Present and futur of the BRI, potential for economic growth.
3. THE BRI AND ITS POTENTIAL EFFECTS ON GROWTH
This section will analyze predictions on economic consequences of the BRI across the globe, in the different countries where China has enacted its BRI and elsewhere.
3.1. Justifying the BRI
Countries that lie along the Belt and Road corridors are lacking the infrastructure they need and they haven’t yet developed the necessary policy reforms. This is unsettling, since the countries that are expected to grow the most are the ones that put up the most barriers to growth. They under-trade by 30% and they are far from achieving the full potential for their Foreign Direct Investment (FDI); they received 70% less FDI than their potential (Xiaoyang, 2018).
The BRI presents both risk and opportunities, and this are not distributed equally among the different investment recipients. Some countries will benefit greatly while doing a modest investment on infrastructure, whereas some who took in bigger debts, will have a tougher time rendering the results of the constructions.
Risks and opportunities will have to be carefully balanced, so that no country gets left behind in the process. Well distributed growth will come from the development of an efficiently and equally distributed network of connections in the low income and middle income countries that received the money. China has an essential role to play in this, since they cannot simply provide the money for the investment without involving in the general flow and economic sense of the constructions planned and realized. It is on their own interest to build infrastructure that renders the benefits needed to repay the debts.
In order to put forward a plan, or to lay out the principles underlying the construction of infrastructure along the many countries behind the BRI, there needs to be a clear goal. International organizations demand a clear leadership and a clear vision of what is the general purpose of each projects. Is important to know, not only how a project connect two cities or countries, but also how that project interacts with the rest of the network of roads and rails that already exist.
3.2. Context in international project founding
Before the BRI, the only way for the low-income and middle-income countries to get payable loans was through the means of the IMF, the World Bank, and other smaller creditors like IDB (Inter-American Development Bank) or ADB (Asian Development Bank). These entities were created for the only purpose of investing in these countries. They are tasked with the duty of doing investments that a normal investor would not find interesting or worth pursuing, due to the high risks and low or dubious returns they may produce.
Figure 3.1 shows the situation as it stands in 2019, of projects related to the BRI, including ports, roads and rails. These are executed, planned and under construction projects. In a project so broad as this one, organizational and other problems will surge, while the legal environment in each place is different, and requires different types of actions to safely and legally build a large infrastructure project.
To better understand the context in which the BRI loans enter the international sphere, is important to understand the other options that were available at the time. Most loans to these countries were given out by organizations such as the IMF. The administrative processes were long and complex, and especially difficult in low-income countries, where the administration is slow and ill-prepared to bring them to term. Apart from that, their decision-making process was based on two different metrics. The first was analyzing the country’s capacity to repay its debt in the future, based on the present situation and the tendencies of the economy. The second one would look at the so-called liberal requirements. They call it the IMF Conditionality framework (IMF, 2020). They support programs in developing countries that put forward a plan for institutional reform.
Contracts carry the conditions of the loan and the framework and policy plans that need to be implanted in the country. They try to assure economic progress and development, so that they will eventually be able to repay their debts. Some of these requirements are the elimination of price controls, a budget consistent with fiscal framework, improving financial sector operations or build up social safety nets. This, they thought, would allow countries to develop their infrastructure and to create the framework to attract investment and internal growth. This was (and still is) a very reasonable approach to international relationships. But then the BRI came, and the rules of the game changed.
Figure 3.1: BRI-related transport projects
Source: Reed and Trubetskoy, 2019.
Note: TEU: twenty-foot equivalent unit.
The BRI approach to international lending to low-income countries is different. China does not have time, they need to move fast to grow fast and be able to sustain the current cycle of economic expansion. Their realpolitik approach to international relationships is different. They don’t follow the liberal requirements clause, and neither do they follow many others reasonable clauses.
Even though they do not have as many barriers for lending, they are not naïve about the countries that receive their loans. They cannot be. Lending to countries in Africa and South Asia has many challenges (Gandhi, 2019). They are aware of the difficulties and challenges that these countries are going through, the lack of leadership in governance, the corruption in their governments and their inefficient administrations. The point is, this is not so important to them as for the IMF or the WB. They are looking for influence first, and sound investments second. They have a more indirect approach to international lending. So far, the only requirement has been to allow a high percentage of Chinese workers (more than 60 percent of the contracts signed go to Chinese companies that bring their own workers to the field) to build the infrastructure, and to sign an agreement that will transfer them the property of the land or the infrastructure if the country is not able to repay.
But BRI has another characteristic, patience. Their strategy is not for the short or the medium term. They are planning, at least, twenty or thirty years ahead. They know the returns of their investments won’t come until very deep into the twenty first century, and they are willing to wait. They were never in a rush to dominate the world, and they are not in a rush now. They saw the opportunity to create a great network of countries for the next century, and they went for it. They did it at a time where rich western countries did not pay attention. The rich world is absorbed by their own problems and they are currently incapable of prioritizing the most important ones. Europe and the US stopped playing their role as leaders of the globalized world. The Chinese government saw the opportunity and took it. They had the money and they were willing to wait. Their bureaucracy is faster and adapts to problems easier than the IMF and the WB, and they have become (or rather, are trying to become) the enablers of the next globalization.
Therefore, this is how the BRI finds itself a place in the international context, in a turmoil of debt and ungoverned countries where they are willing to invest. Only time will say if their bet was correct.
3.3. Short- and medium-term economic consequences
The construction of the infrastructure projects under the BRI will have direct effects: it will lower travel times and it will increase trade and investment. This are the first and most direct effects from the construction of all those roads, rails and ports. The estimates say that, along economic corridors, travel times will fall 12 percent from where they are now.
Foreign Direct Investment occurs when a foreign company establishes business operations in the country or acquires assets from the national companies. I already talked about the two branches that the initiative can be divided in: inland infrastructure and port infrastructure. Inland construction refers to trains, roads (and even pipelines), that shorten travel times in continental transportation. Then there are the maritime constructions, predominantly ports, that try to ease and speed up intercontinental travel, and develop new and better routes. This will create an entire new network of hubs and indirect effects that will develop by itself, finding new ways of traveling and reducing trade costs in ways that haven’t been thought out yet.
Building a railway or a road has an intrinsic value for the recipient country, making transportation between its cities faster and safer; but it also has spillover effects in the surrounding countries. These indirect effects can be expanded and perfected if countries work together to build an infrastructure that is interconnected in an efficient way, looking for a sound investment not only country wise but also region wise, and thus creating a better and more connected network (Baniya, 2019). Cross-border cooperation is necessary if countries want to take full advantage of their infrastructure investment.
In the rest of the world, travel times are estimated to fall by an average of 3 percent, showing how the access to better roads by a big part of the world will indirectly benefit the ones that are outside the agreements (WB, 2019). The net effect of the BRI on trade and FDI will be positive, but that does not mean that some countries, if nothing is done differently, will not suffer dire consequences. Some investments will not have enough positive effect to compensate for the debt burden. Also, these projects are expected to increase trade by between 2,8 and 9,7 percent for corridor economies and between 1,7 and 6,2 percent for the world.
The sectors that will be most beneficial are time-sensitive ones, like fruits and vegetables, as well as those that require time sensitive inputs, like electronics or chemicals. Those will be affected the most, due to the appearance of new opportunities to sell or produce in new places, plus the opportunities from leveraging the time differences and cost that will arise.
On another note, FDI inflows are estimated to increase by 7,6 percent for low income corridor economies (Xiaojang, 2018). Usually, they see an opportunity to do profitable operations because the expectations about that country or company rise. This means that the national company is receiving money because it has built international trust and has now resources that they can invest in things like innovation and development.
Increase trade is expected to increase global real income by between 0,7 and 2,9 percent, for the world economy. In BR corridor economies, the increase is expected to range between 1,2 and 3,4 percent. In addition to this, the indirect effects of the increment of the FDI inflows could further boost these effects.
In Western China, a part of the mainland that is usually discredited as the most underdeveloped and whose citizens are heavily discriminated in big cities like Beijing or Shanghai, will also be affected. They are likely to experience large gains in real income due to the construction work that will be done in that area. Cities like Urumqi fall under this category. In other countries like the Kyrgyz Republic, cities like Osh and Bishkek, that already account for more than 40% of national income, will also see an important rise in real income.
Estimating these effects with precision is a rather difficult task, especially due to the complexity and heterogeneity of the initiative, the uncertainty surrounding many of the projects planned, and the lack of transparency in access to data. With that said, the gravity models used for the data shown in this report are the most recommended and the ones capable of obtaining the most accurate results.
Income gains will not be equally distributed across countries. In countries like the Kyrgyz Republic, Pakistan and Thailand, real income gains could be above 8%. In other places the results won’t look quite like that. Countries like Azerbaijan, Mongolia and Tajikistan could experience negative welfare effects, due to excessive infrastructure costs related to gains from trade and new commerce (de Soyres, 2018). In the later countries, better results would only come if the investment in infrastructure is linked with the necessary policy changes and improvements. Sound institutions that assure a good environment for foreign companies will yield much better results for everyone involved.
BRI transport projects are expected to contribute lifting 7,6 million people from extreme poverty and 32 million people from moderate poverty. Those are not negligible numbers. Apart from all the economics and politics involve, data like this cannot be taken out of decision making when western countries fear the loss of control and try tirelessly to portray the initiative as harmful for world development. Depending on the data we look at, we will get different conclusions.
3.4. Long term effects. Shift of the economy towards Asia.
Reducing trade costs by building infrastructure and creating the necessary framework for investment in low and middle income countries has the potential to reshape economic geography within and across countries. The economic balance will shift from the Atlantic to the Pacific, from the early developers of capitalism to the later contestants in the economic sphere. In fact, one could argue that this shift of attention has already happened. Big opportunities are no longer in Europe or the US, but in China and the countries under its umbrella.
Only after time has passed will we be able to see the real impact in the livelihoods of the people that lie along the corridor. It will be of great importance the free movement of people and workers across countries, if they want to spread the gains between the people that live in the villages and cities all over those countries. Legislation in favor of exchange of workers to balance and allow the transition of workers from the places with the most need for labor and out of the zones that needed it the least. A spatial analysis of Central and South Asia finds that, for example, real incomes in Pakistan could further benefit from urban agglomeration and increasing returns from the manufacturing sector.
Europe and the United States will have a choice to make. To stay quiet and wait for the opportunity to pass through, or to try to adapt and innovate by finding ways to involve Europe, its services and construction companies, and help them export to these countries. Nevertheless, the way in which we involve in business in these countries cannot continue to go in the same direction (Gilsinan, 2020). Europe is creating weak institutions and fake agreements (pure legal and bureaucratic literature that doesn’t translate into reality) in which the mere fact that there is European participation is enough to attract these lesser developed countries. That is no longer the case. If Europe’s goal is to have fruitful and lasting relationships with these countries, it should let elitism in international matters at home, and come to these countries with eyes wide open. Europe needs to listen carefully to understand their needs. European institutions should not go to these places already thinking they know what low income countries want. This will not result in any real collaboration.
