Why China’s ‘One Belt, One Road’ plan is doomed to fail-Eerie
similarities with Japanese scheme 20 years ago suggests a future of white
elephants, wasted money and corruption on a scale never seen before
Facing
a deep slowdown after years of investment-fuelled growth
that culminated in a huge property and stock market bubble, the leaders of
Asia’s largest economy come up with a cunning plan. By launching an initiative
to fund and construct infrastructure projects across Asia, they will kill four
birds with one stone.
They will generate enough
demand abroad to keep their excess steel mills, cement plants and construction
companies in business, so preserving jobs at home. They will tie neighbouring
countries more closely into their own economic orbit, so enhancing both their
hard and soft power around the region. They will further their long term plan
to promote their own currency as an international alternative to the US dollar.
And to finance it all, they will set up a new multi-lateral infrastructure
bank, which will undermine the influence of the existing Washington-based
institutions, with all their tedious insistence on transparency and best
practice, by making more “culturally sensitive” soft loans. The result will be
the regional hegemony they regard as their right as Asia’s leading economic and
political power.
Consistent political will is needed
to ensure one belt, one road initiative succeeds
If you think you’ve seen
this movie before, you probably have. That could be an outline of China’s “One
Belt, One Road” initiative, launched last year to great fanfare, and
relentlessly promoted by loyal officials ever since. But it’s actually a
description of a strikingly similar plan rolled out by Japanese prime minister
Keizo Obuchi in the 1990s. That too promised to provide work for Japan’s
recession-hit construction sector by building Japanese-funded infrastructure
projects around Asia. And it even included a proposal – never realised – to
establish an Asian Monetary Fund to lend to regional governments on easier
terms than either the IMF or World Bank.
Unfortunately for Beijing,
the precedent is hardly encouraging. From the start the scheme was plagued by
bickering over conditions and allegations of corruption. A handful of
infrastructure projects did get built, but the reality fell woefully short of
Tokyo’s grandiose dreams. Far from cementing Japan’s economic ascendancy across
Asia, the project left a legacy of bad blood, and marked the beginning of a
financial retreat from around the region that Japan has only recently begun to
reverse.
All the signs are that
China’s One Belt, One Road plan will similarly fail in its main objectives.
First, the idea that infrastructure projects in Central and South East Asia
could absorb a sizeable portion of China’s excess industrial capacity is simply
unrealistic. Consider steel. Currently China’s steel mills can turn out some
1.1 billion tonnes of the metal annually. Yet even with economic stimulus
efforts in full swing, no one expects domestic demand to exceed 700 million
tonnes this year. It is hard to imagine China building enough roads, ports and
pipelines across Asia to use up the extra 300 million tonnes of capacity,
especially when you consider that the World Steel Association forecasts demand
in the European Union, the world’s largest economy, to be just 150 million
tonnes this year.
China’s one belt, one road initiative
set to transform economy by connecting with trading partners along ancient Silk
Road
Beijing could try. But if it
did, it would run into another problem. Asia needs infrastructure development,
but the region’s capacity to absorb new projects is limited. As China has
learned at home, building a new high speed rail line or state of the art
airport is easy enough given plentiful funding. But building a high speed rail
line that is economically viable is altogether more difficult. Inevitably, if
Beijing attempts to pursue projects at a pace and in a number sufficient to
make a dent in its excess capacity, it will end up building white elephants,
wasting money, and encouraging corruption on a scale never before seen.
China’s one belt, one road plan
covers more than half of the population, 75 per cent of energy resources and 40
per cent of world’s GDP
These constraints mean
China’s ambition of using lending tied to the One Belt, One Road initiative to
help promote the yuan as Asia’s international currency of choice is also
destined to fail. What policy-makers had in mind was something akin to the Marshall
Plan, by which the United States pumped money into Western Europe in the late
1940s to fund post-war reconstruction, so confirming the US dollar’s position
as the world’s dominant reserve currency. But 1940s Europe was very different
from Central Asia today. Europe’s physical infrastructure may have been
destroyed by war, but its know-how and institutional strength in depth were
largely intact. Rebuilding on such foundations was relatively straightforward.
Law firms work on ways to mitigate
stakeholders’ risk in belt-road cross-border deals
Developing Asia’s
foundations are still under construction. But while physical capital like a new
port or railway can be built in just a few years, building the human and
institutional capital that allow that port to operate efficiently and to
contribute effectively to economic and social progress is a slower process. The
two need to go hand in hand, which is why multi-lateral lenders like the World
Bank lay such heavy stress on best practice. The senior officials charged with
implementing China’s grand plan appreciate these capacity constraints, and
appear to be scaling down their ambitions. That’s sensible, but it means the
One Belt, One Road initiative will fall far short of its original objectives,
just as its Japanese forerunner did almost 20 years ago.
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