In the latest edition of Foreign Affairs, Oriana Skylar Mastro writes that China’s Belt and Road Initiative (BRI) is being financed via loans given to developing countries “without the usual Western strings attached.” She’s correct insofar as the structure and purpose of Chinese development loans are fundamentally different than those provided by wealthy western nations. However, these “strings” are identified in her essay as “requirements for market reforms and better governance.” The details of these “reforms” and the definition of “better governance” are to be assumed by the reader; strings are attached to western aid via the International Monetary Fund (IMF), but not always for the purpose of improving civil society or progressive economic reforms.
The Belt and Road initiative, spanning 62% of the world’s population and 75% of its economic output, has been called “the largest investment in human history.”
While the project revolves largely around the financing of large infrastructure programs, many in the US and Europe (as well as some politicians in East Asia) have characterized the expansive project as a malevolent Chinese Trojan Horse, using investment as a ruse to gain political leverage.
Furthermore, criticisms are lobbed at China for seemingly throwing poor countries into unsustainable mountains of debt, ostensibly for the purpose of bolstering Chinese political leverage. Some of these criticisms are justified, but there is little reason for one to assume that allowing the US and the IMF to remain the sole proprietor of economic aid is necessarily good for the developing world.
In March of 2018, then-Secretary of State Rex Tillerson claimed that China’s “predatory loan practices” were pushing developing nations to “undercut their sovereignty.” The Financial Times writes that “some countries have also complained about neo-colonialism.” This might be the case, but China wasn’t the first to be accused of using economic warfare to achieve high levels of political power.
When Indonesia (now party to the BRI) was pressured by the IMF to sign a bailout agreement, economist Joseph Stiglitz writes that the nation’s president “was being forced, in effect, to turn over economic sovereignty of his country to the IMF in return for the aid his country needed…much of the money went not to help Indonesia but to bail out the ‘colonial power’s’ private sector creditors.” This is due to the IMF prioritizing the payment of debt rather than using aid money to invest in the economy; in other words, escaping recession by financing growth (investing in infrastructure would be one way to do this).
Stiglitz continues: “…as a condition of receiving [aid] money, the countries experienced a form of Western domination as bitter as the old colonialism – conditions would be imposed to get loans, which typically included fire sale privatizations of the country’s assets, turning them over to western companies at bargain prices.” This helps contextualize complaints over Chinese seizure of assets due to repayment, such as the Hambantota port in Sri Lanka.
Loss of sovereignty via IMF loans can come in many forms, such as the passage of specific pieces of legislation through a country’s parliament. In the case of South Korea, who turned to the IMF as a last resort in the midst of the East Asian financial crisis, was forced to restructure its central bank. Not only was it allowed more independence, it was told to focus exclusively on inflation rather than unemployment. Stiglitz, also a former World Bank economist and participant in the South Korean bailout project, writes: “South Korea’s economists knew that the policies being pushed on their country by the IMF would be disastrous…Korean officials reluctantly explained that they had been scared to disagree openly. The IMF could not only cut off its own funds, but could use its bully pulpit to discourage investments from private market funds by telling private sector financial institutions of the doubts the IMF had about Korea’s economy.” The measures did prove disastrous; not only was central banking manipulated by the IMF, a credit freeze was imposed, draining domestic industries of funds from financial institutions. Song Jung Tae, a journalist at the Korean Herald, wrote at the time: “more than 90% of construction companies (with combined debts of $20 billion to domestic financial institutions) are in danger of bankruptcy.”
Indonesia was forced to repeal subsidies for food and kerosene, which largely benefitted the nation’s poor and hungry. The result was almost two weeks of rioting and the murder of businessmen and their families. When an external entity can force upon a nation the passage of legislation and the sale of public assets, there exists a strong case that sovereignty has been compromised.
Entwined with criticisms of sovereignty loss are those of excessive debt. Colum Lynch at Foreign Policy charges China with “imposing unsustainable debt burdens on poor countries.” World Bank economist Michele Ruta lectured developing countries “to balance the need for these development projects with the vulnerabilities created by increased debt levels.”
The west, however, hasn’t taken the lead on debt relief. In the case of Indonesia and Pakistan (the latter of which is the largest recipient of BRI aid) IMF loans weren’t forgiven even after the governments which had originally taken out the loans were deposed. In the case of South Korea, much of their debt was held by banks. The IMF pushed South Korea to raise its interest rates, which pushed more and more banks into positions where loan repayment was impossible. South Korea’s recession deepened, and the country experienced a flight of capital which made a bad situation even worse.
Argentina, after taking on large quantities of sovereign debt, experienced a deep crisis beginning in 2001. Much of this debt was taken out by western and American hedge funds, who refused to have the debts go unpaid. According to Stiglitz, “hedge funds that had bought Argentinean bonds after Argentina had defaulted, paying cents on the dollar, and were now trying to collect as if they had been the ones who originally lent to Argentina. (Worse, they took advantage of a quirk in the law to try to get interest in what they had not been paid at rates far, far in excess of the market rate).” These practices add a sick irony to the fact that the Trump administration “has already made it clear it will not back any IMF rescue that might serve simply to help its recipient pay off debts to Beijing.”
Finally, China has been criticized for the scarcity of details on its lending policies. Economist Ricardo Hausmann condemns “China’s practice of keeping financing terms secret from the society that is ultimately responsible, and often from that society’s government.” The IMF itself, apparently finding a conscience now that it’s monopoly on lending is being compromised, issued a critical statement on the Belt and Road Initiative, stating “Greater debt transparency enables borrowers and lenders to effectively evaluate the sustainability of public debt and monitor emerging risks.”
Again, China is not breaking new ground in this regard. As a World Bank economist, Stiglitz wrote that citizens of countries receiving aid from the fund “were not only barred form discussions of agreements; they were not even told what the agreements were. Indeed, the prevailing culture of secrecy was so strong that the IMF kept much of the negotiations and some of the agreements secret from World Bank members even in joint missions!” So much for “monitoring emerging risks.” Perhaps from now on, the Fund can begin by setting positive example.
There is no shortage of legitimate criticism of the Belt and Road initiative. Many of the financed projects will be for oil and gas infrastructure; this comes at a time when such investment is the last thing the human race needs (it should however be noted that China is the world’s leader in issuing Green Bonds and is constructing the world’s largest solar farm in Pakistan.) A loss of sovereignty for economic reasons, regardless of which actor is precipitating it, is always questionable, and the use of Chinese labor means developing nations are missing out on opportunities to give more work to their own blue-collar workforce.
While the maintenance of a critical eye when reviewing this titanic project is a must, the west can’t offer comment without a little bit of self-reflection first. The attachment of “those usual Western strings” have never implied an overall improvement for a receiving nation.
Photo: hans-johnson