May 13, 2017 3:50 pm JST
Yves Tiberghien

Belt and Road Initiative aims to boost globalization

The China-led program should be welcomed in countering growing protectionism

In mid-May, leaders and top representatives from at least 30 countries and international organizations will gather in Beijing for a grand summit of China's Belt and Road Initiative. The scale of the event will rival that of the G20 summit in Hangzhou last September.

Participants include leaders from Russia, Turkey, Italy, Myanmar, the Philippines and Indonesia as well as officials from the United Nations, the International Monetary Fund and the World Bank. Toshihiro Nikai, secretary general of Japan's ruling Liberal Democratic Party will be present, while the U.S. will send a senior delegation, led by Matt Pottinger, who oversees Asian affairs at the National Security Council.

In many respects, China's initiative is currently the world's most ambitious economic integration plan. Often misunderstood in the West, the BRI is in some ways similar to the grand vision of the Single European Act of 1986, but on an even greater scale.

It aims to mobilize diverse players under China's leadership to develop new trade routes, promote economic integration and create new trading patterns across wide swathes of the globe. Contrary to what critics say, it is not designed to be an exclusive, closed or top-down Chinese geopolitical "offensive." Instead, it claims to offer opportunities to all countries participating in the project. Perhaps it should be compared to the creation of the U.S.-led postwar global liberal order.

Documents published by the National Development and Reform Commission, the "super" ministry in charge of economic and industrial policy in China, follow a general neo-liberal view of the global economy. The BRI mostly fills gaps in infrastructure development around the world.

"Asia's $26 trillion infrastructure gap threatens growth," according to a recent report by the Asian Development Bank. "This requires countries across the region to double total annual spending to about $1.7 trillion in areas ranging from transport to basic sanitation."

While the U.S. and Europe appear to be retreating from globalization, China is attempting to promote globalization through the BRI. By nominally focusing on the backwater regions of inner Asia, China is not directly challenging the U.S. and Japanese core interest areas, except in Southeast Asia -- particularly in Indonesia and Thailand, where Japanese and Chinese interests directly intersect. But if China succeeds in overcoming some significant obstacles, the BRI will have broad impact in terms of global trends.

A new roadmap

Three key features define BRI. First, it represents a competitive liberalization strategy. The BRI was conceived in 2013 as part of a response to the U.S.-led Trans-Pacific Partnership. Instead of promising free trade, BRI offers a sweeping vision of increased connectivity in neglected regions through infrastructure development, trade and people-to-people exchange programs.

It promises to boost globalization by offering new mechanisms for increased economic integration, more funding for connective infrastructure, and new instruments for policy coordination that put China in a central position.

Second, the BRI offers a focal point to mobilize forces both inside and outside China. Deliberately called an "initiative" by Beijing and only defined in broad general terms, the BRI allows participants, whether they are international institutions, countries, provinces, companies, universities and other organizations, to propose their own individual BRI strategies in a large competitive space.

Any province or company seeking to build good relations with the central government in Beijing has an incentive to develop their own BRI projects. The China-led Asian Infrastructure Investment Bank represents a small piece in this large network by financing a small percentage of BRI projects while imposing tough internal governance principles. Framed as a massive bottom-up mobilization effort in response to signals from the top, the BRI builds on China's comparative advantages in infrastructure and communications.

Third, the BRI is extremely flexible, open-ended and experimental in nature, which reflects principles that have been the hallmarks of China's economic reform success since 1979.

The BRI is inspired by the historic Silk Road routes across central Asia and the 15th century westward voyages of discovery by Admiral Zheng He to Asia and Africa. But its geographical reach is aimed at expanding beyond that to Oceania and the Americas.

The development of the BRI has gone through several stages since mid-2013. On Sept. 7, 2013, Chinese President Xi Jinping in a speech in Kazakhstan called for a "Silk Road Economic Belt with Central Asian Countries." He laid out five components of the Belt and Road Initiative: policy communication, road connectivity, trade facilitation, monetary circulation and people-to-people exchanges.

In late 2013, Xi told the Indonesian parliament of his hopes to jointly develop the "Maritime Silk Road of the 21st century." In November 2013, Chinese Premier Li Keqiang attended the China-Central and Eastern Europe leaders' summit in Romania and proposed to extend the initiative to Eastern Europe through increased trade and infrastructure development.

The real boost to the BRI came with the announcement of a $40 billion "Silk Road Fund" during the Asia-Pacific Economic Cooperation summit in November 2014. Since then, Chinese delegations have traveled far and wide to seek partners and develop hundreds of cooperation agreements with countries and regions. The May 2017 BRI summit in Beijing will mark a key moment to take stock of achievements and lay the groundwork for establishing an institutional framework to govern this growing web of bottom-up connections.

In its first three years, the BRI has gradually expanded. China has invested about $15 billion a year since 2014 in countries participating in BRI, according to the Financial Times. By the end of 2016, a total of $296 billion was committed to BRI projects. Most of the funds will come from the China Development Bank and the Exim Bank of China, accounting for $134 billion, and China's big four commercial banks, accounting for another $150 billion. The AIIB and Silk Road Foundation are providing a few billion dollars each.

The top five recipient countries so far of BRI funds have been Pakistan, Indonesia, Russia, Kazakhstan and Laos, with Kenya, Vietnam, Ethiopia, Saudi Arabia and Tanzania expected to be targeted next. This geographic distribution reflects an initial focus on Central Asia and Southeast Asia before expanding to Africa, Middle East and Latin America.

The top BRI projects mostly involve energy, transport, industry and trade, water and urban infrastructure, and agriculture. Chinese state-owned enterprises dominate these investments, accounting for about 85% to 90% of the projects.

Question marks

Questions remain about whether the BRI can succeed. Ultimately, projects will have to be viable and earn investors a return on investment. Some of the large-scale infrastructure projects located in remote or insecure regions could fail.

China's recent plans to build the Myitsone Dam in Myanmar serves as a warning. This $3.6 billion project on the Irrawwaddy River was approved in two memoranda of understanding in 2006 and 2009 by Myanmar's then military government. The state-owned China Power Investment Corporation took much of the risk, but retained 80% of ownership. It estimated that construction would involve significant population displacement and environmental impact, yet 90% of the electricity produced was to be exported to China.

The project faced massive opposition from local communities and was abruptly suspended in 2011, with its fate still uncertain. The lesson for China and other investors is that they must participate in local community engagement and promote benefit sharing. Chinese companies are likely to go through a similar learning curve in countless other locales.

The BRI has also faced opposition from some of China's regional rivals, such as India, which has refused to endorse the BRI and opted out of projects so far.

To deal with financial and social risks, China will need to go through a rapid institutional upgrade and devise new sustainable investment risk analysis guidelines and practices to improve community engagement and conduct environmental impact assessments. If such efforts succeed, they could serve as useful contributions to regional governance by providing new blueprints and creating new networks in regions that have been marginal to globalization.

Ultimately, this massive regional connectivity initiative could produce several significant results.

First, it will revive historic land and maritime routes, while developing new ones to Oceania and across the Pacific. Second, the BRI could provide new investments to Europe and Africa, with China having already won goodwill and influence in Greece through its investments there. Third, the BRI will reshape the nodal structure of the global economy, by creating new trading hubs in Greece, Hungary, Kenya, Sri Lanka, Indonesia, Pakistan, Thailand and Bangladesh. Fourth, the BRI could help promote conflict resolution in the Middle East and Central Asia if it able to manage security challenges and other obstacles.

The BRI is still a work in progress and its global impact still remains uncertain. But it should be seen as a positive experiment that could deliver a big boost to globalization in the 21st century. Its success will depend on the development of new institutions, norms, and practices that can be compatible with current global institutions.

Yves Tiberghien is director of the Institute of Asian Research at the University of British Columbia and senior fellow at the Asia-Pacific Foundation of Canada.

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