China’s belt and road plan is a lesson for the West in how to reframe the global growth model, to focus on infrastructure for the developing world

  • Andy Xie says Western foreign aid focuses on poverty alleviation and is misguided. The West has been sensitive about China’s belt and road plan, when it should see the merit of giving billions in infrastructure aid to the developing world
PUBLISHED : Friday, 30 November, 2018, 1:31am
UPDATED : Friday, 30 November, 2018, 6:17am

When the latest Apec summit ended without the traditional communique for the first time, it looked like another casualty of the Sino-American trade war. But the host country, Papua New Guinea, has emerged as a clear winner in these tricky times. To keep up with China’s infrastructure push into developing countries, the United States and Australia are also giving Papua New Guinea infrastructure aid.

Western foreign aid has gone down the wrong path in the past two decades, as multinational aid agencies like the World Bank shift priorities from infrastructure investment to poverty alleviation. As good as poverty alleviation sounds, it often, in effect, traps people in poverty. Without massive capital formation, no country can rise above poverty; yet, capital formation is not immediately profitable. For most developing countries, massive foreign aid – in the form of the US’ Marshall Plan or China’s Belt and Road Initiative – is necessary.

The West has been so sensitive about the belt and road plan, precisely because it is that appealing to the developing world. Consider the alternative: how disastrous a misguided foreign aid policy has proved, for Europe and the US. Refugees from the Middle East and North Africa have flooded into European countries, while central American migrants are heading towards the US. Migration has been politically destabilising, giving rise to right-wing extremism in both Europe and the US. The West should be thankful for projects like the belt and road plan, which could stabilise its borders.

Why China’s investment in Africa might not be so smart

Instead, Western governments and media have portrayed the belt and road strategy as a cunning Chinese scheme to trap aid recipients in debt and control them through leverage. This story ignores the fact that sovereign borrowers rarely pay off foreign debts, and that the most severe punishment is being shut out of the international capital market for a few years. But, all the while, the physical assets on the ground are lifting the borrowers.

Even if a borrowing country chooses to give up control of an asset to China, there is still some benefit for the borrower. China would want to make the asset work, so it could reap some return on its investment. When the asset becomes productive, it boosts the local economy. The bottom line is that some stuff on the ground is better than none.

Could the Belt and Road Initiative be improved upon? Certainly. A country’s development must start with a plan, especially for infrastructure and urbanisation; China should integrate its foreign aid into the plan. As foreign aid projects tend to be stand-alone or to further political objectives, the money is not deployed efficiently. An upstart in the field, China isn’t likely to impose tough conditions on countries receiving its money. It should work together with the West, to formulate a more coherent carrot and stick approach. But first, the West must recognise that China should be a major player, possibly the most important one, in the game.

How can the West make its migration crisis go away? One solution is successful development in Africa and Latin America. But development should be compatible with environmental quality. If coal has to be burnt to bring millions of people into the industrial age, human civilisation might not have much of a future. China has not thought through its belt and road initiative. It would not be in Beijing’s interests to push ahead with the plan in its current form, coal-powered plants and all. Instead of fossil fuels, nuclear and other renewable energy sources should be the mainstay. For everyone’s sake, all rich countries should invest in new energy sources.

If China’s belt and road is ‘imperial’, what about Pax Americana?

Considering the infrastructure needs of the developing world and the urgency to develop new energy sources, massive resources are needed. China is spending about 0.5 per cent of its GDP on the Belt and Road Initiative over a decade. All rich countries should set a similar target: the world can afford to give US$300 billion, a thimbleful of its GDP, in foreign aid every year. This is not a crazy amount – not in times when the US government can pass an unnecessary US$1.5 trillion tax cut to boost the economy.

The world is in a state of flux. Economic growth can’t solve all problems. Political extremism is rising everywhere. Maybe it is time to rethink the economic model. Sustainability should become more important than growth. Solving problems through growth is a risky strategy. For example, since 2008, major countries have piled up more and more debt just to sustain modest growth. Debt-led growth seems to be inefficient and poorly distributed, fanning extremism and instability. As soon as growth slows, another debt crisis might bring down the world economy. That day could come soon.

If another crisis hits, countries might fall back into the dangerous game of blaming other people or countries. Trade disputes could escalate into military conflicts, repeating the catastrophe of a century ago. One way out is to unite major countries in a new endeavour to solve the world’s problems: US$300 billion in foreign aid per year could just be the ticket.

Andy Xie is an independent economist