debt reduction and possibly even defaulting. This case has actually occurred in Sri Lanka when the Sri Lankan government failed to make payments on their loans from China on the construction of the Port of Hambantota. In return for erasing approximately $1 billion US, China gained a 99-year lease on the port, thus creating a strategic foothold in the Indian Ocean.
Risks
While such investments do provide China with major influence across the globe, it also displays a glimpse of the dark side of the initiative. It is evident that while nations participating in the BRI do desperately need infrastructure development for their prosperity, the BRI often forces them to risk much of their economy with uncertain economical benefits. While improvements of infrastructure will help stimulate the economy, the benefits would be gradual and no major short-term economic booms would be expected. As the nations would be accountable for the loans regardless of their economic growth(or lack thereof), nations may fall behind on their debt in the early stages of the projects. The unbalance in their budget due to the large debt can lead to governments cutting their fundings on vital spendings such as healthcare. This can go against the objective of the BRI and hinder the recipient’s economic development and can destabilize the nations’ government which are in some cases already feeble. The recipient’s inability to return its debt can also result in high debt-distress and possibly falling into a debt spiral as they fail to make ends meet. When such events occur, the nation in debt will be forced to sacrifice vital holdings such as ports as collateral, thus losing their major source of income and trade. The recipients of the initiative also often have an extremely low sovereign credit rating and if they were to fall behind on their debts, foreign investors may become even more reluctant to make such a high-risk investment.
Verdict
Whatever happens, the Belt and Road Initiative will undoubtedly benefit China in some form. If the projects were to succeed, many of the emerging economies would see rapid development and would help solve many of the strains holding them back. If the initiative fails and the recipients are not able to return the massive loans, China would receive many vital infrastructures as collaterals and would be able to exert massive influences in many economies as they gradually become drowned in Chinese loans. This, however, should not be the case. While it is evident that the Chinese government rarely takes ethics into account, such high-risk investments on the emerging economies without any guarantee for economic benefits for the recipients can destroy their potential as they can very possibly face debt distresses and destability. Of course, if the initiative succeeds, the developing nations would see immense economic development and alleviation of poverty. However, if China truly cares about the prosperity of all of the participating nations of the BRI, they must make sensible reforms on their loan systems such as lowering the payment for the first few years and not invest on projects founded out of desperation, not practicality. If such alterations are to be made, the Belt and Road Initiative would have the potential to become the new silk road, bringing economic prosperity across the globe just like how the caravans of camel-riding merchants once did.
INQ 