The Belt And Road Initiative And The Global Economy: Volume I – Trade And Economic Development 3030280292, 9783030280291, 9783030280307

Table of contents :
Preface......Page 6
Contents......Page 10
1 Introduction......Page 11
Bibliography......Page 22
2.1 Introduction......Page 23
2.2 China’s “Going Out” Policy......Page 26
2.3 The Washington Consensus......Page 30
2.4 The Beijing Consensus......Page 37
2.5 A State-Led Development Paradigm......Page 40
2.6 Globalization with Chinese Characteristics......Page 43
2.7 The Chinese Dream and the Community of Common Destiny......Page 46
2.8 Conclusion......Page 50
Bibliography......Page 53
3.1 Introduction......Page 57
3.2 Processes and Progress of Economic Development......Page 60
3.3 Growth Theories of Economic Development......Page 64
3.4 Stages of Economic Development......Page 66
3.5 Comparative Advantage, Globalization and Economic Development......Page 69
3.6 Diversification Versus Specialization......Page 74
3.7 Creative, Destructive and Defensive Innovation......Page 76
3.8 China’s Transformation Towards High Technology......Page 80
3.9 Strategies of Economic Development......Page 82
3.10 Conclusion......Page 84
Bibliography......Page 87
4.1 Introduction......Page 92
4.2 Intensified Development Through Integration......Page 93
4.3 International Trade and Globalization......Page 98
4.4 Trade Through Complementarities and Competition......Page 102
4.5 Global Trade and Gaps in Development......Page 105
4.6 China’s Global Trade Relationships......Page 107
4.7 Conclusion......Page 108
Bibliography......Page 110
5.1 Introduction......Page 113
5.2 Infrastructuring for Economic and Social Development......Page 116
5.3 The Backward and Forward Linkages......Page 124
5.4 The Elimination of Bottlenecks and the Construction of Infrastructure......Page 128
5.5 Regional Integration Through Infrastructure......Page 129
5.6 Financial Deepening and Economic Development......Page 131
5.7 Cost-Benefit Analysis and the Viability of Projects......Page 136
5.8 Conclusion......Page 138
Bibliography......Page 140
6.1 Introduction......Page 143
6.2 The Northern Sea Route......Page 147
6.3 Europe and the Euro-Asian Connection......Page 150
6.4 The Quadrangle of East Asia: China, Japan, Korea and Russia......Page 154
6.5 The South-East Asian Region......Page 159
6.6 South Asia and the China–Pakistan Economic Corridor......Page 161
6.7 The Middle East......Page 167
6.8 The African Continent......Page 168
6.9 The South American Hemisphere......Page 169
6.10 Conclusion......Page 170
Bibliography......Page 172
7.1 Introduction......Page 174
7.2 The Asian Infrastructure Investment Bank (AIIB)......Page 176
7.3 The Shanghai Cooperation Organization (SCO)......Page 181
7.4 The Bretton Woods Institutions: The IMF and the World Bank......Page 185
7.5 The World Trade Organization (WTO)......Page 193
7.6 The BRICS: Brazil, Russia, India, China and South Africa......Page 200
7.7 Conclusion......Page 206
Bibliography......Page 209
8 Conclusion......Page 213
Bibliography......Page 215
Postscript: Prospects and Challenges......Page 216
Bibliography......Page 217
Index......Page 218

Citation preview

John Joshua

The Belt and Road Initiative and the Global Economy Volume I – Trade and Economic Development

The Belt and Road Initiative and the Global Economy

John Joshua

The Belt and Road Initiative and the Global Economy Volume I – Trade and Economic Development

John Joshua Shui Mu Shan Cheng Fushun, Liaoning, China

ISBN 978-3-030-28029-1 ISBN 978-3-030-28030-7  (eBook) https://doi.org/10.1007/978-3-030-28030-7 © The Editor(s) (if applicable) and The Author(s) 2019 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

For Feng Yan with much appreciation

Preface

These two volumes of The Belt and Road Initiative and the Global Economy use an eclectic approach which combines economic theories with economic history and international relations as such themes are interrelated. The first volume of The Belt and Road Initiative and the Global Economy will discuss international trade and economic development, while the second volume will discuss the changing International financial system and the implications for the global economy. The first volume starts off with an analysis of the economic policies regarding the Belt and Road Initiative (BRI) as such policies direct the purpose and aim of the BRI. It will describe China’s ‘going out’ policy, the Washington consensus, the Beijing consensus and the state-led development paradigm. This leads into a discussion of globalization with Chinese characteristics. Chinese policies are an attempt to actualize the Chinese dream and the community of common destiny. After a detailed analysis of Chinese policies, the first book will proceed with an analysis of various theories of economic development which relate to the BRI, especially in regard to theories of economic growth, comparative advantage and globalization. Arguments about diversification versus specialization, creative destruction and defensive innovation, and China’s transformation towards high-technology will then follow. Subsequently, the importance of the BRI towards regional integration and trade is explained, especially how integration of regions can intensify economic development. It is argued that various gaps in economic development have to be overcome if economic development is to succeed. vii

viii  

PREFACE

China’s changing global trade relationships are also described. After a detailed analysis of the theories underlying economic development, the book will proceed to discuss how the construction of infrastructure enhances economic growth and development, as well as social development. A discussion on the backward and forward linkages highlights the importance of infrastructure which can be used to eliminate various bottlenecks which may impede economic development. The importance of financial deepening to economic development has been pointed out; however it has been explained that speculative investment is likely to be unstable for economic growth and development. The assessment of any viability of projects is important to the successful implementation, however, such cost benefits analysis have to go beyond the economic terms of the actual projects, bust instead have to include an assessment on the political risks and viability of the projects as well, as such political risks may override any projects, even though they may be economically feasible. A detailed description of most projects and their economic contribution will be provided. There are separate sections on every geographic hemisphere where projects of the BRI occur; however, the BRI in this book expands across all continents, accept the Antarctic. They have all been included as they will have a direct impact on the operation and functions of the BRI. The separate sections will discuss the Northern Sea Route, Europe and the Euro-Asian connection, the quadrangle of East Asia: China, Japan, Korea and Russia; the South-East Asia region, South Asia and the China-Pakistan Economic Corridor, the Middle East, the African Continent, and the South American Hemisphere. The international financial organizations will have considerable influence on the successful implementation of the BRI, so that such international institutions are analyzed as well. There are separate sections on the Asian Infrastructure Investment Bank, the Shanghai Cooperative Organization, and the Bretton Woods Institution: the International Monetary Fund and the World Bank. The World Trade Organization is also discussed in details, as well as the international organization of the BRICS: Brazil, Russia, India, China and South Africa. At the end of the first volume is a postscript which highlights the prospects and challenges of the BRI. The second volume begins with an analysis of the changing international financial system. There is a detailed discussion on the international reserve currencies and exchange rates. Subsequently, the financial crisis of 2008–2009 is discussed in details and is seen here as a precursor to

PREFACE  

ix

reforms. This is followed will arguments about the eventual internationalization of the RMB. The decline of the American dollar is also analyzed in details. The decline of the American dollar and the internationalization of the RMI are the inevitable consequence of the global shift of economic and financial power which is analyzed in great details. Economic Growth has a considerable impact on the environment. Hence, the consequences of international economic growth on the environment are discussed as well. The conflicts between trade liberalization and environmental degradation and health are discussed. Trade policies and the political decision-making process are investigated for their effectiveness in the protection of the environment. Policies on renewable energy and energy security and their ramifications are also discussed. The effect of the BRI on China’s domestic economy is analyzed in great details, including how the BRI creates new markets and investment opportunities, which after all was the initial aim of the BRI. Hence, the BRI is especially discussed in relation to China’s economic growth, and subsequently how it will affect the economies of the participating countries as well as the global economy overall. China is moving towards the innovation frontier which will also have an effect on China’s exports and so will affect the globalization of China’s economy. However, the benefits accruing from the BRI are not expected to be equally distributed. Following an analysis of the impact of the BRI on China’s domestic economy, the effects of the BRI on the domestic economies of the participating countries will also be discussed. There are separate sections on China’s trade and investments within the African continent, China’s trade within Eurasia, China’s investment and trade in Europe, the interrelationship within the quadrangle of East Asia: China, Japan, Korea and Russia. China’s effect on the economies of South-East Asia and the implications of China’s trade with South Asia, the Middle East and South America are also described. The present shift of economic power towards the emerging economies is explained in details; especially the important role that is taken by the BRI in this process, so that the BRI is expected to have a significant impact on the global economy which is likely to lead towards an economic transformation on a global scale. An analysis will follow about various arguments on convergence versus diversification. The gravity model and its relationship to regional economic growth are analyzed in details. This is followed with a detailed analyzes about the flying geese paradigm and the leading dragon as well as the new global production networks.

x 

PREFACE

The BRI will have a considerable impact on international relations. The discussion on international relations begins with an analysis on trade dependence and political dependence. The BRI is seen here as a globalizing force which is creating a counter push by various nations which is analyzed in details. This leads us into discussions on the present thrust towards protectionism, policies of sanctions to maintain hegemony, and multiple trade disputes to prevent China from rising. The discussion on the arising disputes in international relations regarding the BRI is then followed up with arguments about how nations rise and fall. There is an historical perspective on the rise and fall of nations, followed up with an analysis about the current shift in global power which leads to an increase in military expenditure. However, the shift in global power may be seen as the consequence of failed ideologies and economic policies. Finally, a postscript is provided which points to the present shift in global power and its prospects and challenges. The BRI is intended to put the Chinese dream into practice. However, it has to incorporate the aspirations and hopes of the participating nations as well if the BRI is to succeed. Many participating economies of the BRI require bottlenecks releasing investments rather than just the construction of infrastructure to enable the extraction of raw materials to prevent the occurrence of a resource curse and the BRI has to be coordinated amongst those countries involved. The BRI is expected to transform the geopolitical and geostrategic international relations and so is likely to change global governance. Western economies are in decline and so require structural changes to their economies to lead to a paradigm shift to create a sustained economic development, a shift away from neoliberal ideology. The growing importance of the Beijing Consensus will have economic as well as political ramifications; consequently the Washington Consensus is in decline. The world is moving from a unipolar towards a multipolar world order. The global economy is at a turning point and the horizon is constantly shifting; such a shift constitutes opportunities for change but when such opportunities are mismanaged, unexpected dangers will develop. The world is moving in interesting times, full of challenges and prospects; but without challenges there cannot be any worthwhile prospects either. Prospects will depend on how well such challenges are being managed. Fushun, China

John Joshua

Contents

1 Introduction

1

2 Economic Policies, Paradigm Shifts and Their Implications

13

3 Economic Development and the Belt and Road Initiative

47

4 Regional Integration, Trade and the Belt and Road Initiative

83

5 The Development of Infrastructure and Economic Growth

105

6 The Projects of the Belt and Road Initiatives 135 7 International Financial Organizations and the BRI

167

8 Conclusion

207

Postscript: Prospects and Challenges 211 Index 213 xi

CHAPTER 1

Introduction

This is the first volume which deals with the BRI, its multiple projects and its contribution towards economic development and the international implications in international trade and international financial institutions. This book does not just provide a description of the multiple projects of the BRI, but instead integrates various theories of economic development with the practice of the BRI, so that theories of economic development have been discussed in great detail to explain the importance of the BRI to economic growth. Volumes I and II go far beyond the Ancient Silk Road because the present BRI has greater implications in economic and geostrategic and therefore in political terms, especially as it spreads across all continents; for example, it includes huge investments in South America and the African continent. Although the Ancient Silk Road has not been ignored, however the two volumes concentrate on the present BRI to highlight its importance in economic development in numerous economies and its impact on international relations. The importance of the Ancient Silk Road has been explained but to emphasize its role too much would distract from the importance of the present BRI. Instead, both volumes concentrate on the current BRI as a precursor to a shift from a unipolar towards a multipolar world order. The present Silk Road Initiative goes back to the 1970s, including various projects which have become of the BRI. The “go out” policy to find raw materials required for China’s growth of her domestic economy has © The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28030-7_1

1

2

J. JOSHUA

been formulated first during the 1990s eventually also contributed to the present BRI. China’s “going out” policy was first announced in 2001 to find markets in other countries for China’s exports. Hence, the Tenth FiveYear Plan (2001-05) also contributed significantly to the creation of the present BRI. Other Five-Year Plans, such as the Eleventh Five-Year Plan (2006–2010) and the Twelfth Five-Year Plan (2011–2015), also elaborated further on the potential of a future BRI. These two volumes analyse the Belt and Road Initiative (BRI) to explain its importance within the Global Economy. The first volume will analyse trade and economic development in regard to the BRI, and the second volume explains the changing international financial system and the implications of such changes. The analysis cuts across multidisciplinary fields, especially as economic decisions are made within a political framework which has legal as well as social implications. Even though these two volumes are primarily concerned with the economic ramifications of the BRI, the political, sociological and legal implications will be analysed in detail as well. An analysis of the BRI from only one aspect would be only a partial and therefore a limited perspective, so that a multidisciplinary approach is taken to provide a more comprehensive understanding of the functions and operations of the BRI. These two volumes also discuss in-depth various economic theories which relate to economic growth and economic development to explain how various economic development theories relate to the BRI; in other words, the theoretical discussions explain how various economic theories actually are implemented in practice; so that there is a reciprocal relationship between theory and practice. Many of the countries which are part of the BRI have different economies and relate to each other in multiple ways, so that the economic conditions of the participating countries have to be considered before appropriate economic theories can be applied. There is no one single economic theory that is applicable to all countries equally. There are no economic theories which can be adopted without taking account of the specific economic conditions of all participating countries; hence, there is “no one size fits all” so that economic theories have to be adapted towards the economic conditions of specific countries. The BRI is a global phenomenon so that its implications for the global economy cannot be discussed without relating it to the operation and reform of the international financial system and how it will be able to promote international trade and economic growth and development, including China’s international trade relations and how the progression of the BRI

1

INTRODUCTION

3

will affect the economies of China, of the participating countries and the global economy as a whole. If the BRI will be successfully implemented, it will have a considerable impact on the rise and fall of different economies. This will lead eventually towards a new world order in economic as well as in international relations. Hence, it is essential to discuss economic and financial theories in detail before the BRI can be assessed properly. The implementation of the BRI is essentially a multinational project on a global scale to enhance the interconnectivities between people and economies, so that the infrastructures to promote such interconnectivity are fully described and assessed. China is an emerging power and through the implementation of the BRI China is at the forefront of globalization while declining powers are trying to erect tariff walls. The implications of a successful implementation of the BRI will be discussed at length in this book which goes beyond a mere description of the projects of the BRI and economic development of the participating countries; so that it analyses the possible international economic and political consequences on a global scale as well. However, various policies of countries which are opposed to the BRI may attempt to interfere with the successful implementation of the BRI together with the political consequences of a successful implementation of the BRI will be discussed as well; although such scenarios including their outcomes are difficult to predict. The function and implications of the BRI are of greater importance than its name. The BRI is to facilitate the interconnectivity between nations, so that the BRI referred to in this book is considerable wider than the ancient Silk Road and the purpose of it has extended now to almost all continents. Hence, the BRI as regarded in this book is wider than the conventional conception of the Silk Road but extends across the five continents. This book deals with Chinese projects on a global scale rather than just be concerned with those that are located within the geographical location of the ancient Silk Road; instead, it describes the construction of infrastructure on a global scale to enhance connectivity between countries. Furthermore, alternative routes such as the Northern Sea Route are also analysed as such routes are interrelated with the BRI. After describing various projects in multiple regions of the BRI, an analysis of how the development of infrastructure will lead to economic growth and development will follow (Chapter 8). The BRI will have profound implications for the global economies so that the international organizations of trade and

4

J. JOSHUA

finance will be discussed (Chapter 9) and the international financial institutions in relation to the BRI will be discussed (Chapter 10). Finally, the conclusion of Volume I will highlight the importance of the BRI to global trade (Chapter 11). The implementation of the BRI only illustrates such processes of transformation, and this book illustrates why this is the more likely outcome. However, there are opposing arguments as well, including the assumption that China will eventually collapse (Chang 2001). Chang (2001) argues that China has only five, and at the most ten years, before it falls. There is the misapprehension here that assumes that politics in China is static and so cannot adapt to new economic and political circumstances; however, much needed reforms have been implemented and more such reforms are likely to come. Chang proposed in 2012 that China will collapse in that year; however, now it is 2019 and China is going stronger than ever, even though China’s economic growth has slowed down to some extent. This book is followed up with a second volume which analyses in detail the consequences of the BRI, including the changing international financial system, its impact on international trade and economic development. The impact of the BRI on China’s domestic economy, the economies of the participating countries and its impact on the global economy will be analysed in great detail together with the effect on international relations. Below is a summary of each chapter of the first volume. Chapter 1 provides a detailed introduction to the first volume. This book integrates various theories of economic development with the practice of the BRI. Theories of economic development have been discussed in great detail to explain the importance of the BRI to economic growth. Regional integration through trade as it is occurring through the BRI is greatly discussed with a subsequent discussion of the requirements of various types of infrastructure to facilitate interconnectivity between the countries involved. The various projects of infrastructure have been described in detail. The first volume concludes with discussions on various international organizations of trade and finance together with the financial institutions in support of the BRI. Chapter 1 of the first volume provides an introduction which highlights the major themes of the first volume. Chapter 2 will discuss various economic policies and their implications which include a detailed analysis of China’s “going out” policy. China emphasized the promotion of exports but has now adopted a “going out” policy without neglecting

1

INTRODUCTION

5

exports. China has a relatively fast rate of economic growth and an increasing domestic consumption which require sufficient resources. Hence, this chapter discusses the importance of China’s “going out” policy to China’s further economic development. Policies of the Washington Consensus are compared and contrasted with the Beijing Consensus. Different policies to facilitate economic development will be explained. Arguments about state intervention within the economy may have to be reassessed. It will be argued that a state-led strategy of economic development can be integrated with a growing private sector; hence, a detailed discussion will be provided on state intervention in the economy and it will be argued that the BRI projects cannot be implemented without government initiatives; so that state intervention and government finance, especially in regard to the provision of infrastructure are required for any successful implementation of the BRI to enhance the connectivity between nations. Various appropriate industrial policies to transform developing economies will also be described. It is argued in this chapter that a paradigm shift may be required in theories of economic growth and economic development to promote sustainable economic development which essentially is multidimensional. The design of the appropriate policies requires a diagnostic analysis. Subsequently, the difference between initiation and the maintenance of economic growth will be discussed in detail. This then feeds into an analysis of globalization with Chinese characteristics and the Chinese policies on the implementation of the Chinese dream and the community of common destiny. China proposes a “community of common destiny” which will be addressed also in this chapter; specifically, how such projects are to be implemented. Various policies for the implementation of the Chinese dream and the aim to create a moderately prosperous society, including the effect on the distribution of income will be discussed in detail. A distinction will be made between economic growth and economic development. Chapter 3 will address various theories of economic development as they relate to the BRI. This chapter will discuss the processes and the progress of economic development and various growth theories of economic development. A distinction is also made between processes of transformation and processes of transition; that is, transformation assumes that the end of the process is unknown; whereas in the case of transition, the end of the process is known. It is argued that developing countries are engaged in

6

J. JOSHUA

processes of transformation rather than in transition; such processes will be explained in detail. Strategies of economic development also have to analyse the dualistic nature of developing countries as they generally have traditional and modern sectors and design policies accordingly. The importance of culture in the promotion of a sustained economic development will also be addressed. Processes of economic growth and sustainable development have to take into account the culture in which the economy is embedded. The multidisciplinary and multidimensional nature of economic development will be described in detail by referring to various countries which are part of the BRI, including various gaps that impede the economic development in those countries, such as the infrastructure gap, the integration gap and the income gap; the appropriate policies to reduce such gaps are also discussed. The BRI is expected to provide opportunities for economic growth and development in South Asia, South-east Asia, the Middle East, the Mediterranean, North Africa, East Africa, and South America as well as in China. Various economic theories underlying economic development have been explained; the classical and neoclassical growth theories will be described together with theories of the accumulation of physical and human capital and the contribution of technological change, together with an analysis of how such theories may explain economic development, especially in regard to the construction of the required necessary infrastructure. The stages and processes of economic development, including china’s change in comparative advantage and China’s move towards international markets, are discussed in detail. Different policies are appropriate at different stages of economic development. However, given the right policies and resources, stages may be skipped and the process of development may be accelerated. Economic development is seen here as a multiple-disciplinary process moving through multiple stages. The important arguments about diversification and specialization regarding economic development are explained, as well as the importance of innovation in economic development, that is, creative, destructive and defensive innovation. This leads towards a discussion of China’s transformation towards high technology, including China’s policy of “Made in China 2025”. Finally, strategies of economic development are investigated. China has become increasingly competitive through the application and innovation of various technologies. Distinctions are made between defensive and creative innovations and the effect on domestic and other

1

INTRODUCTION

7

economies together with a shift in competitive advantage. The effectiveness of learning by imitation and the shift towards a more innovative economy will be discussed. The contribution of innovation and new technologies has been analysed as well as its effect on international trade. The Heckscher–Ohlin model will be described together with theories of comparative advantage and how it relates to the BRI projects. Comparative advantage is constantly shifting because of technological change. It is argued that the Heckscher–Ohlin model is unable to explain the trade between high-income countries as the theory is based on differences in endowments between nations. Chapter 4 analyses processes of regional integration through trade and how economic development can be intensified through integration which is expected to be facilitated through the implementation of the BRI. The importance and consequences of trade creation and trade diversion are discussed followed with an analysis of complementarities and competition through trade. Gaps in economic development provide obstacles to global trade which will have to be closed before the BRI can be fully successful. The degree of integration largely determines trade; how gaps in integration can hamper trade has been explained in this chapter as well. The importance of the degree of openness and the institution gap has also been explained. Various other gaps in development such as the income gap, the infrastructure gap and the integration gap have also been explained and how they may hamper economic development. Subsequently, China’s global trade relationships are discussed. The Chinese-led BRI and the Russian-led Eurasian Economic Union (EAEU) have been described in detail. This leads to a discussion of how the Shanghai Cooperation Organization (SCO), the BRI and the Eurasian Economic Union (EAEU) may create a synergy. A detailed discussion is also provided about trade creation and trade diversion together with a discussion of how nations may climb the ladder of comparative advantage from the production of cheap labour-intensive goods towards capital-intensive and technologically advanced products. This is followed with a discussion on how revealed comparative advantage may be changed and how this affects a country’s market share. Export diversification increases with the level of technological development. The current trade structure of various countries which are part of the BRI as well as the ASEAN, South American, and African countries will be discussed, especially in regard to their trade with China. The trade flow between various countries will also be discussed.

8

J. JOSHUA

Chapter 5 will address how the development of infrastructure of the BRI can facilitate economic growth and economic development. The importance of backward and forward linkages for economic development and how such linkages may overcome handicaps of economic development are analysed. This is followed by a discussion of how the construction of infrastructure may also eliminate bottlenecks which impede economic developments and thereby may further regional integration. The contribution of financial deepening and of financial intermediaries towards economic development and economic growth is discussed. Financial development has a greater impact on economic growth during the earlier stages of economic development. The lack of finance is often a major obstacle for developing countries during the earlier stages of economic development. However, it is argued that complete unrestricted capital markets may not be conducive towards economic development when capital inflow is merely the consequence of speculative investments. Finally, the importance of a cost–benefit analysis to any assessment of the viability of projects is discussed; however, in projects as under the BRI, such analysis must not only consider economic factors, but have to include possible intangible factors, such as possible political risks as well. Presently the extent and quality of infrastructure are unevenly distributed amongst the countries which are affected through the BRI, so that there are numerous projects anticipated to enhance the connectivity between such nations. Once various infrastructures have been established, the countries involved with BRI are expected to increase their trade connections, especially with China. China produces over half of the steel in the world; uses a great amount of aluminium, copper and iron ore; and imports a huge amount of oil but has insufficient resources which it has to import. The intension is to create eventually a free trade area of more than 70 countries. As the construction of infrastructure spreads across multiple countries, they will have to be coordinated to optimize the degree of connectivity between nations. The land-based corridors and the Maritime Silk Road are referred to collectively as the Belt and Road Initiative (BRI) also known as the One Belt and One Road (OBOR). By 2018, over 100 countries and international organizations have become part of the BRI by signing agreements of participation and cooperation. The BRI began spreading initially from the Eurasian continent to the Middle East, to Africa, to the Caribbean, to the South Pacific and onto Latin America as far as Uruguay.

1

INTRODUCTION

9

Chapter 6 will address the contribution of the most important infrastructures towards economic development in different geographical hemispheres such as the Northern Sea Route; Europe and the Euro-Asian connection; the quadrangle of East Asia: China, Japan, Korea and Russia; South Asia and the China–Pakistan Economic Corridor; the Middle East; the African Continent; the South-east Asian Region; and finally the South American Hemisphere. Hence, the present and contemplated BRI goes far beyond the original Ancient Silk Road which has significant implications for global trade, international relations and global governance. The major projects of infrastructure to foster the required interconnectivity for the creation of trade in the countries which are part of the BRI on five continents will be described. As China already has better infrastructure than other countries which are at a similar income level or even above, it can contribute greatly to the construction of infrastructure through its previously accumulated experience. The BRI is a network of high-speed railways and linkages between multiple deep-water ports. Various projects have been outlined in this chapter which is subdivided into separate subsections describing the projects in particular geographical areas. (a) The Northern Sea Route from Cape Dezhnev to Murmansk across the Arctic Ocean from the Barents Sea in the West to the Bearing Strait in the East connecting the Atlantic to the Pacific Ocean. An anticipated gas pipeline between Sakhalin in Russia’s Far East and Hokkaido in Japan is also described. Other projects associated with the Northern Sea Route are also explained. The northern maritime route is in addition to the numerous RBI projects. (b) Europe and the Euro-Asian Connection: The Far East of Russia has vast reserves of natural resources, such as iron ore, platinum, zinc, manganese and coal. China has increased its links with Russia to obtain military technology and sources of raw materials, especially oil. Sakhalin and Siberia are expected to export gas to the Asian market. (c) The Quadrangle of East Asia: China, Japan, Korea and Russia: Future geopolitical change may be expected as the economic potential for the four countries are considerable if they join their economic forces.

10

J. JOSHUA

(d) The South-east Asian Region: Various projects of the BRI in South and South-east Asia will be described. The Bangladesh–China–India–Myanmar Corridor is expected to connect Kunming with Kolkata. The pipeline linking Yunnan with the Bay of Bengal together with the Kyaukpyu Special Economic Zone in Myanmar will also be described. (e) South Asia and the China–Pakistan Economic Corridor: Pakistan has great demand for electricity but a shortage of electric power; to narrow the gap between demand and supply of electric power will increase Pakistan’s economic growth and development. If India chooses not to participate in the BRI, it will be at a considerable economic cost to India. Chinese Overseas Port Holding Company operates the Gwadar Port and has a lease for 43 years. The Port of Gwadar is an important link between the two sections of the BRI, that is, the overland sector and the maritime section. The port of Gwadar in Baluchistan is expected to connect with Kashgar in Xinjiang. The Qinghai–Tibet Railway is also explained, as well as the construction of infrastructure by China in Sri Lanka. The Port of Gwadar is an important link between the two sections of the BRI, that is, the overland sector and the maritime section. (f) The Middle East: a future construction of an Iran-Syrian pipeline is expected to be extended through Turkey to Europe which will reduce the importance of the Petrodollar. Iran can then supply Europe with natural gas. Transport from the Middle East and Africa to China can then also avoid the Malacca Strait which may be too insecure from the Chinese perspective as the South China Sea serves as an important strategic trade corridor for China. (g) The African Continent: the Mombasa Nairobi Gauge Railway is also constructed at the moment in Kenya; the aim is to integrate East African regions. More infrastructures are being built between Djibouti, Kenya, Tanzania and Mozambique and the Red Sea and further to South-east Europe and central Europe. Such projects are expected to enhance economic development and regional integration. (h) The South American Hemisphere: the Bi-oceanic Rail Corridor between Brazil and Peru will be described as an alternative to the Panama Canal. The Two-Ocean Tunnel which is expected to connect Chile’s Pacific coast with Argentina’s Atlantic coast is also described. Various anticipated projects in Nicaragua and Venezuela will be explained.

1

INTRODUCTION

11

Chapter 7 will address the importance of international organizations of trade and finance and their contributions to the BRI. The chapter begins with a detailed analysis of the Asian Infrastructure Investment Bank (AIIB) followed with an analysis of the functions and operations of the Shanghai Cooperation Organization (SCO) as well as a discussion on the relationship between the SCO and the BRICS (Brazil, Russia, India, China and South Africa). The Asian Infrastructure Investment Bank is a multilateral development bank which was partly formed in response to the slow-moving changes within the World Bank and the IMF. The aim of the AIIB is to promote substantial economic growth and development, especially through the creation of infrastructure. The AIIB is more likely to provide finance for the large investment projects of the BRI than other international financial institutions. The Shanghai Cooperation Organization (SCO) includes China, Kazakhstan, Kyrgyzstan, Russia, Uzbekistan, India and Pakistan and was founded in 1996. The aim of the SCO is to promote economic development and military cooperation. Afghanistan, Belarus and Mongolia have observer status and Azerbaijan, Armenia, Turkey, Nepal, Sri Lanka and Cambodia are dialogue partners. The Bretton Woods Institutions: the organization and the functions of the International Monetary Fund (IMF) and the World Bank are analysed at great length, as well as other financial institutions, such as the China Development Bank Funds, the New Development Bank, the Silk Road Fund, the China–Africa Development Fund and the Export-Import Bank of China. The IMF quotas are reviewed every five years according to changes within the global economy. The IMF quota system was reformed in 2010 which caused a shift in quotas by more than 6% towards emerging economies and China is now the third-largest shareholder. It may be argued that conditions for loans imposed by the IMF may at times be inappropriate; the poorer the country, the more detrimental the effect of the imposed IMF programme is likely to be. The importance of reserve currencies will also be analysed. The transformation of the exchange rate regime is also described, including the SDR system. The yuan has become now part of the IMF global currency basket since 2016. The increasing importance of the yuan is also discussed together with an analysis of China’s exchange rate regime.

12

J. JOSHUA

The functions and operations of the World Trade Organization (WTO) and the World Bank are analysed, including how it affects China’s economy and its trade relationships with other countries. The structure of their governance will be explained together with the decision-making process. After 15 years of negotiations, China was finally admitted to the WTO in 2001 and the consequences for China’s economy and China’s trade relations with other countries are described in this chapter. The BRICS organization of Brazil, Russia, India, China and South Africa has also been discussed at great length, including a detailed discussion on possible future changes to the functions and operations of the BRICS organization. The BRICS contributed about 40% to global economic growth since 2000. The share of BRICS’s exports has increased from 3% in 1990 to 19% in 2011 and is expected to increase further. However, a more coherent approach towards economic development is required to form a multipolar world order. The membership of the BRICS is expected to expand, most likely with Tajikistan, Mexico, Thailand and Egypt to form the BRICS Plus countries. Others are expected to join eventually. Chapter 8 provides the conclusion to Volume I and highlights the major themes of each chapter. At the very end there is a proscript which highlights the prospects and challenges for the BRI. To write this book is a welcome challenge because the global trade relationships are changing at a rapid speed, especially as we are moving away from a unipolar towards a multipolar distribution of economic and political power. When starting to write this book, the BRI had over 70 signed up members, whereas at present it has over 100 countries and international organizations have signed up. Despite such a challenge, every effort has been made to ensure that the policies and the BRI projects are up to -date to January 2019.

Bibliography Chang, G. (2001). The Coming Collapse of China. New York, NY: Random House. Chang, G. (2012, November 1). The Coming Collapse of China. Foreign Policy.

CHAPTER 2

Economic Policies, Paradigm Shifts and Their Implications

2.1

Introduction

This chapter discusses the economic policies together with the present paradigm shift and their implications. The BRI are part of China’s “going out” policy. However, as the implications of the BRI are not only a matter of Chinese investment and the consequences of China’s “going out” policy, the implementation and the operation of the BRI also highlight the conflict between the Washington Consensus and the Beijing Consensus. The BRI also shows the importance of China’s application of a state-led development paradigm. Consequently, the BRI illustrates the advancing globalization with Chinese characteristics. The aim of the BRI is also to establish a community of common destiny not only within China, but between the participating countries of the BRI so that the Chinese Dream is also discussed. The economic policies are discussed in details as they will have a direct impact on the functioning of the BRI. This chapter provides first a succinct introduction to Chinese policies before discussing individual policies in details. China’s “going out” policy is discussed before describing the Washington and the Beijing consensus. A discussion on the state-led paradigm of economic development follows. This analysis leads to the topic of globalization which is a most important concept for the BRI. However, globalization here differs from the usual concept, so that the discussion

© The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28030-7_2

13

14

J. JOSHUA

here emphasizes the particular Chinese characteristics involved. The subsequent discussion then leads to the “Chinese Dream” and the “Community of Common Destiny”. As the BRI appears to be on the way to become a successfully implemented project, it will have consequences for the future of the unipolar world order; so that a counter-push to the BRI is being developed by those who intend to maintain the present world order. The last section of this chapter provides a conclusion to highlight the important issues of this chapter. China’s foreign policy has changed from a policy of “laying low” towards “China is back” policy combined with a “going out” policy which requires the construction of new infrastructures to enhance global connectivity for China’s markets of imports and exports. The “going out” policy was first formulated during the 1990s. The implementation of the BRI will change international relations as China will increase its geopolitical influence, especially with the participating countries of the BRI which will be extensively discussed in Volume II. While over 68 countries have joined the BRI so far, 44 countries have joined the AIIB as Regional members, and 33 have joined as non-Regional members. The AIIB provides loans for many projects of the BRI. China’s international thrust through the BRI cannot be compared with the Marshall Plan as their aims and their impact are not comparable. The Marshall Plan, also known as the European Recovery Programme, began in 1948 and continued until 1951. The Marshall Plan was established to draw Europe fully into the American orbit; the aim of the Marshall Plan was to keep communism out and to increase the power of the United States. The motive of the Marshall Plan was to keep the Russian out, the Germans down and the Americans in. The rebuilding of Europe’s economy was only seen as a way to accomplish these three goals. The Marshall Plan was purely ideological; that is, it was based on anti-communism. Rostow who worked on the Marshall Plan stated that it was “part of an offensive which was aimed to strengthen the area outside of Stalin’s grasp” (Harman 2008, p. 544). The contribution of the Marshall Plan was less than 3% of the combined national income of the recipient countries between 1948 and 1951 (DeLong and Eichengreen 1993). The Marshall Plan was on a much smaller scale; to begin with, the BRI is an enormous project to a much greater extent than the Marshall Plan. Chomsky (2002) regards the Marshall Plan as an “export-promotion operation for American business” (p. 39) to promote economic growth. The Marshall Plan has been

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

15

described by DeLong and Eichengreen (1993) as history’s most successful programme, so that it is of some interest to know what they would call the BRI. Neither can the aims of the BRI be confused with Western colonialism of the past as it is not imperialistic in design, as exemplified during China’s “Century of Humiliation” (bˇainián guóchˇı 百年国耻) which is still part of a living memory of many Chinese, and China is adamant to move ahead on the “road to revival”, which is essentially part of the Chinese Dream (zh¯ongguó mèng 中国梦). The “open door” policy was first initiated during the 1980s, which was eventually followed up with the “going out” policy in 2001. The risk of relying on exports for economic growth became apparent during the global financial crisis in 2008–2009. The Tenth Five-Year Plan (2001–2005), the Eleventh Five-Year Plan (2006–2010) and the Twelfth Five-Year Plan (2011–2015) were fundamental for the implementation of such policies. The Washington Consensus guided by neoliberalism has weakened after the financial crisis of 2008–2009 and the global economy is shifting away from a unipolar world towards a multipolar configuration of world politics and international governance. Various concepts of the Washington Consensus have been incorporated in the Beijing Consensus; nevertheless, a paradigm shift is apparent in policies of economic development, so that the Beijing Consensus underlies the Chinese model of economic development. The Beijing Consensus is engaged in various stepwise incremental reforms and will continue to rely on state-owned enterprises which largely dominate the decision-making process within the economy. The Washington Consensus will be compared and contrasted with the Beijing Consensus as they will affect how globalization will proceed with Chinese characteristics. However, globalization may be seen as the externalization of national capitalism emanating from a major or dominant economy; however, the direction that globalization is likely to take cannot be ascertained in advance. China’s successful economic strategy of economic development requires a re-examination of the underlying concepts of neoliberalism, including assumptions of the role of state intervention within the economy and the market. Unequal social and economic development between regions can impede economic development, so that the construction of infrastructure to enhance connectivity between regions and communities is vital for economic development as sustained economic development requires structural transformation of the economy which often requires a well-designed policy, including an industrial policy, to improve a nation’s capabilities.

16

J. JOSHUA

China has moved away from a policy of keeping a low profile and has become a major economic and political power. The process of globalization has not promoted greater unity and cohesion amongst nations; instead, it has led towards greater discord and confrontation on the international stage. China’s previous foreign policy of “laying low” has now been replaced with “China is back”. China has core interests on which it does not intend to compromise, such as the sovereignty of Taiwan, Tibet and Xinjiang; another that may be added is economic development of which the BRI is part which has been incorporated into China’s national agenda of economic development and figures prominently in China’s 13th FiveYear Plan from 2016 to 2020. The implementation of the BRI requires a peaceful and stable geopolitical environment which may promote a win-win interaction and cooperation.

2.2

China’s “Going Out” Policy

The go-out policy was emphasized in the 10th Five-Year Plan (2001–2005), the 11th Five-Year Plan (2006–2010), and the 12th FiveYear Plan (2011–2015). However, a shift in emphasis occurred during the 13th Five-Year Plan (2016–2020) towards investments in the BRI countries. China’s policy of “laying low” in the past has been effectively abandoned and replaced with “China is back”. At the 19th Party Congress, it was proclaimed that Chinese people can expect the “great victory of socialism with Chinese characteristics”; however, what “Chinese characteristics” imply has not been clearly defined. However, the required transformation cannot rely on market forces, partly because of the high capital costs that are required and the length of time that such transformation processes will take. An industrial policy could be devised that enhances the profitability of those who engage in the transformation of the economy, for example, the creation of export processing zones, tax exemption and subsidies for investments. However, the WTO’s agreements on subsidies do not allow subsidizing the enhancement of export, although countries which are less developed are exempt from such a ruling, so that countries may not sufficiently diversify when they should. Furthermore, Comino (2007) argues that in regard to the textile dispute, “the EU can be reproached for inconsistence and double standards. It is promoting trade liberalisation where it suits its interests, pushing China for market opening and lowering of tariffs, but yields to demand by some powerful lobbies to shield off the impacts of competition” (p. 820).

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

17

China’s foreign policy is largely concerned with finding new venues for Chinese investments in other countries, especially for the construction of infrastructure, and to find access to raw materials and sources of energy. Gao (2017) argues that “China is hedging its energy security bets on the shifting of the undeveloped energy market from Western-dominated international regulations and the forging of the China-led alternative competitive regime complexes” (Gao 2017, p. 308). China is pursuing a risk averse strategy. The “going-out” policy was initially announced in 2001 and the aim of the BRI is in support of such policy. China’s policy of neo-mercantilism is intended to be in support of commercial interests through its endeavour to acquire natural and energy resources. China promotes a policy of “getting out by getting deeper in” (Nathan and Scobell 2016, p. 318). The BRI is essential to absorb capital surplus from China so that overaccumulation of capital and domestic saturation may be prevented. Much can be gained by expanding projects such as the BRI, but political rivalries often intervene to the detriment of economic prosperity of those who are living in the space of largely disconnected communities which can be narrowed through the building of infrastructure. As the Chinese proverb states: rúguoˇ nˇıxiˇang zhìfù, shoˇ uxi¯an yào jiànlì y¯ıtiáo d¯aolù (if you want to get rich, first build a road). Once implemented, the BRI will have far greater implications for global trade than the original Silk Road, and it is driven to a large extent by the demand of raw materials, especially oil and gas. An open-door policy was initiated to accumulate global capital through the inflow of foreign direct investment and to export Chinese made products. The concept of an open-door policy was first implemented in special economic zones in Southern China in 1980 and then moved on to the coastal cities during the mid-1980. However, the risk involved for China to depend on export markets to developed countries for economic growth was shown during the 2008 global financial crisis; hence, the urgency to foster greater domestic demand for Chinese products within China has become apparent. Different economic policies are required in initiating economic development and maintaining economic development. The export sector may assist the domestic economy in economic growth through appropriate investment policies; for example, the appropriate infrastructure has to be created to enhance connectivity through the implementation of the BRI, especially transportation and communication projects to facilitate the acquisition of raw material, such as fossil fuels. The creation of human capital to enhance innovation and productivity is also required.

18

J. JOSHUA

China’s “going out” policy was first formulated in 2000 and was included in the Tenth Five-year Plan (2001–2005) and was affirmed in 2001 by the National People’s Congress. The Tenth Five-Year Plan (2001–2005) promoted the construction of overseas bases for the oil and gas supplies and the diversification of oil imports. The Eleventh Five-Year Plan (2006–2010) changed the policy to “broaden international oil and gas cooperation” and in the Twelfth Five-Year Plan (2011–2015) it was changed to “strengthening reciprocal international energy cooperation” (Liu 2014). The Twelfth Five-Year Plan and the Eighteenth CCPC advocated the “going out” policy to obtain energy resources to be imported into China. Such changes require major economic and political transformation. During the Twelfth Five-Year Plan, new policies to facilitate innovation and high technology entered a new phase of industrial development. In Yongkang in Zhejiang, the production of electric cars and of new energies, that is, solar and photovoltaic energy, took off and attracted five manufacturers with a total production of one million cars (Lu and Ganne 2016). During a 30-year period, Zhejiang was able to move from small-scale production of farm tools to the manufacturing of electric cars. Through its energy investments in developing countries, it is able to circumvent US-led international energy rules. Instead of relying primarily on the export market for economic growth, China now actively promotes a “going out” policy. Initially, a “Go Out” policy (zouch¯ ˇ uqù zhèngcè) has been formulated first during the late 1990s to encourage companies to establish trade links with other countries which also helps to safeguard energy supply and other commodities from other countries to China to feed into China’s economic growth. The “going out” policy is intended to acquire sufficient resources, so that the production for domestic consumption and exports will not decline; hence, China’s “going out” policy attempts to ensure that there are adequate oil resources and other raw materials to feed into China’s domestic economy (Zhang 2014). In times of recessions, Keynesian pump-priming has often been used in the past to stimulate private consumption and consequently to expand business expenditures; for example, during the Great Depression in 1933 and in 1938 it was used in the United States to promote economic recovery. Policies of Keynesian pump-priming intend to increase domestic consumption, whereas the thrust of investment to facilitate the construction of infrastructure on a global scale is expected to create opportunities for corporations to grow through trade by “going out” and to increase employment. It may

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

19

also promote a more inclusive economic development so that poverty may further diminish along the way. Under the “going-out” policy, the state-owned oil companies acquire oil interest in resource-rich economies, especially important here is the diversification of sources of oil imports for security reasons. The Chinese National Oil Corporations (NOCs) are part of the “going out” policy in securing petroleum from other countries required for China’s economic development. The initial policy of NOC’s “going out” policy was intensified in 2001 after China entered the WTO in the same year. Strategically important projects gain extra support from the Chinese government; however, such support amounts to only “a small percentage of the NOCs overall commercial activities” (Liu 2014, p. 565). Liu (2014) makes the point that “Chinese National Oil Corporations (NOCs) are state owned, but not state run, and so the Chinese government does not always exert influence over NOCs” (p. 581). Chinese NOCs are autonomous “commercial entities who are publicly listed on stock markets; their financial statements and any losses incurred in overseas investments must be open to public scrutiny and criticism” (p. 581). Most commercial activities, including overseas investments, are autonomous from government decisions and are “driven purely by commercial consideration” (Liu 2014, p. 565). China’s dependence on “imported oil increased to 31.67% in 2000 and further to 59.35% in 2012” (Liu 2014, p. 567). Under the “going out” policy, state-owned oil companies are acquiring oil interests in various oilrich countries to secure energy safety. As prices of oil and gas increased, revenue and resource-rich countries were reluctant to increase foreign investments in their gas and oil resources; so that “there were very limited choices left for Chinese NOCs eager to ‘go out’, so that the NOCs invested” in the “leftover” resource-rich countries, countries deemed too risky or unprofitable to invest in by the International Oil Companies (IOCs) (Liu 2014, p. 569). Chinese NOCs are able to take greater risk and so have become investors in Iran and Iraq. Chinese NOCs started large-scale investments in Iran in oil and gas resources in 2004 which was discontinued in 2009 (Liu 2014, p. 570). The BRI also acts as a counterweight to Western countries as it increases China’s geopolitical influence in the participating countries of the BRI. China is using an equity stake strategy to ensure uninterrupted supply of raw materials and energy sources as it enables China to import such resources directly from venture projects instead from international markets (Gao 2017).

20

J. JOSHUA

There are several other reasons why Chinese corporations engage in their “going-out” policy; for example, China is using joint ventures with foreign companies, mergers and acquisitions. The Shanghai Automotive Industrial Corporation (SAIC) acquired MGRover to gain a foothold in foreign markets. Through mergers or acquisition, China also acquires higher technology and know-how, for example, through the acquisition of IBM’s personal computer division by Lenovo, and when Greely acquired Volvo; hence the BRI facilitates not only international trade but also mergers and acquisitions.

2.3

The Washington Consensus

After the global financial crises of 2008–2009, the Washington consensus has progressively weakened. The Washington consensus is based on privatization, financial liberalization, deregulation, the rule of law and so-called democratization. Rodrik (2006) argues that “nobody really believes in the Washington Consensus anymore. The question now is not whether the Washington Consensus is dead or alive; it is what will replace it” (p. 974). The growth experience of China and India certainly does not fit into the ideological framework of the Washington Consensus (Rodrik 2006, p. 975). The Washington Consensus promotes private enterprise; however, private enterprise is unlikely to be interested in large-scale projects such as the BRI. Since the 2008–2009 financial crisis, the global power of the United States has declined significantly and it is unlikely to fully recover its economic dominance, and consequently its political power, as it largely lost its power of persuasion, including its power to convince countries of the Washington Consensus as international relations will come to be dominated by multipolar power structures. The power of the United States rested on its economic dominance supported by military power. The movement towards a multipolar international governance regime is likely to weaken established institutions, such as the IMF or the G7 which may strengthen intergovernmental group of the Twenty-Four. Western neoliberal economies are dominated by the financial sector. Multiple financial severe shocks such as occurred in Mexico (1994), Turkey (1994 and 2001), Russia (1998), Brazil (1999) and Argentina (2001) reduced the confidence in the Washington Consensus. Furthermore, the Asian financial crisis of 1998 and the global financial crisis of 2008–2009 were mainly due to the deregulation of the international financial system. Indeed, the Asian Financial crisis of

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

21

1997–1998 illustrated the inappropriateness of the Washington Consensus (Güven 2012). Multipolarity challenges stern concept of universalism. Multipolarity makes allowance to geographical and social conditions whereas universalism promotes one policy for all. Multipolarity is based on collaboration and consensus, whereas universalism imposes a single framework on all; in other words, there is a shift away from Atlanticism towards multipolarism. However, the BRI concept can only flourish when it makes allowances for and accepts individual cultures. The Chinese economy so far has been more successful in recent decades as it advocates more scientific and technological development to further economic growth. China builds infrastructure on a global scale while the western financial sector is to a large extent driven by speculative investment. China promotes economic development through a combination of state-guided economic planning and market self-regulation. The financial crisis of 2008–2009 has affected far more North America and Europe than East Asia, because China provided a very large stimulus package to isolate East Asia from the financial crisis of 2008–2009. The huge investment in infrastructure in China and in the BRI is not only sustainable, but indeed facilitates economic growth, or at least, so far, it has prevented it from falling too fast; indeed, it may be argued that the American economy relies more on China’s economy than China relies on the American economy. The GDP of the United States accounted for almost 30% of global GDP per annum between 1999 and 2001 and has been in decline since 2002 and the decline accelerated after the financial crisis of 2008–2009. The Washington Consensus’ ideological belief is that the free market is most effective in facilitating economic growth, so that government involvement should be minimized. However, the financial crisis of 2008–2009 also made it more apparent that the inviolability of the US dollar was based on myth so that the eventual creation of a new reserve currency is inevitable. Eventually, the US dollar is expected further to decline as the US economy is going to weaken and its debts are expected to increase sharply. The financial crisis of 2008–2009 has illustrated that the market requires more regulations rather than less to prevent such crisis from occurring. Corporations are engaged in channelling a large part of their available finance into stock buy-backs or paying out higher dividends, rather than investing in productive activities which could raise the level of employment. This leads to assets stripping rather than economic growth. Lobbyists represent a small minority with detrimental consequences for the majority; so

22

J. JOSHUA

that pressure groups are essentially anti-democratic because only pressure groups with the necessary available funds are able to support their lobbying activities with the required funds. As the business cycle is essentially a financial cycle, the financial sector is involved in endogenous money creation to extend loans to buyers of assets, companies and real estate which are not productive capital. Loans accumulate through compound interests so that they eventually exceed the increase in GDP whereby more and more money is being channelled into the financial sector so that the debt/GDP ratio will increase, consequently the level of employment falls; so that economics and politics cannot be separated. Hence, any economy requires planning; as an economy without planning is an oxymoron. If there is no state planning, the financial elite are likely to do the planning, and the state becomes an extension of the financial elite who works in their own interests. Economic policies have to be supported by sound institutions; not only by the required financial institutions, such as the Asian Infrastructure and Investment Bank (AIIB), but also by appropriate fiscal institutions and labour market institutions. Before the appropriate policies can be designed and implemented, a “diagnostic analysis” is required to assess “the most significant constraints on economic growth” (p. 982). Rodrik (2006) calls for a “creative and imaginative policy design to target the identified constraints” and calls for the institutionalization of “the process of diagnosis and policy response to ensure that the economy remains dynamic” (p. 982). Different policies are required to initiate economic growth and to maintain economic growth; for example, the development of human capital cannot initiate economic growth where there is insufficient and inappropriate physical capital available; but human capital is required to maintain economic growth as the economy progresses towards higher stages of economic development, for example, when the use of technology is introduced. Neoliberalism prioritizes the private sphere over the public sphere whereby economic decisions are made by the “free-market”. This implies that the influence of the government is expected to be minimized whereby social programmes are to be minimized; as the financial sector is to be deregulated, more austerity programmes are introduced, and whatever can be privatized is expected to be privatized. Programmes which are advocated by the IMF and the World Bank are good examples of neoliberal policies. Bairoch (1995) argues that economic liberal policies during the nineteenth century delayed industrialization. The classical path towards

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

23

economic development is based on the investment of public infrastructure, rather than on the assumption that the public sectors will be privatized. Neoliberal policies were enshrined in trade policies such as the Trans-Pacific Partnership (TPP), the Transatlantic Trade and Investment Partnership (TTIP) and the Transatlantic Free Trade Agreement (TAFTA) which reduces government planning power. To submit to the Washington consensus may lead to financial dependency, austerity and debt-leveraged bubbles. Monetary policy affects State sovereignty and it is central to economic relations between nations. Political sovereignty is largely replaced by economic sovereignty which cannot be exercised without money which however is unequally distributed, so that the power of money contravenes the democratic sovereignty of individuals. The policies in support of neoliberalism were cuts in public expenditure, the privatization of public utilities and the previously publicly owned resources and the lowering of the standard of labour and environmental regulations; whereas post-neoliberalism may be seen as “policies and practices that revolves around the dual aim of: (1) redirecting a market economy towards social concerns; and (2) reviving citizenship via a new politics of participation and alliances across socio-cultural sectors and groups” (Yates and Bakker 2014, p. 64). The ideology of the market makes solidarity between people virtually impossible, but the ideology of the market is supported by policies of “bread and circuses” as such policies reinforce market ideologies. Yates and Bakker (2014) define neoliberalism as “a multifaceted process, stemming from a utopian, ideational project of reorganizing international capitalism, often conjoined with a set of political prospects that seek to enhance conditions for capital accumulation and restore the power of economic elites at multiple scales” (pp. 63–64). However, there are no economic policies that are suitable for all economies as they face different circumstances; furthermore, different policies may be used to pursue the same goals. Rodrik (2006) makes the point that neoliberal economic reforms are concentrating on policies which may overcome inefficiency rather than “stimulating the dynamic forces that lie behind the growth process” (p. 975). After all, it is the growth process that causes the economy to flourish; inefficiencies may interfere with the growth process but efficiencies or the lack of it do not set any goals which have to be designed before policies to promote efficiencies can be introduced. The Washington Consensus is meant to work as a paradigm in which conventional accepted knowledge of economics has been embedded

24

J. JOSHUA

(Williamson 1993). The Washington Consensus essentially advocates “a shift from state-led dirigisme to market-oriented policies” (Gore 2000, p. 790). China has shown that policies which are not part of the Washington Consensus can be effectively used to enhance economic growth; for example, the successful implementation of the BRI provides a coherent strategy of economic development and international trade. Rather than led by a Washington Consensus, the BRI is policy led to promote trade between nations. The Washington Consensus approach towards economic development concentrates on the growth of GDP, often enforced through a donorconditionality-driven approach, whereas a sustainable human development approach regards economic development as a means to achieve an improvement of living conditions and emphasizes a more inclusive economic development to enable a vast majority of the public to improve their lives. Such differences in policies highlight “the mismatch between economic growth performance and social performance” (Gore 2000, p. 796). However, it does not necessarily explain the difference in social performance “and the ways in which domestic policy can rectify this mismatch to deliver more social achievements for any given level of GDP per capita” (Gore 2000, p. 796), because the trickle-down effect is unlikely to improve the livelihood of most people. The Washington Consensus has been driven by ideology, such as neoliberalism; rather than guided by a pragmatic approach; on the other hand, Chinese incremental changes to government policies were driven by pragmatism, while the relevance of ideology has become less of a concern. Jing (2017) makes the point that “‘gradual reforms’ have created radical changes in less than four decades, showing the flexibility of China’s transitional regime” (p. 42). As economic and political conditions are subject to constant changes, a perpetual willingness to engage in policies guided by pragmatism is of importance rather than a political system of governance that is guided by interest groups. The global economy is changing faster than the international financial institutions such as the IMF. The voting rights and quotas of the emerging economies are not reflecting the size and importance of their economies. The financial crisis of 2008–2009 has weakened the power of the United States and the European Union. The change in power relationship implies that the voting rules and the delegation of powers in international financial institutions such as the IMF and the World Bank will have to be eventually addressed. The financial crisis of 2008–2009 has caused a “legitimacy crisis”

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

25

(Stuenkel 2013, p. 614) of the international financial order and led to cooperation between emerging powers; so that the unipolar global order is moving rapidly towards a multipolar power relationship. As a consequence of the financial crisis, emerging powers realized that there is a “necessity to reform the international financial order” (Stuenkel 2013, p. 615). China promotes incremental change and is prepared for a longer period before there will be substantial changes in the governance of the international financial institutions. Reforms of the international financial institutions move step by step; hence, Kennedy (2010) essentially argues that the Beijing Consensus is a myth because it disregards the similarities and differences that China shares with other countries and so cannot be an alternative to the Washington Consensus; however, the Washington Consensus is ideologically driven and assumes that neoliberal policies are applicable to all economies without taking into account their similarities and differences of their specific needs. Beeson and Li (2015) concede that the Washington Consensus has various shortcomings, but argue that “the Washington Consensus is still winning the battle of the paradigms, largely because it has become the highly institutionalized taken-for-granted, conventional wisdom, with apparently no credible rivals” (p. 109), and assume that “American hegemony may well persist” (p. 109); but concede that the global power has shifted and is continued to shift towards East Asia (p. 109), so that a new paradigm will eventually dominate the political and economic scene as the West is unlikely to recover its past dominance because of its economic and therefore political decline. The Washington Consensus intends to create a global economic order in the form of a huge market economy through a one-size-fits-all ideology of globalization which led to exploitation of natural resources and labour. The Washington Consensus is closely aligned with the policies of the IMF and the World Bank. The Washington Consensus may be seen as “a globalised version of the modernisation theory, which proposes that developing countries have to emulate Western institutions … in order to catch up with the West in the modern world” (Hou 2014, p. 61). The “free market” is assumed to have magic powers, able to solve any problems in the long run. Such unquestioned acceptance of the dogma of the free market has been referred to by Stiglitz (2002) as “market fundamentalism”. The Washington Consensus does not concur with the economic growth of China; furthermore, the Beijing Consensus has not so far included neoliberal doctrines wholeheartedly. Economic and political priorities will

26

J. JOSHUA

differ within different stages of economic development. It cannot be argued that the newly industrializing “Asian Tigers” during the 1980s and 1990s was the consequence of neoliberal strategy of economic development enhanced through the liberalization of the market economy and the promotion of exports as there was considerable state intervention within the economy. The implementation of the BRI tries to establish a balance between China’s domestic requirements and China’s “going out” policy; eventually, other participants of the BRI will also aim for their own balance between needs of economic requirements and their integration within a global economy, so that the economic policies of the participating countries will differ according to their stages of economic development. Hou (2014) makes the point that “there is not a universal ‘best’ path of development or a singular end result” (p. 63). Different forms of economic, social and political organization can co-exist side by side. China’s experience of economic development shows that privatization is by no means a precondition for economic development. However, there are considerable variations of the interaction between the market and the bureaucratic hierarchy; for example, while it is more state controlled in Shanghai and Southern Jiangsu, it is more entrepreneurial in Shenzhen (Hou 2014, p. 65) which operate side-by-side; hence, “let a thousand flowers bloom but also let the flowers cross-pollinate” (Hou 2014, p. 65) as may be visualized in mutual learning processes. To introduce an extended incentive system which goes beyond the aims of immediate economic growth creates opposition with some interest groups, such as the introduction of environmental protection and the provision of social welfare. China’s economic policy has changed from economic growth at any cost, towards the construction of a harmonious society. The CPC has been able to incorporate various critical issues as policies to ensure its legitimacy. Depending on the political, social and economic issues involved, the CPC is “being selectively authoritarian and selectively responsive and accountable [and thus] sustains the one party state in China” (Hou 2014, p. 66). Hou (2014) makes the point that “the lack of procedural legitimacy has been replaced so far by performance-based legitimacy and a relatively broad base of social support” (Hou 2014, p. 68). Beeson and Li (2015) distinguish between the Beijing Consensus and the China model. The IFIs “can be seen as a complement to, if not an extension of, American foreign policy” (p. 106). Moreover, “simply by participating in such institutional forums, other countries will be ‘socialized’ into the ways of a ‘western’ diplomatic order and imbibe important

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

27

policy principles in the process” (Beeson and Li 2015, p. 106). There will be various processes of socialization of course, but in the intermediate term, China is likely to develop its own policies of economic development which will differ from the present international political framework. The financial crisis of 2008–2009 has been the worst financial crisis since the Great Depression of 1929. Even though paradigm shifts are rare, a new paradigm shift is occurring in international finance and economic ideologies. Alternative paradigms are first marginalized to keep the prevailing paradigm intact, but a shift away from neoliberal concepts of liberalization and deregulation towards greater regulatory enforcement of the system of international finance is occurring. The switch from one ideology to another is a paradigm switch (Kuhn 1970). A conversion experience is always hurtful as many have an emotional investment in the present paradigm. Whoever has been taught and is teaching neoliberal economics for several decades are naturally reluctant to change their ideological concepts of the free market. However, economics is not value-free as it is embedded within a preconceived ideology which is subject change when a paradigm shift occurs.

2.4

The Beijing Consensus

Halper (2010) argues that China’s market-authoritarian model or the Beijing Consensus provides the biggest challenge to the Washington Consensus. China is effectively using its economic power to exert soft power diplomacy in developing and emerging countries. Various developing countries may come to feel that authoritarianism with economic growth and economic development is preferable to “democracy” together with increasing poverty. Halper (2010) refers to the Washington Consensus as a Western theology of economic development. China’s challenge will eventually extend from the economic sphere to the political field as well. There is no developmental paradigm that is equally suitable for all developing or even advanced countries. Kennedy (2010) argues that China has accepted at least some of the criteria of the Washington Consensus, that is, the liberalization of foreign direct investment and trade, fiscal discipline and maintaining a competitive exchange rate. China has also made progress towards a more unrestricted entry into markets, has strengthened property rights and processes of privatization, allows the interest rates to fluctuate, government subsidies have been reduced and more funds are being channelled towards public goods that promote economic growth through the

28

J. JOSHUA

construction of infrastructure and to enhance primary education (Kennedy 2010). China has selectively adopted various neoliberal concepts of the Washington Consensus, depending on China’s particular situation; so that Kennedy (2010) argues that the Beijing Consensus is a myth. Kennedy (2010) essentially argues that the Beijing Consensus is an inaccurate summary of China’s actual reform experience; nevertheless, it highlights a paradigm shift in economic development. Kennedy’s (2010) main argument is that China has followed eight of the original concepts of the Washington Consensus, especially in the case of fiscal discipline, the liberalization of trade and foreign direct investment, and the maintenance of a competitive exchange rate. However, Williamson (2012) highlights various distinctive aspects of the Beijing Consensus, such as stepwise incremental reforms and experimentation, export-led growth, and the reliance on state-owned enterprises. Economic reforms have to be introduced on an incremental basis to avoid too many dislocations within the economy; as the Chinese proverb states: guò hé m¯ ozhe shítouguò hé (crossing the river by feeling the stones). The financial crisis of 2008–2009 created new grounds for new challenges to the prevailing ideology of free-market capitalism. The newly emerging forms of capitalism include more involvement by the state together with new forms of globalism; hence, “the mentality that views free market vs. state-controlled capitalism as a zero-sum game appears unrealistic” (McNally 2013, p. 1). In this new model, the state takes on a more dominant form in economic development, including in the formation of economic policies, as shown for example in the BRICS countries. It may be argued here that large-scale projects such as the BRI could not have happened without state intervention. The neoliberal model of capitalism also known as the Washington Consensus appears to be archaic together with its institutions, such as the World Bank and the International Monetary Fund, unless appropriate reforms are initiated. Stiglitz (2010) goes so far as to proclaim that the Washington Consensus is dead, whereas Rodrik (2006) argues that the important question is what will replace it. On the other hand, McNally (2013) argues that the challenges to the Washington Consensus are a refurbished form of state capitalism which incorporates various aspects of the neoliberal model, and so refers to “refurbished state capitalisms” as “an ‘in-system’ challenge” (p. 3). The refurbished state capitalism as practised in China incorporates various forms of capitalist systems,

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

29

while the state remains the dominant factor in the decision-making process in pursuing practical aims without being confined to any ideological framework. The Chinese model (zh¯ongguó mótè) represents various policies which may reinforce each other, but they may also at times be in conflict with each other. Such changes and adaptations are moving towards “SinoCapitalism” with considerable emphasis on free market and greater emphasis on unitary state rule (McNally 2012). However, it is the Beijing Consensus which underlies the Chinese model of economic development. The Beijing Consensus and the Chinese model of economic development are expected to increase in importance as China’s importance in international affairs gathers momentum. The Chinese Communist Party is firmly in control of economic and social policies and there is no challenge at present; but the Chinese model of economic development or the Beijing Consensus is expected to prevail with some adaptations as the political and economic situation change to promote economic and social development. The BRI has been initiated through government direction by the use of state ownership. The channelling of finance, numerous material incentives together with various industrial policies, while “top-down, state-guided development dominates” (McNally 2013, p. 4); entrepreneurs are creating “highly flexible production and knowledge networks with global reach” (McNally 2013, p. 4). China channels subsidized investment towards selected strategic industries and promotes an export-led growth strategy. Large-scale economic development is guided by the state, as in the case of the BRI which requires coordination between governments of different countries. Made in China 2025 is another project introduced by the government together with the high rate of investment in R&D and new technologies. Rather than using the invisible hand of the market, China is using the visible hand of state intervention. China promotes international economic relations that are intended to establish mutual benefits based on principles of being government-led (zhèngfuˇ zhuˇ dˇao), enterprise-based (qˇıye wéi zhuˇ ) and being marketoriented (yˇı shìchˇang wéi dˇaoxiàng). The importance of the Chinese model of economic development is likely to increase as China’s economic development and its extension within the global economy is successful. The further decline of the United States and the return of China as a global power will provide challenges as well as opportunities.

30

J. JOSHUA

2.5

A State-Led Development Paradigm

China’s experience of economic development calls for a re-examination of state intervention in the economy, it also requires a re-examination of the usefulness of policy prescriptions based purely on neoliberal assumptions about underlying market forces. It is argued here that many of the projects of infrastructure which are essential for the BRI to flourish would not have happened without state intervention and government finance. China’s regulatory state rather than an unregulated market is used to streamline globalization with Chinese characteristics, so that China is using a state-led development paradigm. China’s experience shows that a state-led development paradigm can not only exist side by side with a growing private sector, but that they can be jointly integrated. Reforms in rural China determined the overall transition towards a market economy. Huang (2012) also makes the point that the township and village enterprises were a most successful private sector. Activities of the township and village enterprises were able to increase rural income and surplus labour from rural areas and thereby reduced the gap between rural–urban incomes. The term “township and village enterprise” refers to the location of townships and villages in which they are embedded, rather than to the ownership of such enterprises by townships and villages which could cover private and public sectors; however, most of them were private. Huang (2012) argues that “Chinese capitalism is rural in origin” (p. 149). From 1978 onwards, major reforms were introduced on a trial basis in a few provinces before they were introduced nationwide, so that sub-national governments play a considerable role in the introduction of new reforms; such experimental reforms may also be introduced “as a strategy to weaken political resistance and to reduce the uncertainties that come from a new reform” (Xu 2011, p. 1107). The outcomes of such trials not only provide information on which programmes may work, but they may be used to convince those who are not yet convinced of the merits of the programmes; on the other hand, programmes which are not successful in their trials can be eliminated before full-scale reforms can be introduced or alternative programmes can be devised. Major policies are generally first introduced experimentally at the local level, and if successfully implemented, become part of the central decision-making process (Xu 2011). All major reforms were initiated by Chinese sub-national governments; hence, “local governments have played a leading role in increasing rates of growth” (Bardhan and Mookherjee 2006, p. 48). Furthermore, China’s state-led governance

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

31

relies on a merit-based personnel system which is centrally managed, rather than guided purely by ideology. It may be argued that in many developed economies, the infrastructure is often inadequate because of a lack of government financial injections. If the BRI is to succeed it has to induce structural transformation which entails a broad change which affects production and consumption, indeed a change in the social relationships. Lin (2010) advocates a change because previous economic policies regarding development have failed and economic policies for economic development have to go beyond neoliberal approaches to economic development. In the case of the BRI generally, and specifically in regard to the construction of infrastructure which are part of the BRI, it may be argued that the state has to direct and lead the process of economic development if it is to succeed. Private enterprises are mainly involved in peace-meal economics rather than interested in connecting different projects to enhance the connectivity of communities which can only be achieved when the differences in development of different regions are considered. China emphasized export promotion but is now trying to go beyond. As projects of the BRI are generally involved in long-term cost-benefit analysis, governments have to be involved in long-term adequate planning through plans implemented at five-year intervals. Economic policies to be successful for sustained economic development may have to move away from the Washington Consensus. The successful implementation of the BRI may well illustrate the importance of the state in channelling investment towards much-needed infrastructure first and then directing the process of development through various implementations of strategies of development. Western economies have deteriorated or stagnated since the global financial crisis from 2008 to 2009 and may find it difficult to recover without a change in government policies. On the other hand, China and India have high GDP and low per capita income, high growth rates, but significant levels of poverty; both countries have prospects for leading global economic growth and development. The Japanese state had a strong influence over Japan’s economic development; for example, the Japanese refining and petrochemical industries developed under strong state guidance whereby the Ministry of International Trade and Industry (MITI) has set the goals for production and helped to facilitate technological innovation and facilitated the linkages between suppliers and customers. The Japanese refining and petrochemical industry created an export base for their products and engaged in import

32

J. JOSHUA

substitution. Japan is a clear illustration of state-directed structured transformation of oil-related industries. Capitalism with Chinese characteristics includes various neoliberal economic features, such as openness to foreign investment to integrate foreign manufacturing into its domestic economy to promote exports and technological innovation. Capitalism with Chinese characteristics includes capitalism which is at least partly driven by guanxi which have been referred to by McNally (2011) as Guanxi Capitalism. Guanxi may facilitate social networking which may enhance business operations; however, guanxi may also breed nepotism and corruption. Shleifer and Vishny (1993) define corruption as the use of “public office for private gains”. The level of corruption is largely related to the structure of governmental institutions and the political process. When governments do not control their agencies, high level of corruption may occur as is the case with various developing countries. Economic growth in China was not only driven by market forces but largely through state-owned enterprises and foreign investment (Naughton 2010). Through the implementation of the BRI, it will be investment rather than consumption which will be the main driver of economic growth, mainly in Asia, but also in other areas where there are large investments through the BRI such as in Africa. Whether investment or consumption is more important in promoting economic growth may depend on the stage of economic development in the region or within the country; when the appropriate infrastructure is already available then economic policies could promote an increase in consumption, but in region where there is inadequate infrastructure, the creation of infrastructure should take priority. It may be argued that the East Asian success in economic development was the consequence that it was state-driven so that such states may be described as developmental states as their prime objective is economic development. If China would be dominated by party politics, whereby the political decision-making process is permeated with powerful economic interests, it could not have developed over the last forty years as it did. Individuals have a right to development, similar to human rights; but individuals cannot obtain this without collective action which cannot be achieved without deliberate government action, especially in the area of economic development, especially if it is to be sustained. However to individualize such rights, it puts the onus on the individual whereby those with greater access to greater resources will be able to obtain their individual rights more than others. Hence, government action is essential so that the deprived are not prevented to accomplish their rights. Furthermore, globalization reduces

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

33

a nation’s control over its own destiny; for example, it reduces a nation’s ability to manage capital flow, exchange rates, and to impose environmental laws and laws to safeguard the health of the public, as it may be regarded as interfering with the free market.

2.6

Globalization with Chinese Characteristics

Neoliberalism starting in the mid-1970s intends to promote the private sector which has “served to legitimate a politics designed to maintain these interests and ends” (Henderson et al. 2013, p. 1226). Neoliberalism then eventually has led to financialization since the 1980s which involves the subordination of all forms of capital and governments to the interests of financial capital. Such subordination has led “to the economic and political turmoil that many parts of the world have endured since 2008” (Williams 2000, p. 1). Henderson et al. (2013) argue that “US capitalism and the form of globalization that it forged can be seen as the midwives of Chinese capitalism” (p. 1227). However, a new form of capitalism is now merging which is expected to drive future globalization. Chinese state’s priorities are reflected in Chinese-style capitalism which has been constructed accordingly. The importance of the strategic value of a particular sector will determine the degree of market coordination and the distribution of property rights (Hsueh 2016); such coordination mechanisms of state-market relations are based on Kornai’s (2000) concepts of “system-specific attributes”, rather than just on a nominal conception of a socialist versus a capitalist classification. Capitalism has to expand first within the country and then across its borders which is then opposed by other capitalist regimes which may lose their economic power. The requirement for the market to grow leads to economic imperialism. The BRI increases sales so that the “going out” policy is an apt policy to increase the size of the market as well as its share and thereby an increase in China’s domestic economy. Galbraith, J. K. (1974) argues that the dominance of global markets by large multinational corporations is the natural outcome of neoclassical economics which enhances monopolistic powers and oligopolistic competition, but effectively reduces competition. Once the BRI has been successfully implemented through the Beijing Consensus, the contemporary globalization of the American form of capitalism is being challenged. Capitalism guided by neoliberalism consolidates power in the financial elite which sees profit-making as the core

34

J. JOSHUA

of democracy. Neoliberalism separates economic activity from any possible social costs. Democracy and freedom are defined in terms of market forces. Globalization of trade has benefited various countries through their expansion of trade, while other countries experienced a decline in their economic growth. Non-trade issues may be used for the protection of one’s own economy. Non-trade issues may be approached from the perspectives of Asian or Western values. Asian values may emphasize more social stability whereby community values are placed above the rights of individuals, whereas Western values may promote more individual’s rights above those of society. The process of globalization has not led to greater unity and cohesion in the world; instead, it has led towards greater divisiveness and more rather than less confrontation on a global scale. Farah (2016) argues that “global governance and law with borderless globalization are to blame for the inability to find appropriate solutions to face the challenges of a constantly changing society” (p. 53). Hence, much of the population are “unable to benefit from such globalization” (p. 53). The emerging economies are becoming the regional hegemon within their geographical regions and so have a profound political and economic effect. China’s foreign policy has now moved away from a policy of keeping a low profile to a policy of striving for achievement. Hence, the stronger more assertive policy regarding the South China Sea dispute is combined with cooperation through the implementation of the BRI by enhancing greater connectivity. However, a soft power balancing strategy may be more likely to enhance common interests and a common foreign policy. Greater tolerance as advocated both by Confucius and by Kant may be conducive towards greater mutual understanding between nations. Kant (1983) argues that state sovereignty is just the external aspect of inner-state popular sovereignty; hence, state sovereignty requires the protection of international law. A global system of economic governance should not impinge on a nation’s sovereignty and should not interfere in the domestic affairs of other countries; however, many of the world’s problems have global consequences, so that they require global solutions. Tolerance in Confucianism is similar to a Kantian categorical imperative which implies a moral obligation. In non-Chinese tradition, tolerance is exercised as “a move prompted by necessity, as a political strategy to reconcile differences and conflicts involving race, ethnicity, religion, and ways of life, and to find a middle ground between the rejection and assimilation of alien elements and groups” (Gu 2016, p. 793); whereas in the

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

35

Chinese tradition the Confucian way of tolerance is adopted as a human ideal and practised as a moral virtue. Tolerance is possibly the best and the most mature way to resolve conflicts on a global scale; especially in the case of the BRI, rather than pushing through an agenda of unilateralism with force. Confucianism emphasizes personal cultivation rather than individual freedom. Confucian ethical theory of tolerance (gongchai) could go some way to present an alternative to the present global turbulence in international relations. Another Confucian central theme is “Do not do to others what you do not desire for yourself” (jˇı suoˇ bù yù. Wù sh¯ı yú rén). It involves “respect for others and recognition of differences” (Gu 2016, p. 789), which is an essential foundation for mutual understanding between nations. Coordination may be guided by five distinctive rules (Gu 2016) which Confucius constructs and orders into a pyramid of practical ethics. First, the Golden Rule: “Do not do to others what you do not want yourself” (Gu 2016, p. 800). This rule serves as the foundation of an exercise in tolerance. Second, the Silver Rule: “Recommend to others what you want for yourself” (Gu 2016, p. 800). Third, the Platinum Rule which is to “help others realize what is good in what they desire” (p. 801). Fourth, the Iron Rule “Repay kindness with kindness and repay injury with justice” (p. 801), and so tries to discourage what is bad and promotes what is good. Fifth, the Jade Rule: “a civilized person seeks harmony but not conformity” (p. 801) and so may overcome disagreements through persuasion, rather than through the use of force. In fact, zh¯ ong guó often referred to as the Middle Kingdom, does not imply that China sees itself as the centre of the world, but rather as being part of a “balanced harmony” (Chen 2002). The advantage of the Confucian ethics of tolerance is that it “integrates rationality with emotion, individual freedom with communitarian values, and ethical ideals with practical behaviour” (Gu 2016, p. 802). Tolerance of course was neither practical nor acceptable during the age of empire building and is also rejected as long as unilateralism is the guiding force in global relations between nations; hence, it is vital to pursue a politics guided by multilateralism. Globalization can be seen as an externalization of a given form of national capitalism (Henderson et al. 2013). It is the American form of capitalism “that provides much of the character of contemporary globalization” (p. 1223); however, it may be infused at a later stage with Chinese characteristics. Socialism with Chinese characteristics is assumed to

36

J. JOSHUA

be an adaptation to Chinese conditions. It includes Deng Xiaoping’s Theory, “Three Represents”, and a Scientific Outlook on Development. The “Three Represents” promote the most advanced productive forces, the most advanced culture, and the fundamental interests of the people. Like so many changes in Chinese economic policies, it often comes with specific Chinese characteristics; thus, Chinese policies of capital account liberalization also come with Chinese characteristics. While explicit controls on capital accounts are removed, various soft controls imposed through administrative measures over capital movements remain. China’s growing economic dominance created a surge of soft power. Complete liberalization of international trade and investment may interfere with public policies, such as the protection of the environment, rights of labour, public health, food security amongst others. However, many of such issues may also be used by countries to protect their own economies. China now takes part in the negotiations about non-trade issues, such as greenhouse emission. Globalization may have detrimental consequences for the environment, social justice and human rights (Farah 2016, p. 112).

2.7

The Chinese Dream and the Community of Common Destiny

China proposes a China-centred regional community, whereby neighbours may link their economic future to the “Chinese Dream”. The BRI may be able to widen economic and cultural exchanges through education, technology and tourism to construct “win-win” cooperation with the countries along the One Belt and One Road (y¯ıdài – y¯ılù) to further an economic and cultural integration. China advocates a “win-win” cooperation with neighbours which requires the building of infrastructure to facilitate regional integration which also necessitates the development of Chinese provinces which serve as gateways for the BRI to other countries (Arase 2015, p. 30). Hence, China proposes a “community of common destiny” (gòngtóng mìngyùn de shèq¯u) or of a “shared fate” (gòngtóng mìngyùn gòngtóngtˇı). The intention is to make the country wealthy and strong (fùyù ér qiáng dà) or rich and powerful (fùyoˇ u hé qiáng dà). The Chinese Dream also incorporates various popular issues such as corruption, pollution, social security and food safety; various nationalist themes, such as the revival of the Chinese nation (Zh¯ onghuá mínzú de wˇeidà fùx¯ıng) and military power; as well as authoritarian issues, such as the prohibition of constitutional rule.

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

37

The CCP emphasizes the liberal pursuit of personal happiness and success while at the same time encouraging continuous reforms (Hou 2014, p. 67). The Chinese Dream emphasizes the “Chinese way” (zhongguo daolu) of economic and social development together with “Chinese characteristics” (zhongguo tese). The major goal of the Chinese Dream is prosperity, building up the strength of the country (guojia fuqiang), the rejuvenation of the nation (minzu zhenxing) and the happiness of the people (renmin xingfu). The “Chinese Dream” intends to appeal to the material expectations of the people as well as to their hopes and aspirations. The core concept of the Chinese dragon is to establish a rich and powerful country and to improve the well-being of the people. The “Chinese Dream” is intended to join the country, the nation with the people to create a common fate or common destiny based on China’s historical tradition and sustainable economic development. Many of the goals of the Chinese Dream are intended to promote patriotism, such as “rejuvenation of the nation” and prosperity of the nation and to get the public behind a common policy. To achieve this, cultural and economic connectivity has to be enhanced between the regions concerned. To foster trade connectivity, it is not only a matter of building the essential infrastructure but also to promote greater trade through the appropriate policies rather than just relying on the “free market” to enhance the interdependence between various countries which are part of the BRI. Such projects could not be implemented by relying just on market forces; it needs a government-directed initiative to be successful on such a scale. However, the Chinese dream may be more intended to procure a successful and modern China rather than achieving a high living standard for the peasantry or migrant workers who are unlikely to benefit from the rise of China as an economic power at least in the short term. Sustained economic development does not only relate to economic growth, but is also concerned with how the benefits of economic growth are being distributed. If inequality is increasing, economic development is unlikely to be sustained in the long run; after all, social stability is a precondition for political stability. As many workers are employed less than full-time, inequality of earnings is high. Means-tested welfare payments and progressive taxes can reduce the overall inequality of income. However, based on life experience of the average person during the period between 1949 and 1978, the quality of life of the average person has improved considerably since the reforms started to have an effect.

38

J. JOSHUA

To create a moderately prosperous society, it is not sufficient just to double the average per capita income after a number of years, but the distribution of income and the cost of living have to be considered as well. Measurements such as income per capita become more meaningful when they are measured through the use of purchasing power parity (PPP), but even in this case, it says nothing about the distribution of income; to use average income levels disguises the level of poverty when there is great discrepancy between the lowest and highest income earners. There are various complementarities involved when designing policies to promote economic growth and policies for the elimination of poverty. The raising of the rate of GNP says little about economic development, indeed economic growth may occur together with a decline in a nation’s wealth. Wealth includes manufactured capital, such as machinery, buildings, equipment, and infrastructure, such as roads and railways; and human capital is also included. However, natural capital such as forests, oil, gas, other raw materials and the ecosystem should also be included but are not included in the standard national accounts. To assess economic progress and the wealth of nations, natural capital has to be included. GNP overestimates the wealth of nations because it ignores the fact that capital assets do depreciate. However, such factors have to be included to assess whether economic growth and development is sustainable. Other factors to be included are urban pollution, water and air pollution as well as erosion (see Volume II, Chapter 3). To be sustainable, the Chinese dream will have to include policies to counteract the detrimental effect on the environment; to increase the efficiency of the use of resources, not only an increase in consumption but also the quality of consumption which of course depends on the stage of economic development as the quality of consumption increases at a slower pace than the quantity of consumption. Dreams of this kind are usually dreamt by those who have the “right” to dream whereby the ordinary Chinese citizen is expected to be a passive recipient. How inclusive the Chinese dream actually is, is a matter of dispute. A dream may serve as a sedative while the fulfilments of the dream are being postponed. The impact that people have on the Chinese dream will depend on their power; elites have greater power so that their dreams are not only greater but are more likely to be fulfilled than the dreams of the ordinary worker; even though the term “Chinese dream” gives the impression that it is all-inclusive, a dream for China; a dream for everyone, but the fulfilment of the dream may be more exclusive then it is generally thought to be.

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

39

China has now an increasingly powerful privileged capitalist elite who have become more powerful over the last 20 years and their dreams are more likely to be fulfilled. The Chinese Dream is intended to link the country into a conglomerate whole with a common destiny, but the destiny is not equally formed by all, but depends on the participants’ power relationship. Callahan (2015) used the term “nostalgic futurology” when policies and future economic developments are coached in great historical traditions of China’s civilization. The Chinese dream promises common prosperity arising from economic growth by sharing the benefits of such growth and sustainable economic development. However, the benefits of Chinese fast economic growth have so far been unequally distributed amongst the population. Dreams of course are subject to changes, so that once the Chinese public has advanced, people’s aspirations and goals will change; hence, economic and social policies will have to change as well. At present, the Chinese Dream is based on Chinese tradition, such as prosperity or national rejuvenation; however, as a society advances, it becomes more demanding, so that what was considered as prosperous by a previous generation may not suffice in the case of the following generation. As Chinese society progresses, new values will be incorporated in the Chinese Dream. Previous dreams may fade into history when they are being replaced with new dreams. Even the concept of prosperity has a different meaning within different generations; it is generally associated with the available financial resources, but even when they are sufficiently available, the change in hygienic behaviour may take generations to evolve. It is still not a priority amongst much of the rural population. Hygiene of course is difficult to maintain when there are constant water shortages; but as it does not directly contribute towards economic growth, it is not seen as a priority. For much of the public, the Chinese Dream is just a dream. People’s material living standards usually changes faster than people’s culture. The Chinese Dream is anticipated to give Chinese people a decent middle-class lifestyle, but people’s lifestyle changes at a slower pace than their material status. The Chinese Dream is intended to establish social cohesion and support for the central government; however, China is unevenly developing so that it is not surprising that attitudes towards the Chinese Dream will differ between the more developed provinces and the less developed provinces; hence social cohesion within the country as a whole is best developed by increasing economic development of the less developed provinces.

40

J. JOSHUA

Mahoney (2014) makes the point that during the initial years of the reform period between 1978 and 1992, there were “incredible gains for many Chinese, including those occupying China’s lowest economic rungs. But since 1992 we have seen widening gaps between the rich and poor, between men and women, between urban and rural areas, and so on” (p. 20), which eventually threaten the current aim of creating a harmonious society. Furthermore, the emphasis on a harmonious development often leads to the suppression of “inharmonious elements” (Sze 2015). The terminology of the Chinese Dream incorporates the rejuvenation of the nation, an increase of prosperity, a more advanced socialist society, as well as a stronger military force. The BRI is perceived as a contribution towards accomplishing the Chinese Dream. However, the Chinese Dream also sets the guideline for discourse to ensure that participants are drawn into line while at the same time it is being used as a “rallying point” (Mahoney 2014, p. 30). The humiliation discourse covers the period from the First Opium War (1839–1842) through to the end of the Sino-Japanese War in 1945. This humiliation period is part of Chinese consciousness as exemplified in the subsequent rejuvenation discourse; both discourses have become part of Chinese national identity. The aim to rejuvenate the nation may be summarized as the Chinese Dream. The rejuvenation discourse serves also as “resources for social mass mobilization” (Zheng 2014, p. 4). From the early 1990s onwards, the Communist Party used the slogan: “the great rejuvenation of the Chinese nation” (zh¯onghuá mínzú de wˇeidà fùx¯ıng) to promote its mission and aim. The Chinese Dream is merely a variation of the theme of rejuvenation and hence serves as its continuation; however, the Chinese Dream focuses on making the country wealthy and powerful, whereas rejuvenation emphasized Chinese grievances of injustices committed against China. The implementation of the BRI is intended to result in a regional community of common destiny through a “community of shared interests” or a “community of shared destiny”, together with a “community of shared responsibility” (Zeng 2016).

2.8

Conclusion

This chapter explains various economic policies which have an impact on the implementation and the operations of the BRI together with the presently undergoing paradigm shifts and their implications. Particular emphasis has been given to an analysis of how the Washington Consensus and the Beijing

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

41

Consensus may relate to the BRI. This chapter will therefore compare and contrast the Washington Consensus with the Beijing Consensus. The Washington Consensus has been increasingly questioned after the financial crisis of 2008–2009 and the global power of the United States have been weakened as a power shift is moving towards East Asia and it is moving from a unipolar towards a multipolar power relationship. It has been argued that there is a paradigm shift occurring between the Washington Consensus and the Beijing Consensus. The Washington Consensus is based on financial liberalization, deregulation and privatization; however, private entrepreneurs are unlikely to be interested in large-scale projects such as the BRI. The American form of capitalism is contrasted here with capitalism with Chinese characteristics; hence, we will compare and contrast the Washington Consensus with the Beijing Consensus which will affect the forms of present and future globalization and therefore the practice of economic policies and economic development in the future. There is now also a greater cooperation between emerging powers as the unipolar global order is declining and moving towards a multipolar power relationship. In fact, the envisioned multipolarity of the BRI is in direct opposition to Western conceived universalism. This chapter describes the economic policies and their implications regarding the BRI. It highlights the opportunities and the challenges which may be activated through Chinese policies. The BRI provides many opportunities as well as possible numerous crises. The Chinese term for “crisis” is weiji and the Chinese characters are 危机, which includes the term for “danger”, wei xian 危险 as well as the term for “opportunity”, ji hui 机 会 (Joshua 2017, p. 226). The BRI passes through many geographical areas which experience various forms of crisis, including warfare and other challenges. Trade and sustainable economic development may reduce or confine conflicts to some geographical areas and so could foster political stability, but various conflicts will remain, largely instigated by those who oppose the BRI. China thus may be confronted by conflicts in some areas, but it may also lose much of its investment which would have a detrimental impact on the domestic economies of the countries involved, especially China’s. Individual Chinese policies which support the BRI will be discussed thoroughly which will have consequences for the present unipolar world order. China’s policies have become more assertive in recent times, a policy from “laying low” to one of “China is back” which will have considerable implications for future international relations. China’s policy of “opening

42

J. JOSHUA

up” during the 1990s is intended to attract foreign investment into China and to export Chinese products. The BRI may be seen as a concrete extension of such Chinese policies. This policy was eventually followed up with a “going out” policy announced in 2001 to reduce capital surplus and to channel Chinese capital into overseas investment. The “going out” policy is to ensure adequate resources of raw materials and other resources to feed into China’s economic growth and sustainable economic development. China’s “going out” policy was for the first time incorporated in the Tenth Five-year plan (2001–2005) and is an attempt to ascertain the supply of raw materials to feed into China’s economy, finding new markets for Chinese exports and the construction of multiple facilities, including transportation facilities to absorb China’s surplus of capital. On the other hand, the open-door policy began during the 1980s to attract foreign direct investment into China. The BRI will also increase China’s geopolitical influence, especially in the participating countries of the BRI. Chinese investments in foreign countries, including through mergers with other corporations or acquisitions may increase their profitability which may also be able to prevent a downturn of the Chinese domestic economy. The BRI is expected to increase trade on a global scale. Consequently, the BRI will also increase China’s geopolitical influence in international relations and in international markets, as well as in international organizations. China essentially promotes globalization with Chinese characteristics through a state-led development paradigm which is integrated with a growing private sector. However, it has to be emphasized that even though many of the larger Chinese corporations are state owned, they are not state run, as most commercial activities are autonomous from government decisions. Chinese economic growth has not only been propelled by market forces, but has been state guided and often executed through state-owned enterprises. The implementation of the BRI is part of the globalization process, but with specific Chinese characteristics which have an impact on the evolving international relations as it will affect nations’ sovereignty and so will have has global consequences which require global solutions. Globalization may be seen as the externalization of a national form of capitalism. China advocates a “community of common destiny” (gongtong mingyun de shegu) for the member countries of the BRI. The Chinese Dream is to establish a moderately prosperous society. However, not everyone is expected to benefit equally from the Chinese Dream.

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

43

The thrust of Chinese economic policies has partly shifted from economic growth at any cost towards the implementation of a harmonious society. Chinese government policies have been able to incorporate various policies to promote social cohesion and promote its political legitimacy; depending on the particular issues involved, the government moves between being authoritarian and being accountable and responsive. It has been emphasized that the BRI has been initiated and implemented through state direction and state ownership, and it is argued that the BRI could not succeed without state intervention. As the BRI is successfully implemented, multiple countries, especially amongst the emerging economies, are likely to follow the Chinese example of economic development. The financial crisis has shown that more regulations of the economy are required. It is also argued in this chapter that more state-led planning is required for proficient economic development; without state-planning the planning will be done by interest groups serving their own interests which may not always serve the interest of the nation. It is also argued that there are no economic policies which are suitable for all economies as the circumstances may differ from each other and different policies may be used to achieve similar goals. Furthermore, economies may be embedded within different stages of economic development which require different economic policies. China has illustrated that different policies other than the Washington Consensus may be used to accomplish economic development. As the global economy is rapidly changing, the established financial institutions will have to adapt themselves towards the new international economic and financial relations which are expected to change the global financial order.

Bibliography Arase, D. (2015). China’s Two Silk Roads Initiative: What It Means for Southeast Asia. Southeast Asian Affairs, 2015(1), 25–45. Bairoch, P. (1995). Economics of World History: Myths and Paradoxes. Chicago: University of Chicago Press. Bardhan, P., & Mookherjee, D. (2006). The Rise of Local Governments: An Overview. In P. Bardhan & D. Mookherjee (Eds.), Decentralization and Local Governance in Developing Countries: A Comparative Perspective (pp. 1–52). Cambridge, MA and London: MIT Press.

44

J. JOSHUA

Beeson, M., & Li, F. (2015). What Consensus? Geopolitics and Policy Paradigms in China and the United States. International Affairs, 91(1), 93–109. Callahan, W. A. (2015). History, Tradition and the China Dream: Socialist Modernization in the World of Great Harmony. Journal of Contemporary China, 24(96), 983–1001. Chen, M.-J. (2002). Transcending Paradoxes: The Chinese Middle Way Perspective. Asia Pacific Journal of Management, 19, 179–199. Chomsky, N. (2002). Understanding Power: The Indispensable Chomsky (J. Schoeffel & R. Mitchell, Eds.). New York: The New Press. Comino, A. (2007). A Dragon in Cheap Clothing: What Lessons Can Be Learned from the EU-China Textile Dispute? European Law Journal, 13(6), 818–838. DeLong, J., & Eichengreen, B. (1993). The Marshall Plan: History’s Most Successful Structural Adjustment Program. In R. Dornbusch & W. Nolling, et al. (Eds.), Postwar Economic Reconstruction and Lessons for the East Today (pp. 189–230). Cambridge: MIT Press. Farah, P. D. (2016). Trade and Progress: The Case of China. Columbia Journal of Asian Law, 30(1), 51–112. Galbraith, J. K. (1974). Economics and the Public Purpose. London: André Deutsch. Gao, S. (2017). China and Global Energy Governance: Integration or Confrontation. Global Governance, 23(2017), 307–325. Gore, C. (2000). The Rise and Fall of the Washington Consensus as a Paradigm for Developing Countries. World Development, 28(5), 789–804. Gu, M. D. (2016). Confucian Ethics and the Spirit of World Order: A Reconception of the Chinese Way of Tolerance. Philosophy East and West, 66(3), 787–804. Güven, A. B. (2012). The IMF, the World Bank and the Global Economic Crisis: Exploring Paradigm Continuity. Development and Change, 43(4), 869–898. Halper, S. (2010). The Beijing Consensus: How China’s Authoritarian Model Will Dominate the Twenty-First Century. New York: Basic Books. Harman, C. (2008). A People’s History of the World: From the Stone Age to the New Millennium (3rd ed.). New York: Verso. Henderson, J., Appelbaum, R. P., & Ho, S. Y. (2013). Globalization with Chinese Characteristics: Externalization, Dynamics and Transformations. Development and Change, 44(6), 1221–1253. Hou, X. (2014). Dissecting China’s Rise: Controversies Over the China Model. China Perspectives, 2014(2), 61–67. Hsueh, R. (2016). State Capitalism, Chinese-Style: Strategic Value of Sectors, Sectoral Characteristics and Globalization. Governance: An International Journal of Policy, Administration, and Institutions, 29(1), 85–102. Huang, Y. (2012). How Did China Take Off? Journal of Economic Perspectives, 26(4), 147–170.

2

ECONOMIC POLICIES, PARADIGM SHIFTS AND THEIR IMPLICATIONS

45

Jing, Y. (2017). The Transformation of Chinese Governance: Pragmatism and Incremental Adaption. Governance: An International Journal of Policy, Administration, and Institutions, 30(1), 37–43. Joshua, J. (2017). China’s Economic Growth: Towards Sustainable Economic Development and Social Justice (Vol. II). London: Palgrave Macmillan. Kant, I. (1983). Perpetual Peace and Other Essays on Politics, History, and Other Morals (T. Humphrey, Trans.). Indianapolis: Hackett Publishing. Kennedy, S. (2010). The Myth of the Beijing Consensus. Journal of Contemporary China, 19(65), 461–477. Kornai, J. (2000). What the Change of System from Socialism to Capitalism Does and Does Not Mean. Journal of Economic Perspectives, 14(1), 27–42. Kuhn, T. S. (1970). The Structure of Scientific Revolutions (2nd ed.). Chicago: The University of Chicago Press. Lin, J. Y. (2010). New Structural Economics: A Framework for Rethinking Development (World Bank Policy Research Working Paper No. 5197). Washington, DC: World Bank. Liu, D. (2014). China’s Resource Demand and Market Opportunities in the Middle East: Policies and Operations in Iran and Iraq. Perspectives on Global Development and Technology, 13(5–6), 564–587. Lu, S., & Ganne, B. (2016). From Farm Tools to Electric Cars: A Study of the Development of a Chinese Industrial Cluster: The Case of Yongkang in Zhejiang (1980–2010). China Perspectives, 2016(1), 37–48. Mahoney, J. G. (2014). Interpreting the Chinese Dream: An Exercise of Political Hermeneutics. Journal of Chinese Political Science, 19, 15–34. McNally, C. A. (2011). China’s Changing Guanxi Capitalism: Private Entrepreneurs Between Leninist Control and Relentless Accumulation. Business and Politics, 13(2), 1–29. McNally, C. A. (2012). Sino-Capitalism: China’s Re-emergence and the International Political Economy. World Politics, 64(4), 741–776. McNally, C. A. (2013, February). How Emerging Forms of Capitalism Are Changing the Global Economic Order. Asia Pacific Issues. Analysis from the East-West Center (107), 1–8. Nathan, A. J., & Scobell, A. (2016). Globalization as a Security Strategy: Power and Vulnerability in the “China Model”. Political Science Quarterly, 131(2), 313–339. Naughton, B. (2010). China’s Distinctive System: Can It Be a Model for Others? Journal of Contemporary China, 19(65), 437–460. Rodrik, D. (2006). Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank’s Economic Growth in the 1990’s: Learning from a Decade of Reform. Journal of Economic Literature, XLIV (4), 973–987. Shleifer, A., & Vishny, R. W. (1993). Corruption. Quarterly Journal of Economics, 108(3), 599–617.

46

J. JOSHUA

Stiglitz, J. E. (2002). Globalisation and Its Discontents. New York: W. W. Norton. Stiglitz, J. E. (2010). Free Fall: America, Free Markets, and the Sinking of the World Economy. New York: W. W. Norton. Stuenkel, O. (2013). The Financial Crisis, Contested Legitimacy, and the Genesis of Intra-BRICS Cooperation. Global Governance, 19(4), 611–630. Sze, J. (2015). Fantasy Islands: Chinese Dreams and Ecological Fears in an Age of Climate Crisis. Oakland: University of California Press. Williams, K. (2000). From Shareholder Value to Present-Day Capitalism. Economy and Society, 29(1), 1–12. Williamson, J. (1993). Democracy and the ‘Washington Consensus’. World Development, 21(8), 1329–1336. Williamson, J. (2012). Is the “Beijing Consensus” Now Dominant? Asia Policy, 13(1), 1–16. Xu, C. (2011). The Fundamental Institutions of China’s Reforms and Development. Journal of Economic Literature, 49(4), 1076–1151. Yates, J. S., & Bakker, K. (2014). Debating the ‘Post-neoliberal Turn’ in Latin America. Progress in Human Geography, 38(1), 62–90. Zeng, L. (2016). Conceptual Analysis of China’s Belt and Road Initiative: A Road Towards Regional Community of Common Destiny. Chinese Journal of International Law, 15(3), 517–541. Zhang, W. (2014, January 6). Overseas M&As of Chinese Petroleum Enterprise (Part One) (China Chemical Reporter). Zheng, W. (2014). The Chinese Dream: Concept and Context. Journal of Chinese Political Science, 19(1), 1–13.

CHAPTER 3

Economic Development and the Belt and Road Initiative

3.1

Introduction

This chapter analyses the processes of economic development and its relationship to the BRI. The chapter begins with the processes of economic development, including the pre-existing social and economic conditions which feed into or hinder economic development before describing theories of economic growth and economic development. Subsequently, the stages of economic development together with the different production cycles and the production ladder will be analysed. Policies of comparative advantage and how they affect globalization and economic development are discussed; however, the necessity of diversification leads us into an argument about the necessity of technological change through creative, destructive and defensive innovation and the necessity of China’s transformation towards high technology. The importance of the upgrading of technology in shifting a comparative advantage has been emphasized. This chapter discusses the relationship between the BRI and economic development and begins with the underlying process of economic development and its progress. This discussion is followed up with different growth theories of economic development and an analysis of the different stages of economic development. The analysis then elaborates on theories of comparative advantage and economic development and explains how such theories relate to globalization. Subsequently, the arguments for diversification and specialization will be explored which may require processes of creative, destructive and defensive innovation before China’s thrust towards © The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28030-7_3

47

48

J. JOSHUA

the application of high technology can be investigated. The chapter then concludes with a discussion of different appropriate strategies of economic development. This chapter explains the effects that the BRI may have on economic development of participating countries. A detailed discussion on the effects of the BRI on China’s domestic economy, on the participating economies of the BRI, and the effect on the global economy is provided, respectively, in Chapters 4, 5 and 6 in Volume II. This chapter relates theories of economic development to the BRI and thereby highlights essential economic reforms that may be introduced to improve the economic development of the participating countries of the BRI. The theoretical discussions are also important to highlight the eventual shift in developmental theories. Various models have been described in this chapter. The Heckscher–Ohlin theory of endowments and the Ricardian model which takes account of technological change have been explained. Barro’s model uses inputs of capital and labour together with government policies to explain economic growth, while Lucas’s endogenous growth theory explains economic growth through fiscal decentralization by increasing government expenditures to increase physical and human capital. Theories of comparative advantage and their relationship to globalization and economic development are explained. However, comparative advantage may shift and countries may achieve higher economic growth in the long run by diversifying their economic activities. By advocating comparative advantage, it actually will prevent the comparative advantage from shifting and so provides a continuing advantage to those countries which have industrialized first. The increase in the quantity and the quality of infrastructure will increase productivity and economic growth and so will also enhance the comparative advantage. Comparative advantage has been shifting throughout history and now it is shifting towards East Asia, so that theories advocating comparative advantage deny the progress of economic history. Economies that follow unquestionably theories of comparative advantage do so at their own peril; furthermore, stages of economic growth can also be skipped. A contrast is also made between comparative advantage and competitive advantage; that is, comparative advantage implies that goods can be produced at a lower opportunity cost than competitors, whereas a competitive advantage of a product or service results from the superior attributes so that customers see it as being of higher value.

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

49

Any country has to give serious consideration to arguments concerning diversification and specialization. The level of export diversification increases with the level of technological development (Balassa 1977). Trade relationships have to be carefully designed as they may promote or hinder the development of new comparative advantages. Comparative advantages may shift between stages of economic development (Balassa 1986), especially as the level of technology differs in different stages. As comparative advantages are shifting, so are countries’ attitudes towards free trade; that is, as countries’ comparative advantages decline, they are inclined to oppose free trade, so that globalization is promoted by countries which have a comparative advantage. However, a change in a country’s comparative advantage usually requires a structural transformation of the economy. The distinction and relationship between creative, destructive and defensive innovation (Schumpeter 1934, 1949) have also been explained. It has been argued that it is of greater importance to create new jobs, rather than protecting outdated jobs; otherwise, comparative advantages will be shifting to other countries. The opening up of trade with developing countries may be coordinated with the creation of new financial institutions, the creation of much-needed infrastructure and the construction of hospitals and schools. The provision of infrastructure, such as the provision of electricity and water, will help to change attitudes towards hygiene. In various Chinese provinces, there are constant power outages and disruption of water supply. In many developing countries, the first priority is to get water supply into the home, once people have sufficient supply of water, people will start to be concerned about clean water. In many developing countries, the constant interruption of water supply and power outages are an all too common occurrence which interferes with business as well as private activities. The availability of electricity and water also increases the level of hygiene and therefore improves people’s health. Calderon and Serven (2008, 2014) argue that the provision of infrastructure and economic growth lowers the level of poverty. However, in many instances the consumption of electricity is increasing faster than the increase in the supply of electricity. Electricity outages and water shortages may occur because of ageing infrastructure and an increase in the demand for electricity and water. China’s success of development and the reduction of the level of poverty by over 800 million people since the economic reform began is partly the consequence of the construction of a vast infrastructure network which

50

J. JOSHUA

helped to facilitate fast economic growth. State-led interventions may be essential in situations when uneven development increases inequality and creates poverty in various regions. However, an increase in stricter environmental regulations and increasing wages in China caused various Chinese manufacturers to shift their operations of production to Cambodia, especially in the garment industry which provides about 90% of Cambodian non-commodity exports (Pál 2013, p. 1392). This chapter explains how different economies move through different stages of economic development; how they move through different production cycles and thereby are moving up the product ladder, so that the quality of products increases as well. China continues to move up the product chain and the value chain, whereby a new global production network has evolved. The two separate types of production processes of “spiders” and “snakes” in the production chains have also been explained. The purpose of the theoretical sections is to assess the viability of present policies and to advocate policies which may be more suitable in achieving a sustained economic and social development. The implementation of the BRI is regarded here as an important part of economic development to achieve such ends.

3.2

Processes and Progress of Economic Development

Developing economies are in the process of transformation rather than in transition. Henderson and Nadvi (2011) make the valid point that “transition assumes a known end to the change process” (p. 293), whereas transformation “assumes that the end of the change is unknown” (p. 294), so that the usage of the term of transformation “allows for the possibility … of open-ended reflection on the dynamics and consequences of political, economic and social change” (p. 294). Transformation of an economy entails changes in the structures as well as institutions. Consequently, there is a shift in the distribution of the population between rural and urban areas; between the types, level and quality of education; between required skills and redundant skills and an ever-increasing use of technology. However, competition is likely to be constrained through: (1) low quality of infrastructure services, such as Internet access, telephone services and power supply; (2) factors markets such as labour market, skilled labour and access to finance; (3) regulating requirements; and (4) governance disciplines (Broadman 2007, p. 172).

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

51

Concepts underlying endogenous growth theory had already been promulgated by Kant (1994/1803), some two-hundred years before Romer (1994). Kant (1994) argues that competition between individuals increases their efforts and so builds up and accumulates new knowledge required for the formation of sustained economic growth. Kant (1994) explains that human beings have to be cultivated through education and instructions to instil skilfulness. The marginal return to knowledge does not decrease when knowledge accumulates and so promotes sustained economic growth, so that Schultz (1961) regarded expenditures on education as an investment rather than a matter of consumption; whether for private gains or for the accumulation of social benefits at large. Kuznets (1955) argues that growth causes changes in the distribution of income. An improvement of human capital and greater access to off-farm job opportunities will affect the relationship between economic growth and income distribution. Individuals with higher human capital are less affected by the adverse effect of the distribution of income. Income distribution may also differ profoundly between geographical areas. The existence of geographic poverty traps implies that households in poorer areas experience lower economic growth and less growth in income than in areas of more economic growth. However, education policy is not only concerned with the formation of human capital but should also address issues of absolute poverty, inequality of opportunity and inequality of outcome. Policies to reduce inequality have to address all three inequalities. Absolute poverty could be eliminated by expanding the dibao programme which covers the minimum living allowance. The eligibility threshold could be lowered and the benefit structure could be improved. In China, the existence at the lowest income level may be subsidized; for example, the di baohu is a means-tested support scheme to provide a subsidy for those at a monthly income which is lower than the lowest average standard of city of residence, whereas the wu baohu subsidizes income at the lowest average of family income to guarantee the five essentials; the recipients of such allowances are usually residing in the countryside. Furthermore, the emphasis on economic growth may not affect the living standard of the general public, which largely will depend on the distribution of income. The Lorenz curve or other comparisons of inequality only provide a static picture of inequality. The generational transmission of poverty and opportunities to move into higher remunerated and higher skills employment has to be considered as well; without such transition, people in poverty will not be able to escape from their poverty. When the

52

J. JOSHUA

population is divided between the urban and rural sectors, there is a persistence of two separate types of wage earners with great differences in the standard of living; while the rural sector remains largely stagnant, the urban sector moves ahead. The urban workforce is divided into two separate groups, that is those who are engaged in the informal sector with low productivity who serve as a standby labour force. Capital is concentrated in the formal sector, while the informal sector is dominated by high disguised unemployment and marginal employment. The informal sector provides mostly a living for those who are being left behind. The development of a modern sector attracts workers from the countryside to the cities which do not have the capacity to absorb all migrants to the city and so creates disguised unemployment which causes a large population to live in squalor, whereby urbanization moves ahead of industrialization. However, foreign investment in emerging economies generally benefits more the local elite than the local population as a whole. Poverty breeds complacency when there is little hope to escape from poverty. Instead, people in poverty are being used as a standby workforce to be called up whenever the need arises; but their wages remain little above the level of subsistence. However, long-term foresight is generally not appreciated, especially when it interferes with present way of living. Governments may also not put a high priority on the elimination of poverty, and peasants’ complacency may also prevent a rise in living standards for them. Peasants cultivate the land mostly for subsistence, whereas farmers cultivate the land for profits; however, some peasants may succeed to move out of the peasantry and become active as farmers. China’s industrialization goes through similar processes as the Industrial Revolution in England during the eighteenth and the late nineteenth centuries. Rationality is required for progress and reason does not evolve instantaneously or instinctively but requires practice and experience to progress through learning by doing (Arrow 1962). Needless to say that progress cannot occur without effort which however has to turn into a habit before it can evolve into progress. The increase in China’s national consumption and China’s status as a manufacturer requires vast quantities of raw materials of which it has an insufficient supply to meet current demand, which also has caused a sharp increase in the commodity prices since 2003. However, the BRI will be able to increase supply to meet demand. China is an importer of raw materials on a grand scale and is expected to export higher value-added goods and

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

53

services. Emerging markets and developing countries should sail in the same boat because in various areas they complement each other and may well turn out to be the future engine of global growth. A competitive domestic market is vital for international competition of domestic industries into the global economy. Global integration may increase allocative efficiency as inefficient firms are pushed out of the market while new firms enter the market. As firms become internationally more efficient, they are likely to increase their export performance. Imports and FDI may also lead to more innovation which increases dynamic efficiency. As individuals earn more income, they increase not only their consumption but the quality of goods consumed will also increase, so that existing goods are progressively replaced with higher-quality goods and services. Schumpeter (1934, 1949) rejected the neoclassical assumption of required stability and argued that economic growth and stability were contradictory to each other as development can only occur under constant change, for example, through the introduction of new technologies, avantgarde knowledge, new markets, new sources of raw materials or a change in the organizational structure of industry and employment, including the infusion of direct foreign investment. The injection of physical capital and technological expertise through the BRI can promote economic growth in the participating countries. China’s economic growth was driven by exports and investment; since 2004, the share of China’s exports as a percentage of its GDP is over 35% (Li and Shaw 2014, p. 84). Such an overdependence on foreign markets makes China vulnerable position; hence, China is to some extent constraint in pursuing an independent policy and thereby may be subject to political pressure. If China’s access to raw materials is prevented, then this will have a detrimental, even a devastating impact on its economy. The BRI can go a long way in diversifying its supply of energy sources and of raw materials. However, countries will have to come to a mutual understanding of how to share or modify each other dreams. Connectivity is fomented through education and sustained economic development, not through the imposition of military force; although some nations which are in their decline of political and economic power may see military force as the only way to enforce the unilateral dominance, but in the long term, it will produce a countervailing effect.

54

3.3

J. JOSHUA

Growth Theories of Economic Development

Economic growth and development may be investigated from the perspective of classical and neoclassical growth theory. Chow (1993) and Chow and Li (2002) emphasized capital accumulation; Bosworth and Collins (2008) emphasized technological progress. The implementation of BRI emphasizes infrastructure to facilitate connectivity and consequently trade. In Barro’s (1990) model, a region’s output results from capital and labour inputs and government expenditure as it improves the level of human capital and increases physical capital. Lucas’s (1988) endogenous growth theory can be used to analyse the impact of fiscal decentralization on growth through an increase of human capital and physical capital as a result of government injection of funds. The output of a region can be increased with capital and labour. Government expenditure can be increased to further the accumulation of capital and education to increase the growth of GDP. The level of government spending may depend on projected economic growth which may be accelerated through government-sponsored projects, such as the BRI. During the initial stages of the BRI, government expenditures are largely concerned with the construction of infrastructure which is essential if BRI is to succeed. Chu and Zheng (2013) find that Lucas’s (1988) endogenous growth theory was more applicable in explaining Chinese provincial economic growth, than Barro’s (1990, 1991, 1997) theory. Economic development relates to economic progress which can only be achieved with technological progress (Schumpeter 1949). Economic growth as a result of an increase in the population or in wealth should not be confused with economic development which requires the combinations of new productive forces, rather than more of the same techniques. Economic development entails new products, new techniques of production, better quality of goods and services, the opening up of new supply roads for raw materials and new organizational networks and new markets which require the liberation of productive forces. Economic growth and development requires the co-evaluation of technologies and the appropriate institutional framework. The appropriateness of the institutions will depend on the specific conditions. Institutions have to adapt to changes; otherwise, they may retard economic growth and development. The implementation of the BRI can facilitate such progress in several geographical regions and so may contribute towards the Chinese Dream.

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

55

Policies of inclusive economic development must pursue social objectives, such as reduction of poverty, the improvement of employment situation and to redress the distribution of income without a deliberate policy on social welfare, the “trickle-down” theory remains a myth. The “trickle down” theory assumes greater well-being for the masses by greater job and other opportunities; it assumes a vertical flow from the richer to the poorer sections of the economy, without any thoughts be given to economic development, and without any deliberate action it is assumed to occur automatically. In any case, as Lewis (1955) remarked, economic development is inequalitarian because it does not start in every part of the economy at the same time. Income may increase in the enclave or in several enclaves which may have favourable and unfavourable effects on other parts of the economy. The inequalitarian nature of economic development occurs from the failure of horizontal spread from the enclave sector to the remaining part of the economy, even though there may be some vertical “trickle-down” effect which has a beneficial effect on the enclave economy. Myrdal (1956) argued that there cannot be economic progress and national integration without redistributional reforms. Economic growth with equity cannot be achieved without a deliberate effort towards a greater equitable distribution of the benefits of economic growth. Kuznets (1955) argued that inequality is likely to increase during the early decades of economic development, before more unequalizing trends within the economy become effective. Economic development implies structural change, rather than more of the same. Economic growth may be induced by some economic sectors leading the economy, and it may be impeded by other sectors lagging behind; economic growth then may depend to some extent of how fast resources can be shifted from the lagging sector into the leading sector. Economic growth in some economic sectors may impede economic development like in some cases of the mining sector, and economic development may occur without economic growth. Concepts of balanced and unbalanced economic growth and their strategies are strategies of development as they involve structural changes. The development of economically underdeveloped areas, therefore, is a matter of priority. Economic growth and development requires the co-evaluation of technologies and the appropriate institutional framework. The appropriateness of the institutions will depend on the specific conditions. Institutions have to adapt to changes; otherwise, they may retard economic growth and development. Of course, there is this naïve assumption that economic growth is just “an increase in income” (Schultz 1964, p. 74); never mind

56

J. JOSHUA

the title of his book which includes “transforming”, but little else is said about actual structural changes of the agricultural sector. More emphasis is given to structural changes by Hirschman who argues that economic development implies processes of transformation from one sector of an economy into another, more advance sector (Hirschman 1958).

3.4

Stages of Economic Development

Economies may move from stages of preconditions to self-sustaining growth and economic development which leads towards cultural change. Economic development and social transformations have a reciprocal relationship with each other. China has proceeded through different stages to accomplish fast economic growth and economic development through targeted economic reforms implemented by the government. China attempted complete industrialization during the 1960s through central planning by trying to enforce self-reliance and self-sufficiency through industrial policies while attempting to leapfrog developmental stages by concentrating on the establishing of heavy industry; however, it was not sustainable. China established domestic and international markets after the economic reforms of 1978. China’s policies are similar to what Smith (1999/1776, pp. 109–117) advocated in his “The Wealth of Nations” through the division of labour based on the size of the market which he illustrated through the eighteenth-century pin factories. Wen and Fortier (2016) argue that China’s success in creating markets created the foundation for future economic growth whereby the “sequence of market creation explains the absence of any recurrent and destructive financial crises that dominated the developmental history of the West and Latin America” (p. 192). Production on a large scale can only be productive when there is a mass market available which requires a mass-distribution system. Chinese purchasing power is rapidly increasing to support a mass market. The division of labour is limited by the size of the market (Smith 1999/1776). Policies such as “Great Leap Forward” have failed because there was not the necessary mass market; similar to Gerschenkron’s (1962) concept of a “bigpush” towards industrialization, mass production requires a mass market. However, different policies may be required during different stages of economic development. Countries which are part of the BRI may be regarded as ships on the sea which together rise with the waves; however in reality,

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

57

the participating countries are at different stages of economic development and, therefore, have different prospects. Wen and Fortier (2016) make the valid point that China’s experience of economic development is a new model of economic development which they describe as the new stage theory (NST) of development which is related to the old stage theory of Rostow (1960), List (1885/1841), and Marx (1906/1867) and theories of “Structuralism and New Structuralism” (Lin 2009, 2011). Most importantly, industrialization cannot bear fruit without the creation of an adequate market to support such industrialization. Differences in stages of development between nations may cause differences in nations’ policies, but such policies may either intensify or diminish such differences, however which direction such policies may take cannot be determined without an analysis of the economic determinants of such differences, including an analysis of policies which may narrow the gaps between economic developments. Economic development is a multidisciplinary process moving through multiple stages, so that differences in economic development have multidisciplinary and multidimensional causes. The stages of economic development in which countries find themselves largely determine the economic structure of a country. The take-off stage requires various preconditions. According to Rostow (1956, 1971), “revolutionary changes in agricultural productivity” are an essential condition for successful take-off (1971, p. 8). A take-off requires an increase in the rate of productive investment, the development of a manufacturing sector and the emergence of a suitable institutional framework to facilitate the mobilization of the required capital which is able to transmit the increasing income and savings from the leading sector to other sectors. However, market opportunities are required to attract capital and infrastructure is needed to take advantage of market opportunities; there are great market opportunities in China for raw materials from the participating countries. Imbs and Wacziarg (2003) found that during early stages of development countries tend to diversify but during the later stages they tend to specialize so that sectoral concentration takes on a U-shaped pattern in relation to per capita income. An increase in sectoral specialization applies mainly to high-income economies. The Engel effects cause an increase in the diversity of goods consumed. An increase in the size of the market and an increase in diversification go along with economic growth. There are traditional and modern sectors, and it is the latter that drives economic

58

J. JOSHUA

growth through increases in productivity. Consequently, economic growth increases diversification during its early stages and then reduces it; furthermore, the traditional and the modern sectors are substitutes rather than complements (Acemoglu and Zilibotti 1997). The availability of skilled human capital will assist in the process of diversification away from the raw material sector. Diversification also implies that more social groups are involved in the production process and therefore are more likely in enhancing the distribution of income towards a more equal income distribution. “Made in China 2025” is intended to use technology to enhance competition, rather than by imposing trade barriers. “Made in China 2025” is also intended to reduce China’s dependence on other countries and so becomes self-reliant in technological know-how and so may advance from low-tech manufacturing to high-tech manufacturing. Non-resource sectors often remain underdeveloped and are usually connected to the resource sector, such as construction. To rely just on the resource sector for income implies that the economy is vulnerable to global commodity prices and the export market. Rostow (1971) argues that economies pass through different stages of economic development and finally “drive to maturity”. Rostow (1980) makes the point that the rate of economic growth slows down because the incentive from catching up with the technologically more advanced economies becomes less powerful. Construction of infrastructure provides externalities which may improve the productivity and capability of the public. However, the claim by Rostow (1971) that all nations pass through the same stages is empirically incorrect for two reasons: firstly, the movement through the different stages will depend on a country’s specific environment which differs between nations; secondly, stages can be skipped, as in the case of China which now has leapfrogged into high-technology innovation. Indeed, stages of comparative advantage may also be reversed as is indicated, for example, through the “rust-belt” in the Midwest of the United States. Industrialization is first driven by imitation which then promotes import substitution, so that initially the drive towards economic growth and development causes from an increase in consumption rather than from production, so that entrepreneurs decide to produce those products themselves rather than importing them; whereas in the case of China’s economic growth, it began with the exporting of commodities. China has now progressed to its own product innovation and advances in hightechnology research. China is not interested in catching up with the

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

59

advanced economies, but instead intends to leapfrog them by concentrating on strategic technologies, such as robotics and artificial intelligence. China has truly moved from imitation to innovation and has moved on to high technology.

3.5

Comparative Advantage, Globalization and Economic Development

According to the Heckscher–Ohlin model, countries only compete with other countries when they have similar factor endowments. Differences in the characteristics may induce producers to divide production processes into different stages and locate them in different countries according to their comparative advantage. Under the Heckscher–Ohlin assumption of comparative advantage, it is determined by the abundance of the factors of production; for example, a nation that has cheaper and abundant labour ought to specialize in the exports of labour-intensive products. However, it may be essential that some countries will diversify rather than relying on a few specialized products. Comparative advantage may be shifting with the help of technology transfer and the building up of the required human capital. Most developing countries have abundant labour but insufficient capital. The assumption of the Stolper–Samuelson (1941) model is that free trade will increase income in the case of abundant factors, but reduces income for factors which are scarce. High specialization may result in comparative advantage; which may be increased through the availability of new resources, as in the case of Heckscher–Ohlin model, or it may be achieved through the application of technologies as in the Ricardian model; comparative advantage may shift especially in the case of technological change. However, the Heckscher–Ohlin model is inadequate to explain the flows of trade between high-income countries as the theory was based on the differences in endowments between nations. According to the Heckscher–Ohlin model, countries are expected to export products which are using their abundant resources together with low-cost factors of production, whereas the Ricardian model assumes that trade patterns will follow the patterns of comparative advantage. However, the Heckscher–Ohlin model and the Ricardian model concentrate on natural comparative advantages which are given, that is first order which are associated with comparative endowments of a country such as land, labour

60

J. JOSHUA

and capital, to the exclusion of second nature which relates to the advantages which are accrued from the presence of other firms which thereby attract other firms (Picard and Zeng 2010). The Heckscher–Ohlin model ignores other factors such as technology, education, infrastructure and government policies as well as the complementarities in production between economies. It is argued that this model cannot explain China’s economic growth. Neoclassical theories are not able to explain the growing importance in exports of increasingly complex products with increasing capital intensity, technology and higher levels of skills. Standard theories of comparative advantage assume that developing countries do not have a comparative advantage in such goods, but their market shares are nevertheless increasing fastest. To adhere to standard theories of comparative advantage will keep developing countries in their place as they are not expected to compete with more advanced economies. In contrast to the Heckscher–Ohlin theory of endowments, the technological gap theory assumes that trading patterns are dynamic and are therefore subject to change. New products and new methods of production may be introduced and so may balance the foreign trade accounts rather than being in a perpetual surplus or deficit when accepting trading according to theories of comparative advantage which worked for countries which developed first. The increase in trade has been faster than the increase in GDP over the last 60 years. Ricardo (1951–1973/1817) assumed that trading nations ought to specialize in the production of commodities where they have a comparative advantage; however, comparative advantages are shifting (Joshua 2017, Volume I, pp. 86–97), and by advocating comparative advantage, it prevents such advantage from shifting, which suits established manufacturing countries as it eliminates competition for their products. Relative revealed comparative advantage may be defined as RCA = ((Xij /Xit )/Xwj /Xwt ), where Xij and Xwj are the values of a country’s exports of product and world exports of the productj . The total exports of the country are Xij and the world’s total exports are Xwt (Joshua 2017, Volume I, p. 87). The revealed comparative advantage may be changed because of changes in comparative factor prices or because of a catching-up effect because of technological change and learning by doing. As countries increase their competitiveness, they will increase their market share and

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

61

when they become less competitive, they will lose market share. RolandHolst and Weiss (2005) find that ASEAN countries have experienced losses of market share because of considerable competition from Chinese exports. Agénor (2010) argues that the construction of infrastructure facilitates economic growth in less developed countries. Yogo and VerdierChouchane (2015) describe the key channels through which infrastructure may affect economic growth and competitiveness. Infrastructure lowers the costs of production and increases productivity. Public infrastructure enhances the profitability of private inputs, such as capital investments and labour. Infrastructure reduces transaction costs through effective modes of transport and also increases FDI. Infrastructure also improves the supply of electricity and the supply of water. Yogo and Verdier-Chouchane (2015) found that a 1% increase in the quality of infrastructure increases on average competitiveness by 0.64%. Infrastructure increases productivity and leads to higher economic growth, and the availability of infrastructure also leads to further cultural and social development. Networks of infrastructure are essential to link communities to greater markets. Many countries which are part of the BRI lack adequate infrastructure so that it is vital that the political framework of the BRI highlights the construction of infrastructure at various levels. The main aim of BRI is to enhance or establish processes of connectivity to facilitate local and international developments through the construction of infrastructure such as roads, railways and pipelines. With the growth of the BRI, Eurasia will become more Sino-centric. Leontief (1953) used an input–output analysis to test the theory of international specialization. His results show that the United States exported labour-intensive products and imported capital-intensive ones, and so did not confirm the Heckscher–Ohlin theory. However, Leontief (1953) did not include products for which there was no domestic production in the United States. Leontief (1953) repeated the tests by estimating the quantity of production within each sector of the economy; but the results were similar (Leontief 1958). Although the Heckscher–Ohlin theory may not fit the pattern of specialization at a given point in time, it nevertheless may explain the changes in the pattern of specialization over time, so that the theory may still be relevant for policies of economic development. According to theories of comparative advantage, natural resource-poor economies which are densely populated are likely to be complementary with economies which are less populated but are rich in natural resources (Leamer 1987; Deardorff 1984). The reason is that trade depends largely

62

J. JOSHUA

on the endowments of natural resources of a country as compared with the industrial capital available in other countries. However, comparative advantage between nations is also based on a nation’s capabilities, but capabilities can be acquired, so that comparative advantage can be shifted. When competitive advantage is based more on knowledge and technology, new innovations may increase the level of productivity. Strategic alliances across borders may be found, and networks between companies may be established between clusters. Competitive advantage without innovation cannot exist for long in the modern world. Innovation is vital for sustained economic growth and development, and it also provides customers’ satisfaction and therefore customer loyalty. Competitive advantage may also be shifting because when the costs of labour and other costs increase, competition will become more intense. Comparative advantage has been shifting throughout history and continues to shift towards East Asia. Resource-rich countries have an initial comparative advantage but are faced with a decline in terms of south-north trade as they import manufactured goods from the north. The ideology of comparative advantage has been turned into a pseudo-science. Stages of economic development assume a dynamic progression, whereas theories of comparative advantage deny the dynamic progress as they ignore economic history. Virtually, any developing country which followed the ideology of comparative advantage failed to develop and instead remained backward and impoverished; numerous countries in Latin America and the Middle East can attest to this scenario. Gerschenkron (1962) argues that the economic backwardness of emerging economies gained strategic advantages to use import substitution which led towards economic growth through industrialization through the creation of competitive export strategies. Some of the emerging economies were able to jump stages of economic growth while others remained behind and locked in poverty. Economic growth in numerous emerging countries, such as South Korea, Japan and China, was facilitated through the development of industrial capabilities instead of using their comparative advantage. The three countries have insufficient resources and used public investment and coherent industrial policies. To change from a low-productivity to a high-productivity economy requires structural transformation. Within dual economies, such as China, the traditional sector has a very low productivity, and as resources shift out of the traditional sector and into a more advanced sector, the national economy is expected to grow. Many countries on the

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

63

way of the BRI are in need of structural transformation rather than just relying on their present comparative advantage. Comparative advantages are shifting and may be turned into competitive advantages. Comparative advantage implies that a company can produce goods or services at a lower opportunity cost compared with its competitors. On the other hand, a competitive advantage results from the advantage that a company has over its competitors and thereby differentiates its products and services from those of its competitors and therefore is able to achieve higher revenue because customers perceive its goods and services as being of higher value. When competing countries have a comparative advantage in similar products, then they may lose; for example, an increase in Chinese exports may crowd-out other countries’ products in similar markets; for example, Mexico’s slower economic growth has been at least partly due to the increase of Chinese exports. When emerging countries have similar comparative advantages as those in the advanced economies, then they may be seen as competitors. Various emerging countries have moved up on the production possibility curve as they introduced technology to enhance the structures of their production and consequently also of their exports, so that their competitive advantage has increased. The complementary and competitive patterns consequently change as well (Kaplinsky and Messner 2008). Economies that specialize in the exports of primary products because of their comparative advantage in those products may experience a detrimental effect on economic development for the country as a whole, although it may increase the profitability of the primary sector for a certain time. Exports are highly concentrated within emergent economies, so that not all emergent economies share equally. Even countries with similar endowments vary in their composition and magnitude of exports; hence, there are other factors involved in the creation of exports besides comparative advantage in endowments. Economic strategic policies may be part of the answer. Emerging market and developing countries should sail in the same boat as they are the engines of global growth. The latest available growth rates of real GDP show a 6.3% p.a. for China, a 5.0% p.a. for East Asia, a growth rate of 4.4% for emerging markets and developing economies, an average growth rate for the world overall at 3.3%, but only a 1.8% growth rate for the advanced economies (IMF 2019). As emerging economies accumulate physical and human capital, they shift from labour-intensive industries, such as clothing, and shift towards

64

J. JOSHUA

more capital-intensive goods, while low-income countries move into various labour-intensive industries which have been vacated by emerging countries. The shift in comparative advantage has been fast and is expected to shift further as the products in China are becoming more sophisticated; for example in 1994, China’s top two exports were footwear and children toys, but by 2008, their export share fell from 3.5 to 2.4%. However, by 2008 China’s top exports are completed computers with 4.5% of exports and TV’s, cell phones, and radio transmitters constituting 30% (Hanson 2012, p. 53) and importantly, by moving from the exports of apparel to electronics, China has captured “more links in global production chains” (Hanson 2012, p. 54) and it is also contributing a larger share of value added in the production process. The United States is rapidly declining in manufacturing productions, both in low-end and in high-end manufacturing. Shenkar (2006) argues that American competitive advantage in technological know-how and in innovation is expected to disappear. It may be argued that China is not taking high-tech jobs away from America, but rather that in many cases, American companies are transporting American jobs to China. Hence, the comparative advantage is tipping in favour of Chinese manufacturers. Myrdal (1957) and Seers (2009) both reject theories of comparative advantage as they argued that the comparative advantage is only relevant to a stationary economy; however, as economies are constantly changing, so are their comparative advantages. In any case, complete unrestrained liberalization of trade may prevent developing economies to climb up the productivity ladder and thereby may lead towards uneven economic development. Historically, trade liberalization followed economic development. Policies of trade liberalization should take into account the conditions of individual economies. Rostow (1960) implicitly includes the possibilities of diversification of economic activities as the economy moves from a more homogeneous agricultural stage to a more heterogeneous agricultural and then to an industrial stage. According to Ricardo (1951–1973), even if a country has an absolute advantage in the production of all goods, the country can still obtain greater benefits through specialization based on opportunity costs.

3.6

Diversification Versus Specialization

According to the Heckscher–Ohlin model, when LDCs specialize in cheap labour the demand for cheap labour will increase and so will lead towards

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

65

an increase of wages of unskilled labour as the demand for them increases; however, this contravenes the predictions made by Feenstra and Hanson (1996) who argue that multinational companies transport raw materials and intermediate inputs to LDC to utilize cheaper labour and then move those products to developed countries where they can get higher return. However, as multinational companies transfer technology to LDC to increase productivity, it uses relatively higher-skilled human capital in LDC so that demand for unskilled workers in LDC declines and consequently the wage gap for skills widens. When China’s pattern of trade indicates that technology used in exportoriented sectors is comparatively less capital and skill intensive, then this will be in agreement with the Heckscher–Ohlin model. The outsourcing theory as proposed by Feenstra and Hanson (1996) assumes that the trade liberalization of exports induces multinational companies to establish production facilities in China for exports to developed countries. When the technology used by the multinational companies is more skill intensive than in other domestic sectors, the relative demand for skilled workers increases, thereby causing the skill wage gap in China to widen. Furthermore, workers with a lower level of education are unlikely to benefit from trade liberalization. Balassa (1977) in his research on comparative advantage in industrialized countries between 1953 and 1971 finds that export diversification increases with the level of technological development. The processes of comparative advantage may of course be impeded or reinforced through a country’s trade relationship. Developing and emerging economies may also contribute to world exports according to the different stages of economic growth in which they are embedded, as has been explained by Balassa (1986). A diversification of exports rather than specialization enhances trade and sustainable economic growth in the long term although specialization may enhance the profitability of some corporations in the short term. Diversification of exports may also make a country more resilient towards shocks in the global commodity market. Overall the concept of globalization is helpful for countries which have a comparative advantage and are detrimental to countries which do not have this advantage. Australia used to have a car industry, now there is none. Furthermore, the competitive advantage of nations is shifting so that countries are also shifting their concepts about free trade; for example, the United States has become more and more protectionist, whereas countries which have a comparative advantage in international trade will promote free trade and oppose trade barriers. Globalization creates Rust Belts states

66

J. JOSHUA

as has already occurred in the United States and various other countries. To prevent this, countries will have to reinvent themselves which requires the application of innovative skills to promote sustained economic growth and economic development. An economy based on so-called free market neoliberalism does not advocate an inclusive economy; it is not meant to be as the aim is to promote profits for corporations rather than promoting the welfare of the people. Future economic growth, especially as envisaged through the BRI projects, requires considerable finance for the required infrastructure which could not have been provided just by private corporations as such projects go far beyond the aim to optimize profits. Various emerging countries try to assert their autonomy through their diversification of trade and political alliances which emphasizes greater South–South alliances which gives them greater political and economic influence on a global scale, especially as the North generally does not regard countries from the South as equal partners.

3.7

Creative, Destructive and Defensive Innovation

Technological change and innovations will create new jobs and make others obsolete, which generally requires retraining in new areas of expertise. Pick and shovel work could be performed by machines which are more competent in that kind of work. New curricula have to be adapted to the new task ahead which requires the acquisition of new cognitive skills. Driverless cars will certainly be much safer than human-driven cars; the former are less inclined to make stunts on the roads while driving. Countries will have to compete in the construction of destructive innovations. Innovations may introduce new products or upgrade older products and thereby may establish new markets, or it may change methods of production or organization, or it may use alternative sources for the creation of energy (Schumpeter 1934). Innovations may be defensive or creative; defensive innovation may increase one’s competitiveness against countries which have a cost advantage (Joshua 2015, p. 102), while creative destruction promotes endogenous economic growth (Joshua 2015, p. 88). A leading industry may eventually experience technological decline together with the workings of creative destruction which then may open up new opportunities (Schumpeter 1934, 1949). However, economic growth based on extractive growth such as based on mining industries cannot last

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

67

because they do not lead towards negative destruction through new innovations. Western economies are in decline so that many of their industries are declining which leads to a deindustrialization at the core with a concurrent shift of industrialization of countries at the periphery. Core-periphery theories argue that the underdevelopment of developing and emerging economies is structural because of their trade pattern. Technological innovation at the core increases productivity gains and then reinforces the core and periphery patterns of trade (Yang et al. 2017). Theories of product life cycle also reinforce processes of deindustrialization at the core. Emerging economies such as China, South Korea and India have increased their importance in international trade as well as in economic growth. Innovations are not any more the sole activity of mature economies, so that a new Schumpeterian cycle is developing which is led by China and East Asian countries (Mathews 2013). The core of destructive innovation is the restructuring of the economy; so that rather than protecting outdated jobs, it is more important to create new jobs, and consequently, competitive advantage will be shifting. This is especially the case as Western nations had so far a competitive advantage in setting the rules under which nations had to compete; however, as the rules which determine trade on a global scale are rapidly changing, so is the power to make the rules of global trading. Western companies partly contribute to the decline of Western competitiveness by outsourcing. Rather than leading a race to the bottom, East Asia, especially China is leading a race to the top through innovation and technological breakthrough. Agents of change may be avant-garde or backward and so will affect competition and innovation to a different degree (Aghion et al. 2005). Processes of creative destruction are vital for industrial renewal and technological change to promote economic growth. New innovations give the innovating country a monopoly power for the time being, until other countries can produce such innovations on their own, for example through imitation, or during the time of the imitation gap which can be explained through the Schumpeterian concept of destructive innovation (Schumpeter 1949). The imitation gap or lag may be divided into different phases, such as the “foreign reaction lag”, the “domestic reaction lag” and the “demand lag” (Posner 1961). Posner argues that the “dynamism” of a country is a consequence of its innovation, whether original or imitation, and that “dynamism” affects a country’s international trade.

68

J. JOSHUA

Even though the concept of “learning by doing” has been used in more recent times by numerous authors, such as Arrow (1962) and Lucas (1993), it was already formulated by List (1885) in his argument for protection. “Dynamism” is also related or further enhanced through the availability of capital. Many countries which are part of the BRI lack sufficient capital which also contributes towards the gap in available technology; however, the infusion of Chinese capital into those countries can make a profound difference in promoting economic growth. The greater availability of capital then can lead to greater risk-taking which is essential for the innovation of new products and an increase in scientific education. The advancement of technological knowledge is best facilitated through the combination of internal R&D and various sources of external knowledge partners. External knowledge may come in the form of scientific knowledge, technological knowledge, knowledge of the market and intermediate knowledge as is required in production chains, each of them is making distinctive contributions towards economic growth and economic development. Chen et al. (2016) find that internal R&D and external sources of knowledge have a positive effect on a company’s innovation capability. They also find complementarities between internal R&D and the contribution of value chain partners; however, they did not find any complementarities between domestic R&D and universities. They found that the collaboration between Chinese domestic R&D and value chain partners had the strongest impact on innovation compared with other sources of external knowledge. The financial crisis of 2008–2009 had a considerable impact on economic growth in the advanced economies; for example, the OECD expenditure on R&D for the period between 2008 and 2012 was half of what it was between 2001 and 2008 (OECD 2014), whereas China has doubled her expenditure on R&D for the period between 2008 and 2012. China has now become the leading economy engaged in research and development. R&D expenditure for advanced economies has declined to 1.6% for the period between 2008 and 2012, whereas it was double during the period between 2001 and 2008; on the other hand, China’s R&D expenditure doubled for the period between 2008 and 2012. Without the appropriate R&D to facilitate greater efficiency and innovative products, nations will be unable to remain competitive. China is engaged in high-tech R&D to become proficient in the creation of high technology, so that she has established numerous industrial parks which focus on R&D. Table 3.1 lists the high-technology industrial zones

2,620,437 1,062,759 353,116

450,982 541,788

554,692

486,875

324,964

19,407,420

5345 4073

3973 3827

3052

2091

2015

103,631

Number of persons engaged

22,013

Number of enterprises

Source China Statistical Yearbook (2017) selected and rearranged from table 20.21

Zhongguancun Science Park Shanghai Zhangjiang Hi-Tech Park Tianjin Binhai High-tech Industrial Development Zone Xi’an High-tech Industrial Development Zone Guangzhou High-tech Industrial Development Zone Wuhan Donghu New Technology Development Zone Shenzhen High-tech Industrial Development Zone Hangzhou High-tech Industrial Development Zone Overall total

Development area

3,070,574,989

54,800,066

72,711,727

120,124,578

71,318,365

112,296,750

44,725,282

192,580,282

530,257,999

Total income 10,000 Yuan

322,920,415

4,409,341

14,250,926

10,910,707

7,838,352

14,982,058

3,673,088

26,311,367

20,843,514

Exports (1000 Yuan)

Table 3.1 Major indicators of high-technology industrial development zone (2017) (only includes industrial development zones with over 2000 enterprises)

3 ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

69

70

J. JOSHUA

with over 2000 enterprises. Overall, in 2017 there were about 103,631 enterprises involved in high-technology research.

3.8

China’s Transformation Towards High Technology

China actively promotes a policy of “Made in China” by 2025; however, China needs global markets for this to succeed. Even though Western countries generally believe in competition, they do not want China to become too competitive. China’s policy of “Made in China” seeks to become a global leader in the high-technology of robotics, aerospace, shipbuilding, artificial intelligence and space exploration. China is moving from an economic stage of “made in China” towards “Innovated in China” to climb up the global value chain (Liefer and Wei 2014). China is rapidly upgrading its technology in high-tech industries, including telecommunication and information technology, so that competition in global trade between China and its trading partners will become more intense, before China will eventually become the dominant economic power. Registered patents and patent applications are an important indicator of future economic development; without innovations, economic growth and development cannot be sustained in the medium and long run. China has made considerable advances in fifth-generation high-speed data networks, and it is fast increasing its high technology know-how which is gradually superseding low-value production. Newly introduced technologies from advanced industrialized economies initially contribute to economic growth in developing countries. However, the effectiveness of technological diffusion also depends on the absorptive capability, such as the availability of human capital and the effectiveness of financial institutions. The acquisition of knowledge from foreign innovation through imitation may provide a stepping stone for companies in lagging countries to engage in innovation. However, the effectiveness of learning by imitation will depend on whether the lagging country is able to shift towards a more innovative economy and so may leapfrog the leading country from which it has imitated initially (see Brezis et al. 1993). Initially, China was able to increase its economic growth by opening its markets and through labourintensive manufacturing, but now is engaged in its own innovations.

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

71

Market size is an important factor in inducing innovation as a consequence of demand-pull factors (Schmookler 1966). An increase in demand leads to an increase in revenue and the more efficient the process of production the greater will be the savings in the cost of productions. New technologies are likely to reduce the cost of production. China is experiencing scale benefits similar to what the United States experienced after the Second World War (Huang and Sharif 2015). Many European-based innovations were brought to the United States as American companies had the required economies of scale in much the same way as many innovations from the West have been brought to China as it now has the required economies of scale as a consequence of Chinese rapidly expanding domestic market and the fast increase in Chinese exports. As economic power shifts between different economies, so does technological progress. China has a competitive advantage in at least two areas: it has a huge domestic market and a centralized power which is willing to channel resources to implement industrial policies. The worldwide transformation of global markets also works to the advantage of China. Huang and Sharif (2015) analyse how technological leadership has shifted through various geographical locations. Abramovitz (1986) argues that countries which are technologically backward have a greater potential to increase economic growth faster than more advanced economies, provided they have the necessary human capital and social capabilities to adapt to the technologies used by technologically advanced economies. Another advantage that China has is that it has a viable industrial policy guided by the government which Western economies lack. To enhance a country’s innovative ability and capacity, scientific and technical education and expansion of R&D activities are required. Innovative ability requires higher education; however, it is insufficient if the country has no capacity to absorb new technologies which can be created through the implementation of a sound government-directed industrial and innovation policy. A good example is the Chinese industrial policy regarding wind turbines. Concessions for wind power together with a preferential feed-in tariff policy led to fast development of the Chinese wind turbine manufacturing industry. Chinese wind power capacity before 2005 was almost zero but doubled each year between 2006 and 2009. In 2010, one-third of newly globally installed wind turbines were located in China, and by 2013, China installed capacity of wind power reached 91.4 gig watts which constituted 29% of world’s total. Within a globalized economy, not every innovation has to be invented anew, but instead may be acquired through acquisitions and

72

J. JOSHUA

mergers or may be forthcoming through R&D cooperation. Such acquisitions of advanced technology strengthen China’s competition with other enterprises in the domestic and foreign markets. Knowledge spillover occurs between related economic sectors; that is, industries that are closer related also experience greater technological and knowledge transfer amongst each other. Related industries are more likely to provide the necessary fertile ground for related knowledge to flourish. The effectiveness of knowledge spillover is greater when there are technological relatedness and cognitive proximity. Sustainable economic development requires new knowledge and innovation. Most research literature on university-industry transfer of knowledge concentrate on industrialized economies (Rossi 2010) although some research has been done in this regard on developing countries and emerging economies (Fernandes et al. 2010). To expand university education at the undergraduate level is insufficient to cater for new research and cannot develop new knowledge and innovation. Furthermore, the interaction between universities and industry may depend on the level of economic development as different stages of economic development will require different types of knowledge. An increase in R&D expenditures is required to create a steep learning curve. However, private enterprises are unable to appropriate all the benefits derived from R&D so that governments could better finance R&D if the benefits of the R&D are accrued to the whole society.

3.9

Strategies of Economic Development

Strategies of economic development have to distinguish between elements which contribute towards economic development and economic growth and elements which do not contribute. Developing countries are generally dualistic, there are traditional and modern sectors, often with a variety of cultures interspersed with different degrees of development; this particularly applies to most of the regions which may eventually be interconnected through the BRI. A viable assessment of economic growth and economic sustainable development has to take into account also the culture in which the economy is embedded. The countries involved in the BRI have varying and in many instances changing socio-economic conditions, so that different policies may be applicable in different countries. Chu and Zheng (2013) find that China’s fiscal decentralization increased expenditures on physical

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

73

infrastructure and education during the period between 1996 and 2005 which helped the regional economies to grow. Shi et al. (2014) investigated the factor of culture to explain China’s disparity in economic growth and development across different regions. Culture can be seen as “the collective programming of the mind” (Hofstede and Bond 1988), so that values which are passed on through culture form individuals’ perception and largely determine their behaviour. Shi et al. (2014) found that the marginal effect of culture had a significant impact on economic performance. They also showed that arable land per capita has a significant and negative effect on regional economic development, so that agricultural development counteracts a commercial culture which is more conducive to progressive economic development. China has heterogeneous cultures so that the effect of culture varies on economic development across China. The cultural impact on economic growth is strongest in the eastern provinces and is weakest in the inland provinces of China. Industrial clusters are vital in the economic transformation. Industrial clusters are the concentration of productive industries from same sectors situated in the same geographical area (Lu and Ganne 2016). Such industrial clusters can also increase the economic vitality in various countries which are part of the BRI. Lessons can be learned here from the construction of clusters in China; for example, in the Pearl River Delta a quarter of the 404 administrative cities have been constructed as clusters to enhance the production of specialized activities; similarly, there are over 300 specialized clusters (Lu and Ganne 2016, p. 37). Many of such clusters have advanced to global international markets. Such clusters have also been able to move China towards a market economy and move ahead in international trade. Industrial clusters may expand and thereby promote growth in more disadvantaged regions. However, Sheppard (2012) argues that “unrestricted trade reproduces, rather than resolves, conditions of uneven geographical development” (p. 47), unless of course geographic obstacles are overcome, for example through the building of interconnections. A multidisciplinary approach should be taken when designing a viable programme which may facilitate economic development, so that the relevant social and cultural factors may be taken into consideration in the planning stages as well as during the implementation. As countries ascend the ladder of development, development theories often lag behind as they are reactive rather than proactive in their solutions. Individuals have different goals; although such goals may change with an individual’s level of education, such goals have to be considered.

74

J. JOSHUA

3.10

Conclusion

The economic and social processes of economic development have been explained together with the effect of economic growth and processes of globalization on the distribution of income. The continuing technological progress and enhanced interconnectivity will promote international economic integration, so that globalization compels companies to engage in product innovation. Difficulties of implementing interconnectivity do more often occur at the level of middle management where staff often resent any changes; hence, management organization will have to address such issues. Economies move through different stages of economic development and different economic policies are required during separate stages, and so may involve a multidisciplinary process. During the early stages of economic development, economies often diversify, whereas they may be inclined to specialize during later stages (Imbs and Wacziarg 2003). An increase in the size of the market is likely to induce diversification and thereby promotes economic growth. The creation of more human capital is also likely to lead towards greater diversification. The need for greater diversification is especially important for economies which are specializing in the export of raw materials, particularly when such exports are not processed before being exported, whereby the other economic sectors of the economy do not benefit. Comparative advantage has been shifting worldwide and continues to shift; it has been moving towards East Asia for the last four decades, while concurrently there has been a decline in South–North trade. Comparative advantage indicates that a company produces goods or services at a lower opportunity cost than its competitors, whereas a competitive advantage implies that a company has an advantage compared with its competitors and consequently achieves higher revenue. It has been argued that any developing countries which followed the concept of comparative advantage have remained less developed and instead advocate the development of industrial capabilities which may be facilitated in various countries through the implementation of the BRI. Competitive advantage may be gained by engaging in creative, destructive and defensive innovation. This chapter explains why creative destruction is essential to achieve sustainable economic growth. China is increasing its technological capabilities, including in high-tech industries which are gradually superseding low value production. China’s trade pattern is rapidly changing as it is expected to increase its exports of higher value-added

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

75

goods. The importance of market size has been emphasized in inducing innovation. New appropriate industrial policies can facilitate technological change and innovation. Countries like China, Japan and South Korea furthered economic growth by developing industrial capabilities, instead of narrowly specializing on their perceived comparative advantage. Sustained economic growth and economic development can be achieved only through continuous structural changes whereby the economy moves towards higher productivity. Price competition is only a short-term solution, and a change in the exchange rate affects the price but ignores structural transformations which may be required to remain competitive. The traditional sector has low social marginal productivity and so remains uncompetitive in global trade. Industrial policies have to include viable policies which are able to transform the structure of the economy to enhance a nation’s capabilities. Countries which include more advanced products in their exports can be expected to grow faster than countries which export low-skilled products, especially when based on the exports of raw materials. China requires a vast amount of raw materials to feed into its economy so that the BRI is largely intended to secure the necessary supply of resources for its economy and exports for its markets. Economic growth requires perpetual changes to the economy; for example, the introduction of new technology and structural changes within the economy are essential. The BRI may be able to facilitate a new approach towards economic development in the member countries of the BRI. The construction of the BRI may also enable China to diversify its supply of raw materials and energy sources which is essential for reasons of security. China is presently moving towards the application of high technology. The first move is to promote China’s policy of “Made in China” by 2025, especially in technology robotics, aerospace and artificial intelligence. China’s thrust towards the application of high technology is most important for China to become the dominant economic power to succeed in its promotion of sustained economic development. The importance of China’s industrial policy has also been explained. A multidisciplinary approach towards economic development has to be used so that social and cultural factors can be considered. However, theories of economic development often lag behind because most economic developmental theories are reactive rather than proactive in their policy recommendations.

76

J. JOSHUA

Economies move through different stages and processes of economic development. However, different stages require different economic policies. China has gone through various stages and moved on from heavy industrialization during the 1960s. After the economic reforms of 1978, China began to establish markets to accelerate economic growth through exports, especially as it has been realized that industrialization cannot succeed without adequate markets. During the 1990s, China began to open up its economy to international trade and foreign investment and more recently initiated a “going-out” policy. Economic development entails structural changes within the education system, a movement of the population between urban and rural areas, the formation of the appropriate human capital and changes in the use of technology; such changes will depend on the stages of economic development of a specific country. However, economic growth may not benefit the public at large; furthermore, the elimination of poverty is not always a priority of government policies. Economic growth causes changes in the distribution of income, and different geographical regions will be differently affected by economic growth, including the existence of poverty traps which retards economic growth. The BRI may be able to increase connectivity and cooperation to promote an inclusive economic development amongst the participating countries and regions through the construction of multiple projects and thereby may reduce poverty and inequality. The improvement of rural–urban transport is also an essential precondition for economic development and the alleviation of poverty. Large-scale development through infrastructure is guided by a transformational vision and thus highlights connectivity which can facilitate the development of smaller parts through their connectivity to each other. Economic development should feed into well-being of a country and its citizens, rather than just concentrate on economic growth. However, sustained economic development may also involve processes of modernization whereby the focus is on the community. Processes of modernization, however, will face various obstacles as part of poverty is culturally based; so that it may be difficult to change ingrained attitudes; hence, processes of modernization are not only a long-term process but they are a continuous process. The construction of infrastructure is not only essential to facilitate economic growth, but it is also vital to enhance factors such as the level of hygiene; however, priority is given to the construction of infrastructure that contributes directly towards economic growth, rather than to factor

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

77

which contributes indirectly towards economic growth and development, such as enhancing the health and the comfort of the public. Economies are going through a process of transformation when the final stage is basically unknown, whereas in the case of transition, the final stage is assumed to be known. This distinction between processes of transformation and transition of an economy is of considerable importance when decisions are being made regarding economic growth and sustainable economic development. Developing economies are necessarily in processes of transformation; otherwise, a country will experience a stagnant economy. A developing economy is unlikely to progress unless there are social and economic structural changes implemented as well. The contribution of the BRI towards economic growth and sustainable economic development will depend to a large extent on viable industrial and innovative policies. The construction of the BRI will be able to enhance connectivity, and the quality of the available infrastructure and consequently will facilitate access to new markets. However, the implementation of the projects in the BRI requires an appropriate cost–benefits analysis which would include various intangible variables, including the costs and benefits of goodwill created in participating countries, the geopolitical influence, the costs and benefits of access to raw materials and the possible future costs of political interference.

Bibliography Abramovitz, M. (1986). Catching Up, Forging Ahead, and Falling Behind. Journal of Economic History, 46(2), 385–406. Acemoglu, D., & Zilibotti, F. (1997). Was Prometheus Unbound by Chance? Risk, Diversification, and Growth. Journal of Political Economy, 105(4), 709–751. Agénor, P. R. (2010). A Theory of Infrastructure-Led Development. Journal of Economic Dynamic and Control, 34(5), 932–950. Aghion, P., Bloom, N., Blundell, R., Griffith, R., & Howitt, P. (2005). Competition and Innovation: An Inverted U-Relationship. Quarterly Journal of Economics, 120(2), 701–728. Arrow, K. J. (1962). The Economic Implications of Learning by Doing. Review of Economic Studies, 29(2), 155–173. Balassa, B. (1977). A Stages Approach to Comparative Advantage (World Bank Staff Working Papers No. 256). Washington, DC: World Bank. Balassa, B. (1986). “Stages Approach” to Comparative Advantage. The Newly Industrializing Countries in the World Economy. Baltimore, MD: John Hopkins Press.

78

J. JOSHUA

Barro, R. J. (1990). Government Spending in a Simple Model of Endogenous Growth. Journal of Political Economy, 98, S500–S521. Barro, R. J. (1991). Economic Growth in Cross Section of Countries. Quarterly Journal of Economics, 106(2), 407–443. Barro, R. J. (1997). Determinants of Economic Growth: A Cross-Country Empirical Study. Cambridge, MA: The MIT Press. Bosworth, B., & Collins, S. M. (2008). Accounting for Growth: Comparing China and India. Journal of Economic Perspectives, 22(1), 45–66. Brezis, E. S., Krugman, P. R., & Tsiddon, D. (1993). Leapfrogging in International Competition: A Theory of Cycles in National Technological Leadership. American Economic Review, 83(5), 1211–1219. Broadman, H. G. (2007). Africa’s Silk Road: China and India’s New Economic Frontier. Washington, DC: The World Bank. Calderon, C., & Serven, L. (2008). Infrastructure and Economic Development in Sub-Saharan Africa (Policy Research, Working Paper No. 4712). Washington, DC: World Bank. Calderon, C., & Serven, L. (2014). Infrastructure, Growth and Inequality: An Overview (Policy Research, Working Paper No. 7034). Washington, DC: World Bank. Chen, Y., Vanhaverbeke, W., & Du, J. (2016). The Interaction Between Internal R&D and Different Types of External Knowledge Sourcing: An Empirical Study of Chinese Innovative Firms. R&D Management, 46(S3), 1006–1023. Chow, G. C. (1993). Capital Formation and Economic Growth in China. Quarterly Journal of Economics, 108(3), 809–842. Chow, G. C., & Li, K. W. (2002). China’s Economic Growth: 1952–2010. Economic Development and Cultural Change, 51(1), 247–256. Chu, J., & Zheng, X.-P. (2013). China’s Fiscal Decentralization and Regional Economic Growth. The Japanese Economic Review, 64(4), 537–549. Deardorff, A. V. (1984). An Exposition and Exploration of Krueger’s Trade Model. Canadian Journal of Economics, 5(4), 731–746. Feenstra, R. C., & Hanson, G. H. (1996). Globalization, Outsourcing, and Wage Inequality. The American Economic Review, 86(2), 240–245. Fernandes, A. C., De Souza, B. C., Da Silva, A. S., Suzigan, W., Chaves, C. V., & Albuquerque, E. (2010). Academy-Industry Links in Brazil: Evidence About Channels and Benefits for Firms and Researchers. Science and Public Policy, 37 (7), 485–498. Gerschenkron, A. (1962). Economic Backwardness in Historical Perspective. Cambridge, MA: Belknap Press. Hanson, G. H. (2012). The Rise of Middle Kingdoms: Emerging Economies in Global Trade. Journal of Economic Perspectives, 26(2), 41–64.

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

79

Henderson, J., & Nadvi, K. (2011). Greater China, the Challenges of Global Production Networks and the Dynamics of Transformation. Global Networks, 11(3), 285–297. Hirschman, A. (1958). The Strategy of Economic Development. New Heaven, CT: Yale University Press. Hofstede, G., & Bond, M. H. (1988). The Confucius Connection: From Cultural Roots to Economic Growth. Organizational Dynamics, 16, 5–21. Huang, C., & Sharif, N. (2015). Global Technology Leadership: The Case of China. Science and Public Policy, 43(1), 62–73. Imbs, J., & Wacziarg, R. (2003). Stages of Diversification. American Economic Review, 93(1), 63–86. International Monetary Fund. (2019, April). IMF Data Mapper. Real GDP Growth. Washington, DC: IMF. Joshua, J. (2015). The Contribution of Human Capital towards Economic Growth in China. Houndmills, Basingstoke, and Hampshire: Palgrave Macmillan. Joshua, J. (2017). China’s Economic Growth: Towards Sustainable Economic Development and Social Justice (Vol. I). London: Palgrave Macmillan. Kant, I. (1994/1803). Lectures on Pedagogy. In M. J. Gregor & A. W. Wood (Eds.), The Cambridge Edition of the Works of Immanuel Kant: Practical Philosophy (pp. 434–485). Cambridge: Cambridge University Press. Kaplinsky, R., & Messner, D. (2008). Introduction: The Impact of Asian Drivers on the Developing World. World Development, 36(2), 197–209. Kuznets, S. (1955). Economic Growth and Income Inequality. American Economic Review, 45(1), 1–28. Leamer, E. E. (1987). Paths of Development in the Three-Factor, n-Good General Equilibrium Model. Journal of Political Economy, 95(5), 961–999. Leontief, W. (1953). Domestic Production and Foreign Trade: The American Capital Position Re-examined. Proceedings of the American Philosophical Society. Leontief, W. (1958). Factor Proportions and the Structure of American Trade: Further Theoretical and Empirical Analysis. Review of Economics and Statistics, 40(1), 111–116. Lewis, W. A. (1955). The Theory of Economic Growth. London: Allen & Unwin. Li, X., & Shaw, T. M. (2014). “Same Bed, Different Dreams” Riding Tiger Dilemmas: China’s Rise and International Relations/Political Economy. Journal of Chinese Political Science, 19(1), 69–93. Liefer, I., & Wei, Y. H. D. (Eds.). (2014). Innovation and Regional Development in China. London: Routledge. Lin, J. Y. (2009). Economic Development and Transition: Thought, Strategy, and Viability. Cambridge, UK: Cambridge University Press. Lin, J. Y. (2011). New Structural Economics: A Framework for Rethinking Economic Development. World Bank Research Observer, 26(2), 193–221.

80

J. JOSHUA

List, F. (1885/1841). The National System of Political Economy (S. Sampson & M. P. Lloyd, Trans.). London: Longmans Green and Co. Lu, S., & Ganne, B. (2016). From Farm Tools to Electric Cars: A Study of the Development of a Chinese Industrial Cluster—The Case of Yongkang in Zhejiang (1980–2010). China Perspectives, 2016(1), 37–48. Lucas, R. E. (1988). On the Mechanics of Economic Development. Journal of Monetary Economics, 22(1), 3–42; also in Grossman, G. M. (Ed.). (1996). Economic Growth: Theory and Evidence, Vol. I (pp. 284–323). Cheltenham, UK: Edward Elgar. Lucas, R. E. (1993). Making a Miracle. Econometrica, 61(2), 251–272. Marx, K. (1906/1867). Capital: A Critique of Political Economy, Vol. I: The Process of Capitalist Production (F. Engels, Ed.). New York: The Modern Library. Mathews, J. (2013). The Renewable Energies Technological Surge: A NewEconomic Paradigm in the Making? Futures, 46(1), 10–22. Myrdal, G. (1956). An International Economy. New York: Harper & Bros. Myrdal, G. (1957). Economic Theory and Underdeveloped Regions. New York: Harper Torchbooks. OECD. (2014). Science, Technology and Industry Outlook. Paris: OECD Publishing. Pál, N. (2013). Chinese Investors, Labour Discipline and Developmental Cosmopolitanism. Development and Change, 44(6), 1387–1405. Picard, P. W., & Zeng, D. Z. (2010). A Harmonization of First and Second Natures. Journal of Regional Science, 50(5), 973–994. Posner, M. V. (1961). Technical Change and International Trade. Oxford Economic Papers, 12(3), 323–341. Ricardo, D. (1951–1973/1817). On the Principles of Political Economy and Taxation, in the Works and Correspondence of David Ricardo (P. Sraffa & M. Dobbs, Eds.; chapter 7: On Foreign Trade). Cambridge: Cambridge University Press. Roland-Holst, D., & Weiss, J. (2005). People’s Republic of China and Its Neighbours Evidence on Regional Trade and Investment. Asian Pacific Economic Literature, 19(2), 18–35. Romer, P. M. (1994). The Origins of Endogenous Growth. Journal of Economic Perspectives, 8(1), 13–22. Rossi, F. (2010). The Governance of University-Industry Knowledge Transfer. European Journal of Innovation Management, 13(2), 155–171. Rostow, W. W. (1956). The Take-Off into Self-Sustained Growth. Economic Journal, 66(261), 25–48. Rostow, W. W. (1960). The Stages of Economic Growth: A Non-communist Manifesto. Cambridge: Cambridge University Press. Rostow, W. W. (1971). The Stages of Economic Growth: A Non-Communist Manifesto (2nd ed.). Cambridge: Cambridge University Press. Rostow, W. W. (1980). Why the Poor Get Richer and the Rich Slow Down: Essays in the Marshallian Long Period. Austin: University of Texas Press.

3

ECONOMIC DEVELOPMENT AND THE BELT AND ROAD INITIATIVE

81

Schmookler, J. (1966). Invention and Economic Growth. Cambridge, MA: Harvard University Press. Schultz, T. W. (1961). Investment in Human Capital. American Economic Review, 51(1), 1–17. Schultz, T. W. (1964). Transforming Traditional Agriculture. New Heaven, CT: Yale University Press. Schumpeter, J. (1934). The Theory of Economic Development. Cambridge, MA: Harvard University Press. Schumpeter, J. (1949). The Theory of Economic Development (3rd ed.). Cambridge, MA: Harvard University Press. Seers, D. (2009). The Limitations of the Special Case. Bulletin of the Oxford Bulletin of Economics & Statistics, 25(2), 77–98. Shenkar, O. (2006). The Chinese Century: The Rising Chinese Economy and Its Impact on the Global Economy, the Balance of Power, and Your Job. Upper Saddle River: Wharton School Publishing. Sheppard, E. (2012). Trade, Globalization and Uneven Development: Entanglements of Geographical Political Economy. Progress in Human Geography, 36(1), 44–71. Shi, S., Huang, K., Ye, D., & Yu, L. (2014). Culture and Regional Economic Development: Evidence from China. Papers in Regional Science, 93(2), 281–300. Smith, A. (1999/1776). The Wealth of Nations, Book I-III. London: Penguin Books. Stolper, W., & Samuelson, P. (1941). Protection and Real Wages. Review of Economic Studies, 9(2), 58–73. Wen, Y., & Fortier, G. E. (2016). The Visible Hand: The Role of Government in China’s 98(3): Long-Awaited Industrial Revolution (pp. 189–226). Third Quarter: Federal Reserve Bank of St. Louis Review. Yang, Y., Poon, J. P., & Dong, W. (2017). East Asia and Solar Energy Trade Network Patterns. Geographical Review, 107 (2), 276–295. Yogo, U. T., & Verdier-Chouchane, A. (2015). Enhancing North Africa’s Infrastructure for Improved Competitiveness. African Development Review, 27 (3), 274–287.

CHAPTER 4

Regional Integration, Trade and the Belt and Road Initiative

4.1

Introduction

In the classical theory of international trade, it is assumed that trade will lead to mutual benefits for the trading partners, whereas Samuelson (1948) assumed that free trade leads eventually to the equalization of income around the world. An equalitarian trend of income eventually leads to an increase of the domestic and international markets and thereby increases economic growth. However, whether international trade and globalization may lead towards higher economic growth between countries will depend on the specific social and economic conditions of the countries involved. Greater connectivity may provide greater opportunities, a decline in poverty, an increase in education and greater mobility of capital and transfer of technology. However, there is no single policy that can be successfully applied equally to all countries. Policy makers usually refer to the necessity to reduce poverty and increase education, but it is not generally a priority in economic policies. Trade in goods and services increases along with foreign direct investment, international finance, the movement of global production networks, together with other factors. Smith (1999/1776) assumed that free trade extends the market; the greater the market, the greater the gains from the division of labour (chapter III, pp. 121–126). With an increase of the number of trading partners and the number of export markets, a country becomes more diversified. With an increase in trading partners, the export portfolio of the exporting country also becomes more diversified. As the © The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28030-7_4

83

84

J. JOSHUA

number of trading partners declines, the exporting country becomes more vulnerable to fluctuation in the trading partner’s economic situation or trade policies. China supports free trade and thereby opposes protectionism and attempts to get other countries involved in the BRI, including from Latin American and the Caribbean countries, which is intended to be the Pacific Maritime Silk Road. The key priorities of the BRI in any of the participating countries are investment, mainly for the construction of infrastructure, partly for the exploitation of sources of energy and of various raw materials, but also to enhance scientific and technological innovation, manufacturing as well as investments in the agricultural sector, together with the consequential finance. All of these factors contribute towards global trade. The level effect and the relative effect of trade have been explained. The “Going Out” policy of China has been described as well as China’s international trade relations together with various trade agreements. The importance of bilateral trade agreements has been emphasized. The consequence of greater openness to trade for different countries has been analysed. The possibility and the effects of a resource curse have been discussed as well. It is argued that diversification is often a more appropriate policy rather than specialization. The complementary effect and the competitive effect in trade have also been analysed. The extensive and intensive margins deriving from exports and their relationship to economic growth have been explained. The contribution of the product cycle to economic growth through trade has been assessed as well.

4.2

Intensified Development Through Integration

The BRI is expected to lead towards a global economic restructuring together with local transformation. Boschma and Frenken (2006) explain the underlying evolutionary economic processes and the dynamic mechanisms that may facilitate or impede economic development. The uneven development between regions will largely affect such processes; hence, different policies may be appropriate depending on the state of development of the different regions. The improvements of infrastructure during the 2000s are essentially designed to improve to incorporate poor country areas into the economy which increases the effective demand for China’s domestic industries. Much the same applies to the more backward areas of the member states of the BRI.

4

REGIONAL INTEGRATION, TRADE AND THE BELT …

85

Poverty and economic stagnation may be caused or prolonged by unequal effects of international trade; for example, the prices for raw materials may be stagnating and there may be a higher growth rate in the productivity in the manufacturing sector of economically more advanced economies, so that the benefits of trade accumulate to the more industrialized countries and so may intensify uneven development (Sarkar and Singer 1991). In trade theories, transportation and communication which commodify interconnectivity are usually neglected, if not altogether ignored. There are multiple ways in which geographical development can evolve (Bergmann 2011). Depending on the underlying conditions, regions diverge and converge, specialize and diversify and different networks may evolve between them. The outcome of greater interconnectivity through the construction of infrastructure is difficult to reconcile with major trade theory, especially in regard to theories of comparative advantage based on the abundance of factors of production. In fact, it may be argued that the construction of infrastructure, interconnectivity and transportation is endogenous to the production of goods and services rather than exogenous. All the countries which are part of the BRI differ greatly in their economic and social conditions, and so have different interests and therefore pursue different strategies. Proliferation of bilateral free trade agreements (FTAs) is partly the consequence of intensifying market-driven economic integration. The ratio of trade to gross domestic product (GDP) is expected to increase from 39.4% in 2010 to 74.4% in 2030 (Suvannaphakdy and Toyoda 2014, p. 363). Multiple integrational initiatives are progressing which eventually will lead towards a new world order, so that such projects have become objects of global competition. The BRI will further economic integration amongst the participating countries depending to a large extent on their domestic economies and their geographic location. The BRI can open up new opportunities and eventually intensifying new economic activities. Through the improvement of interconnectivity, the BRI can promote interdependence across the border. Member states of the BRI should not be regarded just as suppliers of raw materials and as a source of energy; instead, the BRI is able to advance the domestic economies of those countries if the implementation of the BRI is properly managed. As countries’ economic situations are subject to

86

J. JOSHUA

change, so do their trade relationships and their rate of change of economic development. The Eurasian Economic Union (EAEU) began in 2012, and in 2013 the BRI followed, together they may be able to form a greater Eurasian partnership while Kazakhstan will constitute the main link between the EAEU (Armenia, Belarus, Kazakhstan and Russia) and the BRI. The free trading bloc of the EAEU has now been joined by Iran initially for three years to prepare for an accord on a free trade zone. The EAEU was created in 2015, and Vietnam became a member in 2016 as the first non-regional country. The creation of an East Asian Community would be beneficial not only to China and Japan, but also to other East Asian nations, including a reunited Korea. China’s and Japan’s economies and the other East Asian nations are highly complementary to each other; but some mutual distrust and animosity towards each other will have to be eventually overcome first. The Regional Comprehensive Economic Partnership (RCEP) is an alliance of 16 Asia-Pacific nations; that is, it includes the ten members of the ASEAN as well as China, India, Japan, South Korea, Australia and New Zealand. According to the Heckscher–Ohlin model, in the case of endowmentdriven specialization, Chinese exports have a greater impact on countries which have similar factor endowments, and countries with different factor endowments as compared to China are expected to be less affected. However, the Heckscher–Ohlin model ignores other important factors such as the level of technology, infrastructure, and the level of education or government policies, such as China’s “Going out” policies which encourages China’s corporations to invest in other countries and to increase their exports; so that the level effect will be negative and the relative effect will be positive. Furthermore, the complementarities in production between different countries have also to be considered, especially as countries in East Asia have established highly integrated supply chains (see Athukorala 2009). China has increased its investment as part of the “Going out Policy” (zˇou ch¯u qù) implemented since 2001 which has increased Chinese FDI in ASEAN countries considerable (Shi 2008; Cheung and Qian 2009). Various free trade areas have been created in East Asia. Vietnam became a member of the Association of Southeast Asian Nations (ASEAN) in 1995 and also joined the Asian-Pacific Economic Cooperation (APEC) in 1998. The China–ASEAN Free Trade Agreement (CAFTA) was inaugurated at the beginning of 2010. The high-income members of ASEAN countries

4

REGIONAL INTEGRATION, TRADE AND THE BELT …

87

are Brunei and Singapore; middle-income members consist of Malaysia, the Philippines, Thailand and Indonesia; and the low-income members are Cambodia, Laos, Myanmar and Vietnam. China’s first standard bilateral trade agreement with a sovereign state was signed in 2005 with Chile, which eliminated 74% of Chile’s tariffs and 63% of China’s tariffs within two years (Wang 2011, p. 615). China and New Zealand concluded a free trade agreement (FTA) which became effective in 2008 and it was the first FTA agreement between China and a developed economy. This agreement allows for the eventual removal of tariffs of 96% of traded goods (Wang 2011, p. 616) and also includes provision for labour cooperation and environmental cooperation, including the observance of the Fundamental Principles and Rights as promulgated by the International Labour Organization (New Zealand Ministry of Foreign Affairs and Trade 2008). FTAs have been concluded since between China and various other countries such as Iceland, Norway and Switzerland amongst others. China’s FTAs are expected to change not only trade relations between those countries involved, but also it is likely to change the political landscape as well; for example, under the China–ASEAN FTAs China has reduced average tariff on ASEAN goods from 9.8 to 0.1% between 2010 and 2011 and the China–Singapore FTA has achieved duty-free trade on practically all goods traded between the two countries (Wang 2011, p. 621). China is also expanding its bilateral cooperation with many other countries, such as with Bangladesh, Pakistan, Iran and Nepal through similar projects. Bilateral trade relations should be mutually advantageous which requires the development of reciprocal and cooperative trade policies. However, problems which are caused multilaterally cannot be solved through bilateral negotiations. Research by Suvannaphakdy and Toyoda (2014) find that the creation of an East Asian Free Trade Area is vital to facilitate intraregional trade. They also find that bilateral trade flow trading is positively related to the size of trading countries GDP and the sum of the GDP of the trading countries, but inversely related to the differences in factor endowments, costs of transportation and tariffs on imports. China has become the largest export country in 2009 and so has an effect on the economies of other countries which provide new challenges and opportunities. The productivity of exports is generally higher than those of non-exporters. Chinese exports were 3.3% in 1994 and increased to 13.5% in 2008, while Japan experienced its largest decline in exports from

88

J. JOSHUA

12.53 to 6.80% during the same years. Declines have also been experienced by Singapore, Malaysia and Indonesia (Kong and Kneller 2016, p. 199). Countries generally will export such goods for which there is a large domestic market in the case of increasing returns because of economies of scale (Krugman 1980). Strong productivity growth may cause deflation as goods become cheaper and real wages increase as a consequence of an increase in productivity. On the other hand, deflation may also be caused by monetary shocks. Prices of several commodities have increased as a result of China’s increasing demand which has benefited exports from developing countries. On the other hand, increasing Chinese exports have reduced the market share of some developing countries in the manufacturing sector (Kaplinsky and Morris 2008). The development of a viable manufacturing sector in Africa is largely impeded because of inadequate infrastructure and being unable to take advantage of economies of scale. The creation of infrastructure being part of the BRI could go a long way to remedy this situation. The main barriers to trade are the lack of adequate infrastructure to create the required connectivity. The BRI can serve as a facilitator for the manufacturing sector in many of the participating countries. India has to establish a vital manufacturing sector, rather than just a service sector if it intends to continue to excel in economic growth. Hence, it would be of considerable advantage to India and its economy to join the BRI which could provide India with the required markets for its manufactured products which could lead towards a “Make in India” policy. Such a policy would also at least partly address the problem of unemployment amongst a fast-increasing population. However, the economic development in India is highly unequal and so is the distribution of income; for example, there is sufficient food available for everyone because access to food supply is not evenly distributed. Food security implies sufficient availability of food and access to food. Sen (1981) discusses various famines, such as in Bengal in 1943, in Ethiopia in 1973 and in Bangladesh in 1974, and shifted the focus to the access to food. India is a perfect example of the unequal distribution of food, as “India is food self-sufficient but has [the] highest undernourished population in the world” (Reddy 2016), while concurrently “India has highest number of malnourished children and pregnant women and a large number of children are undernourished” (p. 632). Reddy (2016) found that India’s performance in this regard is below that of Brazil and China.

4

REGIONAL INTEGRATION, TRADE AND THE BELT …

89

Roland-Holst and Weiss (2005) find that China’s current trade structure is similar to South Korea and Taiwan in 1990 and conclude that China’s exports are reducing the market share of its regional neighbours, as well as that of Japan and the United States. This is especially the case in products in which trading partners have specialized. Closer regional economic integration can facilitate intraregional trade and outward-oriented economic development. China’s rapid economic growth has furthered regional economic integration which increased intra-Asian trade (Athukorala 2009; Haddad 2007).

4.3

International Trade and Globalization

According to models proposed by Stolper and Samuelson (1941), trade protection leads to an increase in the price of scarce factors of production, such as capital and skilled labour. However, greater trade openness will lower prices because of competition. Stolper and Samuelson (1941) argued that an expansion of trade will increase the wages of skilled workers while wages of unskilled workers in economically advanced countries will decline. Hence, it could be argued that the decline of lower wages and the increasing inequality of wages in the United States is the consequence of a change in global trade, particularly in regard to trade between China and the United States. On the other hand, wages in China are expected to increase as global trade increases (Leamer 1995; Wood 1995, 1998), especially as a consequence of the BRI. Of course, the effect will differ between different industries. Wood (1995) argues that wages of unskilled workers in advanced economies have declined because of increasing trade with developing economies; another reason is the increase in technical progress which has reduced the demand for unskilled workers. However, protectionist policies cannot help to reduce unemployment in the long run as unskilled jobs will not return to developed economies. An alternative policy is a managed policy for the creation of human capital which, however, cannot assist the present unskilled workforce as the formation of human capital is a longterm proposition. China’s and India’s increasing global trade will positively affect the natural resource sector of other countries, whereas it will have a negative impact on the labour-intensive sector. Kuznets (1955) argues that during the early stages of economic development when an economy moves from an agrarian to an industrial structure, income inequality will increase, and once such

90

J. JOSHUA

transition has been completed, inequality of income is likely to decline again. However, Policardo et al. (2016) show that “a 1 % increase in Gini index would cause a 13.3 % decrease in the Brazilian GDP per capita” (p. 658) for the period between 1980 and 2009, whereas in the case of China “a 1 % increase in GDP per capita causes a 0.54 % increase in the Gini index of income inequality” (p. 659). China succeeded in reducing the level of poverty; however, the level of income inequality has steadily increased largely because of various economic reforms, such as trade liberalization, exchange rate liberalization and the entrance of China to the WTO which has benefited mainly those with the appropriate capital. Hence, the reduction of poverty and equity is not related (Policardo et al. 2016). Trade competition induces companies to employ more skilled workers, use more technology and attempt to increase their rate of innovation to increase the quality of their production and productivity of their operations, and to introduce new products. Many multinational companies regard China as the manufacturer of the world because of cheap production costs and so increase the profits of such multinational companies. The rise of the middle class in China has “transformed product-oriented Chinese markets to a brand-oriented one” (George and Kumar 2017, p. 42). However, before a brand can become a global brand, it has to become a strong recognizable brand within the domestic market although at the moment, Chinese brands are generally less known outside of China; however, Chinese corporations are using various strategies to make Chinese brands recognizable worldwide (George and Kumar 2017). However, a domestically recognizable brand will have to be adapted to the conditions of international markets. The domestic experience can then be used to promote expansion into foreign markets. To reduce the risk, initially a marketing strategy could be to enter a niche which then can lead to an expansion on a wider scale. A strategy of acquisition and merger also facilitates greater marketing opportunities. Chinese brands have some comparative cost advantages and so may initially enter markets in emerging economies as consumers there may be more price-sensitive. However, the “Made in China” label may be at a disadvantage at present in advanced economies as this label is often associated in such economies as being of lower quality and low reliability; however, such perceptions are eventually likely to change for the better as Chinese quality is likely to increase. Chinese companies going global will have to improve their rapport with customers, including the development of an after-sales culture. Acquisitions and mergers may be used to overcome some of such problems. In the

4

REGIONAL INTEGRATION, TRADE AND THE BELT …

91

long term, however, Chinese companies have to develop in their customers brand loyalty. Globalization in this context implies the economic integration through greater trade openness and capital liberalization. Trade openness is the sum of imports and exports as a percentage of the GDP. Hanson (2012) finds that for the period from 1994 to 2008, trade as a share of regional GDP has increased rapidly. Exports as a proportion of GDP increased from 26 to 55% in middle-income countries and from 25 to 44% in China and India, whereas in high-income countries, it increased from 17 to 26%. Capitalism, whether with or without Chinese characteristics, must grow to survive and so will outgrow beyond national borders as markets are becoming too small to satisfy their shareholders demand for higher dividends deriving from higher profits. It may be argued that the BRI is essentially the globalization of the Chinese economy by expanding Chinese domestic markets whereby trade between the participating countries supplements and complements each other; however, the participating countries in BRI have different economies and different political, social and legal frameworks. It can be argued that the BRI is concerned more with international economic integration rather than with globalization. The BRI intends to integrate international markets for goods, factors of production and services. Rodrik (2000) distinguishes between “international economic integration” and “globalization”, especially as globalization contains a heavy amount of value judgement (Rodrik 2000). Rodrik makes the point that “sovereignty imposes serious constraints on international economic integration” (p. 180) and poses the question: “can markets become international while politics remains local?” (p. 180). Countries cannot maintain concurrently an independent monetary policy, an open capital account as well as a fixed exchange rate. This trilemma may be referred to as the open-economy trilemma (Rodrik 2000); for example, if a government accepts fixed exchange rates and capital mobility as part of its monetary policy, then it will lose monetary autonomy. Winners from international integration are likely to be multinational corporations and financial interests, whereas losers are likely to be environmentalists and workers; however, internationally negotiated environmental regulations and internationally accepted labour regulations may help to prevent the downgrading of living standards in terms of wages and a reduction in the emission of GHG. International disclosure requirements, global accounting standards and financial regulations may also benefit international investors.

92

J. JOSHUA

Chinese companies investing in other countries may be used primarily as an export platform so that there are limited spillover effects occurring in the domestic economies, especially when such investments occur in special economic zones or in export processing zones which produce for markets in other countries, for example in the case of the production and exports of raw materials, as such corporations are largely isolated from the domestic economy. The export of raw materials could provide the required foreign exchange to develop other sectors within the economy; however in the absence of improved terms of trade, the export of raw materials will not provide extra funds for investment in other sectors of the economy. Exports should also be expected from the participating countries for other products, and the BRI would have to include more value-added projects to enhance wider economic and social benefits. International trade can promote economic growth (Frankel and Romer 1999) but it also exposes trading partners to external shocks so that greater openness to trade may lead towards a greater growth volatility which however may be reduced when trading partners are more diversified in their exports. Much the same applies to the diversification of imports. Openness to trade is measured by the ratio of the sum of exports and imports to GDP. The total impact of concentration on growth volatility depends on the degree of openness. Access to external markets can also provide a buffer against a detrimental impact of insufficient domestic demand. Haddad et al. (2013) find strong evidence of the importance of export diversification in reducing the vulnerability to global shocks. Exporters are generally more competitive and productive than domestic companies which do not export (Wagner 2007). Exporting companies are better performing; they are “larger, more productive, more capitalintensive, more technology-intensive and willing to pay higher wages than non-exporters” (Yang and Mallick 2010, p. 1219). Exporting companies are exposed to more competition and other factors also enhance productivity, so that such companies are “learning by-exporting” (Cleridis et al. 1998). Yang and Mallick (2010) find that exporters have 24.3% higher TFP than non-exporters. The “open door” policy for almost four decades has greatly contributed to China becoming the leading exporter; it contributed towards the economic growth of China and the global economy. China has shifted its exports away from cheap labour-intensive products, such as clothing, towards innovative products, such as electronics. It was

4

REGIONAL INTEGRATION, TRADE AND THE BELT …

93

trade which contributed greatly towards China’s economic growth, something that could not have occurred without the economic reforms which began in 1978. Changes in patterns of trade can be divided between extensive margin and intensive margin; the former refers to the margin of the exports of new goods, whereas the latter refers to the margin of changes in exports which were previously exported. The extensive margin may be used to explain the increase in the growth in trade. Kehoe and Ruhl (2013) find that for the period between 1995 and 2005, “a 10 percent increase in trade between two countries was associated with a 36 percent increase in the extensive margin” (p. 359) and find that the extensive margin is an important contributing factor towards economic growth. They find that the extensive margin explains 9.9% of the growth in the case of NAFTA country pairs, but 26.0% in the case of trade between Chile, South Korea and the United States. They also find that in the case of the trading partners of the United States where there were no structural changes or policy changes, the extensive margin was not of any importance. Kehoe and Ruhl (2013) find extensive growth in the extensive margin after the reduction of trade barriers. As the liberalization of trade increases, the extensive margin will also increase; hence, a successful implementation of the BRI is likely to expand trade and profitability. Kehoe and Ruhl (2013) argue that the growth in the extensive margin is not so much increased by the product cycle but rather is the consequence of trade liberalization. However, the contribution of the product cycle towards economic growth is enhanced through trade. China is changing fast its trade pattern, so that it exports and imports new types of goods. On the other hand, they find no evidence for an extensive margin in the case of trade between the United States and its major trading partners; hence, there is no progress in the trade of new products. During the period from 1995 to 2005, Chinese exports of goods increased from 19.7% of GDP to 34.1% while imports increased from 17.4 to 29.5% of GDP (Kehoe and Ruhl 2013, p. 373).

4.4

Trade Through Complementarities and Competition

Further and intensified development along the way of the One Belt and One Road will improve regional integration at various levels which will further expand domestic and international markets. A successful implementation

94

J. JOSHUA

of the various BRI projects will increase the degree of openness and consequently trade between the countries involved. However, a high degree of openness, even though necessary, is not sufficient. Trade will only increase if countries have something to offer which can be traded; but goods and services can be produced in various production facilities across different countries. Through the accumulation of human and physical capital, trade may be increased through an increase in income and GDP. The provision of infrastructure will increase access to different markets of supply and demand, and it will also lower the transaction costs. Various countries involved within the BRI have inadequate infrastructure such as railways and roads which are essential to connect suppliers with consumers and people with their place of work. Much of the infrastructure is in bad condition and badly maintained. As richer countries have more capital available, they are able to spend more on investment in infrastructure and so may have lower trade transaction costs than poorer countries. To reduce barriers to trade increases competition and thereby may facilitate technological innovation and transfer of technology which may induce a shift in competitive advantage. This in turn leads to changes in the composition of exports. However, the rapid change in international trade is largely based on complementarities rather than competition amongst nations. China shows that there is a considerable gain in international competitiveness as a result of non-price factors which also shows that the importance of the exchange rate as a factor of China’s competitiveness has been overemphasized (Benkovskis and Wörz 2016). A consumer’s valuation and perception of a product depends on tangible as well as intangible attributes of the product. A higher degree of complementarity in trade between nations leads to higher trade (Armstrong 2015). Trade performance is the actual trade as a ratio of potential trade. Armstrong (2015) finds that on average, East Asian trade achieves more of its trade potential than the global average. East Asia intraregional trade was at 67% of its potential in 2006 which was the highest achieved in the world, whereas South Asian regional trade potential was the lowest at 25% during the same year; however, South Asia achieved more of its potential trade with trade partners from outside the region than from within its own region (Armstrong 2015, pp. 308–309). Furthermore, Pakistan trade was closer to its potential on average as compared to its trade with India; similarly, India also achieved higher trade potential on the average than in its bilateral relationship with Pakistan. On the other hand, trade between China and Japan achieved more of its potential as

4

REGIONAL INTEGRATION, TRADE AND THE BELT …

95

compared with Japan’s trade on average and China’s imports, but was similar to China’s average performance of its exports. Chinese and Indian trade consists of competition and cooperation, whereas the economic relationship between India and the United States consists of low competition. Greater cooperation between China and India is advisable. Some Chinese companies could shift some production to India as various Chinese companies already have shifted some production to Thailand as the wages in India are lower than in China. Different countries use different inputs into trade so that they create different degrees of complementarities as countries tend to specialize in the types of production where they have a comparative advantage. The creation of complementarities at the global, national and regional level could be given greater emphasis to enhance global trade. The flow of trade is expected to be increased through the construction of the BRI as it will lead towards greater integration and so will promote more trade, especially within Asia. Whether a greater degree of openness has beneficial consequences for a country will depend on the economic condition of the country. Baliamoune (2009) finds that greater openness to trade has a negative effect in lowerincome countries and has more positive effect in African countries which have higher income. Openness may be conducive for technology transfer and the increase in the economies of scale. However, openness may not benefit a country when FDI enters a country merely for the exploitation of natural resources whereby the rest of the country may not benefit as in the case of the phenomenon of the resource curse. South Korea is one of the five Asian Tigers; the others are Hong Kong, Malaysia, Singapore and Taiwan. Drucker (2002) referred to South Korea as the most entrepreneurial nation in the world. Korea’s exports were led by the chaebols. Korea became an information and communication technology (ICT) powerhouse. The Korean economy depends on international trade because it lacks the required natural resources, but has sufficient human capital. As South Korea was unable to maintain a competitive edge with other countries, especially with China in the production of light and heavy industry products, it changed its economic strategies towards more knowledge-intensive and high-tech endeavours. China’s rapid economic growth requires natural resources and as the Chinese and Latin American economies are highly complementary to each other, their trade relationships have expanded rapidly. China has diversified its resources of supply of energy, whereas China previously was dependent

96

J. JOSHUA

on crude oil coming from the Middle East, Africa and Russia. Venezuela’s domestic economic growth depends largely on revenue from the export of crude oil. The trade between China and Venezuela has expanded significantly since 1999, and in 2004, Venezuela recognized China as a market economy (Sun 2014, p. 651). The economic complementarities between China and Venezuela are based on market forces. The Chinese-Venezuelan joint Fund of US$6 billion was established in 2007 by the China Development Bank and the Chinese and Venezuelan oil companies for the construction of infrastructure in Venezuela and oil refineries in China. However, the funds supplied by the China Development Bank are a loan, not an investment or equity. The loan is to be repaid by exporting crude oil from Venezuela to China. The endogenous changes within the global trade and the complementarities between Latin American and the Chinese economies have led to increasing bilateral cooperation between them. The first-ever strategic partnership of common development in bilateral development relationship was established in 2001 (Sun 2014, p. 651). The Sino-Venezuelan cooperation in the oil sector extends to infrastructure, agriculture, high tech, and various projects in the construction field which are financed through Chinese credits to be repayable in crude oil exports to China.

4.5

Global Trade and Gaps in Development

Trade is largely affected by the degree of integration between the countries within a region and trade may be hindered when there is a considerable gap in integration. The integration gap is measured through the degree of openness, for example, foreign trade as a proportion of GDP. The institution gap consists of the combination of the financial and banking system, the degree of corruption, the number of research facilities and the number of patents issued, and it also includes managerial skills and levels of human capital, as well as market regulations and their effectiveness in dealing with market failure. Giang and Thanh (2007) analyse the gaps in development in ASEAN countries. Giang and Thanh (2007) use the “4-1” approach to assess the ASEAN economies, that is the income gap, the infrastructure gap, the integration gap and the institution gap. Economic development is more than just economic growth. Development goes beyond economic changes and includes the building up of human capacity and enablement (Sen 1999;

4

REGIONAL INTEGRATION, TRADE AND THE BELT …

97

Sen and Anaud 2000). To fill the gaps in infrastructure may be regarded as a Keynesian policy of pump priming. The impact of China’s rapid increase in trade may be seen through trade creation and trade diversion. Trade diversion causes a negative effect, whereas trade creation has a positive effect on trade, as it creates new opportunities. Trade creation may occur when economic growth promotes new exports, whereas trade diversion occurs when higher quality and/or lower costs displace exports from one country with the exports of another country. Technological change driven by innovation makes it inevitable that nations have to climb the ladder of comparative advantage and is partly the cause of the rise and fall of nations. The ladder of comparative advantage progresses from cheap labour-intensive goods towards capital-intensive and finally technologically advanced products (Balassa 1977), which then will have implications for a country’s export and further economic growth (Balassa 1978). Economic policies of diversification, including in a country’s exports, will expose a country less to external shocks and reduce a country’s growth volatility. Free trade agreements (FTAs) result in a welfare effect due to an increase in trade and a negative-positive welfare effect because of trade diversion; the net effect of a FTA depends on the contribution of trade creation and trade diversion. Regional trade agreements (RTAs) can have a positive impact on member countries when such agreements are trade creating; that is, it creates new opportunities of trade without having a detrimental effect on trade of third countries. On the other hand, RTAs may lead to trade diversion which has a detrimental impact on economic growth and development of member countries (Viner 1950). All RTAs are driven by economic and political considerations (Fiorentino et al. 2007). RTAs can create economic interdependence and can also lead to a reduction of political tension and so can lead to greater regional stability. RTAs may cause trade creation and trade diversion as explained by Viner (1950). RTAs have overall a positive welfare effect on the participants of the RTAs. RTAs can also be used as building blocks to be used as stepping stones towards a multilateral trading system. Bilateral arrangements in the longer term deepen regional economic integration. China is a major driving force to promote regional economic integration which is reinforced with the successful implementation of the BRI.

98

J. JOSHUA

4.6

China’s Global Trade Relationships

Trade may be defined as exports or imports or openness. The latter term implies exports plus imports. However, in this book, trade includes the complete range of economic transactions; that is, it includes services, investments for example for infrastructure, and official development assistance. Countries with more open borders have generally a faster economic growth rate (Frankel and Romer 1999). Trade liberalization is best accompanied with a deliberate industrial policy to diversify the economy and so creates diversification for its exports. An economy may diversify through moving up the quality ladder or by creating new products altogether. The geographical expansion may also create new markets. Tran (2010) only finds weak empirical support that in the case of China, its trade with the ASEAN countries, Japan and the United States has a significant effect on economic growth during the period between 1981 and 2002. A lot of course has changed since. A continuing shift in the distribution of wealth is occurring and accelerating towards the emerging economies. Since 2007, the BRIC countries have contributed almost 40% of global economic growth which has caused huge balance of payments surpluses and rapid increases in official reserves, so that the emerging economies hold approximately 77% of world reserves (Economic Outlook 2008), and this trend is expected to continue. The BRICS are expected to contribute towards global economic growth of about 40% between 2009 and 2020. The BRI projects are expected to vastly increase China’s global trade relationship. The BRI will create opportunities for Chinese and multinational companies, and it will also extend China’s influence in other countries. Chinese expenditures on BRI are expected to amount to approximately $100 billion each year for the next decade. China’s investments through the BRI are expected to generate new cycles of growth and economic development on a global scale. Baliamoune-Lutz (2011) argues that China’s global exports are expected to increase which may at least partly prevent or delay the diversification of production in Africa. However, countries which export one major commodity to China, as in the case of Angola and Sudan, benefit more than countries which have more diversified exports like South Africa. Overall, imports from China “have a robust positive effect on growth” (p. 204). The imports of consumer goods from China may also crowd out local manufacturers in the supply of products in domestic and foreign markets.

4

REGIONAL INTEGRATION, TRADE AND THE BELT …

99

African countries may not be able to increase their exports to improve their balance of trade with China (Chemingui and Bchir 2010). The beneficial effects on economic growth in Kenya and South Africa and in African countries generally appear to come from imports from China rather than exports to China that promotes economic growth (Maswana 2009). While imports from China to Africa are quite diversified, African exports to China are highly concentrated. Countries that import capital goods and export consumer goods generally have a higher growth performance, so that the export of oil which is driven by capital-intensive production is unlikely to foster sustainable economic growth and economic development, unless deliberate policies are introduced in investing such gains from the oil industry to create a more diversified economy. However, the oil industry produces relatively few employment opportunities and spillover effects in other industries. The trade relationship between India and Senegal has been diversifying, but it is still dominated by exports of phosphate and phosphoric acid from Senegal to India, whereas China has been primarily engaged in retailing in Senegal during the mid-2000s. Investments by China and India in Senegal are mainly aimed at getting access to the required raw materials and of establishing new markets. Senegal imported mainly tea from China until 2003, but since 2004 textiles have overtaken tea which was overtaken in 2005 by construction materials. Senegal always imported mainly rice from India. Transport vehicles made up about 20% of Senegalese imports from India in 2005.

4.7

Conclusion

The purpose of the BRI is to intensify integration between the participating countries which will lead towards structural transformations and greater economic development. However, as different regions experience different degrees of economic development, different policies may be required, even though such regions are integrated within a global network. Trade theories all too often ignore interconnectivity between countries; it is argued in this chapter that the construction of infrastructure to enhance interconnectivity is endogenous rather than exogenous to the production of goods and services. The BRI will be able to facilitate greater trading opportunities and an increase in economic activities. The creation of an East Asian Community will be beneficial of those countries concerned as such nations are highly complementary to each other. The impact of FTAs with China has also

100

J. JOSHUA

been explained. China has become the largest export country in 2009 and so provides new challenges and opportunities to other economies. Globalization refers to economic integration through greater trade openness and capital liberalization. Trader openness refers to the sum of exports and imports as a proportion of GDP. Globalization and its effects on international trade have been discussed. China’s trade liberalization, exchange rate liberalization and China’s entrance to the WTO have benefited mainly those with the appropriate human capital so that inequality of income has increased in China; hence, there is no relationship between equity and China’s reduction in overall poverty. The BRI is mainly concerned with international economic integration rather than with globalization as the intention is to integrate international markets for goods, services and means of production. The BRI increases international trade and thereby deepens the interdependency of members of the BRI and thereby promotes the regional integration by increasing trade; however, even though countries gain from taking part in trade, such gains are unequally distributed. The BRI will expand domestic and international markets and will lower transactions costs. The construction of infrastructure may utilize local development to facilitate the required connectivity with other regions. The BRI can contribute towards a sustainable economic development rather than just looking at economic growth per se. The impact of the emerging economies, such as China, Brazil and India on developed countries in the North Atlantic region, is indicated by the shift towards greater South-South trade, especially towards East Asia. Different regions have different requirements for their economic development, but the most important aspect of international trade is the creation of further interconnectivity which may advance various mutual benefits; that is, what the various countries need and what they can contribute has to be determined to design the appropriate economic policies for a sustainable economic growth and development. New growth centres may lead to positive spillover effects and eventually may lead to greater economies of scale. The spillover effects may reduce the dualistic nature of the economies of various countries which are part of the BRI which is essential for economic growth and sustainable economic development. However, various gaps have a detrimental impact on economic development which also impedes global trade. Such gaps may consist of gaps in institutions, integration gaps, income gaps and infrastructure gaps. Economic development includes changes in human capacity and enablement (Sen 1999; Sen and Anaud 2000).

4

REGIONAL INTEGRATION, TRADE AND THE BELT …

101

Bibliography Armstrong, S. P. (2015). East and South Asia: Managing Difficult Bilateral Relations and Regional Integration Globally. Asian Economic Journal, 29(4), 303–324. Athukorala, P. (2009). The Rise of China and East Asian Export Performance: Is the Crowding-Out Fear Warranted? The World Economy, 32(2), 234–266. Balassa, B. (1977). A Stages Approach to Comparative Advantage (World Bank Staff Working Papers No. 256). Washington, DC: World Bank. Balassa, B. (1978). Exports and Economic Growth: Further Evidence. Journal of Development Economics, 5, 181–189. Baliamoune, M. (2009). Openness, Growth, and Convergence in Africa: Evidence from 1980–1999 Data. Journal of African Development, 11(1), 109–126. Baliamoune-Lutz, M. (2011). Growth by Destination (Where You Export Matters): Trade with China and Growth in African Countries. African Development Review, 23(2), 202–218. Benkovskis, K., & Wörz, J. (2016). Non-Price Competitiveness of Exports from Emerging Countries. Empirical Economics, 51(2), 707–735. Bergmann, L. (2011). A Co-evolutionary Approach to the Capitalist Space Economy. Environment and Planning A, 44, 518–537. Boschma, R., & Frenken, K. (2006). Why Is Economic Geography Not an Evolutionary Science? Towards an Evolutionary Economic Geography. Journal of Economic Geography, 6(3), 273–302. Chemingui, M. A., & Bchir, M. H. (2010). The Future of African Trade with China under Alternative Trade Liberalization Schemes. African Development Review, 22(s1), 562–576. Cheung, Y.-W., & Qian, X. (2009). Empirics of China’s outward direct investment. Pacific Economic Review, 14(3), 312–341. Cleridis, S., Lach, S., & Tybout, J. (1998). Is Learning by Exporting Important? Micro-Dynamic Evidence from Columbia, Mexico, and Morocco. Quarterly Journal of Economics, 113(3), 903–947. Drucker, P. F. (2002). Managing in the Next Society. New York: St. Martin’s Press. Economic Outlook. (2008, October). Changing Patterns of Global Wealth, Oxford Economics (pp. 19–31). Blackwell Publishing. Fiorentino, R. V., Verdeja, L., & Toqueboeuf, C. (2007). The Changing Landscape of Regional Trade Agreements: 2006 Update (Discussion Paper No. 12). Geneva: World Trade Organization. Frankel, J., & Romer, D. (1999). Does Trade Cause Growth? American Economic Review, 89(3), 379–399. George, J., & Kumar, S. V. A. (2017). ‘Going Global’: The Case of Chinese Brands. The IUP Journal of Business Strategy, XIV (3), 41–57. Giang, B. T., & Thanh, V. T. (2007). Approach to Development Gaps in ASEAN: A Vietnamese Perspective. ASEAN Economic Bulletin, 24(1), 164–180.

102

J. JOSHUA

Haddad, M. (2007). Trade Integration in East Asia: The Role of China and Production Networks (World Bank Policy Research Working Paper No. 4160). Washington, DC: World Bank. Haddad, M., Lim, J. J., et al. (2013). Trade Openness Reduces Growth Volatility When Countries are Well Diversified. Canadian Journal of Economics, 46(2), 765–790. Hanson, G. H. (2012). The Rise of the Middle Kingdoms: Emerging Economies in Global Trade. Journal of Economic Perspectives, 26(2), 41–64. Kaplinsky, R., & Morris, M. (2008). Do the Asian Drivers Undermine ExportsOriented Industrialisation in SSA? World Development, 36(2), 254–273. Kehoe, T. J., & Ruhl, K. J. (2013). How Important is the New Goods Margin in International Trade? (Staff Report No. 324). Research Department, Federal Reserve Bank of Minneapolis. Kong, Y. E., & Kneller, R. (2016). Measuring the Impact of China’s Export Growth on Its Asian Neighbours. The World Economy, 39(2), 195–220. Krugman, P. (1980). Scale Economies, Product Differentiation, and the Pattern of Trade. American Economic Review, 70(5), 950–959. Kuznets, S. (1955). Economic Growth and Income Inequality. American Economic Review, 45(1), 1–28. Leamer, E. (1995). The Heckscher-Ohlin Model in Theory and Practice. Princeton, NJ: Princeton University, Department of Economics. Maswana, J.-C. (2009). Can China Trigger Economic Growth in Africa? Chinese Economy, 42(2), 91–105. New Zealand Ministry of Foreign Affairs and Trade. (2008). Key Outcomes: New Zealand-China Free Trade Agreement. Available at http://www.china.fta.govt. nz. Policardo, L., Punzo, L. F., & Sanchez Carrera, E. J. (2016). Brazil and China: Two Routes of Economic Development? Review of Development Economics, 20(3), 651–669. Reddy, A. A. (2016). Food Security Indicators in India Compared to Similar Countries. Current Science, 111(4), 632–640. Rodrik, D. (2000). How Far Will International Economic Integration Go? Journal of Economic Perspectives, 14(1), 177–186. Roland-Holst, D., & Weiss, J. (2005). People’s Republic of China and Its Neighbours Evidence on Regional Trade and Investment. Asian Pacific Economic Literature, 19(2), 18–35. Samuelson, P. A. (1948, June). International Trade and the Equalisation of Factor Prices. Economic Journal, 58, 163–184. Sarkar, P., & Singer, H. W. (1991). Manufactured Exports of Developing Countries and Their Terms of Trade Since 1965. World Development, 19(4), 333–340. Sen, A. (1981). Poverty and Famines: An Essay on Entitlement and Deprivation. London: Oxford University Press.

4

REGIONAL INTEGRATION, TRADE AND THE BELT …

103

Sen, A. (1999). Development as Freedom. New York: Knopf Press. Sen, A., & Anaud, S. (2000). Human Development and Economic Sustainability. World Development, 28(12), 2029–2049. Shi, W. (2008). Rubber Boom in Luang Namtha: A Transnational Perspective, Rural Development in Mountainous Areas of Northern Lao PDR (RDMA) GTZ. Vientiane. Smith, A. (1999/1776). The Wealth of Nations, Book I–III. London: Penguin Books. Stolper, W., & Samuelson, P. A. (1941). Protection and Real Wages. Review of Economic Studies, 9(1), 58–73. Sun, H. (2014). China-Venezuelan Oil Cooperation Model. Perspectives on Global Development and Technology, 13(5–6), 648–669. Suvannaphakdy, S., & Toyoda, T. (2014). Impact of Regional Trade Agreements in East Asia on Members’ Trade Flows. Journal of Southeast Asian Economics, 31(3), 361–378. Tran, V. H. (2010). Impact of the WTO Membership, Regional Economic Integration, and Structural Change on China’s Trade and Growth. Review of Development Economics, 14(3), 577–591. Viner, J. (1950). The Custom Union Issues. New York, NY: Carnegie Endowment for International Peace. Wagner, J. (2007). Exports and Productivity: A Survey of the Evidence from FirmLevel Data. The World Economy, 30(1), 60–82. Wang, J. Y. (2011). China and East Asian Regionalism. European Law Journal, 17 (5), 611–629. Wood, A. (1995). How Trade Hurt Unskilled Workers. Journal of Economic Perspectives, 9(3), 57–80. Wood, A. (1998). Globalisation and the Rise in Labour Market Inequalities. The Economic Journal, 108(450), 1463–1482. Yang, Y., & Mallick, S. K. (2010). Export Premium, Self-Selection and Learningby-Exporting: Evidence from Chinese Matched Firms. World Economy, 33(10), 1218–1240.

CHAPTER 5

The Development of Infrastructure and Economic Growth

5.1

Introduction

The BRI also known as the One Belt and One Road (y¯ıdài y¯ılù 一带一路) is progressively moving along first within the Eastern hemisphere and now towards the West, the African Continent and Latin America. The BRI is expected to extend its inter-regional cooperation beyond what is usually perceived as the geographical area of the initial Silk Road; it will encompass the whole continent of Africa, as well as South America, including geographical areas relatively close-by to China, such as Australia and New Zealand, which because of economic necessity will eventually be absorbed by South Asia. Cooperation in economic development creates synergies between different economic sectors. The infrastructure of the BRI consists of the hard infrastructure, that is, the concrete, steel, computers and the necessary equipment that are required to construct ports, railways, roads, pipelines together with special trading zones. The soft infrastructure consists of the institutional framework, such as the required financial institutions, various research institutions, cultural exchanges and diplomatic channels, through which economic cooperation can be facilitated. Infrastructures cover a wide range of facilities such as telecommunication, water supply, sanitation and sewerage, electricity, pipelines for gas and hydrocarbon, and any facilities concerned with transport, such as roads, railways, post, airports and waterways. Infrastructures are essential for sustained social and economic development. Infrastructures have to be maintained and updated to be functional and the © The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28030-7_5

105

106

J. JOSHUA

availability of logistics will increase trade. An industrial policy in support of international trade requires the necessary infrastructure to make such policies viable. On the latest count and counting, the BRI consists of 68 member countries across Asia, Europe and the African Continent which are connected through various land and maritime routes. Furthermore, it has reached various countries in South America which are often not considered as being part of the BRI. Such countries account for over 30% of the global economy. It is a vast network which requires a vast infrastructure. Through the implementation of the BRI, a track of interconnectivity between multiple projects is in the process of being established with the aim of achieving sustainable economic development. A leading financial contributor to the various projects is the Asian Infrastructure Investment Bank (AIIB). Although the BRI was initially and primarily concerned with China’s “going out” policies, it now has gone beyond with enormous implications for all the member countries of the BRI, so that the BRI does not only serve the interests of China’s domestic economy. Greater investment opportunities within China will also develop through an increase in Chinese exports, greater investments domestically and an increase in economic growth, or trying to prevent China’s economic growth from declining too much. It will also greatly increase opportunities for economic development in domestic regions, such as in Xinjiang, which lies at the crossroads of the BRI. Xinjiang and Fujian could be regarded as an important nexus to the BRI because of their geographical location. Xinjiang is China’s opening to the West and so is expected to become a financial hub as well as a transit point. Fujian on the other hand provides the connection between the Land Silk Road and the Maritime Silk Route. The BRI can also greatly, or at least partly, overcome the uneven development of China, especially between rural and urban areas. Of course, the BRI is heavily linked to China’s domestic economy to accomplish China’s strategic goals. The BRI provides opportunities for China’s excess capacity; building railways is only one of the multiple ways. The BRI will help to diversify China’s exports, including Chinese technology, to participating countries. It is a means to globalize China’s domestic economy. As the BRI expands, the international use of the RMB will expand accordingly. Boffa (2018) shows that trade linkages between participating countries of the BRI have vastly proliferated and China’s networks of production have intensified which will in the future lead towards greater globalization of China’s economy. Hence, the BRI is not just an agglomeration

5

THE DEVELOPMENT OF INFRASTRUCTURE AND ECONOMIC GROWTH

107

of multiple infrastructures, but instead is emerging as a global investment, production and trading platform. The BRI however is not only concerned with infrastructure such as roads and railways, but could also be involved in making affordable transportation available to the peasantry which would reduce the cost and time absorbed in the transportation of agricultural products and thereby can reduce the marketing costs and thus is vital to a stable food supply. The availability and adequate maintenance of food supply is also vital for the alleviation of poverty. Peasants are involved in subsistence agriculture largely because there are inadequate transport facilities which have a detrimental effect on the surrounding economy. Inadequate transport facilities also result in post-harvest losses; for example, the World Bank (2009) shows that 13% of the post-harvest losses in Tanzania are caused by inadequate transportation (p. 70). In East Africa, transportation costs amounted to about 76% of the total marketing costs of maize in 2008 (World Bank 2011). The provision of electricity in agriculture is also vital to move peasants away from subsistence farming. India is at the intersection between the overland silk roads and the maritime silk routes. However, connectivity does not only facilitate trade with China but provides great advantages to India as well; without such connectivity, India may be marginalized from future economic transformation in Asia and the Indo-Pacific. However, India could enhance its exports and increase its domestic manufacturing base by joining the BRI. An economy must have a sound secondary sector, rather than just an expanding tertiary sector as at present in India. India would also gain vastly from expanding its port facilities to further expand its trade relationships. The impact of the BRI on the growth of regional economies will depend on the investment of physical capital, especially infrastructure, and the increase of labour and its quality as measured by the embedded human capital in the labour force. Such factors of production will differ between different regions depending on the local requirements. However, as infrastructures spread across different regions, investments in infrastructures will have to be coordinated if different regions are to be effectively joined through the projects. Hence, the BRI goes beyond the optimization of regional utility, at least in the case of the construction of infrastructure; it is concerned with the optimization of connectivity which may be created through an effective infrastructure. However, the connectivity of the infrastructure may be compromised through political rivalries and hence

108

J. JOSHUA

a lack of coordination of different projects between countries which take part of the BRI. China has a profound competitive advantage in the construction of railways and is building high-speed railways across three continents concurrently, that is, in Africa, Asia and in Latin America, as well as in Europe. It is anticipated that eventually more countries are likely to join the BRI. The BRI is especially important for landlocked countries such as Rwanda, South Sudan and Uganda.

5.2

Infrastructuring for Economic and Social Development

The BRI consists of the Silk Road Economic Belt and the twenty-firstcentury Maritime Silk Road. The BRI intends to establish an integrated market with free movement of economic resources. It provides multilateral framework for economic development; hence, it cuts across economics, politics, international relations and different cultures. The policies of the BRI include the creation of connectivities between the nations involved. The other main policies are financial integration, to facilitate trade by removing trade barriers, and the coordination of strategies of economic development. The BRI is a tool to facilitate the actualization of Chinese power in economic and political terms. The BRI is being used also to stabilize China’s domestic economy, including the maintaining of an acceptable economic growth rate. China intends to establish inter-regional trade and economic cooperation within the BRI stretching across the whole Middle East. It has allocated $20 billion to restore the economies of the Middle East, mainly for infrastructure to enhance connectivity between the nations through the construction of railways, roads, pipelines and power line. The Middle East is most important for the BRI as it connects Asia with Europe. Projects of the BRI will enhance industrialization, sustained economic development and urbanization in the participating countries. The construction of infrastructure is a means to an end, and the aim is to facilitate trade on a global scale. Another important reason for the implementation of the BRI is that China requires a vast amount of natural resources to feed into Chinese economic growth and the BRI could open up vast mineral resources and of oil reserves and natural gas. Economic growth in East and South-East Asia declined because of lower demand in Western economies so that China’s domestic demand

5

THE DEVELOPMENT OF INFRASTRUCTURE AND ECONOMIC GROWTH

109

also decreased. Hence, China requires new markets which require the construction of new infrastructure to facilitate new trade. The aim of the BRI is to enhance the required connectivity between communities and their markets, so that the absolute size of the present and potential market is vital when considering the building of trade lanes. In the longer terms, the BRI may also improve the conditions for health and sanitation, and if the projects are well managed, it may also reduce the level of pollution and the degradation of the environment. Chinese loans are provided for the construction of infrastructure, manufacturing, and the building of schools and hospitals without imposing conditions to enforce economic reforms in line with the Washington Consensus. China is using tied aid whereby recipients are required to use at least a certain percentage of funds to buy from Chinese companies. Chinese financial arrangements for the construction of infrastructure consist of various packages, covering infrastructures, schools, hospitals and multiple engineering projects. Loans are usually provided at concessional rates. Loans for the construction of infrastructure are also provided through longterm infrastructure-for-loans whereby China can exploit resources in return for the construction of infrastructure. Hence, China provides alternatives for developing countries in search for loans for their much-needed development, so that China is able to gain access to required resources and to wider global markets. However, the United States has condemned the construction of the BRI of conducting a “debt trap diplomacy” whereby nations become entrapped in dependency. China is using resource financed infrastructure (RFI) to pay for various projects in African countries. Under such a scheme, governments commit themselves to repay to fund the construction of infrastructure from revenues derived from resource development projects and the extraction of resources so that benefits may accrue faster rather than having to wait for profits to accrue first. Revenues from future resource extractions are used as collaterals for loans which are used for the construction of infrastructure to make the extraction of resources possible. Under the RFI model, it is possible to exchange one resource for another productive asset and thus may promote sector diversification. The exchange of one resource for another also reduces the role of the financial market. The construction of infrastructure may also be used as a countercyclical policy; furthermore, much of the infrastructure in advanced economies needs to be upgraded. A successful implementation of the BRI will be able to overcome numerous bottlenecks in infrastructure. However, excess

110

J. JOSHUA

capacity and excess savings can be used to fund more investment in infrastructure, and thereby leads to the elimination of bottlenecks and increases the level of development which reduces poverty; so that sustainable economic growth requires the elimination of bottlenecks. Chinese financial investments often comprise a whole range of packages which include not only the usual infrastructure, such as the construction of roads, pipelines and hydropower dams, but they include the building of hospitals and schools. Hydropower plants like those in Cambodia are often constructed by Chinese state enterprises under “build-operate-transfer or build-own-operate-transfer agreements” (Pál 2013, p. 1391); so that Chinese state enterprises operate the projects for about thirty to forty years before they are transferred to the Cambodian government. Chinese direct investment occurs mainly in infrastructure whereby Chinese companies acquire existing assets. Investments may also occur through contracts to construct various engineering projects. Chinese banks provide loans at concessional terms for various infrastructure projects to be constructed by Chinese companies. Infrastructure-for-resources loans provide China with long-term contracts for the exploitation of natural resources in return for the construction of infrastructure. Although loans do not have to be repaid in kind, however oil-backed loans are guaranteed by the sales of oil which are deposited into the borrower’s bank account to ensure repayments. However, China does not impose any conditionalities on the borrowers when providing loans. It is anticipated that the BRI will be able to increase the rate of economic growth and GDP of most of the participating countries and it will connect those countries more closely with China, both in economic and political terms. It is also expected that China will form closer association with ASEAN, the Eurasian Economic Union (EAEU), the European Union, the South Asian Association of Regional Cooperation (SAARC), and the Organization of Islamic Cooperation. The intention is to establish eventually a free-trade area across approximately 80 countries being part of the BRI. The Eurasian economic integration will enhance China’s emerging global financial relationship with other countries as this project is likely to increase trade between China and countries which are part of the BRI. As China is involved in the construction of multiple projects it will also reduce China’s current overcapacity of its production of steel, cement and aluminium. The BRI will vastly expand China’s exports and imports and so will develop and integrate the economies along the way of the BRI, including

5

THE DEVELOPMENT OF INFRASTRUCTURE AND ECONOMIC GROWTH

111

Xinjiang which implies “New Frontier”. Xinjiang functions as a gateway to Russia, Europe, the Middle East and Central Asia, and borders seven Central and South Asian nations and is the hub for the BRI for its land roads components. The province of Xinjiang borders Afghanistan, India, Kazakhstan, Kyrgyzstan, Mongolia, Pakistan, Russia and Tajikistan. Xinjiang is the gate to the West and now has a growth rate which is faster than in the rest of China. Various companies have moved from China’s East Coast to Chengdu and Chongqing which are closer to China’s western border because the BRI will reduce transport costs from China to Europe. Greater interconnectivity also facilitates more innovative activities. However, innovations to be effective must have a fertile ground if such innovations are to flourish; without a fertile ground, new technologies cannot be absorbed; hence, China may be utilizing various innovative research centres which are productive in their research, rather than distributing R&D activities widely across China which would be in many areas highly unproductive. The BRI will have a transformative impact on the socio-economic environment as well as international relations between members of its participating countries which will increase the interconnectivity once various BRI projects have been implemented as a strategic thoroughfare connecting the Pacific Ocean with the Atlantic Ocean, which is essential as there is a high degree of complementarities in supply and demand factors between the participating countries, for example between China and Central Asia. China is the biggest exporter of commodities to Central Asia and is the biggest importer of natural gas from Central Asia. A country has specific endowments, such as land, labour and capital. Natural resources may further increase a country’s potential for a sustained economic development. Infrastructure is another endowment which may increase the potential of the other endowments and thereby increase the economic competitiveness which is endogenously determined. Larger projects such as the BRI require coordination to facilitate structural transformation and innovation. While companies may engage in important industrial upgrading, they are unlikely to engage in sufficient structural transformation without proper coordination between all the required actors involved. The growth of infrastructures may facilitate the interconnection between clusters of industrial zones which may then facilitate urban as well as rural developments which then can also reduce the level of poverty. The provision of infrastructure will also attract domestic and foreign investment (Foster et al. 2009, 2010).

112

J. JOSHUA

The neoclassical and the endogenous growth models regard investment as the most important contributor towards economic growth. Barro (1997) in his panel study of about 100 countries for the period between 1960 and 1990 finds that lower government consumption increases economic growth. However, in the case of the BRI, huge government expenditures are required to provide the infrastructure which would not be provided by private enterprise on such a scale. Furthermore, there may be a mismatch between the life cycle of an infrastructure asset and the life cycle of the products supported by the infrastructure. Chu and Zheng (2013) argues that “fiscal decentralization would positively contribute to regional economic growth” (p. 543). This is not disputed in the case of individual regions, nevertheless coordination between different regions is required if the BRI is to succeed. Chu and Zheng (2013) find that an increase of 1% in physical capital will increase the Chinese provincial GDP by 0.84% and an increase of 1% in the labour force or human capital will increase provincial economic growth by 0.16%, so that physical capital has a greater impact than that of human capital. At the initial stages of economic development, physical capital makes a greater contribution whereas human capital becomes more important in economic development as the economy passes onto higher stages of development (Joshua 2015). Similarly, China’s rapid economic growth has been largely due to the increases in the investment in fixed assets (Lin and Liu 2000). Much the same applies to the BRI as huge funds must be invested in infrastructure before it can commence successful operations. Infrastructures are able to facilitate collaborative strategies between technological and social systems which may be referred to as synergizing. Infrastructures establish relationships between the users and producers. To create infrastructures may be referred to as infrastructuring. Pipek and Wulf (2009) use infrastructuring to “subsume all activities that contribute to a successful establishment of usages” (p. 450); hence, the term infrastructuring can be used for any physical infrastructure as well. Infrastructuring is a continuing process as the need for connectivity is continuously expanding as well, to enhance cooperation which leads towards synergy, that is, enhanced effectiveness in the cooperation in the workings of various subsystems through various collaborative strategies, for example between various communities or countries. Through the appropriate synergizing of local and global spheres, communities may be able to be brought closer together. Synergizing then results in a multidimensional network to increase the

5

THE DEVELOPMENT OF INFRASTRUCTURE AND ECONOMIC GROWTH

113

degree of connectivity which thereby can facilitate to synergize economic and social development. Inadequate infrastructure makes the environment less conducive for economic activities but also has a detrimental effect on people’s lives; for example, inadequate access to proper sanitation, electricity and safe water causes in various areas in China, especially in rural area, constant power outages and the interruption of water supplies. The construction of infrastructure is vital to enhance connectivity between nations; however, this does not mean that investment in education and health has to be neglected. The provision of adequate infrastructure may take generations to be completed as it is also part of people’s culture. If governments do not see adequate hygiene and sanitation as a priority within the domestic economy, they are less likely to see it as a priority when they are involved in the construction of infrastructure in other countries as it may be regarded as not contributing towards economic growth. Once the required infrastructure has been put into place, consumer demand is likely to turn towards proper provision of sanitation, hygiene, health care and better education. Investment in infrastructure has drastically declined in Western economies and Western economies have declined as well as a whole; the newest airports and the best highways were in the West; but they have moved to China by now. The vast constructions of infrastructure within China have promoted domestic development, so that China will be able to utilize its domestically gained expertise in economic development to develop appropriate infrastructure in other economies, regardless whether they may be developed or developing economies. This should be of no surprise as China is spending approximately $500 billion or 9% of its GDP on infrastructure each year on average. The status of an economy can be judged largely by the standard of the infrastructure. A proper sustained development requires enhanced connectivity which will facilitate trade between regions and nations. It also may facilitate better use of complementarities between the countries involved. However, quite a few countries which are part of the BRI suffer from ingrained corruption, poverty, insufficient funding for education and are infested with public violence. The construction of infrastructures can partly solve such problems, but infrastructures only provide the foundation for economic development. The provision of transport enhances economic growth through greater ability to promote comparative advantage, promoting specialization and

114

J. JOSHUA

it improves the linkage between suppliers and consumers. Improved connectivity reduces costs of trading and increases the flow of trade. It facilitates labour mobility, employment, health care and education, and thereby reduces the level of poverty. Sustained economic development requires the appropriate infrastructure before economic development can commence, and a large-scale construction of infrastructure requires government agencies as a coordinator of such projects. Attitudes and policies towards the construction of infrastructures are changing; for example, the World Bank now considers “support for infrastructure as a strategic priority in creating growth opportunities” (World Bank 2012, p. 1) as infrastructure can be an agent for change. China performs well on trade logistics and performs better than other countries at the same income level (World Bank, 2016). By providing the required infrastructure, industries also become more competitive. However, most corporate capital investment is financed by retained corporate earnings and stock issues, rather than through bank credits, so that short-term profitability is aimed for to satisfy their shareholders, rather than engaging in long-term projects. Since the 1960s, there have been no worthwhile economic projects conceived by Western governments which are aimed at long-term prosperity. Neoclassical economic thinking is geared towards short-term profit-maximization rather than long-run well-being of the nation. Rather than seeing economics as a way to maximize private profits, it may be regarded as a way to optimize social and economic sustainable development. The BRI could lead towards the mutual development of those countries involved. China has developed the most extensive expressway system starting in 1988. China has now a vast system of high-speed railway network which commenced the operation of high-speed trains in 2007, and by 2015, China had a high-speed rail network spanning over 16,000 km. Such skills which China has gained in the development of such infrastructures will be useful in constructing similar infrastructures in the Middle East, Africa, Russia, Europe and Central Asia, as well as some parts of South America. Such projects are described in details in the next chapter. China has better infrastructure to facilitate trade as compared to countries which are at a similar income level as the government encourages the construction of infrastructures which are largely completed by state-owned enterprises (SOE), so that China’s trade transaction costs are lower. Russia’s concept of a Greater Eurasia is Russia’s thrust to the East where the future economic and technological markets are to be found. Hence,

5

THE DEVELOPMENT OF INFRASTRUCTURE AND ECONOMIC GROWTH

115

it may be argued that there is a reciprocal symbiotic relationship evolving between the BRI and the Greater Eurasia. Russia only started to turn towards the East after its attempts to be part of Europe has been rejected by Europe; Russia made numerous attempts to join Europe, on each occasion Russia was rejected by Europe, and so eventually the concept of a Greater Eurasia evolved and is now being implemented. Russia now perceives itself as a great Eurasian power, rather than as a European power. The BRI serves as a bridge across civilizations and so establishes a new geopolitical, geoeconomics and new cultural paradigm. The Greater Eurasia includes also Japan and Korea. Iran and the EAEU signed a free-trade agreement in December 2018 which is expected to be followed with a free-trade agreement between Iran and India. Iran is also a vital link between India and Russia to establish the International North-South Transport Corridor (INSTC). Kazakhstan is also a member of the EAEU as well as of the BRI. China as well as Russia emphasizes the community spirit of the BRI and Greater Eurasia; the Russian “sobornost” refers to “community” and the Chinese term “community of common destiny” (gòngtóng mìngyùn de shèq¯u) or of “shared fate” (gòngtóng mìngyùn gòngtóngtˇı) implies a common destiny. Finally, the aim is to connect the BRI, Greater Eurasia, Eurasia, EAEU, SCO, INSTC, BRICS, BRICS Plus and ASEAN. The BRI intends to go beyond regional integration as it promotes the ‘common development’ and co-prosperity. The BRI includes multiple projects in various fields as it is not only concerned with the construction of infrastructure to establish interconnectivity between countries, but it is also involved in the building of hospitals, schools and other facilities. The implementation of the BRI may turn the ebb of the current economic growth, which has occurred since the global financial crisis of 2008–2009, towards economic growth in some of the participating countries of the BRI. However, rather than seeing the BRI as a welcome opportunity for economic growth and sustained economic development, it is seen in the West largely as a challenge to the present world order. China is using foreign policies to foster geo-economic strategies. International relations are largely determined by a nation’s economic power. Geopolitical interests may be enhanced by the resort to trade policy, investment policy, financial and monetary policy, foreign aid, energy policy and the imposition of sanctions (Blackwill and Harris 2016). Most of such policies are part of the BRI, although China opposes the imposition of tariffs and does not impose any sanctions on any nations. Such policies when

116

J. JOSHUA

implemented within the BRI framework make them truly geo-economic rather than just economic tools.

5.3

The Backward and Forward Linkages

Economic development can be regarded as a revolutionary concept rather than an evolutionary one. Economic development entails various radical changes in social institutions as well as in attitudes which may lead to conflicts between interest groups as economic development is likely to benefit some groups more than others. Hence, it is important that the BRI will develop trade for the mutual benefits between countries involved, but such mutual benefits are not necessarily equal. Trade is an important driver of economic growth and also promotes economic integration; whether it contributes towards economic development will depend on the linkages within the economy. Economic growth is often driven by the middle and upper classes which see economic development in terms of industrialization which concentrates on urban centres but often leaves the rural population behind. However, sustained economic development entails an inclusive approach, so that the agricultural hinterland is not left behind. Industrialization through BRI comes largely in the form of export promotion rather than import substitution. Industrialization in most participating countries of the BRI requires the import of physical capital and technological expertise. A country may be divided between the gate region and the hinterland region; similar to China when it opened to international trade when the coastal provinces developed faster, whereas many central provinces stayed relatively behind. The gate regions provide access to the global market so that economic actors from the hinterland have to go through the gate regions to get access to the international market. The hinterland is less developed and has a greater share of unskilled workers as compared with the gate regions. As domestic transport costs decline, the hinterland has a greater chance to develop as manufacturing companies may relocate to the hinterland as production costs in the gate regions increase. Strategies of economic development may use forward and backward linkages to allocate investment towards sectors which have the most forward and backward linkages and thereby may also facilitate economic growth. Forward linkages are complements of backward linkages (Hirschman 1958) so that they are best utilized together. Forward linkages consist when the production of specialized inputs induces the production

5

THE DEVELOPMENT OF INFRASTRUCTURE AND ECONOMIC GROWTH

117

of more specialized goods, whereas backward linkages imply that the local production of sophisticated final goods can elicit the production of other specialized inputs. When forward and backward linkages operate, they may intensify division of labour and are likely to increase the level of wages. However, forward and backward linkages cannot be isolated from each other as forward linkages require backward linkages to flourish; without such linkages, sustained economic development is impossible. Hirschman (1958) explains how the linkage effects of a leading sector may induce economic development in other sectors of the economy; whereby strategic sectors, such as the mining sector or the development of infrastructure may facilitate further development in other sectors. He argued that strategic sectors should be given priority to enhance the linkage effect. However, the effective working of an economy has to go beyond the analysis of economic variables. Countries participating in the BRI have different cultures and people have different motivation, aims and goals. Policies of economic development which promote the more promising sectors have to consider the economy as a whole, rather than seeing different sectors in isolation from each other. This implies an inclusive economy to optimize the linkages between different sectors; such sectors may even be at different stages of economic growth and development from each other. Linkages may result in investment-generating forces. Backward linkages result in new investment in input-supplying facilities, whereas forward linkages lead to investment in output-using facilities (Hirschman 1977). Balanced economic growth strategies may be associated with forward and backward linkages which however may not lead towards a more inclusive economic growth and development, which however could be established with a more unbalanced economic growth; for example when more resources are being invested into more deprived areas to enhance the level of development. Hirschman (1958, 1977) also argues that inputs produced locally are more likely to enhance economic development. The construction of infrastructure is a complement to other factors of production. The creation of infrastructure will increase the level of productivity and lowers the costs of production transaction costs and so may promote economic integration. In the longer term, living conditions can be improved by drastically reducing the population growth rate, especially in impoverished countries, or increasing the rate of economic transformation; an even better solution could be to combine these two options. Backward and forward linkages have to be explored; for example, if a country mainly exports raw materials, economic activities could spread into engineering,

118

J. JOSHUA

business services and biotechnology which could be related to the exploitation of natural resources. The connection of such linkages could also lead towards greater diversification of the export sector. Investment in infrastructure may be seen as creative investment rather than as speculative investment, whereas the former creates better opportunities for economic growth and development, the later may impede it. To overcome bottlenecks in infrastructure can lead to higher financial and economic as well as social return. Although the construction of infrastructure can enhance connectivity, it may only do so if it is connected with productive capital, so that infrastructure may be connected with the wider community to foster an inclusive sustainable economic development; without such connectivity, infrastructure alone cannot facilitate economic growth. An inclusive sustainable economic development may be encouraged by crowding in or drawing in investments through the creation of cluster developments which could eventually spread further out. Lin (2012) sees infrastructure as a fourth endowment besides land, labour and capital. The optimal industrial structure is largely endogenously determined by its structure of endowment; hence, as infrastructure is part of a country’s endowment it can enhance the level of optimal industrial structure. Infrastructure can provide a linkage between a country’s structure of endowments and latent comparative advantages and so may convert them into competitive advantage within the global economy (Lin and Wang 2016). They mention that policies should concentrate on the available resources of the countries rather than on what they lack. Of course, as countries’ resources may expand so will new opportunities; so that comparative advantage may be shifting as well. The returns from the exploitation of raw materials can be utilized to build, such as railways and road, or can be used to build schools and hospitals. The processing of such raw materials at the local level may also enhance employment opportunities and provide additional linkages to the domestic industries. The occurrence of a Dutch disease which shows the booming and lagging sectors coexisting side by side may cause structural maladjustments within the economy. A mining boom increases the country’s exports, increases its exchange rate and leads to a wage push within the mining sector. On the other hand, other sectors within the economy which lag behind find it difficult to adjust. When a manufacturing sector disappears, skills are lost which were initially acquired mostly through “learning by doing”; unless there are linkages between the mining sector and the local industries, there may be less involvement by “learning by doing”.

5

THE DEVELOPMENT OF INFRASTRUCTURE AND ECONOMIC GROWTH

119

A resource curse may occur when there is a weak linkage between the resource sector and other sectors of the economy. There are various channels of transmission through which a resource curse can pass. Ross (1999) and Stevens (2003) identified several of them, but not all of them apply to all resource-rich countries, depending on a country’s particular situation. The depletion of natural resources may be compensated for by investments in other areas vital for a sustainable economic development. The building up of connectivity through the construction of infrastructure is a major way of doing so. A move towards greater diversification to enhance economic development in different areas to increase trade is also essential. Strong linkages between the resource sector and other sectors of the economy should be established. A reason for slower growth in the economies which are rich in resources has been identified as weak linkages between the resource sector and the other sectors of the economy (Hirschman 1958). However, the infrastructure being established may improve the linkages between different sectors of the economy. A booming resource sector may crowd out other sectors of the economy which are deemed less profitable. Zhang et al. (2008) suggest that “the existence of a resource curse may help explain the recent widening regional inequality and stagnant poverty prevalent in resource-rich regions, particular Western China” (p. 26). The construction of BRI projects will be able to link various sectors of different economies and the demand for raw materials is also expected to increase. Resource exporting countries often have a vast population that is relatively poor, so that the creation of more connective economies may help to alleviate at least partly some of the poverty. Rodríguez-Clare (1996) describes the positive and negative linkage effects, whereby the positive linkage refers to a situation when a multinational corporation has a greater linkage coefficient than those of local companies; when a multinational corporation has a lower coefficient than local companies, the multinational corporation has a negative linkage effect. The linkage coefficient refers to the ratio of employment which is generated in upstream industries through the creation of demand for specialized inputs. Multinationals with a high linkage will make a higher contribution towards economic development. Linkages are more difficult to establish in backward geographical areas. However, as multinationals usually come from more advanced economies than their host countries, it may be argued

120

J. JOSHUA

that they are less likely to establish positive linkage effects. Many intermediate goods are likely to be brought in from the home country; however, a positive linkage effect occurs when intermediate goods are drawn from the host country. Multinational companies may be able to enhance economic development when they use intermediate goods; however, multinationals may also establish enclave economies in their host countries. Of course, multinationals may also affect the economic development of their host countries through the transfer of technology and the creation of human capital. Economic development moves across space and time and requires deliberate action. Economic development moves across time when it moves through different stages of economic development or is affected through the diffusion of innovation and technology. The implementation of the BRI is essentially a developmental process moving across space. In the long term, economic progress can only occur through economic development which entails not only the development of resources but also of people’s capacity and capability; as technological know-how becomes more important, more human capital is required as human capital and technological know-how are both reinforcing each other. Economic development was already promoted by Sun Yatsen (1922) when he advocated the regulation of capital, state capital and industry through the construction of new “means of production, railways and waterways, on a large scale” (p. 8) to create “an unlimited market for the whole world” (p. 5).

5.4 The Elimination of Bottlenecks and the Construction of Infrastructure Without the necessary infrastructure, economic development will encounter bottlenecks which may prevent a sustainable economic and social development. Bottlenecks within the economy also lead to lower productivity than its potential. How to reduce or eliminate bottlenecks in economic development may require an investigation into what resources such countries have, rather than investigate what their needs are; that is, economic development has to begin with the available resources. Bottleneck-releasing investment in developing and emerging countries may then be focused on the task of economic development. The BRI is intended to break bottlenecks in connectivity between nations. The BRI is to redirect China’s capital and excess capacity towards

5

THE DEVELOPMENT OF INFRASTRUCTURE AND ECONOMIC GROWTH

121

the participating countries of the BRI. The BRI may facilitate the construction of supply roads for the exports of Chinese products and the imports of raw materials to China. The BRI roads are linked to multiple industrial parks located between East Asia to Kenya and Greece. The National Development and Reform Commission of China agreed with multiple international partners on a new Eurasian land bridge together with four economic corridors: from East Asia to Western Asia; from China through Mongolia to Russia; from China to South-East Asia; and from China through Pakistan to South Asia, including Bangladesh and Myanmar, which is expected to be extended to India eventually. The China-Pakistan Economic Corridor (CPEC) is situated between the Silk Road Economic Belt and the twenty-first-century Maritime Silk Road and so is of strategic importance as it connects China with Central Asia, Southern Asia and the Middle East and so serves to enhance trade between China, Africa, the Middle East and South Asia. The BRI is intended to facilitate connectivity and thereby increases regional cooperation not only in Eurasia but beyond and should be able to increase economic growth and economic development of the participating countries.

5.5

Regional Integration Through Infrastructure

Government expenditures on physical capital, such as on infrastructure as well as human capital does not only depend on the local political and economic environment, but it also depends on what lies ahead; for example, the aim of the construction of different projects under the BRI is to optimize the utility of all those regions along the BRI, so that the successful construction of the projects under the BRI does not solely depend on a particular peculiarity of a province. The BRI should be considered as a project which serves to increase the utility of the projects as a whole. An increase in the efficiency of port facilities will heighten the attractiveness of locations for facilities as it reduces transportation costs (Clark et al. 2004) and thereby increases the volume of trade (Blonigen and Wilson 2008). Larger ports generally can also accommodate larger ships and attract more shipping companies and so increase efficiency through greater competition. Suppliers and buyers that are situated at a considerable distance from each other involve higher costs of transportation which may be minimized through improved linkages as envisaged through the BRI. The growth of trade in services has become increasingly important and has

122

J. JOSHUA

been accelerated through a decline in transport and telecommunication costs and technological change which increase domestic as well as international trade. Costs of transport are non-tariff barriers to trade caused by delays and in pecuniary terms. The longer distance of some locations to suitable port facilities will lead towards less manufacturing facilities in such locations. The BRI will be able to improve the spatial linkages to different locations and so enhance the connectivity between the demand and supply chains. Transportation costs are a major driver of spatial concentration of manufacturing of goods for exports. Spatial linkages significantly affect a province’s attractiveness for the location of export processing facilities for both Chinese-owned and foreign-owned export processing facilities, but were more important for foreign-owned plants (Ma and van Assche 2016). Transporting commodities by coastal shipping is much more cost effective than transporting them by roads; for example, to transport a metric ton of cargo for 1 km through “coastal shipping costs about 5 per cent of the cost incurred by road, and carbon dioxide emissions are about 17 per cent” (United Nations 2017, p. 108). As transportation by sea is also more environmentally friendly than other types of transport, it will also enhance sustainable economic development. Dry ports could be constructed along the roads of the BRI and the railway lines to connect with seaports. Presently, dry ports are used in China as container logistics centres. The main concept of dry ports is to extend the function of seaports to the hinterlands and so increases the efficiency of moving stock. Dry ports can eliminate transportation bottlenecks and enhance economic development of the hinterland in the long term, and also lower the transport costs. Construction of dry ports redirects the focus from seaports towards the hinterland (Dadvar et al. 2011). Shipping costs to be considered are fuel prices and the costs of going through various canals. Furthermore, containers have to be brought from the place of manufacturing to the port facilities so that a viable road network has to be constructed or improved from the existing roads. The flow of containers to and from the port has to be smooth without bottlenecks. Dry ports promote economic development as they attract manufacturing enterprises and other economic activities; indeed, dry ports may develop into special economic zones, so that the construction of ports or their improvements attracts different types of industries and so contributes towards regional development. 40,000 containers were transported in 2016 which is expected to reach 100,000 containers by 2020 (United

5

THE DEVELOPMENT OF INFRASTRUCTURE AND ECONOMIC GROWTH

123

Nations 2017, p. 39). Hence, dry ports are essential for the development of countries which are landlocked. Many economies along the BRI are relatively small economies so that even small increases in the volume of trade can contribute significantly to the economic growth of such countries. A more coordinated development strategy could be contemplated to elicit economic development to promote an inclusive engagement between the Central Asian countries. The construction of physical infrastructure has to be supported with soft infrastructure; for example logistical hubs are less effective when the appropriate customs and border-crossing procedures are not implemented. Physical infrastructure alone is less likely to facilitate interconnectivity between countries.

5.6

Financial Deepening and Economic Development

The BRI is a road in the true sense; it is not the end but a big step towards a changing global economic environment. The BRI intends to spend $6 trillion on the construction and the development of multiple infrastructures (SCIO 2015), cutting across multiple countries on a global scale. Such huge projects of course require the access to the required finance. The four large Chinese banks, that is, the Agricultural Bank of China, Bank of China, China Construction Bank and the Industrial and Commercial Bank of China have wide experience in the finance of domestic infrastructure projects and are now also involved in the BRI countries. There is some risk in the provision of finance for infrastructure, mainly because it takes a considerable time before a positive cash flow can be generated as such projects are long term. Loans are usually provided by a syndicate of banks which reduces the financial risk involved. However, multinational banks are generally overtly risk averse and may be diverting funds from needs of development towards consumption and from local production and consumption towards export-oriented production. Shaw (1973) defines financial deepening as indicated through an increasing ratio of financial assets to income (pp. 7–8). Financial assets are the stock of savings whereas the act of saving refers to the flow. Financial deepening is caused by channelling savings towards investments that facilitates growth which however may not necessarily facilitate economic development as investors are generally concerned with optimizing profits in the short term

124

J. JOSHUA

as economic development is not to be confused just with increases in per capita income. There is also a strong relationship between economic development and financial policies. During the early reform period, the Chinese financial system was characterized by the monopoly of state-owned financial institutions. Since 1978, Chinese financial policies, regarding interest rates went through three separate stages; that is, between 1978 and 1982, negative interest rates were applied; subsequently, the rates of interests were close to zero, while positive interest rates were applied since 1995. Because of the financial repression between 1978 and 1994, banks had no incentives to engage in viable projects. The financial repression during the period between 1978 and 1994 explains to some extent why Chinese banks have a great amount of non-performing loans. Calderon and Liu (2003) argue that financial deepening contributes more to economic growth in developing countries than in developed countries. The various financial institutions related to the BRI, such as AIIB and the NDB are intended to “kick-start” economic growth on the way of One Belt and One Road constructions. The NDB and AIIB may obtain tripleA ratings depending on the types of projects undertaken and the capital structure. The African Development Bank (ADB) has obtained high credit ratings even though most of the shareholders of the ADB have a credit rating well below the credit rating of the ADB. The function of the China Development Bank (CDB) is to accelerate the internationalization of China’s economy and at the same time to exert greater influence by China on the global economy. The financial institutions involved in providing finance for BRI projects are able to overcome to a large extent the bottlenecks that may occur in economic growth and development and are also able to contribute towards China’s “going out” strategy. However, the contribution of financial intermediaries towards economic development may well decline at higher levels of economic development when too much of finance at higher economic development is challenged to speculative investment rather than constructive investment. Deidda (2006) and Greenwood and Jovanovic (1990) show that financial development has a greater effect on economic growth during lower stages of economic development because during times of economic development there are greater opportunities to gain from specialization and economies of scale; as development proceeds and the financial system expands, this may lead to a diminishing return to specialization. The lack of finance is often the main

5

THE DEVELOPMENT OF INFRASTRUCTURE AND ECONOMIC GROWTH

125

obstacle for developing countries to develop the much-needed infrastructure; together with the Silk Road Fund may be able to fill the gap. Access in rural areas to water supply and sanitation are also vital for sustained economic development. At a higher level of economic development there is the endogenous emergence of a stock exchange so that equity financing becomes more important at higher level of development whereas debt financing declines (Boyd and Smith 1998; Bose 2005). However, much of equity finance is speculative investment which may in some instances not be conducive to economic development. In less developed countries, economic growth depends to a large extent on increases in the level of productivity; however, a certain level of finance has to be provided first before productivity can be increased. Calderon and Liu (2003) show that financial deepening can increase capital accumulation and productivity and thereby will promote economic growth. In countries with an avant-garde innovation environment, equity finance is more prevalent than debt financing; whereas debt finance would have less effect on promoting productivity and consequently on economic growth. Financial deregulation precipitated the financial crisis in 2008, and financial deregulation in China would lead towards a Western takeover of the Chinese financial system and thereby would rechannel domestic savings towards speculative non-productive activities to enhance short-term profitability without increasing economic growth or economic development and so may undermine large-scale projects such as the BRI and thereby would undermine present Chinese economic performance. A too fast increase in the growth of credit will increase the rate of inflation and could lead towards financial crises. An increase in financial deepening may also be caused by wide-spread financial liberalizations when there are insufficient financial regulations. On the other hand, McKinnon (1973) sees only benefits in financial liberalization and states that while “financial sector liberalization spread around the world, the influence of financial sector development on economic growth has diminished” (p. 276). To open up the financial market without restrictions can lead towards financial crises; especially as speculative capital can make economic growth very unstable. Their findings that the finance-growth relationship weakened considerably are robust regardless of the estimation methods used. Financial crises are usually related to too-fast deregulations of the financial sector and financial deepening. The positive impact of financial deepening on economic growth completely disappears during a financial crisis and in most cases contributes

126

J. JOSHUA

to the financial crisis. Hence, financial liberalization should proceed with caution and on an experimental basis step by step. Discussions on the relationship between financial deepening and economic development generally assume that the necessary finance is provided by the private sector. However, finance for development within the BRI scheme is provided very similar to how China was providing finance for its own domestic economic development. The BRI expands globally and projects are added continuously in multiple regions which are supported through various loan arrangements. Development banks are geared towards achieving economic growth and development; especially as they are involved in infrastructure-led development; rather than just trying to optimize their own profits. The China-Africa Development Fund was created in 2006 and began operations in 2007 and is funded by the CDB to promote investment in Africa, mainly in infrastructure, natural resources and the manufacturing sector. The CDB began operations in 1994 and was involved in largescale projects before the initiation of the BRI, such as the construction of the Shanghai Pudong International Airport and the Three Gorges Dam. The CDB is more active in Latin America, whereas the China ExportImport Bank is more involved in Africa; although the CDB has increased its activities in Africa as well. The CDB and the Export-Import Bank of China (EXIM) are lending now to developing countries more than the World Bank (Kopinski ´ and Sun 2014). The CDB and the EXIM Bank also provide loans for infrastructure, energy and raw materials. While the EXIM Bank promotes Chinese companies to find investment opportunities in other countries, especially in Latin American and Caribbean countries, the CDB facilitates investments in infrastructure and urbanization projects by Chinese local governments as well as in other countries, especially in Latin American and Caribbean countries. The CDB is the largest development bank in the world and provides multibillion dollar long-term loans to foreign countries such as Brazil, Russia and Turkmenistan which are secured by revenue from oil that has been sold to China. Chinese aid may be extended through interest-free loans, concessional loans and grants. China has been able to drive “an ideological wedge between African countries and Western aid institutions” (Kopinski ´ and Sun 2014, p. 602). Most Chinese finance has been made available for

5

THE DEVELOPMENT OF INFRASTRUCTURE AND ECONOMIC GROWTH

127

the development of infrastructure, but only about 7% is linked to natural resource exploitation (Foster et al. 2008). China’s two largest sovereign wealth funds, the China Investment Bank and the State Administration of Foreign Exchange Investment Company have also been drawn into supporting the BRI through the provision of capital. The New Development Bank (NDB), known originally as the BRICS Development Bank, was created in 2014 and started to operate in 2015 to provide finance for the construction of infrastructure for BRICS and various other developing and emerging countries. The NDB is expected to expand its investment also to the African Continent. The NDB has an initial authorized capital of $100 billion. The NDB’s initial subscribed capital of $50 billion came from equal contributions from the BRICS countries, each with a share of 20% voting right. China has veto power over changes in rules. It is an alternative source of finance to that of the World Bank. The NDB is a challenge to the World Bank and the IMF. The NDB’s main function is to provide a pool of currencies for the construction of infrastructure projects. Eventually the AIIB and the NDB are likely to denominate its Contingency Reserve Arrangements in RMB which is expected to lead towards a multi-currency system in line with a multilateral world order. The NDB also eliminates the dollar from their energy deals and so generates an increasingly diversified governance for global energy. There is a considerable shift away from the US-led international energy regime so that the global energy market and its governance have become more fragmented. The BRICS New Development Bank has largely eliminated the US dollar from their energy deals and provides some protection against international liquidity pressures, and it may also contribute towards a change in the US dollar-based international reserve system. The Silk Road Fund commenced in 2014 with an initial grant of $40 billion and another $15 billion were committed in 2017 to be used in the construction of infrastructure. The Silk Road Fund is a policy instrument whereas the AIIB is not as it is interested in commercially viable projects. Projects are initiated in two separate ways: some projects are recommended by governments of the host countries and financial institutions and other projects may be initiated through the Silk Road Fund.

128

J. JOSHUA

5.7

Cost-Benefit Analysis and the Viability of Projects

A cost-benefit analysis is a vital component of a comprehensive qualitative and quantitative project evaluation. Projects of the BRI generally have different aims than those of shareholders of private corporations. The following criteria may have to be used when assessing the viability of various projects, because the BRI consists of multiple huge projects, each of them incorporates other master projects to design and construct highways and railways to enhance the much-required interconnectivity. Such master projects will then lead towards the implementation of individual projects; all the master projects require a thorough cost-benefit analysis to ascertain the viability of the projects. Such cost-benefit analysis requires an assessment of the time factors involved, the allocation of human and physical capital and of course the finance to implement such projects. Intangible factors will have to be considered as well, but they are more difficult to assess; such as the creation of possible goodwill and their costs and benefits of China’s possible growing geopolitical influence, and the benefits and costs of easier access to raw materials, including the access to oil and petroleum resources. What are the costs of possible regime changes in the countries which are part of the BRI which may be initiated as a countermeasure to the BRI? On the other hand, China has concluded various security treaties with countries which are part of the BRI, such as Central Asian nations, Pakistan and Afghanistan as its own countermeasure. The BRI will however bring more geopolitical opportunities than challenges. The value of the infrastructure projects has to be evaluated according to the developmental needs of the host country, not just according to the needs to facilitate the exploitation of raw materials, but it also has to consider the host country’s economic development and the opening of new market opportunities for domestic enterprises of the host country. A costbenefit analysis compares the present value of the expected returns of a project with the current value of the costs of the projects. Cost-benefit analyses are able to assess the comparative advantages of various projects. However, priorities of investment strategies will depend on long-run goals of development economics as well as political choices and opportunities. There may also be political constraints, even though the projects may be viable economically. Furthermore, monetary costs may also have to consider the social costs.

5

THE DEVELOPMENT OF INFRASTRUCTURE AND ECONOMIC GROWTH

129

Projects may have secondary benefits and there will be various externalities which will also have to be assessed. The successful implementation of the BRI will result in various external economies, changing relationships between different economic sectors, the effect on the balance of payments and on economic development which may give priority to a project which nominally has a lower ratio of present value of benefits as compared to costs than to a project which has a higher ratio. The BRI does not only exist of economic projects but has political aims as well which indeed may override narrower economic evaluations. The life-cycle costs and benefits may be calculated in terms of Net Present Values (NPV) and rate of return on the investment and benefit cost ratio. The life-cycle costs and benefits are the sum of all the costs and benefits which occurred during the period of analysis. Benefits are having positive values while the costs have negative values. If the NPV are positive, the project under investigation is regarded as economically viable. Different alternative projects will have to be evaluated. The rates of interest are used to assess the different values of the current value of money and the past and future value of money. The value of future money is converted to the present value, so that P=F

1 N (1 + i)

where P = present value; F = Future Value, i = the Rate of Interest. Cost-benefit analysis should highlight the strengths, weaknesses, opportunities and the threats of specific projects. China’s strengths in the international construction market are that it constructs the projects at lower costs; however, over the longer term, Chinese costs are likely to increase as Chinese wages are increasing, and the RMB is likely to appreciate over time and so has a detrimental impact on Chinese exports. There are risks of uncertain external political factors which are basically uncontrollable by those who invest in the BRI. The financial risks include political risk of instability, unable to recover the financial costs, or not be able to repay the loans, although the risk is less when loans are granted on the basis of being repaid in term of the exploited raw materials and the future markets of the products involved. The BRI is intended to enhance economic development in the participating countries and could work in conjunction with policies as announced through the 2030 Agenda for Sustainable Development of the United

130

J. JOSHUA

Nations to reduce poverty, inequality and the consequences of climate changes. To implement the BRI, various strategies have to be developed before they can be crystallized into effective programmes which include master projects which in turn include the individual projects which consist of various coordinated plans to quantify the resource requirements, such as human resources, time constraints, financial resources, the requirements of physical capital which necessitates a cost-benefit analysis. Such cost-benefit analysis will have to include various intangible variables, including the costs and benefits of goodwill created in the participating countries; the geopolitical influence; the costs and benefits of a greater access to particular raw materials and energy sources; the cost and benefits of financing such projects; the costs of possible future political interference or disturbances which may interfere with the projects. Traditional cost-benefit analysis assumes that a marginal dollar for the richer section of the economy is the same as the marginal dollar for the poorer section of the economy; however, the marginal utility of a dollar declines with an increase of income. Neither can it be assumed that economic policies which are efficient are necessarily good policies, so that a cost-benefit analysis of the BRI goes beyond an evaluation of the projects, but also has to include factors such as potential risk of investment, for example security and political viability.

5.8

Conclusion

This chapter analyses developments of the infrastructure of the BRI and how this will enhance economic development of the participating countries. How infrastructures may increase economic growth and competitiveness, especially through greater connectivity and productivity are explained in details. Hence, the construction of infrastructure is seen here as means to an end rather than as an end in itself. Infrastructure can facilitate collaborative strategies between technological and social systems, which then may result in a multidimensional network to establish connectivity to enhance economic and social development. The BRI is capable to make available vast resources of raw materials to feed into China’s domestic economy, while at the same time it opens up export markets for China. Such anticipated changes require structural changes within the economy reinforced through new innovation. It has been argued that the construction of adequate infrastructure requires government coordination as private enterprises avoid long-term investments in infrastructure as they generally aim for short-term profit

5

THE DEVELOPMENT OF INFRASTRUCTURE AND ECONOMIC GROWTH

131

optimization. The assessments of the viability of projects which are part of the BRI are beyond any conceivable interests of private corporations; for example, the costs and benefits of Chinese growing geopolitical influence, or the possible costs of regime changes which may jeopardize the implementation of the BRI has to be assessed. Standard cost-benefit analysis does not consider the huge positive externalities as a consequence of structural transformations. However, a cost-benefit analysis should be able to assess the strength and weaknesses of the projects from the economic, social as well as from political aspects. The BRI provides new challenges as well as new opportunities; especially as it may inaugurate a new world order which will cause also considerable opposition by those who want to perpetuate a unipolar world. If the BRI is successfully implemented, it will change the global relations of international trade as well as of international relations. The BRI aims for sustainable economic development and is a central pillar of multilateralism and thereby is in sharp contrast to unilateralism. The BRI will create synergies and complementarities for the countries which are part of the BRI but it will also create opposition as it will challenge the present world order. The BRI is not just China-centred, but provides a long-term strategic effort to establish multilateral cooperation between the members of the BRI. The successful implementation of the BRI is likely to increase the appeal of the Chinese economic model or the Beijing Consensus to other countries. As the BRI creates new opportunities, more countries will be drawn into it. The BRI is the biggest project regarding international cooperation and so will have political ramifications; it may be said that while China builds bridges across continents, others who see their unilateral power declining intend to undermine the BRI. The vast infrastructure of the BRI amounts to over US$800 billion, which is mainly funded by China, but also to a large extent by the AIIB as well as by the New Development Bank (NDB) and other international financial institutions. Economic development is seen here as a revolutionary concept because it requires deliberate actions; without deliberate actions, an economy may grew, but it is unlikely to develop and advance further. Economic development requires changes in attitudes and in social institutions. Furthermore, economic development requires an inclusive approach so that the forward and backward linkages of the economy may be connected to induce economic development which may optimize such linkages. Economic development should benefit the society as a whole, rather than specific interest groups.

132

J. JOSHUA

Bibliography Barro, R. J. (1997). Determinants of Economic Growth: A Cross-Country Empirical Study. Cambridge, MA: The MIT Press. Blackwill, R. D., & Harris, J. M. (2016). War by Other Means: Geoeconomic and Statecraft. Council of Foreign Relations Series. Cambridge, MA and London: Harvard University Press and Belknap Press. Blonigen, B., & Wilson, W. (2008). Port Efficiency and Trade Flows. Review of International Economics, 16(1), 21–36. Boffa, M. (2018). Trade Linkages between the Belt and Road Economies (Policy Research Working Paper 8423). Washington: World Bank Group. Bose, N. (2005). Endogenous Growth and the Emergence of Equity Finance. Journal of Development of Economics, 77, 173–188. Boyd, J. H., & Smith, B. D. (1998). The Evolution of Debt and Equity Markets in Economic Development. Economic Theory, 12, 519–560. Calderon, C., & Liu, L. (2003). The Direction of Causality Between Financial Development and Economic Growth. Journal of Development Economics, 72, 321–334. Chu, J., & Zheng, X.-P. (2013). China’s Fiscal Decentralization and Regional Economic Growth. The Japanese Economic Review, 64(4), 537–549. Clark, X., Dollar, D., & Micco, A. (2004). Port Efficiency, Maritime Transport Costs and Bilateral Trade. Journal of Development Economics, 75(2), 417–450. Dadvar, E., Seyedalizadeh Ganj, S. R., & Tanziti, M. (2011). Feasibility of Establishment of ‘Dry Ports’ in the Developing Countries—The Case of Iran. Journal of Transportation Security, 4(1), 19–33. Deidda, L. (2006). Interaction Between Economic and Financial Development. Journal of Monetary Economics, 53, 233–248. Foster, V., Butterfield, W., Chen, C., & Pushak, N. (2008). Building Bridges: China’s Growing Role as Infrastructure Financier for Sub-Saharan Africa. Trends and Policy Options, (5). Washington, DC: The World Bank/Public Private Infrastructure Advisory Facility. Foster, V., Butterfield, W., Chen, C., & Pushak, N. (2009). Building Bridges: China’s Growing Role as Infrastructure Financier for Africa. Washington, DC: The World Bank. Foster, V., & Briceño Garmendia, C. (2010). Africa’s Infrastructure: A Time for Transformation. Washington, DC: The World Bank. Greenwood, J., & Javanovic, B. (1990). Financial Development, Growth, and the Distribution of Income. Journal of Political Economy, 98, 1076–1107. Hirschman, A. O. (1958). The Strategy of Economic Development. New Heaven, CT: Yale University Press. Hirschman, A. O. (1977). A Generalized Linkage Approach to Development with Special Reference to Staples. In M. Nash (Ed.), Essays on Economic Development

5

THE DEVELOPMENT OF INFRASTRUCTURE AND ECONOMIC GROWTH

133

and Cultural Change in Honor of Bert Hoselitz (pp. 67–98). Chicago: University of Chicago Press. Joshua, J. (2015). The Contribution of Human Capital towards Economic Growth in China. Houndmills Basingstoke, Hampshire: Palgrave Macmillan. Kopinski, ´ D., & Sun, Q. (2014). New Friends, Old Friends? The World Bank and Africa When the Chinese Are Coming. Global Governance, 20(4), 601–623. Lin, J. Y. (2012). The Quest for Prosperity: How Developing Economies Can Take off. Princeton, NJ: Princeton University Press. Lin, J. Y., & Liu, Z. (2000). Fiscal Decentralization and Economic Growth in China. Economic Development and Cultural Change, 49(1), 1–21. Lin, J. Y., & Wang, Y. (2016). New Structural Economics and Resource Financed Infrastructure. Pacific Economic Review, 21(1), 102–117. Ma, A. C., & van Assche, A. (2016). Spatial Linkages and Export Processing Location in China. The World Economy, 39(3), 316–338. McKinnon, R. (1973). Money and Capital in Economic Development. Washington, DC: The Brookings Institution. Pál, N. (2013). Chinese Investors, Labour Discipline and Developmental Cosmopolitanism. Development and Change, 44(6), 1387–1405. Pipek, V., & Wulf, V. (2009). Infrastructuring: Toward an Integrated Perspective on the Design and Use of Information Technology. Journal of the Association for Information Systems, 10(5), 447–473. Rodríguez-Clare, A. (1996). Multinationals, Linkages, and Economic Development. American Economic Review, 86(4), 852–873. Ross, M. (1999). The Political Economy of the Resource Curse. World Politics, 51(2), 297–322. SCIO. (2015). State Council Information Office of the People’s Republic of China. BRI Infrastructure Investment is to Reach $6 trillion. http://www.scio.gov.cn/ m/31773/35507/35524/Document/1527954/1527954.htm. Shaw, E. S. (1973). Financial Deepening in Economic Development. New York: Oxford University Press. Stevens, P. (2003). Resource Impact: Curse or blessing? A Literature Survey. Journal of Energy Literature, 9(1), 1–42. United Nations. (2017). Economic and Social Commission for Asia and the Pacific Review of Developments in Transport in Asia and the Pacific. Transport for Sustainable Development and Regional Connectivity. Bangkok: ESCAP. World Bank. (2009). Eastern Africa—A Study of the Regional Maize Market and Marketing Costs. Washington, DC: World Bank. World Bank. (2011). Missing Food: The Case of Postharvest Grain Losses in SubSaharan Africa (Technical Report). Washington, DC: World Bank, FAO. World Bank. (2012). Transformation Through Infrastructure. Washington, DC: World Bank.

134

J. JOSHUA

World Bank. (2016). Connecting to Compete: Trade Logistics in the Global Economy. Washington, DC: World Bank. Yatsen, Sun. (1922). The International Development of China. New York: G.P. Putnam’s Sons. Zhang, X., Xing, L., Fan, S., & Luo, X. (2008). Resource Abundance and Regional Development in China. Economics of Transition, 16(1), 7–29.

CHAPTER 6

The Projects of the Belt and Road Initiatives

6.1

Introduction

This chapter describes the multiple projects of the Belt and Road Initiative (BRI) and includes separate sections on the following geographical and geopolitical spheres of influence under the following headings: the Northern Sea Route (NSR), Europe and the Euro-Asian Connection, the Quadrangle of East Asia: China, Japan, Korea and Russia, the South-East Asian Region, South Asia and the China–Pakistan Economic Corridor (CPEC), the Middle East, the African Continent and the South American Hemisphere. Using Mackinder’s (1904) concepts of the geographical pivot, the BRI is advancing in the heartland as well as the rimland concurrently. The NSR also known as the Polar Silk Road goes from the Barents Sea in the West to the Bearing Strait in the East. It provides a promising transit between North-East Asia and Europe without the risk to security that exists in the Strait of Malacca and the Suez Canal. The next section discusses the Euro-Asian connection to Europe which enhances the economic integration between Europe and Euro-Asia. Various projects which facilitate such connection have been outlined. The Eurasian route connects Lianyungang on the East China Sea with Rotterdam and the Mediterranean via Urumqi. The importance of Turkey as a crossroads between East and West has been highlighted. The next section explains the importance of the quadrangle of East Asia: China, Japan, Korea and Russia. The interactions of the quadrangle with © The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28030-7_6

135

136

J. JOSHUA

the BRI are explained. Various projects to enhance the connectivity and economic growth between countries of the East-Asian quadrangle have been described. The eventual reunification of North and South Korea is seen here as essential to promote economic growth in the north-eastern part of Asia. The next section describes the major prospects in South-East Asia and their contribution towards economic development. This analysis of the BRI in South-East Asia is followed with an analysis of the multiple projects in South Asia, with special emphasis given to the CPEC. The CPEC was inaugurated in 2016 and is expected to be completed in 2030 at a cost of $46 billion. The CPEC will be able to connect the North with the South and the East with the West and so may facilitate trade and investment across the region. The Middle East is also of great importance to the BRI, especially as China is the largest importer of oil and the second largest importer of LNG. The BRI connects Asian, European and African markets and so crosses several civilizations. Africa has become a fast-growing region, but presently it is not sufficiently united to put itself in a better bargaining situation. The last section covers BRI activities in the South American hemisphere where various projects are anticipated to connect the Atlantic with the Pacific Ocean. The various projects have been included and described on the assumption that political interference is unlikely to be able to prevent the success of the BRI in the long run as the economic interests are expected to prevail rather than global political power politics. The impact of the BRI on economic and social development of Chinese domestic economy will be explained in Chapter 4 in Volume II, the effects on the participating countries will be explained in Chapter 5 in Volume II and the impact on the global economy is explained in Chapter 6 in Volume II. The Mongol Empire had created during the thirteenth century the largest free trade zone stretching from Vladivostok to Belgrade, an area now referred to as Eurasia. As the ancient Silk Roads have been revived, the ancient relationship may also be revived for the mutual benefits of the participating countries. The ancient Maritime Silk Road of Yore went from China to Egypt. The new Silk Road divides in Xinjiang into a northern and southern route along the edge of the Taklamakan Desert and from there moves along to India, Central Asia and the Mediterranean. The Silk Road consisted right from the beginning of multiple roads which were the first instance of globalization. The present Silk Road Economic Belt (SREB) has two main objectives: to revive the ancient Silk Road linking the East with

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

137

the West and to establish an Economic Belt to foster an economic association between countries situated along the Silk Road. The modern Silk Road is implemented through the BRI and consists of the SREB and the Twentyfirst-century Maritime Silk Road. The term “Silk Roads” was first coined in 1877 by Richthofen. The Silk Roads link the Pacific to the Mediterranean. The SREB was announced in September 2013, and in October of the same year, the Maritime Silk Road was announced; together they are known as the BRI or One Belt and One Road (OBOR). Maritime security is concerned with the safety of the sea lanes of communication for economic and political interests, without such security a country’s economy, especially its global trade cannot be guaranteed. Sea lanes are vital for the transportation of raw materials and sources of energy and for the global trade generally, so that disruptions can have a detrimental impact on the countries’ economies. The Strait of Hormuz links the Indian Ocean with the Persian Gulf and is vital for the uninterrupted flow of crude oil supply. Economic growth and economic development depend on the supply of energy so that if the supply is interrupted, there can be no economic growth. Turkey has an important role in the success of the BRI because of its geo-economic and geopolitical position. Turkey together with Iran and Pakistan is vital for the implementation of the BRI between China and the EU. China intends to expand its presence in Turkey’s ports, the Mediterranean, the Black Sea and the Aegean Sea, while all the ports in such regions are expected to be connected by railways. The BRI intends to develop multiple projects in energy, particularly in oil and gas, as well as in petrochemicals, power stations and fibre optics. To accomplish this, the BRI constructs numerous infrastructures, such as road and railway networks and ports across five continents to facilitate the required interconnectivity. The maritime route which connects Chinese ports to multiple ports in the Mediterranean and Africa will further enhance the regions interconnectivity. Projects of this kind have to be government led as private equity firms would have little interest in public assets on this scale. Once the required infrastructure has been implemented, it will greatly facilitate trade between the nations involved which is expected to contribute towards economic growth. The concept of Eurasia may be used to promote new models of economic development to expand interconnectivity and harmonization between the European Union and the Eurasian Union through the implementation of the BRI. The BRI is able to connect China with the markets in the EU, but political decisions often interfere

138

J. JOSHUA

with the economic decision-making process. The BRI is related to the Chinese saying that “to get rich, build roads first” (Yào zhìfù, xi¯an xi¯u lù 要致 富, 先修路). The BRI is a global enterprise stretching across continents. The aim of the BRI is to connect the Pacific Ocean to the Atlantic Ocean across the Asian continent. The Northern Corridor runs along the Trans-Siberian Railway (TSR). The Central Corridor runs along the ancient Silk Road and the Southern Corridor runs from China through Pakistan to Turkey and then onwards to Europe. Of course, political rivalries may provide obstacles to the successful implementation of the BRI. The BRI may be seen as a consolidation of past success by the Chinese economy. Furthermore, some projects of the BRI actually were implemented before the announcement of the BRI in 2013, such as the Chongqing-Duisburg railway line and the expansion of the Piraeus port. Vu (2014) argues that “a new regional order has been shaping under China’s leading role” (p. 158), connecting it to various communication and energy systems which promote economic development. Other railway lines started full operation in 2011 to transport car components from Leipzig and Regensburg to Shenyang. Since 2016, the railways of China are linking 16 cities between China and twelve cities in Europe. Xinjiang is a most important lynchpin of the BRI and serves as the crossroads for gas and oil. Xinjiang has become China’s gateway to the West; it leads to Central Asia, Russia and Europe, so that it is the logistics hub for the BRI, and it is vital for Eurasian integration; hence, the construction of infrastructure has become a priority in Xinjiang; presently, there are 17 airports either being constructed or are completely reconstructed. Xinjiang is several thousand kilometres away from the Indian and Pacific Oceans so that the linkage between Kashgar and Gwadar are very important as a transport hub to further connectivity to ascertain sustainable economic growth. Transportation and communication accelerate the production process, shorten the turnover times and increase the returns to investment. In assessing distances in the case of China, the great circle distance between capital cities is inappropriate; for example, the distance between Urumqi in Xinjiang to Hamburg by road is shorter than from Hangzhou to Hamburg but by sea from Urumqi in Xinjiang to Hamburg is longer than from Hongzhou to Hamburg because goods being sent from Urumqi to Hamburg have to be trucked first to a seaport and then shipped to Hamburg. Instead, Ma and van Assche (2016) propose to separate the distance into

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

139

two parts, that is, the distance travelled by road and the distance from port to the country of final destination. However, their choice of ports for the different provinces will soon be outdated as western and south-western provinces of China, such as Xinjiang, Qinghai, Gansu, Ningxia and Sichuan will be using the port of Gwadar in Pakistan when it has been completed.

6.2

The Northern Sea Route

This section provides a detailed description of the NSR as it opens up another transit route for goods moving between East Asia and Europe and therefore is in direct competition to the BRI. According to the Russian legislation, the NSR also known as the Polar Silk Road runs through Russian territorial waters stretching from Novaya Zemlya to the Bering Strait which belongs to Russia’s Exclusive Economic Zone (EEZ) and so connects Western with Eastern Eurasia. The NSR stretches from Cape Dezhnev to Murmansk across the Arctic Ocean along Russia’s northern coast going from the Bearing Strait in the East to the Barents Sea in the West. Russia argues that a large swath of the Arctic Ocean which is related to the Lomonosov Ridge is part of Russia’s sovereign territory according to the 1982 United Nations Convention on the Law of the Sea (UNCLOS). As the sea ice is melting, the Northeast Passage becomes highly relevant to the construction of infrastructure. There will be shipping hubs at Murmansk in the West and in Petropavlovsk-Kamchatsky at the Eastern end of the NSR. Russia’s largest infrastructure projects are situated at Murmansk with roads, railways and ports. Sabetta Port on Yamal is being developed by the Russian government together with Novatek which is Russia’s largest independent gas producer. The NSR will provide a promising alternative transit between NorthEastern Asia and Europe to be used for containerized cargo as a consequence of the greenhouse effect which causes the ice to melt at a rapid rate in the Northern Polar Ocean. The Arctic continental shelf contains also a large reservoir of natural resources. China, Japan and South Korea rely heavily on imported energy resources and also export a large quantity of commodities to the European Union. Hence, the NSR will be useful as this route is 40% shorter than going through the Indian Ocean and Suez Channel route. Through the implementation of the Arctic route, China is able to avoid or at least minimize various vulnerable strategic positions, such as the Strait of Malacca, the Suez Canal and Gibraltar. It is in many ways a safer transport

140

J. JOSHUA

route than across the South China Sea and through the Strait of Malacca for the implementation of the BRI, especially as over 80% of oil imports to China pass through the Strait of Malacca. The construction of infrastructure connecting Pakistan with Central Asia is another way to avoid the Strait of Malacca and so increases China’s security of oil and gas imports. The Russian NSR is a safer transit route than going through the Strait of Malacca when moving from East Asia to Europe crossing the Far East coast and the Russian Arctic. The Russian NSR is for China also a better option than the Northwest Passage which goes along the northern coast of North America. This NSR can connect Yokohama and Vladivostok with Rotterdam, a transit that takes about 20 days when visiting ports on the way, and it takes between 7 and 15 days if the ships are not entering any ports along the way. From Southeast Asia to Europe via the NSR reduces the transportation time by half compared with taking the route through the Indian Ocean and through the Suez Canal. It would be most beneficial for all concerned when a Eurasian integration could include Japan, but politics and national chauvinism often interfere with sensible policies. To establish an energy bridge by constructing a gas pipeline between Sakhalin in Russia and Hokkaido in Japan could also be in the best interests of both countries depending on the terms of trade. The development of infrastructure along the NSR will have considerable effects on the economic development of the Russian Arctic regions as well as the development of the Far Eastern region. It will extend the BRI to the Arctic and is expected to become a major transport road for international trade. The NSR can promote Eurasian economic integration which facilitates further economic development such as the Belkomur project going from Arkhangelsk to Komi and then down into the Urals. Yamal may become another profitable project through the production of gas fields. Arkhangelsk and Murmansk are expected to develop into transport hubs to connect with Russia’s interior as well as with Northern, Central and Southern Europe. Although China is not an Arctic state, China has major investment in the Yamal liquefied natural gas (LNG) project in Russia. The Northern Maritime Route is in addition to the projects of the BRI. While the Southern Maritime Route goes through numerous countries ridden with social conflicts, they are also more promising in terms of economic developments; the NSR goes through relatively calm regions, but there are fewer opportunities for economic growth along the way at least at present. The sea lane, say from Shanghai to Hamburg via the Northern Maritime

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

141

Route, is about 4500 km shorter than the Southern Maritime Route, so that it will provide considerable savings in terms of transport costs. Consumer goods can travel from East Asia to Europe via the TSR and the NSR. The NSR connects the port of South Primorye with Murmansk and then continues onto Europe over land; at the moment, the NSR is passable by ships only during the summer months. The increasingly ice-free area of the Arctic increases the opportunities for the extraction of hydrocarbon deposits and for opening up the NSR for transit shipping. This would also accelerate the economic development of North-East China. The TSR can access China through multiple routes; all are situated in the Far East of Russia. There will be a direct access using the Trans-Korean Railroad; there is access through the ports in Southern Primorye and through the port of Vanino in the Khabarovsk Region and via the Baikal-Amur railroad (BAM); however, the infrastructure for all those options will have to be improved considerably. The NSR will also be beneficial to Korea and Vietnam as well as European nations. Japan and Russia would each benefit greatly when they construct various prospects in the neighbouring regions of Sakhalin Oblast and Hokkaido. Japan requires raw materials, especially in the form of hydrocarbon which Russia can deliver. Japan is in close proximity of the NSR and so has an advantage of importing raw materials such as LNG from the Yamal project. The Russian TSR can also be extended to Tokyo through a rail link through North Korea and South Korea. Japan could use also the Russian TSR for its exports to and imports from Europe. The Yamal region in the Russian Arctic has attracted over US$100 billion of investment up to 2025 to explore the vast reserves of oil and natural gas to be used in Russia as well as in many other countries in Europe as well as in China. Gas pipelines connect the region also to the Nord Stream which is expected to deliver gas to Germany and other parts of Europe. Yamal is expected to become a major hub for the Russian NSR which will connect the Pacific to the Atlantic running along the Russian Arctic Circle which will reduce the time required for transport from China to Europe by about 12 days. The Nord Stream 2 gas pipeline project is a joint venture between the Russian gas company Gazprom and various European energy companies. At present, Russia supplies about 35% of European gas requirements. Nord Stream 2 is expected to deliver natural gas from Russia to Germany. The pipelines are anticipated to be connected from Germany to other countries

142

J. JOSHUA

of the European Union, and it is expected to be completed in 2019. However, there is a lot of pressure on Germany to discontinue the Nord Stream 2 project which is beneficial to Germany and other European countries; if this project would fail, then shale gas will be imported from the United States at a much higher cost compared with the cheaper gas from Russia; furthermore, the possible liquefied material gas supplies from the United States would be inadequate to satisfy European demand for gas. The Nord Stream 2 project has an advantage over a possible pipeline between Russia and Germany via Ukraine, and the costs of transport are about one-half from Yamal in Russia to Germany. Russia intends to construct with Germany Nord Stream 3 going from Vyborg to Greifswald, while Nord Stream 2 runs almost parallel to it from Ust-Luga to Greifswald. To obtain gas from Russia makes the gas supply cheaper by 20–30% than from other supplies.

6.3

Europe and the Euro-Asian Connection

This section describes the European and the Euro-Asian connection because it is anticipated that eventually Europe and Euro-Asia are likely to economically integrate because of economic necessity which is partly facilitated through the construction of the BRI. Chinese investment in infrastructure as well as other economic sectors such as power plants, airports and chemical companies within the European Union has exceeded 100 billion. China operates the port of Piraeus since 2008. COSCO, the Chinese-owned shipping company, owns 51% of the Piraeus Container Terminal in Greece, which has been bought in 2016 for $342 million. The Piraeus Port will be used by China as an entry point for freight to Europe. The Chinese-built railway links Piraeus with Budapest which facilitates transport from the Mediterranean to Western, Central and Eastern Europe. China also bought 100% of the container terminal of Zeebrugge in Belgium, a 35% stake in the Euromax terminal in Rotterdam and a majority stake in the Noatum Port in Spain. The China Communications Construction Company (CCCC) won a contract to construct the new container terminal in Hamburg Süd. Venice is expected to become a major hub which includes an offshore-onshore port system. The South Stream project is a viable proposition for the construction of a gas pipeline going from Azerbaijan through Turkey to Greece and Bulgaria, Romania and then on to Austria, but political pressure is being exerted on those countries not to participate in such projects as it would make

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

143

Russian gas available at cheaper prices. China is involved in the upgrading of the Budapest-Belgrade railway line, and China provides 85% of the costs through the Export-Import Bank of China. The sixteen countries of the China–CEEC (Central and European countries) have joined the BRI, that is, Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Romania, Serbia, Slovakia and Slovenia. In June 2017, the first rail route was launched between Daqing and Zeebrugge Port in Belgium. The second route was opened in 2018 to connect Tangshan City with Antwerp Port. The latest route was opened between Zhengzhou and Liege in Belgium. About 11,000 trains have moved between European and Chinese Cities from 2014 onwards. The division of the production process has changed the patterns of international trade, international cooperation as well as protective policies, such as tariffs. International trade has progressed from inter/intra-industry trade to intermediate-oriented intra-product trade. The Eurasian route is running from Lianyungang on the East China Sea via Urumqi to Rotterdam and to the Mediterranean via Istanbul. Russia’s Far East covers over 6 million square kilometres which is inhabited by about 6.2 million people. Central Asia is a most important link between China and Europe which will turn Kazakhstan into a regional transport hub as Kazakhstan is situated in the centre of Eurasia. It comprises over 17 million people and it is the 9th largest country in the world. The new infrastructure includes the construction of a railway link between Dostyk situated on the Chinese border and Aktau on the Caspian Sea. The construction of a new port at Kuryk on the Caspian Sea and the highway between China and Europe is in the process of being vastly improved. The Khorgos-Eastern Gates Free Economic Zone (FEZ) situated on the Chinese border provides a big transport link between China and Kazakhstan where cargo is transferred from Chinese trains, which use the standard Stephenson gauge of 1435 mm, to a wider gauge. The track gauge is the distance between the inner sides of the rails. The widely used “standard gauge” system promotes interconnectivity and inter-operability. However, the problem associated with the use of two different gauge lines, that is, the 1435 mm standard gauge used in China as well as in a large part of Europe and the 1520 mm gauge lines from the former USSR, can be largely overcome with the use of containerization. The movement of cargo through the use of containers can also overcome the problem associated with a different width of gauges. Exports from Europe to China will have to increase

144

J. JOSHUA

to make the overland transport routes more profitable not only from China to Europe but also from Europe to China. A successful implementation of the BRI also contributes towards Russia and China as geopolitical powers. Geo-economics goes hand in hand with geo-politics; hence, a linkage between South Korea and Russia, together with a pipeline to connect Sakhalin Island and Siberian gas fields to South Korea through North Korea, is a logical conclusion which would link the Trans-Korean Railway to the TSR; such a linkage could also be constructed to connect with Japan as well. A rail, road and tunnel infrastructure could be constructed to link Sakhalin in Russia with Hokkaido so that the BRI could be extended to Japan. One of the world’s longest gas pipeline running over 3000 km, called the “Power of Siberia” which is also known as the Eastern route, is between Kovyktinskoye in the Irkutsk region close to the Baikal Lake in Siberia, which may be connected to China and crossing into China at Blagoveshchensk; it was expected to be completed by the end of 2018. The Bystrinsky project within the Trans-Baikal region in Siberia is connected to the Chinese borderland which is about 400 km away. The Bystrinsky mining and processing facilities in Chita in Russia’s Zabaykalsky Krai have large deposits of copper and gold. The Amur River is crossed with a new bridge connecting Russia with China. The project will be operational in 2019. The Heilongjiang-Blagoveshchensk Bridge will link with the BRI through the China–Mongolian–Russia Economic Corridor (CMREC). The Central Asian railway networks are connected to China, Russia and Iran. In 2014, Central Asia had approximately 22,664 kilometres of railways, most of it in Kazakhstan. The railway length of Central Asian countries is as follows: Kazakhstan 14,319, Kyrgyzstan 417, Tajikistan 621, Turkmenistan 3115 and Uzbekistan 4192 (World Bank 2014). China, Central Asia and Turkey will be connected by a 4500 km long land road as well as the East-West Railway programme. As Western countries largely disinvest in Turkey, China is likely to move in. Turkey has a unique geo-strategic position and is increasingly important as a hub and as a corridor for the transportation of energy in Eurasia. Turkey’s and China’s economic relations are complementary to each other; Turkey is for China of strategic importance for security reasons, whereas China is important to Turkey as a source of economic growth. Turkey serves as a corridor for Eurasian transportation of energy. Turkey is situated at the crossroads of global trade for energy connecting the Caspian region, Russia and the Middle East. Turkey is a major channel

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

145

for the BRI. The majority of global gas and oil reserves are situated within the Caspian region, the Middle East and Russia so that Turkey is located on the crossroads of the global trade of energy. The Baku-Tbilisi-Kars railway surrounds the Black Sea which also enhances the level of regional interconnectivity. Turkey is likely to join the SCO, and it intends to become the bridge between the BRI and Europe. Eventually, most countries situated in close proximity are also likely to join such as Iran, Afghanistan and Pakistan including various East European countries. Turkey is still a member of NATO but it is getting closer to Iran and Russia, and it is also buying weaponry from Russia such as the S-400. The development of the BRI is of great importance to China’s and Turkey’s economic development, so that China and Turkey are engaged in constructing pipelines and have signed the Memorandum of Understanding on developing the BRI. Turkey will become a transit point between Europe and other countries as Turkey is situated at the intersection between Asia and Europe. Turkey’s geographic location is highly important for the full implementation of the BRI and therefore of the Eurasian geo-economic connectivity and economic and social relations. Turkey has the fastest economic growth rate in Europe and the Middle East at around 8% per annum. Both Japan and Turkey are concluding several bilateral agreements that are not denominated in US dollars. The western province of Xinjiang has common borders with Mongolia, Kazakhstan, Kyrgyzstan, Tajikistan, Pakistan, India, Afghanistan and Russia, so that Xinjiang is vital for a pass-through to Eurasia for the BRI. The Eurasian Land Bridge from Xinjiang to Moscow and St. Petersburg includes a free trade zone at Khorgos in Kazakhstan which is being constructed at present. Kazakhstan has abundant natural resources, livestock and grain. A high-speed railway is being constructed between Moscow and Kazan which was then expected to be connected to Beijing through Kazakhstan in 2018. Furthermore, the creation of a custom union could go a long way to enhance the interconnectivity amongst Central Asian nations or at least amongst the Eurasian Economic Union (EAEU) which includes Armenia, Belarus Kazakhstan, Kyrgyzstan and Russia or even just between the inner core countries of Armenia, Kazakhstan, Kyrgyzstan, Tajikistan and Turkmenistan. However, it is to the advantage of all countries concerned that the EAEU and Chinese affiliated regions are joining together to optimize the interconnectivity between such nations which could spread out from the development of the energy sector which has already implemented numerous infrastructures.

146

6.4

J. JOSHUA

The Quadrangle of East Asia: China, Japan, Korea and Russia

This section describes the quadrangle of East Asia which involves future geopolitical changes that will affect the operation of the BRI. The quadrangle of East Asia interacts in multiple ways with the BRI, especially as it competes with various transit routes within East Asia and to and from Europe. As the Russian Far East and Siberia opens up economically, there will be huge investment potential in Siberia and Russia’s Far East, especially for China, Japan and Korea. Russia’s Far East is surrounded by developed and developing countries, by Japan, China, North Korea and Mongolia. Special economic zones have been established in Russia’s Far East. There are vast reserves of natural resources, such as zinc, iron, platinum, manganese and coal. Russia is in the process of expanding its exports of gas and oil from Sakhalin to Asian markets. In 2016, an agricultural fund of $10 billion has been created between China and Russia to improve the infrastructure to facilitate more exports to China. A gas pipeline is being constructed from Russia to China at a cost over $55 billion. China and Russia are part of the biggest landmass, whereas the United States is surrounded by two oceans and thereby may be more constrained. Russia has vast resources which contribute about 80% of Russia’s exports, mainly oil and gas which makes Russia vulnerable to global fluctuations in the market. It also makes it vulnerable to political disturbances. The best interconnectivity between Russia and South Korea is through North Korea. The TSR has been connected to the North Korean harbour of Rason which could be easily connected further to South Korea. A Trans-Korean–Trans-Siberian connection would increase South Korean trade with Eurasia. Russia and South Korea are well located to construct various geographic connections to facilitate the supply of agricultural products, fisheries, gas and electricity to take part in joint development projects, such as the construction of railways, the Arctic shipping route and various seaports. When the Korean Peninsula eventually will be reunited, it will be very beneficial to East Asian economies as North Korea is situated in the most advantageous geographic location. The BRI and the EAEU can be joined through a Trans-Korean Railway and the upgrading of ports in North Korea. The port of Zarubino on the Sea of Japan is being developed jointly by China and Russia and is linked by road and railway to the province of Jilin through the border

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

147

city of Hunchun and possible to the North Korean port of Rajin. The railway then continues on to South Korea and then could proceed through a tunnel to Japan, but politics often interfere with successful economic implementations. The port of Zarubino in Russia will give China direct access to the Sea of Japan on the south of Primorsky Krai in close proximity of the borders of North Korea and China. There is a railway line running north to Vladivostok, west to Hunchun in the province of Jilin and south to Rajin in North Korea. The TSR connects Moscow with Vladivostok, a distance of some 9000 km. Once the Korean Peninsula is reunited, the TSR will connect with Korea as well. The planned undersea tunnel between South Korea and Japan will also open the transit to Japanese exports and imports to Europe across Russia. A further benefit is that the port of Zarubino is ice-free all year round. When the Trans-Korean Railway may eventually be connected with the TSR, it becomes connected with the other participating countries of the BRI, and so becomes the Iron Silk Road. A natural gas pipeline from Russia through North Korea to South Korea would also bring great benefits and may also ease geopolitical tensions. It would be in the best interest of South Korea and North Korea to join together in an economic endeavour, even though there are a few countries which would oppose any such alliance. Ice-free ocean areas in the Russian Far East provide prospects for economic development, for example for the construction of the NSRs (NSR) and the extraction of hydrocarbon deposits. Such constructions are of an advantage to China, South Korea and Japan as all three countries depend on imports for their energy requirements and could use the NSRs as another route to reach their export market for commodities. The NSR is about 40% shorter than the route going through the Indian Ocean and then through the Suez canal so that there will be cost savings in time and fuel. The Amur River Bridge also connects Siberia with China; it will connect Blagoveshchensk in the Far East of Russia to Heihe in Heilongjiang, which is also connected to the CMREC which also leads to the EAEU. The Tongjiang Rail Bridge connects Tongjiang in Heilongjiang Province to Nizhneleninskoye in the Far East of Russia to the construction of the China–Russia–Mongolia Economic Corridors. Once North Korea has become part of the BRI, it will promote regional economic integration. The BRI going through the eventually reunited North and South Korea and then continues to Japan via the Tsushima Island requires denuclearization and the withdrawal of all foreign troops from the Korean peninsula, so that Tokyo could then be connected to Europe through the Korean

148

J. JOSHUA

peninsula and Siberia. Tsushima Island is about halfway between Japan and South Korea, approximately about 50 km from the Japanese and the South Korean coast. Such connection would greatly enhance international trade between those countries that would be mutually beneficial. Korea can then access the TSR through the Trans-Korean Railroad which is the best option as it is the shortest and cheapest one. Korea can also access the TSR through the posts in Southern Primorye and port of Vanino in the region of Khabarovsk and the Baikal-Amur railway link (BAM). The Primorye region will then be able to develop further to benefit the Far Eastern maritime region of Russia’s Far East. A reunited Korea would obviously be of great economic benefit not only to a united Korea but also for China, Japan, Russia as well as the countries involved in Eurasia. A united Korea will be linked with Korea and Russia through an upgrade of roads and railways. The concept of a community of common destiny and a community of shared fate can then be applied to a reunited Korea. This may eventually benefit members of other participating countries of the BRI, especially within Eurasia. The construction of infrastructure connecting North and South Korea will enhance the prospects of economic development of North-East China which has been neglected so far. China and Russia is able to develop the infrastructure in North Korea which could connect China with South Korea through a Trans-Korean Railway. The economies of China and Russia are highly complementary so that the BRI will be able to contribute towards a win-win situation provided the necessary investment will be forthcoming. The Russian-Chinese investment cooperation is referred to in Russian as “Dakaitaowa” because one leads to another, like what happens when opening a matryoshka doll; for example further monetary integration may lead to trade to be financed in RMB. Russia is amongst the top five producers of oil and gas over at least the next decade. Russia has the world’s largest natural gas reserves of 1736.5 trillion cubic feet (TCF) and has the eighth-largest oil reserves (86.15 BbbI) and also has become the leading natural gas exporter. Russia reached in 2014 its first $400-billion agreement for the supply of gas from East Siberia to China. Gazprom is to deliver 1.1 TCF per annum to China from West Siberia in addition to the previous delivery of 1.3 TCF so that China has become Russia’s largest customer of gas (Snyder 2016, p. 69). By March 2016, the Prirazlomnoye field offshore in the Pechora Sea was the first oil-producing field on the Arctic Shelf in Russia (Kaminskii et al. 2011). A Southern Gas Corridor is anticipated to transport natural gas

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

149

from the Caspian region through Turkey to Austria from 2019 onwards. The Nord Stream pipeline started to operate in 2012 and connects Russia with Germany. Gazprom signed the biggest ever gas contract of over $400 billion with CNPC in 2014 which became effective in the same year. The contract includes the construction of gas pipelines and the supply of gas from Siberia to China. Russia is to deliver 38 billion cubic metres of gas to China per annual for 30 years. The actual deliveries of gas will commence in 2019. A second gas pipeline from Siberia to China is expected to deliver an extra 30 billion cubic metres per annum of gas to China and other Eastern Asian countries. However, for the time being, the Siberia-2 gas pipeline project is on hold. The gas project on Sakhalin which has a capacity of 8 billion cubic metres per annum is also on hold at present. Yamal LNG is constructing an LNG plant in the Yuzhno-Tambeyskoye gas field is partly financed by the Silk Road Fund and also includes Japanese, Chinese and French’s total interests. Production of the Yamal LNG plant already commenced in December 2017, and the production capacity is to increase by 30% over the next few years. The infrastructure connecting Russia with Japan consists of two projects: firstly, a bridge connecting the Russian mainland with Sakhalin, secondly, a bridge connecting Sakhalin with Japan. These projects would fuse with BRI. The successful implementation of these projects would foster economic growth in Sakhalin and Hokkaido as well as in within the area of Vladivostok. Japan like China provides a huge market for raw materials and petroleum. It would also facilitate trade between Europe and the Far East. The project of an 1100 km long Russian gas pipeline from Sakhalin–Khabarovsk–Vladivostok to South Korea via North Korea, first contemplated in 2008 has also been revived to deliver an expected 20 billion cm3 per annum. Russia and North Korea intend to cooperate in various projects, such as rail networks, seaports, Arctic shipping, gas and shipbuilding. Japan is also extending its cooperation in the construction of infrastructure with Russia which will help to open up economic development in the Far East of Russia. The TSR together with the ferry will connect China with Russia, Japan and South Korea. Japanese and Russian economic cooperation in East Russia is vital for economic growth in the Far East and Siberia. Furthermore, joint Chinese, Japanese and South Korean projects would be even more beneficial for the countries involved. The Transneft Telecom communication lines of 16,000 km which covers the complete Russian

150

J. JOSHUA

territory will be connected with another 1000 km line connecting the network with South Korea and Japan. Russia administers the Kuril Islands which stretch from Kamchatka down to Hokkaido. Russia agreed in 1956 to return Habomai and Shikotan to Japan; even though the agreement was ratified, it was not implemented by Japan as it insisted that all four islands should be returned; however, it is likely that at least the two islands and possible the four will be returned to Japan in the near future. If Russia returns Iturup, Etorofu, Habomai and Kunashiri Islands to Japan, huge Japanese investment will follow into Siberia and the Far East which will be more beneficial to the Russian economy than those islands ever could provide to Russia. Japan is also likely to join the BRI once it appears that the BRI will be successfully implemented, although there is still some hesitation by Japan to do so. Negotiations between China and Japan are taking place regarding arrangements of the Regional Comprehensive Economic Partnership (RCEP). Japan is committed to the principles of globalization and free trade and has already agreed to cooperate with China within the framework of the BRI. When the BRI turns out to be successfully implemented, Japan is eventually likely to join the BRI as well as the AIIB as it will be to the financial and economic interests of Japan. Japan may also join other countries, especially with China to jointly oppose policies of the United States on tariffs as both have been subjected to US tariffs on steel and aluminium. When Japan may eventually join the BRI, it will be perceived as a nightmare for the United States, especially when North Korea comes eventually to an agreement with South Korea about a possible reunification. Japan and China will gain economically when those two countries will cooperate in joint investment projects in the BRI. Japan has already agreed to cooperate with India in the construction of various infrastructure projects in Bangladesh, Myanmar and Sri Lanka where China is also already involved in the construction of infrastructure through the BRI. China obtained a lease for 99 years of the port of Hambantota in Sri Lanka which is located on one of the world’s busiest shipping route between the Middle East and Africa, so that it is important to the BRI. China, India and Japan may find it economically advantageous to cooperate here, rather than just to compete against each other. China has a huge need for gas so that it has signed contracts with Russia and the United States. China signed a gas deal with the state government of Alaska in 2017 for the production and export of LNG from Alaska to China, which was intended to be sold to China for US$43 billion, but

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

151

imposed tariffs and sanctions have caused problems. China has imposed a 25% tariff on imports of American crude oil in July 2018 and instead increased its imports of crude oil from West Africa and Iran. Alaska is the closest US state to China and so could serve as a gateway for China to North America. Eurasia could be connected with the American continent through the construction of a 100 km tunnel under the Bering Strait which could be followed up with the Alaska–Canada railway link and eventually go through the Canadian territories from the Yukon via the Canadian Shield down to Nova Scotia and then onwards to the South of the American Continent. Canada and China will benefit as Canada can supply the raw materials which China needs. However, present political rivalries are based on Hobbesian concept of power where the stronger rules the weaker ones, rather than being guided by what may contribute the greatest benefit for a nation.

6.5

The South-East Asian Region

BRI includes multiple projects of infrastructure in South-East Asia, and one of the most important projects is the Bangladesh–China–India–Myanmar corridor (BCIM); it is intended to connect Kunming with Kolkata. The corridor includes the Kyaukpyu Special Economic Zone (KSEZ) in Myanmar which has a deep-sea port and an express railway link. The pipeline linking Yunnan with the Bay of Bengal is important for China’s security of energy. The oil and gas pipelines, which are intended to be accompanied by a railway and a highway, are running from Kunming to Kyaukpyu port in Myanmar. The Myanmar-China pipeline has been completed in January 2015, connecting the deep-water port of Kyaukpyu in the Bay of Bengal with Kunming in Yunnan. China is also developing the ports of Chittagong in Bangladesh and Sittwe in Myanmar. China is also investing in various projects of social development, including schooling in South-East Asia. The BRI also involves a vast extension of the road and rail networks inside China, especially through the construction of roads in rural areas of China. Another important road is intended to go through Afghanistan’s Wakhan corridor moving towards the west in search of new markets. However, the Rakhine state in Myanmar is politically unstable and so are Kashmir and Afghanistan, and the BRI needs political stability to succeed. The reemergence of the Kashmir dispute and the Rakhine violence is just another

152

J. JOSHUA

way to try to disrupt the BRI. In various places of the BRI, political instability is often used to undermine and to derail at least parts of the BRI projects. The Pan-Asian railway network consists of three separate railway lines, the east, middle and west lines beginning in Kunming going through Vietnam, Cambodia, Laos and Myanmar. The three lines join in Bangkok and then proceed to Singapore via Kuala Lumpur. This Chinese rail project is in the process of being developed between Cambodia, Laos, Myanmar, Thailand, Malaysia and Singapore to connect Kunming with Southeast Asia through medium- and high-speed railways which provide China with access to the Indian Ocean. The high-speed rail running from Kunming in Yunnan to Vientiane in Laos is expected to be completed in 2021 and is to be extended to Singapore. The journey from Kunming to Singapore is expected to take 10 hours. The China–Laos railway is also expected to be completed in 2020. The construction of a China–Thailand railway has also commenced. China commenced the construction of a railway link between the east and west coast of Malaysia stretching over 688 kilometres which is expected to be completed in 2024; it is expected to connect the Straits of Malacca in the West with the South China Sea in the East. The Pan-Asian Railway refers to the South-East Asian part of the SREB. The BRI includes the land-based SREB and the ocean-going Maritime Silk Route (MSR). Myanmar borders China in the north and extends to the Bay of Bengal in the South. Yagoon is a big port and highly important to the successful implementation of the Maritime Silk Road as part of the BRI connecting China and South-East Asia with Africa and Europe. Bringing gas and oil to China through Myanmar is another way of avoiding the Strait of Malacca because of security concerns. The anticipated Kunming-Chittagong road will connect China with Bangladesh and is also anticipated to connect further with Myanmar and India which will increase trade between those nations. However, India proposes another counterweight by constructing the India–Myanmar–Thailand project to connect Moreh in India to Mae Sot in Thailand. Rather than advocating parallel projects which more than duplicates expenditures and reduces their profitability, it may be more advantageous for all the participating countries concerned to join various projects, but political rivalry often takes priority over economic necessity. Large transport infrastructure projects have been completed within the Greater Mekong Sub-region (GMS), such as the North-South Economic

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

153

Corridor (NSEC), the East-West Economic Corridor (EWEC) and the Southern Economic Corridor (SEC) (Vu 2014) to overcome the obstacles to interconnectivity to foster trade. China is also close to establish a “technological ‘hub-and-spoke’ system in the GMS’s electricity field” (Vu 2014, p. 159). The GMS consists of about 2.3 million km2 and a population of approximately 245 million. The GMS includes Cambodia, China, Lao PDR, Myanmar, Thailand and Vietnam. Improved connectivity will facilitate economic development within the region. The development of infrastructure varies widely amongst ASEAN members. Brunei, Singapore and Malaysia have the best developed infrastructure followed by Indonesia, the Philippines and Thailand, and the lowest development of infrastructure is in Cambodia, Laos, Myanmar and Vietnam. The Kunming-Singapore railway link estimated to cost about $23 billion will go through Laos, Thailand and Malaysia. The China–Indonesia Peninsular Economic Corridor intends to connect Southeast Asia’s 600 million inhabitants to China’s economy through infrastructure of rails and ports. This corridor can be extended to Australia. China is vital for Australia’s economy; indeed, without China purchasing a large bulk of Australia’s raw materials, Australia’s economy may drastically decline. China is Australia’s most important trading partner and Australia’s reluctance to join the BRI will be to the detriment of Australia. Cooperation between China and India, such as in the case of the 2800 km long BCIM infrastructure project could be intensified to increase trade and economic development. The BCIM may also help to close the gap in resources in Bangladesh and Myanmar which creates considerable bottlenecks to further economic development. Any connection between China and the Indian Ocean has to go through Myanmar if the Himalayas are to be avoided. Myanmar is also rich in natural resources and so is vital for the BRI. Not surprisingly, it is also subject to policies of regime change. Sanctions on Myanmar imposed poverty on the country and prevent any viable sustainable economic development.

6.6

South Asia and the China–Pakistan Economic Corridor

Since 2009, China has expanded its footprint in Pakistan and has also signed an FTA with Pakistan which came into effect in 2007. Through the port of Gwadar, China gained access to the Arabian Sea and the Indian Ocean. China’s endeavours in Pakistan include the construction of power

154

J. JOSHUA

plants, hydroelectric dams, nuclear reactors, roads connecting Karachi on the Indian Ocean to Xinjiang across the Karakorum Pass and much more. Pipelines going through Pakistan bring LNG from Central Asia to Pakistan and crude oil from the Middle East to China. The overland trade route allows China to avoid the Malacca Strait and so enhances China’s security of supplies. The CPEC includes infrastructure of the value of about $46 billion and is anticipated to be completed by 2030. The BRI is essential to improve infrastructure in areas which still have inadequate infrastructure and insufficient finance. The CPEC is the most important foreign direct investment in Pakistan. The CPEC includes a vast transportation system, special economic zones and multiple power projects. The CPEC was inaugurated in 2016 and consists of highways, railways, pipeline and fibre-optic cables and stretches over 3000 kilometres which connects the Silk Road with the Maritime Silk Route. The CPEC connects Kasha with Islamabad and the ports of Gwadar and Karachi. Gwadar is a deep-sea port located in the province of Baluchistan in Pakistan close to the Strait of Hormuz and is able to receive oil tankers with a capacity of 200,000 tons (Anwar 2011). The port of Gwadar is 72 km from the border of Iran and is constructed by the China Overseas Port Holding Company; the construction includes an export processing zone and an international airport together with the construction of roads and railways. China and Pakistan are in the process of upgrading the Karakorum Highway (KKH). It provides the shortest access to seaports for the landlocked counties in Central Asia. Baluchistan has also an estimated 29 trillion cubic feet of natural gas and 6 billion barrels of oil. The Gwadar port in Baluchistan will connect with Kashgar in Xinjiang via Kashmir by road. The Xinjiang–Pakistan Economic Corridor runs from Kashgar to Gwadar and reinforces the Karakorum Highway that links China with Pakistan which is significant to the CPEC. The distance from Kashgar to the east coast of China is about 3500 km, whereas the distance between Kashgar to Gwadar is approximately 1500 km, so that there are considerable savings involved in the transport road between Kashgar and Gwadar are fully operational. Kashgar has become a special economic zone in 2010. The China–Pakistan Investment Company (CPIC) is a private real estate company which concentrates within the CPEC. Gwadar Port is a gateway to the CPEC; it is connected by road and rail to Kashgar in Xinjiang. Gwadar is situated about 480 km from Dubai and is expected to become the biggest port in South Asia.

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

155

Four separate new roads are going through the Khunjerab Pass which brings it to eight roads connecting China with Pakistan. The KKH links China with the Arabian Sea, South Asia, Central Asia and West Asia. The CPEC is a project to develop Pakistan infrastructure which gives China access to the Arabian Sea and the Indian Ocean. The CPEC will bring great advantage to Pakistan in terms of economic development, especially through the construction of roads, railways and pipelines together with the construction of power plant to improve the supply of electricity. It will promote imports to and exports from China, particularly of sources of energy. This development is vital to China and can serve partly as a substitute to the Malacca Straits which could be highly insecure in the future from the Chinese perspective. China attempts to escape from the Malacca Strait containment zone with the construction of the CPEC which provides China with overland access to the Indian Ocean. China is adamant to protect its sea routes as it gets most of its petroleum by sea. A pipeline going from the Middle East through Iran, Iraq and Afghanistan is politically risky at the moment. China also sees the security of the South China Sea as vital to protect China’s supply lines and so attempts to ensure the connectivity of the BRI. As the South China Sea is expected to hold considerable resources of oil and natural gas and as it provides a transit passage for China’s exports and imports, China intends to hold on to the South China Sea; although once the CPEC has been implemented and is fully operational, it also provides an alternative route for the flow of oil from the Middle East to China. The CPEC promotes regional integration and should also increase regional security. Through the CPEC, landlocked regions in Central Asia can get access to the Arabian Sea and so enhances their export opportunities. The CPEC is able to reduce the distance from China to the Middle East from 13,000 km to merely 2500 km (Khan and Marwat 2016). It has been described as a “lifeline for economic revival” (p. 103) for Pakistan. The CPEC can increase trade between Central Asia, South Asia, the Middle East and Africa, because they are highly complementary in terms of demand and supply. Regions cannot integrate without the construction of the appropriate infrastructure. The CPEC is the crossroads between North and South and between East and West. The CPEC interconnects resources-rich areas with resource-poor areas but which have high demand for such resources which will facilitate trade and investment across regions. The CPEC will be able to open up new markets of supply and demand towards less developed

156

J. JOSHUA

regions. Once proper infrastructure has been established across the CPEC, cross-border production chain can also be established. Pakistan is situated on the crossroads between Central and South Asia and the Middle East. The 650 km long road between Gwadar in Pakistan and Termez in Uzbekistan will be further connected with Mazar-i-Sharif in Afghanistan and to Chaman in Pakistan through Kandahar. The CPEC goes through the Pakistan region of Gilgit-Baltistan which India also claims as its own territory. India does not oppose that the AIIB will finance the CPEC projects, but even if it should object, it lacks a veto power in the AIIB. In any case, it would be more in India’s economic interests to integrate into the wider multipolar Eurasian region. The most important joint projects between China and Pakistan are the Gwadar Deep-Sea Port and the Karakoram Highway. Gwadar is situated 72 km from Iran and 32 km from Oman from which Pakistan bought Gwadar Port in 1958. Gwadar provides access to a deep-sea port to landlocked countries of Central Asia and Afghanistan and so to international markets (Anwar 2011). Many projects of the CPEC will strengthen Pakistan’s energy sector and will also reduce Pakistan’s trade deficit. The projects are also expected to improve the living conditions in Pakistan. However, India attempts to use the port of Chabahar as a countermeasure to the port of Gwadar; a better idea may be to integrate the port of Chabahar into the BRI. India intends to facilitate the Iranian port of Chabahar to get access to the central Asian market. India anticipates to develop the Chabahar port in Iran and signed an agreement with Iran accordingly. The Chabahar port is just 72 km from Gwadar and so provides an alternative; hence, India would be able to circumvent Pakistan to get direct access to gas-rich Central Asia, and this would also increase substantially India’s trade with the five Central Asian states of Kazakhstan, Tajikistan, Kyrgyzstan, Turkmenistan and Uzbekistan. India’s freight costs would also decline by about 30% on the way to Russia and Europe. Thus, India is at present opposed to the CPEC and encourages independence of Baluchistan from Pakistan. India intends to develop its own network of international infrastructure to establish closer economic links with South and South-East Asia. However, India cannot compete with China for geographic influence as there are no Indo-Japanese and no Indo-American projects which could act as a countervailing force to the BRI. A much more promising prospect would be the implementation of the BCIM which could provide an important link between Yunnan in China and Myanmar, Bangladesh and India which

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

157

would greatly benefit those countries involved. However, this project has been postponed as political rivalries are often given greater impetus than economic rationality. As India does not provide any real alternative to the BRI, India’s neighbours are likely to get more and more involved in the BRI which is expected to benefit their domestic economies; however, by putting political rivalry aside, India could join the BRI and indeed would become an important partner which could also increase its trade with neighbouring countries. Eventually, a railway link may be established between China to Kameshwaram in the south of India through Mansarovar in Tibet. However, presently India and Japan are opposed to the BRI, but it is to the long-term advantage for both countries to join the BRI; instead, India and Japan are to promote the Asia Africa Growth Corridor (AAGC) as a possible counterweight to China’s initiated BRI. The International North-South Transport Corridor (INSTC) is about 7200 km long and is intended to connect India, Iran and Russia which could be easily extended to be part of the Golden Ring of Pakistan, Iran, Russia and Turkey. It could help Iran to diversify its economy and facilitate its oil exports, despite imposed sanctions against Iran. This route could be joined up with the BRI rather than seeing it as an alternative in this geographical region. China is also involved in the construction of the Iran–Pakistan gas pipeline. The development of international roads across the TransHimalaya is vital for the success of the BRI in that region, especially the Mustang Road and Humla Road going from Tibet to Bhutan, which can then be expanded to Bangladesh. There are more roads in the central districts of Rasuwa and Nupri in Nepal which can be upgraded as well. Much of the population in such areas are living a Zomian existence, that is, cultural traditions that defy central government structures which are the “weapons of the weak” (Scott 1999). The present infrastructure actually may increase for much of the population the chances to engage in Zomian practices, even though the development of new roads brings much of the population closer to the state systems. The development of infrastructure is vital to the establishment of new markets which submerges the regional area into global capitalism. The expected extension of the Qinghai-Tibet Railway to the ChineseNepalese border through Tibet will increase greatly bilateral trade. At present, China and Nepal are not connected directly by a railway; however, once the new railway has been established, it could significantly increase

158

J. JOSHUA

trade between China and India. The project is expected to go up to Kathmandu. Tibet has potential mineral deposits of some $100 billion which would increase the profitability of the link. China and Nepal developed a cross-border railway. The Qinghai-Tibet railway will be extended from Lhasa to Xigaze and will then proceed to the Sino-Nepalese border at Gyirong which is expected to be completed by 2020. The gas pipeline projects of Turkmenistan–Afghanistan–Pakistan will be able to fulfil the energy requirements of Pakistan as well as India. The overland routes through Pakistan are able to enhance intra-regional and interregional connectivity required to improve trade and the transactions of energy. Pakistan’s three major ports are those of Gwadar, Karachi and Qasim on the Arabian Sea. The economies of Central Asia and South Asia complement each other; for example, the power surplus countries in Central Asia can enhance economic development in the power-deficit countries in Afghanistan and Pakistan. Eventually, the Almaty-Bishkek-KashgarKarakorum-Islamabad-Karachi network, also known as the Almaty-Karachi road, goes through the Karakorum Mountains and will be able to greatly improve the economies of the participating countries, once the construction of the Gwadar port facilities has been completed. The Gwadar port is expected to double the Pakistani ocean trade and will also increase Afghan exports. The new Silk Road will help to improve interactions between Central Asia and South Asia, China and the Far East. The construction of various road corridors will lead towards the creation of new trade flows and economic diversification in Central Asia. Pakistan and northern India have a lack of energy resources, whereas only a few hundred kilometres to the north, Turkmenistan, Uzbekistan and the northern part of Afghanistan have about 217,108 TCF of gas reserves (Anwar 2011). Access to Central Asian energy resources is vital for the Pakistani economy. It will also be essential for India to make the appropriate arrangements to get access to such energy resources as well, rather than trying to obtain energy resources from more distant locations at higher costs. There are basically two separate pipelines which could be implemented to supply the necessary energy, that is the Turkmenistan–Afghanistan— Pakistan–India (TAPI) pipeline and the Termez–Kabul–Peshawar–India (TKPI) pipeline. The countries concerned have agreed to the TAPI which, if implemented, may increase the interdependence between India and Pakistan which could improve their mutual relationship. An increase in the consumption of gas will also lower the emissions of greenhouse gases through

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

159

the reduction of the burning of coal. The global consumption of energy is expected to increase by 57% between 2002 and 2025 (Anwar 2011), especially in regard to emerging economies, particularly in China and India. Sachdeva (2011) anticipates that India’s economy will have to grow by at least 8% per annum over the next 25 years to reduce the level of poverty, so that the capacities of the infrastructure and the energy sector will have to increase between 3 and 6 times (Sachdeva 2011).

6.7

The Middle East

The Gulf region is of major importance to the BRI. Through the interaction of multiple countries, various potential opportunities may be unlocked. The Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) are expecting to benefit from trade with China. China is the largest importer of oil and is the second largest importer of LNG. Eventually, there are likely to be an Iran-Syria pipeline which could also go through Turkey. In this case, the petrodollar hegemony may become irrelevant to the disarray of Saudi Arabia and the UAE. Future natural gas may be supplied in the future to Europe from Iran. The pipeline transports energy from the Middle East and Africa to China which thereby bypasses the Malacca Strait and so it is safer from the Chinese perspective. Approximately 20% of all global trade in petroleum move through the Strait of Hormuz, which is approximately 35% of all the petroleum transported by sea, and about 85% of such trade, goes to Asian markets. China is the biggest energy consumer worldwide and imports most of its oil from the Middle East. China’s total energy consumption was 22% in 2012 as compared to the United States with 18% (Amineh and Crijns-Graus 2014, p. 808). China’s operation of state-orchestrated market capitalism requires security of energy to feed in its relatively high economic growth. Infrastructure developments will enhance energy security. The construction of pipelines from Iran to China will be able to minimize the risk to security of energy supply. Furthermore, supply of energy sources should be diversified to minimize risk in supply. As China is pursuing purely economic interests, China’s oil companies are able to enter multiple countries concurrently. China has become the leading importer of Iraqi crude oil as it is buying over half of Iraq’s production. China has also rebuilt some of Iraq’s infrastructure and invested in Iraq’s economy.

160

J. JOSHUA

6.8

The African Continent

The Mombasa-Nairobi Standard Gauge Railway is a major infrastructure project led by China in Kenya and is a key component of the Kenya Vision 2030 development plan. The new railway is facilitating the regional integration in East Africa. The railway in Kenya is part of the OBOR. Another corridor will connect Djibouti, Kenya, Tanzania and Mozambique to the Red Sea on the Eastern Mediterranean and to South-eastern and Central Europe. The New Silk Road will connect the European, Mediterranean and African markets with China. It is a project crossing several civilizations which may enhance national development, prosperity and economic integration. Chinese FDI into Africa can promote economic growth and development through technology transfer, the promotion of export creation and thereby also promotes domestic investment. Africa has become one of the faster growing regions. However, Africa as a whole lacks a coherent bargaining power as it is split into multiple counties with divergent interests, whereas China is one country with a coherent policy. A more united African approach may give some advantage in trade negotiations. China is building a transcontinental Sahelian-Saharan Road to connect Port Sudan on the Red Sea to the capital of Chad N’Djamena by rail. The aim is to connect Nigeria to the Eurasian landmass through a bicoastal corridor which will contribute towards economic growth of the regional economies. The deep-sea port of Lamu in Kenya is expected to be connected eventually to landlocked Ethiopia and South Sudan by railway, roads and pipelines and then on to Douala, a port in Cameroon. Habiyaremye (2013) indicates that the construction of infrastructure is positively associated with the diversification of exports and economic growth; however, the coefficient for infrastructure was larger for “Angola mode” countries which imply that those countries were in greater need of the construction of infrastructure. The sharp increase in investment in Africa by China and the increase in trade between such countries has also increased Africa’s bargaining power with Western countries. Economic diversification leads to export diversification which leads to further economic growth (Al-Marhubi 2000). China has developed the most efficient infrastructure construction industries, and African countries are in need of infrastructure while China requires a great supply of resource materials, so that China and African countries complement each other which resulted in an increase in trade between those nations. Yogo and

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

161

Verdier-Chouchane (2015) find that on average, in North African countries the quality of infrastructure has a greater impact on the level of competitiveness, rather than the quantity of infrastructure. They suggest that North African countries should engage more in the maintenance rather than more construction of new infrastructure to improve the region’s competitiveness and economic growth; however, their argument for the need for more private investment is not applicable in the case of the construction of infrastructure within the countries which are part of the BRI as private investment is implemented with a view to enhance the profitability of investors in the short run, whereas the projects under the BRI provide opportunities to increase the welfare of member states in the long run. Once the African Continent has become a Free Trade Area (AfCFTA), it will cover 55 countries and some 1.2 billion people. The access to a unified market will increase economies of scale, and it will also contribute towards an increase in value-added jobs. A draft agreement was agreed in Rwanda in 2015 by 44 countries. The BRI will be able to establish the required connectivities between the African nations. A Trans-African railway link between Dakar in Senegal via Ndjamena to Djibouti crossing through 10 different countries, most of them are landlocked, but then will be linked to the Atlantic and the India Ocean.

6.9

The South American Hemisphere

The geographical and economic expansion of the BRI in Eurasia and the African Continent is likely to eventually draw the Latin American continent into its orbit as a consequence of economic necessity. Of course, there is no reason to assume that economic growth, especially sustainable economic growth, can occur everywhere concurrently (Kuznets 1955; Lucas 2000), so that it can be expected that economic growth will decline in some countries while it rises in others. Presently, most Latin American countries have inadequate infrastructure which is a hindrance to economic growth and to the reduction in poverty. Many Latin American countries do not have the necessary capital required for the construction of much-needed infrastructure; however, Chinese investment in the infrastructure in Latin America may be able to facilitate such constructions. China is interested in the construction of a Pacific-Caribbean rail corridor passing through the Isthmus of Tehuantepec in Mexico which separates the Atlantic Ocean from the Pacific Ocean by a mere 200 kilometres. It

162

J. JOSHUA

may be regarded as the “Mexican Silk Road”. It would be another route to bypass the Panama Canal. It could replace the presently stalled plans to construct the Nicaraguan Canal which would also link the Atlantic with the Pacific Ocean. China is prepared to invest $50 billion to construct the Nicaragua Inter-oceanic Canal which will connect the Pacific Ocean with the Caribbean and thus provides an alternative route to the Panama Canal. Western countries cannot match China’s expenditure on a global scale so that international relations will shift in favour of China as time proceeds. There are two further major projects anticipated in Latin America. The 300-mile Bi-Oceanic Rail Corridor constructed by China is intended to connect Brazil with Peruvian ports and could be funded by the AIIB and the BRICS’ New Development Bank (NDB) created in July 2014. The Twin-Ocean Rail is to provide an alternative to the Panama Canal. The Two-Ocean Tunnel is expected to connect Argentina’s Atlantic coast with Chile’s Pacific coast. The cross-Pacific route connects with the Chinese port of Hong Kong, Xiamen, Qingdao and Shanghai with ports in Latin American, such as Callao in Peru, Buenaventura in Columbia, Guayaquil in Ecuador and multiple ports in Chile. Brazil would benefit from greater investment in infrastructure, especially by China as it has the expertise in fostering interconnectivity between different regions to promote economic growth. The benefits of greater integration of global trade will largely depend on the specific characteristics of the countries involved. Brazil has to invest about US$1.1 trillion in infrastructure projects between 2010 and 2022 (Gouvea 2013, p. 47).

6.10

Conclusion

The BRI also known as the OBOR (yidai – yilu) initiative is intended to broaden Chinese trade channels towards South Asia, South-East Asia, the Middle East, the Mediterranean, East Africa and South America to sustain China’s economic growth and development and also furthers economic growth of countries along the road. As the BRI projects unfold, they open up new opportunities on a global basis and are not anymore confined to the geographical area of the ancient Silk Road. The extended BRI now stretches from Greenland on the Arctic Circle to Tierra del Fuego in Argentina in the sub-Antarctic. There are six economic corridors which are described in details: China–Mongolia-Russia, China to Central Asia and Western Asia, the Eurasian Land Bridge, the BCIM, the China–Pakistan corridor and the China–Indochina peninsula.

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

163

The BRI is a geo-economic and geopolitical projection so that international relations are going to change profoundly. The global political environment is likely to be reformed; consequently, various nations will increase their economic and political importance, whereas others are in decline which will lead towards a change in the structure of global governance. The BRI is intended as a tide to lift all boats together. The Silk Road may eventually be able to create an area of free-flowing goods and services and free movement of people across vast areas to achieve common prosperity and a common community with a shared future which will require the construction of new infrastructure on the land and the sea and across the mountains. Trade between many of the participants of the BRI is often highly complementary between them, so that trade can be a win-win situation by increasing trade. Trade lanes will enable to optimize market opportunities. China is the biggest importer of natural gas from Central Asia, while it is the biggest exporter of commodities to Central Asia. Not all projects are concerned with energy security of China; for example, the project of Shah Deniz in Azerbaijan takes gas from Central Asia and delivers it across Georgia and Turkey to Greece and Albania and then to Italy and other parts of Europe. Security of supply of energy is important for China and so is demand security for oil exports. The major growth in demand has shifted to the East. China’s and India’s growing demand for oil has increased sharply and will continue to do so until at least 2040; both are expected to be the largest importer of oil from Saudi Arabia. China has become increasingly interconnected with the world. However, China’s integration into the global economy proceeded to different degrees in different Chinese provinces; the integration was strongest in the coastal provinces. Infrastructures have to be integrated to ensure the efficient flow of merchandise and raw materials. Tailor-made infrastructure, whether directly or indirectly part of the BRI, will “plug China deeper into the global economy facilitating imports of resources and exports of manufactured goods and diversifying its logistics” (Oerstroem Moeller 2016, p. 4). China’s high-speed railways have contributed greatly towards China’s development. The first high-speed railway was operated between Beijing and Tianjin in 2008 for a mere distance of 118 km. 25,000 km highspeed railways existed by 2017 in China which is expected to increase to 38,000 km by 2025. Chinese railways have surpassed in speed and technology the original high-speed railways of Germany and Japan. The tracks

164

J. JOSHUA

facilitate more economic development along the tracks and not only nearby the train stations. China is expanding its domestic railway linkages rapidly, although it is already the largest high-speed rail network in the world. China’s vast experience in the construction of infrastructure can be transferred to the construction of infrastructure on a global scale. Labour productivity is enhanced through the use of infrastructure and the intensity of investment in specific regions. The geographical environment has an important influence on the productivity of infrastructure. There is a reciprocal relationship between economic and social opportunities and the relationship between economic and social opportunities and the productivity of infrastructure; without economic opportunities, no infrastructure can be productive, but infrastructure can enhance the probability to enhance opportunities. Coordinated industrial policies can make use of regional complementarities as well as intensify such complementarities. Industrial policies are required to enhance the absorptive capacities of different regions. China has numerous export processing facilities for global value chains which can be extended to the participating countries of the BRI. Depending on how it is playing out, China’s Polar Silk Road and other sections of the BRI provide a chance to Western countries to avoid partly a Western decline, including that of the American continent. However, political rivalry will have to be minimized if the BRI is to prosper on a global scale. It is argued here that a reunited Korea would lead to great economic benefits to the whole region of the quadrangle of East Asia. This will also greatly enhance trade with other countries which are part of the BRI, so that the reunification of Korea is essential for the prosperity of North-East Asia and beyond. It is indeed a precondition to foster a community of common destiny.

Bibliography Al-Marhubi, F. (2000). Export Diversification and Growth: An Empirical Investigation. Applied Economics Letters, 7 (9), 559–562. Amineh, M. P., & Crijns-Graus, W. H. J. (2014). Rethinking EU Energy Security Considering Past Trends and Future Prospects. Perspectives on Global Development and Technology, 13(5–6), 757–825. Anwar, Z. (2011). Development of Infrastructure Linkages between Pakistan and Central Asia. South Asian Studies, 26(1), 103–115.

6

THE PROJECTS OF THE BELT AND ROAD INITIATIVES

165

Gouvea, R. (2013). Core Issues Facing Brazil’s Quest Towards Sustainable Growth. Asian Journal of Latin American Studies, 26(4), 39–65. Habiyaremye, A. (2013). ‘Angola-mode’ Trade Deals and the Awakening of African Lion Economies. African Development Review, 25(4), 636–647. Kaminskii, V. D., Suprunenko, O. I., & Suslova, V. V. (2011). The Continental Shelf of the Russian Arctic region: The State of the Art in the Study and Exploration of Oil and Gas Resources. Russian Geology and Geophysics, 52(8), 760–767. Khan, S. A., & Marwat, Z. A. K. (2016). CPEC: Role in Regional Integration and Peace. South Asian Studies, 31(2), 103–112. Kuznets, S. (1955). Economic Growth and Income Inequality. American Economic Review, 45(1), 1–28. Lucas, R. E. (2000). Some Macroeconomics for the 21st Century. Journal of Economic Perspectives, 14(1), 159–168. Ma, A. C., & van Assche, A. (2016). Spatial Linkages and Export Processing Location in China. The World Economy, 39(3), 316–338. Mackinder, H. J. (1904). The Geographical Pivot of History. The Geographical Journal, 23, 421–437. Oerstroem Moeller, J. (2016). Policy Brief: Imbalances Will Continue to Rule Over the Global Economy. The Singapore Economic Review, 61(5), 1–9. Sachdeva, G. (2011). India. http://www.silkroadstudies.org/new/docs/ publications/1004joshi-VII-Linkages.pdf. Scott, J. C. (1999). Seeing Like A State: How Certain Schemes to Improve the Human Condition Have Failed. New Haven: Yale University Press. Snyder, E. (2016, June). Regional Report: Russia. World Oil, pp. 68–73. Vu, T.-M. (2014). Between System Maker and Privileges Takers: The Role of China in the Greater Mekong Sub-region. Revista Brasileira de Política Internacional, 57 (Special Edition), 157–173. World Bank. (2014). In C. Rastogi & Arvis, J.-F. (Eds.), The Eurasian Connection—Supply-Chain Efficiency Along the Modern Silk Route Through Central Asia. Washington, DC: World Bank. Yogo, U. T., & Verdier-Chouchane, A. (2015). Enhancing North Africa’s Infrastructure for Improved Competitiveness. African Development Review, 27 (3), 274–287.

CHAPTER 7

International Financial Organizations and the BRI

7.1

Introduction

The promotion of sustainable economic growth requires the construction of infrastructure to facilitate economic growth and economic development as well as opportunities of employment. However, the successful implementation and operations of the BRI will also be determined to a large extent on its relationship with various international organizations. Hence, various international financial institutions are discussed in their relationships with the successful operations of the BRI. Many international financial institutions, such as the Asian Infrastructure Investment Bank (AIIB), the International Monetary Fund (IMF), the World Trade Organization (WTO), the China Development Bank (CDB) Funds, the BRIC’s New Development Bank (NDB) and the Chinese Silk Road Fund are interconnected and provide the politico-economic mechanisms which will have an effect on the success of the BRI, but they have separate and distinctive aims and fulfil different purposes. This chapter analyses the relationship between various international financial organizations and various aspects of the Chinese economy which are related to the BRI. Hence, this chapter will address issues of trade, global investment and international finance. Parallel institutions are needed for the emerging powers as an alternative path to enhance their rise in economic power. Paradise (2016) argues that “China is using parallel institutions as a strategic tool to enhance its participation in global economic

© The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28030-7_7

167

168

J. JOSHUA

governance” (p. 150), so that various emerging financial institutions will be discussed, especially the AIIB. The chapter begins with an analysis of the structure, operations and functions of the Asia Infrastructure Investment Bank, followed with a detailed analysis of the Shanghai Cooperative Organization which is part of the Eurasian Economic Partnership. Subsequently, the long-time established international organizations of the IMF and the WTO are analysed, and it is argued that these two organizations have to engage in various internal reforms if they are not to lose their relevance within a changing economic environment. This discussion is followed up with an analysis of the growing importance of the association of the BRICS (Brazil, Russia, India, China and South Africa), even though one or two members of the BRICS do not contribute as much as they could at present. The AIIB was established to fulfil the requirements of finance for new investment in infrastructure to foster economic growth and economic development which would not be sufficiently met by the traditional financial organizations, such as the IMF or the WTO. The aim of the AIIB is to provide finance for the construction of vast infrastructure to promote sustainable economic development and so supports the BRI. The main purpose of the AIIB is to facilitate economic development and to promote connectivity through the creation of infrastructure and other productive investments. The AIIB also aims to overcome obstacles towards sustainable economic development. It has been argued that financial deepening can promote economic growth; however, this does not necessitate a complete deregulation of the financial market. The next section discusses the WTO, specifically in regard to China’s admission and how some of the policies affect developing countries, especially China, Brazil and India. The centre of the global economy is shifting towards a multipolar world order which requires changes in the structures of financial institutions as they were established within a unipolar economic system. The international economic relations have changed substantially but international organizations which have been established when the global economy was dominated by a unipolar world order, have changed more slowly, so that much of their structures and policies have become outdated; for example, the quota system should reflect the size of a nation’s economy; however, changes to the quota system are unlikely to at present pass as the United States is the only country with an effective power of veto.

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

169

The creation of the Shanghai Cooperative Organization is also a sign that the global economy is shifting towards a multipolar world order. Even though the creation of the Shanghai Cooperation Organization (SCO) was initially intended for security reasons, it has now moved beyond and may eventually evolve into a powerful economic bloc, especially with its association with Eurasian and other countries associated with the BRI. The SCO has evolved into a viable counterbalance to the unipolar world order, so that the shift towards a new multipolar world order is apparent. The BRICS intend to redress the North-South imbalance of economic development and to establish a multipolar world. The BRICS are expected to expand eventually to become the BRICS-Plus countries. The BRICS has some viable aims; however, it may better reduce itself at present to a RIC, that is, Russia, India and China. At present, a fully cooperative coordination between the BRICS countries is not a viable option. Furthermore, India with its casts system is a burden on any possible viable economic reform which requires greater equality amongst the masses which is highly unlikely to occur at present, so that India cannot at the moment contribute to the BRICS as it should. Neither can India provide international stability as long as it wavers constantly between Russia, China and the United States, which may also have a detrimental impact on the SCO. Neither can the NDB of the BRICS be fully functional as long as there is a discord between its members. At the moment, China and Russia are the only viable members of the BRICS so that they are being reduced to CR. Finally, this chapter will analyse the BRICS association between Brazil, Russia, India, China and South Africa. The BRICS may eventually be able to use economic and political strategies which may lead to further regional integration which may provide alternative arrangements to those as advocated by the Bretton Woods Institutions.

7.2

The Asian Infrastructure Investment Bank (AIIB)

The AIIB was formally established in 2015 with US dollar 50 billion and included 57 prospective founding members from Asia, Europe, Africa, South America, Australia and Oceania and began to operate in January 2016. The AIIB is intended to increase investment in infrastructure which is anticipated to further economic growth. Hong Kong as a non-sovereign territory is also a member. The membership of the AIIB continues to rise and has reached 87 members, with 68 full members and 19 prospective

170

J. JOSHUA

members as at 8 October 2018 worldwide (AIIB.Org.). As the AIIB is increasing the membership, its influence on the global economy and that of China is also increasing so that the global economic power is shifting towards East Asia. The AIIB started to operate initially to improve the use of China’s reserves of foreign currency as a consequence of the financial crisis and the slow moving of the governance and reforms of international financial institutions, such as the World Bank and the IMF. Despite objections by the United States, Australia and South Korea joined the AIIB in 2015 as founding members. On 13 March 2015, Britain applied to become a member, and France, Germany, Italy and Switzerland soon followed with their own application to join, followed by Saudi Arabia. Joining the AIIB has become a matter of financial necessity to attract investment. Japan is likely to join the AIIB eventually as well after a considerable time of hesitation. However, the US government urges countries not to join. The articles of the AIIB state that bidding for procurement is open to all countries; in contrast to the Asian Development Bank (ADB) where the bidding for contracts is restricted to member countries. The ADB is providing finance and technical support for the construction of infrastructure for the Bangladesh, Bhutan, India and Nepal Motor Vehicles Agreements (BBINMVA). Once completed, it will increase trade and tourism. The finance that is provided by the ADB is intended as a countermeasure to China’s BRI as Japan and the United States are the two leading members of the ADB. The ADB was created in 1966 and its design is similar to that “of the World Bank in terms of weighted voting system, governance structure, investment policies and conditionality” (Wu 2017, p. 49). Authorized capital is 100 billion US dollars, divided into 1 million shares each of 100,000 dollars, consisting of 20% of paid-up shares and 80% of callable shares based on a country’s nominal GDP, which is based on the market exchange rate (60%) and GDP (PPP) (40%). The AIIB limits the shares of non-regional members to less than one-third. In the AIIB, the voting power is determined according to the capital contribution and the size of the economy of the members, while the founding members have an extra 600 votes each. The biggest share of voters goes to China with 26.06% of the total votes. India has 7.5%, Russia has 5.92%, Germany has 4.1% and South Korea has 3.5% of the total votes. Significant issues, such as membership, increases of capital and the structure require a supermajority; that is, at least three-fourths of the total voting power of all the members,

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

171

so that China has a de facto veto in this case (Chin 2016). The AIIB uses an open, transparent and merit-based process in the appointment of managers, including the president of the AIIB who “shall be a national of a regional member country” (AIIB, Article 29 of the AIIB’s article of agreement). The AIIB is a multilateral development bank which supports numerous projects of infrastructure. The main aim of the AIIB is to promote sustainable economic development and to create and improve connectivity through the formation of infrastructure and other productive assets between different sectors of the economy. At the moment, the AIIB infrastructure is mainly concerned with railways, ports, roads and power generation. A further intention is to facilitate regional cooperation to solve challenges of sustainable development (Chin 2016). India intends to borrow from the AIIB about $100 billion to finance its large coal projects as it has the largest coal reserves in the world, to supply electricity to 1 billion electricity-deprived people; at the moment coal is generating three-fifth of the electricity supply. Indonesia too is expecting to finance a 2000megawatt coal project to produce energy from funds using the AIIB. The AIIB came into existence because it was realized that there is a need for the construction of infrastructure to foster economic growth and development in Asia and that such an aim requires considerable long-term finance additional to the traditional lenders. As the AIIB is growing in its membership, it is an indication that China’s economic influence is rapidly increasing on a global scale, and that the world economic power is shifting towards East Asia. The establishment of the AIIB and other newly created multilateral organizations is likely to give a greater voice to developing and emerging economies and thereby may provide more effective and more even-handed lending practices (Chin 2016), so that the AIIB is likely to present a challenge to the present dominant West-centric financial institutions. The AIIB is integral to the BRI and will finance multiple projects during the construction stage, especially in the central Asian region. The AIIB extends loans to countries with fewer conditions than does the World Bank and the IMF. The AIIB is involved in numerous projects on a global scale, although some of the projects are not officially part of the BRI, such as rural road projects in Gujarat in India; but the BRI goes far beyond the initial Silk Road. Much of the AIIB’s lending has been conducted in partnership with the ADB and the World Bank. According to Article 1 of the AIIB’s Articles of Agreements (AoA), the purpose of the Bank is to foster sustainable economic development through

172

J. JOSHUA

the promotion of infrastructure to enhance connectivity. Hence, the AIIB can serve as an avenue for China to invest its excess capacity in other countries, especially in BRI projects. DeJonge (2017) argues that “if the AIIB is the vehicle through which China’s overheated investment capacity can be diverted out of the domestic economy, OBOR is the roadmap of destinations for that investment” (p. 1066). The AIIB may be seen as another opportunity for China for “crossing the river by feeling the stones (mo shi guo he 模式过河) in realizing sustainable development goal shared by all member nations” (DeJonge 2017, p. 1083). The AIIB is likely to cater more appropriately to the specific needs of its members which are part of the BRI as it funds multiple projects without the conditions that the IMF and the World Bank generally impose on borrowers and so provides much funding for various infrastructure developments to increase connectivity within BRI. The acceptance and respect of national sovereignty is an important principle in China’s foreign policy, so that China does not impose any policy conditions in contrast to the IMF or the World Bank. The AIIB loans also do not require the borrowers to privatize or to deregulate state-owned companies (https://www.aiib.orp/en/projects/ approved/). However, there is an important difference between the IMF and the WTO, that is, there are no provisions for most-favoured-nation standard in the IMF; neither are there any provisions to prevent members from doing any harm to the monetary assets of other members. Many of the projects which form an integral part of the BRI are unlikely to obtain approval through financial institutions such as the IMF, often because of political considerations, so that the AIIB and the NDB may serve as an alternative source of finance. Economic development on such a scale as is envisaged through the BRI can only be implemented through broadly based investment to provide the necessary financial capital for the required infrastructure; rather than just by increasing exports or domestic consumption as advocated by most neoclassical economists. Loans to foreign countries increase political influence of the donor countries; hence, countries that are providing loans largely compete amongst each other, for example, in 2014, Pakistan was the third-largest recipient of United States loans and it was the second-largest recipient of funds from China. Some countries may have difficulties in repaying Chinese loans; however, such loans are based on collaterals such as real estate, infrastructure, businesses and other physical assets build with Chinese loans. The AIIB may grant loans for investments even though the proposals may not be fully in agreement with the objectives of the BRI. However, the main

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

173

loans provided by the AIIB are for the construction of infrastructure to enhance creativity and thus is directly supporting the activities of the BRI. The financing of infrastructure and other projects have to be assessed also for their sustainability of the environment. The AIIB specifies its position on environmental issues, specifically on environmental protection when it deals with projects such as coal-produced energy, at least at the standard of the World Bank or the ADB. International institutions such as the AIIB should be administered by professionals who have expertise knowledge in their area, so that staff are employed on merit rather than based on their political affiliations. The AIIB and to some extent the BRICS-led NDB will be integral to the BRI. The AIIB will finance projects during the construction stage, especially in less developed regions of central Asia and will also finance networks of regional railways. It is likely that the AIIB will compete with the World Bank in various areas. The AIIB will finance not only infrastructure projects but also extends finance to other areas, such as education, health and technical assistance, and thus provides another alternative to the World Bank. Whereas development lenders usually require the procurement of goods and services to be contingent to the finance of projects, the AIIB does not use tied money. The AIIB is largely involved in the financing of various infrastructure projects which are part of the BRI, such as the multiple projects in highways, pipelines, power plants, airports, dams and railways to promote connectivity in Pakistan. The AIIB is the main financial contributor to such multiple projects. The AIIB will provide a challenge to the World Bank as well as the IMF, especially as the agenda of the AIIB differs from the IMF and the World Bank. Furthermore, the lending practices of the AIIB and the IMF and the World Bank are quite different. As the IMF and the World Bank have been reluctant to adapt to the shift in the global economy towards a multipolar world order, it could have been expected that alternative institutions may be established. Wu (2017) argues that the new AIIB should “break with conventional wisdom and the business as usual of the BWIs [Bretton Woods Institutions] and adopt the concept of co-progressiveness for international development” (p. 41). In all great projects, there are not only winners, but there may also be losers, if such projects are not well managed, for example, in regard to laws protecting the environment. Most of the approved projects are

174

J. JOSHUA

in the energy and the transport sectors and should be subject to regulations to protect the environment. The finance provided by the AIIB mostly complements the aim of the BRI. The AIIB may finance projects if it will enhance Asian trade. The AIIB defines its purpose in the first article of its Charter; that is, to “foster sustainable economic development, create wealth and improve infrastructure connectivity in Asia” by “investing in infrastructure and other productive sectors” (Asian Infrastructure Investment Bank 2015). The AIIB has become a truly global financial institution. Most projects approved by the AIIB are for developing countries within Asia, such as the natural gas project in Bangladesh and a dam in Indonesia, although two projects have been approved for Oman which is a high-income country.

7.3

The Shanghai Cooperation Organization (SCO)

The Shanghai Five was founded in 1996 by China, Russia, Kazakhstan, Kyrgyzstan and Tajikistan as a regional organization to promote cooperation on political and security issues, such as border disputes which evolved after the 1991 dissolution of the Soviet Union, and anti-terrorism, but its activities have extended to regional economic cooperation. The Shanghai Cooperative Organization has five full members. The group was established officially as the SCO in 2001 and included then also Uzbekistan when the group was renamed as the SCO. Mongolia gained observer status in 2004. The SCO has become increasingly important; its full members together with observers and dialogue partners comprise approximately half of the global population and a quarter of the world’s land area (Kembayev 2016). Current members of the SCO are China, India, Kazakhstan, Kyrgyzstan, Pakistan, Russia, Tajikistan and Uzbekistan. Afghanistan holds observer status since June 2012 and Belarus holds observer status since 2015. India, Iran and Pakistan gained observer status in 2005, and India and Pakistan gained full membership in 2017. Afghanistan and Belarus have also obtained observer status and there are six dialogue partners: Azerbaijan, Armenia, Cambodia, Nepal, Sri Lanka and Turkey. Turkey has become a dialogue partner in 2012 and is negotiating full membership at present as it is gradually shifting its political alliance towards Eurasia. Turkey and Iran are expected to join eventually to full membership. The governance of the SCO is based on a consensual decision-making process which is regarded as imperative to a closer regional integration to

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

175

promote regional harmony. The SCO is assumed to be based on a commitment to multiculturalism and mutual respect for their differences. However, the most important unifying aspect of the SCO is a common concern with security, such as the unimpeded access to sources of energy, anti-terrorism and military security; such security concerns will take on greater importance as the BRI succeeds in its implementation as various countries perceive it as a threat and so may intend to undermine it. From the point of view of security of sources of energy, Iran is likely to become a full member of the SCO. The SCO is also vital to get access to markets, not only in Central Asia, but also to Europe. The SCO has progressed from primarily a security-oriented organization towards greater economic cooperation as the prime goal. China has surpassed Russia as the trading nation in Central Asia and so is expected to increase its political influence in those regions as well. Full accession will bring considerable economic benefits. It can be expected that eventually Iran will join SCO as a full member. The SCO has eight full members and the area of the SCO covers more than threefifth of Eurasia and has a total population of over 3 billion. The SCO has become the main alliance of nations in Eurasia; and at the present moment, the SCO has eight full members, four observers, ten candidate observers and six dialogue partners. The aim of the SCO is to facilitate economic development and military cooperation. All SCO members are part of the Eurasian Economic Partnership whereby the BRI will act further as a unifying force. The BRICS and SCO members advocate the importance of state-owned enterprises (SOEs) in the energy market and state intervention. The SCO can also be used to overcome the disputes between India and Pakistan which will be of great economic benefit to South Asia. India and Pakistan were admitted as full members in 2017. Never mind previous animosities between India and Pakistan, they are eventually likely to be overcome because of economic necessity. The economic benefits to both countries are too important to be ignored by a rational mind. India will gain much-needed gas and energy supplies for its economic development from Central Asia. Pakistan is most important for the successful completion of the BRI when it connects Central Asia with the Arabian Sea. Long-term security is important for the construction of the vast infrastructure and too many countries are still unstable; however, Afghanistan could facilitate further the connectivity between China, South Asia and the Middle East.

176

J. JOSHUA

The SCO is the largest geographical regional organization with over 3 billion people spreading across the Eurasian continent. The SCO and various other international organizations are able to create synergy to expand and intensify the projects of the BRI. A shift in global power relationship towards a multipolar world order will also involve a change in India’s foreign policy. The SCO provides an opportunity for India and Pakistan to realize their economic potential. Iran is India’s third biggest oil supplier and India now has started to pay for Iranian oil in rupees and so by-passes the sanctions on Iran and eventually is expected to dump US dollars in oil trade altogether. China, the United States and India are the first, second and third biggest buyer of oil, respectively; it is expected that India will eventually trade in petroyuan. Members of the SCO have highly complementary economies; for example, China is the largest manufacturing economy and the major importer of raw materials and the leading importer of petroleum on a global scale. Russia and Kazakhstan are large exporters of petroleum and other raw materials. China can also help to expand and upgrade the infrastructure in Central Asia. The aim is to eventually establish a free trade zone amongst the SCO members; even though Russia and various Central Asian states are not too enthusiastic about China’s proposal of a free trade zone at present (Kembayev 2016). However, the Chinese proposal to connect the SREB with the Eurasian Economic Union (EAEU) has been well received within the Central Asian nations as well as Russia, and a joint declaration in support of such a proposal has been signed in 2015 which aims at joint development of the SREB and the EAEU to create a “‘common economic space’ in Eurasia which may include a free trade agreement between EAEU and China” (Kembayev 2016, p. 698). Russia attempts to create a strategic triangle between China, India and Russia while Iran is waiting in the wings to be admitted as well. Turkey is another candidate for membership. If such countries do join, it would further enhance the integration of Eurasia. In this case, it may constitute the second quadrangle of Asia after the quadrangle of East Asia: China, Japan, Korea and Russia; both quadrangles would gain significantly from such a geopolitical configuration. Some of the Central Asian countries are also members of the SCO and the Eurasian Alliance which further cements their economic and cultural relationships. The term EAEU was replaced with the term of Euroasian Economic Community (EurAsEC). The EurAsEC was established in 2000. The membership of China and Russia of the SCO gives the organization a high international profile. Brzezinski’s (1997) prognosis of a possible Asia

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

177

and Europe linkage is feared by the United States. The SCO together with ASEAN could be used to reinforce a Greater Eurasian Partnership which could include not only the SCO and ASEAN, but also the EAEU. The establishment of multilateral associations, such as the SCO spreads the geopolitical space and thereby sphere of influence. The creation of the SCO may be regarded as a Grossraum, a term used by Schmitt (1976). A “Grossraum analysis projects the possibility of a wider pluralistic interGrossraum global order that aims to preserve a small number of separate, sovereign entities, each with their own territorial zone of influence free of extra-regional interference” (Salter and Yin 2014). A Grossraum model assumes the existence of various levels of geopolitical powers with different degrees of influence, instead of equality between states as there are leading powers within any constellation of nations which have joined within a specific space. A multipolar international order is developing which is concentrated on a number of power centres. Ill-guided ideologies may eventually lead to an ever-changing world of multipolarity. A Grossraum becomes integrated through a common goal or political concepts such as “common prosperity” and “regional harmony”. A consolidated Grossraum does not accept the intervention of a foreign power. China promotes the SCO as a viable counterbalance to the unipolar world order led by the United States. The SCO as a Grossraum must have a considerable coherence of an internal governance to implement a common policy. The SCO is becoming slowly integrated with the vast investment projects of the BRI. The integration of India and Pakistan into the SCO will highlight investment and economic growth. A gas pipeline between China and Central Asia has been constructed in 2014 to increase China’s energy security. As various projects are concurrently developing, an “Asian energy grid” is likely to develop to share and distribute sources of energy. Greater economic, financial and energy coordinating policies create a greater intra-Grossraum organization to coordinate SCO’s policies. Like the Westphalian concept of international relations, the SCO fosters a national sovereignty which includes inviolable equality between the states (Salter and Yin 2014). The SCO is committed to regional pluralism and multipolarity and thereby rejects unilateralism dominated by any major power. The SCO promotes mutual respect for individual differences between member states, instead of assimilation. The existence of a Grossraum assumes a single leading power; however, the SCO includes two leading powers, China and Russia. This is also reflected in the fact that

178

J. JOSHUA

according to Art. 20 of the SCO Charter, Chinese and Russian are the two official languages (Salter and Yin 2014). The SCO is likely to expand and will deal with economic and security issues which will affect not only the domestic economies of the members of the SCO but it will also affect their domestic governance structure. A successful SCO may encourage similar organization to arise, or to enhance the cooperation amongst and within existing organizations, such as the African Union. Such cooperation amongst member states within a viable Grossraum could also give some assurance against foreign countries intervening in their domestic affairs. Such a move could lead towards greater multipolarity of international governance.

7.4

The Bretton Woods Institutions: The IMF and the World Bank

The Bretton Woods Institutions are the IMF and the World Bank which were established in 1944 nominally to promote international economic cooperation through the construction of a new economic world order. The International Bank for Reconstruction and Development evolved into five developmental institutions as the World Bank Group known as the World Bank whose prime aim was to facilitate international trade. The prime purpose of the IMF was to ensure the stability of the exchange rate and to facilitate international monetary cooperation. The function of the IMF was intended to harmonize monetary policies. The IMF’s mandate has been widened in 2012 “to include all macroeconomic and financial sector issues that bear on global stability” (Wu 2017, p. 49). The IMF and the World Bank were created in a world that has become increasingly irrelevant and redundant. The economies and the international financial system were profoundly different during the time when such international organizations were established so that such organizations are not anymore as suitable to serve the global economy in an equitable way; the importance of some countries in international economic and financial organizations is overstated as their economies have considerably declined, such as in the case of the United States, Great Britain and France, whereas the power and influence of China and India are understated as compared with the size of their economies; for example, the voting shares of the relatively fast-growing emerging economies are disproportionately low in the World Bank and the IMF, while the biggest emerging countries, for example,

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

179

China and India are not represented in the Financial Stability Forum (FSF) and the Bank for International Settlements (BIS) at all. The membership of the IMF, the World Bank and the WTO has increased over the years; however, the voting shares of the members and their structures of governance have virtually remained unchanged. The power of the United States within the IMF and the World Bank is determined by the structure of their boards as well as the fact that the United States holds the presidency of the World Bank. Even though quotas have been adjusted, such adjustments lag behind the rapid changes within the global economy as the structural organization of the IMF is changing more slowly than the global economy, especially in regard to various emerging economies. The present formula to determine a member’s quota is a weighted average of GDP (50%), openness of a member’s economy (30%), economic variability (15%) and the amount of international reserves (5%). The United States has 16% of the votes which effectively gives the United States a power of veto because major decisions require an 85% majority of voting power (Eichengreen and Woods 2015, p. 47). Even though, quotas are reviewed every five years, any changes to the quota system are unlikely to be passed as the United States can effectively bloc any proposal from being implemented; hence, much-needed changes may not be introduced at present. International organizations ought to be responsive to the requirements of individual members rather than cater for the perceived needs of members who have the highest quota (Kawai and Petri 2014). As the United States is the only country with a quota above 15%, it has a veto power over major decisions (Kawai and Petri 2014, p. 236). An effective reform of the IMF and the World Bank would require a shift in the voting power of their members in favour of developing and emerging economies so that members’ voting share is in agreement with their weight in the global economy. The quota system of the IMF was reformed in 2010 when a quota shift occurred by more than 6% in favour of large emerging countries; China became the third-largest shareholder followed by Germany. Russia, India and Brazil are now amongst the ten most important shareholders. The European states hold together approximately one-third of the shares of quota, so that when such countries vote together in unison, they can also exercise a veto. Emerging as well as developing countries are underrepresented as their quotas do not reflect their growing importance in the global economy. Furthermore, the Managing Director of the IMF is always from a country of the European Union while the First Deputy Managing Director

180

J. JOSHUA

is always an American. Unless more equitable reforms of the IMF are introduced, the IMF is likely to lose its legitimacy and will be unable to respond adequately to further financial crises. The financial crisis of 2008–2009 was brought about to a large extent by an under-regulated financial sector (Shiller 2008). The structure of governance of the IMF and the World Bank has become outdated, considering the shift in economic power and so reduces the legitimacy of their decision-making power. More bilateral agreements are the consequence of the disillusion of emerging countries with the international trade and financial organizations. It has become inevitable that international financial reforms will result in a more equitable participation between advanced and emerging countries. International rules on trade were created by nations which were the major trading nations at that time and as China is increasing rapidly its trade on a global scale, it will also have eventually a larger say in the rule-making process of international trade. A realignment of quotas in the IMF would be necessary so that members’ share depends on their economic power which also entails a rebalancing of representation on the Executive Board. Furthermore, the IMF and the World Bank heads should be based on merit rather than based on nationality. The weighted voting system of the IMF and the World Bank is based on an outdated economic system as the economic powers have shifted considerable and therefore cannot meet the requirements of the emerging and developing countries. The decision-making powers at the IMF and the World Bank do not reflect the international economic power relationship so that much of the legitimacy of the decision-making process is largely undermined. Stiglitz (2003) argues for the democratization of the IMF and the World Bank. Stiglitz (2003) makes the point that policies pursued by the IMF have not only failed in achieving their proclaimed objectives of promoting economic growth and economic stability but were in fact largely counterproductive. Robinson (1979) makes the point that the “capitalist West” effectively has impeded the “Third World” countries from solving their own economic problems through the functioning of the World Bank and the IMF and proposes that low-income countries establish a cooperation amongst themselves; although she does not hold much hope for this to happen, but argues that China may be a guide to the rest of the world. Negotiations between the financial institutions and developing countries and the outcomes of such negotiations are also a reflection of the imbalances of power. There is usually a financial trade-off between gaining

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

181

extra financial resources and losing at least partly national sovereignty which may result as a consequence of IMF imposed programmes. Furthermore, Vreeland (2003) argues that adjustment programmes imposed by the IMF had only a mild positive impact on macroeconomic stability, especially as IMF programmes increase inequality by redistributing earnings away from labour towards capital. The poorer the people, the more detrimental the impact of the IMF programmes are likely to be (Vreeland 2003). During the 1990s, the IMF assumed that policies on the free flow of financial capital between different countries were a “one size fits all” to solve many macroeconomic problems; however, towards the end of 2012 the IMF came to realize that “capital account liberalization should be sequenced and may not always be the right policy” (Gallagher 2015, p. 185). The IMF has now come to accept that regulations of capital flows may be essential to prevent possible financial crises. The IMF now is also more likely to accept greater diversity in the regulation of capital flows between nations rather than pushing a “one size fits all” policy. The research department in the IMF “began to articulate the view that capital account regulations are Pigouvian ways to correct for market failure” (Gallagher 2015, p. 188), so that capital account regulations could improve the functions of the market rather than seeing such regulations as being distortionary. Jeanne et al. (2012) examine the effect of capital account liberalization on the global economy and advocate a reconciliation between domestic and international financial regulation to prevent boom-bust situations in financial markets. They conducted a meta-regression of multiple economic studies and found no empirical positive relationship between the liberalization of capital flow and economic growth. During the late 1980s and 1990s, the IMF imposed structural reforms together with various austerity programmes which resulted in the transfer of economic activities to the private sector which subsequently “led to large and often abrupt fiscal adjustments resulting in the deterioration of infrastructure” (Gransow 2015, p. 273). The IMF has followed at least until the financial crisis of 2008–2009 a rigid policy dominated by the Washington Consensus (Babb 2013; Ban and Blyth 2013). International organizations such as the IMF, World Bank and the ADB also impinge on countries’ economic decision-making, so that we can speak of an international politics of trade. Whenever policies are based on ideologies, they are unlikely to take realities into consideration; thus, the IMF and the World Bank have often taken inappropriate decisions. The

182

J. JOSHUA

relaxation of IMF’s policies on capital controls can be regarded as an extension of the emphasis on a policy of “crisis-proofing, regulatory upgrading and financial stability” (Güven 2012, p. 875) by the Post-Washington Consensus (PWC) The IMF and the World Bank act as guardians to the global governance of the financial system as installed by the United States so that emerging economies do not share in the decision-making process; however, the BRICS countries are “pushing for enhanced ‘chairs and shares’” (Katada et al. 2017, p. 408) to take part in the leadership of the financial institutions, known as the Bretton Woods institutions. Presently, the United States and West European powers are overrepresented in the power distribution of the IMF and the World Bank. The quota share at the IMF is intended to reflect the share of the GDP of a particular country, the openness of its economy and foreign reserves and is revised every five years. However, the process of revision emphasizes the status quo, so that “any fast-growing member country is underrepresented, and European countries remain overrepresented” (Ito 2012, p. 200). Ito (2012) makes the point that during the Asian currency crisis of 1997–1998 the IMF provided loans to Indonesia, South Korea and Thailand with a list of conditionalities which however did not reduce the crisis or limit the contagion because the “macroeconomic policy prescriptions by the IMF were too tight and procyclical” (p. 198) which led to a severe recession. The IMF promotes “corporate-friendly liberalization policies such as the opening of capital accounts, alongside policies inimical to labour that tends to weaken the bargaining power of workers and reduce wages, in particular contractionary policies with negative impacts on employment” (Vernengo and Ford 2014). The inability to come to terms with the financial crisis of 2008–2009 was the result of denial similarly to the present denial of the decline of Western economic powers by many economists. World Bank programmes are often increasing the risk of impending crisis and such risk is increased when governments “remain under an IMF or World Bank program once the economy improves” (Dreher and Gassebner 2012, p. 330). Furthermore, agreements on conditionality and advice were more important in provoking government crises than the size of the loans (Dreher and Gassebner 2012); however, only governments that agreed to the programmes were exposed to a crisis but not governments that have inherited such programmes from previous governments. The underlying assumption of a natural rate of unemployment is that the economic system is self-adjusting; however, Keynes (1967) argues that the concept of the

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

183

natural rate of unemployment should be discarded. Hence, Chinese loans for projects may be a viable alternative for obtaining loans as they come with almost no conditionalities attached. The monitoring of fund arrangements can be accessed at www.imf.org/external/up/pdr/mona/index.aspx. It may be argued that when national sovereignty is severely compromised by the imposition of conditionalities by the IMF or the World Bank for their extended loans, then when a government is uncertain of survival it is more likely to adopt non-compliant strategies before elections or when there is a possible instability amongst the ruling class, whereas when there is no risk of survival governments are more likely to accept the conditionalities imposed. Conditionality generally includes macroeconomic stability, namely low-budget deficit and low inflation, privatization of SOEs, no interference in the market system of pricing, and openness to trade with other countries. Poorer countries also pay higher premium to be able to get loans from IMF and in the case of the World Bank funds of borrowing nations are used to pay for the World Bank operations in the case of bad loans. The imposed conditionality by the World Bank and the IMF has two reasons. Firstly, the development effectiveness rationale to ensure that the assistance provided will actually contribute to the country’s development objective. Secondly, the fiduciary rationale, that is, to make certain that the resources provided are actually used for the intended purpose. Wu (2017, pp. 55–56) points out four different types of conditionality. Firstly, fiduciary conditionality deals with the financial management of the funds provided. Secondly, conditions imposed on “the process of planning, distributing, implementing and evaluating of a fund project” (p. 55). Thirdly, there is the policy conditionality that deals with economic and social policies which are considered by the IMF and the World Bank as important to ensure the viability of the programmes. Fourthly, there is the outcome conditionality to ensure that the outcome of the goals of the programme is actually measurable. However, policies by the World Bank and the IMF are usually driven by neoliberal ideologies so that they advocate austerity, trade liberalization and the privatization of public services which often deteriorates the social conditions of the lower section of the public. Unless the World Bank and the IMF change some of their loan practices and adapt to the changing global economic condition, they are likely to become less relevant for emerging economies and developing economies. The IMF as “lender of last resort” indebts countries through a web of debts as a consequence of interests and compound interests which lead to

184

J. JOSHUA

further deterioration of the domestic economy together with a deterioration of the financial situation; consequently, various austerity programmes are imposed which are passed on to the wage earners; availability of job vacancies decline, inadequate health care and less assistance for the impoverished classes. When the IMF was launched, currencies were fixed to the US dollar, so that other participating countries lost their ability to control their own monetary policy; hence, their sovereignty was effectively controlled. The exercise of authority over domestic issues by international organizations such as the WTO and the IMF may increase sovereign inequality between their members when such exercise of authority is acted on discriminately. Countries may cede authority over a particular issue to obtain a loan. International organizations “display somewhat Janus-faced characteristics in their interactions with the practice of state sovereignty” (Clegg 2016, p. 119). The main reason for this is that the decision-making process in international organizations is influenced more by members of such organization who have and exert greater power and influence so that less powerful nations are at a considerable disadvantage as they have less influence. Hence, international agreements bestow rights, obligations and responsibilities on the members of such organizations according to their power to influence the decision-making process (Donnelly 2006). Various emerging economies are forging ahead in their economic development which provides a challenge to the IMF and the WTO, particularly since the financial crisis of 2008–2009. As advanced economies are losing their competitive advantage, they are resorting to protectionism or beggarmy-neighbour policies. The recession of 2008–2009 may have prevented to some extent the IMF from falling into irrelevance as it activated a shift of policies towards a greater concern with inequality and poverty. The IMF also moved away from its policy of capital account liberalization and has become less orthodox in its policy (Moschella 2012; Gallagher 2011; Gabor 2012). However, unless more substantial adjustments are made by the IMF in its policies it may be losing its relevance in international trade and international finance. The development of the international monetary system has not progressed as fast as the changes in the global trade patterns which also largely caused the huge current account deficit of the United States. Furthermore, emerging economies have different trade patterns which are changing over time (McDonald et al. 2008) so that economic policies have to be adapted to the specific economic and social situation of particular countries if they are to be successfully applied.

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

185

The shift towards a multipolar economic system requires a multicurrency international monetary system which reflects the current global system. Yip (2011) makes the point that China has to maintain some capital controls so that monetary policy can be used to fine-tune economic activities, while concurrently be able to counteract the appreciation of the RMB. Chinese capital controls are used to reduce the volatility of the exchange rate and to promote foreign direct investment. Capital controls may be essential to prevent a large capital outflow as occurred in Thailand, South Korea and Indonesia during the Asian financial crisis of 1997–1998 (Xiao and Kimball 2006). Until 2006, the RMB was fixed to the US dollar, whereas after 2006, the RMB was allowed to fluctuate, but it is considerably more stable than other major floating currencies. Gallagher (2011) discusses the re-emergence of capital control as a legitimate way to ascertain stability. After the financial crisis of 2008–2009, emerging countries and various developing countries have introduced capital controls to advance a more independent monetary policy. Capital controls can be used by emerging economies to isolate themselves from speculators’ financial activities, and the Asian Financial Crisis of 1997–1998 illustrates the point. The BRICS countries were less affected by the Asian financial crisis of 1997–1998 as they used capital controls. Gallaher advocates an international coordination to promote greater stability and economic growth in the management of flows of global capital. The financial crisis of 2008–2009 eventually led to changes in the global governance of the IMF; rather than continuing to rely on the G7 as the key forum for policies, the G20 became more important as a policy forum which gave emerging economies a greater input in the decision-making process to reflect the changes in the global economy. In other words, emerging and developing economies are expected to gain greater importance in the policymaking process which will also affect the quotas of members in the IMF (Bénassy-Quéré and Béreau 2011). A member’s quota determines voting rights, the allocation of SDRs and access to IMF financing. The World Bank and the IMF have considerable influence on how development programmes are to be implemented. Hence, Projects such as occurring under the BRI could never have happened under the fast outdating international financial institutions and trade organization such as the World Bank, the IMF or the WTO. Veblen (1953) argues that “institutions must change with changing circumstances, since they are of the nature of a

186

J. JOSHUA

habitual method of responding to the stimuli which these changing circumstances afford” (p. 132). Hence, China established instead new international financial institutions such as the Asia Infrastructure Investment Bank, The NDB, and the New Silk Road Fund, amongst others. Money talks, so that it is unlikely that Europe eventually will not join the BRI. The future of Europe lies with Eurasia. China is able to provide a viable alternative to investments and assistance provided by the international financial institutions which eventually is likely to lead towards a multipolar international order (Nederveen-Pieterse 2011).

7.5

The World Trade Organization (WTO)

The WTO has been created in 1995 as a follow-up of the General Agreement on Tariffs (GATT) created in 1948. Membership of the GATT expanded from 23 founding members in 1947 to 126 members by 1994, when the WTO succeeded the GATT in 1995 the membership increased to 159 members in 2014 (Wong and Yu 2015). China joined the WTO in December 2001. It took 15 years of negotiations before China was admitted finally to the WTO in December 2001 when China largely opened its economy to foreign companies. China had to commit itself to a higher standard than what was applicable to other WTO members. China accepted many WTO-plus obligations and also accepted multiple WTOminus rights. The negotiations politicized the economic factors. China was denied the status of a developing country and China was labelled a nonmarket economy. For 15 years after China’s accession to the WTO, non-market economies could be faced with charges of anti-damping. To join the WTO, China agreed to liberalize its financial markets and allowed for more foreign investment in various areas such as electronic commerce, tourism and entertainment. Various tariffs were reduced on manufactured and agricultural products. In 1999, China agreed to eliminate subsidies of agricultural exports and drastically reduced tariffs. Tariffs were also reduced on a large range of industrial goods. The WTO policies lead to the opening up of Chinese markets to Western corporations in the agricultural sector which use pesticides, fertilizers and patented seeds to supply transnational corporations’ global supply chains. China had to comply with various conditions when entering the WTO. China had to open its markets and it also had to agree with rulings regarding the GATT-TRIP (General Agreement on Trade and Tariffs–Agreement on

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

187

Trade-Related aspects of Intellectual Property). China amended its Patent, Trademark and Copyright Laws and also passed regulations to protect the layout design of integrated circuits. As the economy grows and becomes more sophisticated, China will be able to invent their own designs and so will reduce the need to produce counterfeit products so that an improvement in the enforcement of intellectual property rights can be expected. Owners of intellectual property may be able to protect their intellectual property rights better since China joined the WTO; however, the enforcement of various laws and regulations often can be a tedious and drawn-out process in China. Harpaz (2016) makes the point that “some of China’s rules commitments bound it to a higher standard than that applied to other WTO members” (p. 127). An applicant with a freer market has little difficulties in becoming a member of the WTO; however, a free market can also exist within an undemocratic country dominated by neoliberal economic dogmas. “The rules of the WTO are designed for market economies”, so that “transition countries such as China and Russia … are expected to take a longer time to accede to the WTO” (Wong and Yu 2015, p. 846). Furthermore, China relinquished rights available to other WTO members, as in the case of anti-dumping and countervailing investigations, so that there is a greater possibility that foreign activities may impose “dumping/countervailing duties on Chinese exports” (p. 127). The argument that dumping is harmful is generally accepted and so does not have to be proven in anti-dumping investigations. Bi (2013) argues that the current anti-dumping system does not prevent “unfair trade” and advocates a gradual substitution of anti-dumping law by competition law. Except in the case of predatory pricing, there are no economic reasons for anti-dumping regulations. Many trade barriers have been nominally imposed to protect the environment, to protect public health and other legitimate causes, but are often merely a disguised form of trade restrictions to protect a country’s companies from other countries’ competition. The main difficulty for China is “that China can still be treated as a non-market economy in anti-dumping investigations” (van Kerckhoven and Luyten 2014, p. 205) so that WTO members can initiate anti-dumping investigations without a proper comparison with domestic prices in China. The WTO basically divides its regulatory structure into action undertaken by the governments and those undertaken by private companies. Once China has been granted the status as a market economy, it will be more difficult to impose anti-dumping penalties. However, once China has been

188

J. JOSHUA

recognized as a market economy domestic, prices will have to be taken into account. Furthermore, Chinese entrance into the WTO was used by Chinese reformist to weaken their Chinese opponents of economic liberalization. Moreover, there is virtually no evidence that membership of the GATT/WTO induces members to become more “democratic” once they have become members. However, Barro (1996a, b) argues that a free and competitive market may be associated with a more democratic regime; specifically, Barro (1996a) makes the point that free markets, less government consumption, high human capital and the maintenance of the rule of law have a favourable effect on economic growth; however when such variables and the initial level of real per capita GDP are held constant, the impact of democracy on economic growth is weakly negative. Barro (1996b) argues that property rights and a free market promote economic growth, but also find that more political rights do not enhance economic growth; instead, an increase in the standard of living precedes the expansion of political freedom. Wong and Yu (2015) assume that a democratic regime is one where the government is elected in contested elections. They find the differences in the length of the accession negotiations to the GATT/WTO to be statistically and economically significant. They conclude that the reason for China for its accession period of 15 years is that “China’s political regime is different from that of most existing members of the WTO which makes it more difficult for them to accept China” (p. 856). Wong and Yu (2015) show that democratic regimes take considerable less time to accede to the GATT/WTO as compared to non-democratic regimes, once the size and economic growth of the applicant have been accounted for. However, the term “democracy” is left undefined. GATT Article X requires WTO members to publicize the law and uniform application, but the Chinese administrative decision-making and enforcement can be very opaque. Establishing the rule of law may also be difficult when there is “a low level of political status and authority for formal legal institutions and low capacity of courts to handle cases independently and enforce rulings effectively” (Wu 2011, p. 234). It is the general perception about what a democracy is which prevails, rather than whether a country is truly democratic. A country to be truly democratic requires more than, say, an election every four years; moreover, elections are usually interfered with by multiple pressure groups whose financial power determines their financial contribution towards parties or

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

189

election campaigns. Furthermore, if a political party wins an election, say with 51%, the other 49% are then effectively disenfranchised. Elected politicians generally do not feel obliged to adhere to their promises which they have proclaimed during their election campaigns. It appears that the term “democracy” is being used to promote western conceptions and to create additional hurdles to accede to the GATT/WTO organization to elicit additional concession of some applicants. China’s accession to the WTO in 2001 brought economic benefits to China; however, China’s trade policies have to be in agreement with the WTO agreements when there are disputes about the proper implementation of such agreements; they may be settled by the WTO Dispute Settlement Understanding (WTO DSU). As a consequence of China’s accession to the WTO, China gained greater markets for its exports and liberalized its imports regulations. China’s request to be admitted as a developing country was denied; hence, “China was required to make concessions significantly more deep-cutting than developing countries during their accession” (van Kerckhoven and Luyten 2014, p. 196). Some members of the WTO still consider China to be a non-market economy, so that it is easier to launch anti-dumping investigations against China by using the Price Comparability in Determining Subsidies and Dumping section (van Kerckhoven and Luyten 2014, p. 197, note 9). Chinese producers have to prove that they are operating under market conditions before the domestic price can be accepted as the benchmark. China had to commit itself to higher commitments than other new WTO members. The main reason for China to accept the more onerous conditions was that it was adamant to gain access to the global consumer markets. China’s participation in the WTO DSU has changed since its accession to the WTO in 2001. Initially China commenced few disputes, but since 2006 China has become the third most active participant in the WTO DSU proceedings (Kennedy 2012). As China has become a powerful economy, it can be expected that China will be able to affect the rules of international trade to enhance its own interests. China undertook many WTO-plus obligations and also agreed to accept various WTO-minus rights so that China relinquished certain rights which allow other WTO members to deviate from WTO rules. When seeking membership in the WTO, China became more entrenched in interdependence with its trading partners and submitted to “a complicated system of mutual commitments with its international partners” (p. 318). Such “changes made China’s economy one of the most open in the world”

190

J. JOSHUA

(Nathan and Scobell 2016, p. 319). On the one hand, China’s request to be granted developing country status was rejected by the United States and the European Union; on the other hand, China was obliged to accept conditions in many situations which go beyond those of developed countries. China’s international trade relationships have changed over the years, the conditions under which China could accede to the WTO became harsher and more demanding (Wu 2011, p. 236). China tried to restrict exports of various raw materials such as bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc. The United States, the European Union and Mexico argued that this is in violation of the provisions of the GATT and China’s Protocol of Accession. China used GATT Article XX (g) which allows such practices when it relates to the conservation of exhaustible natural resources and also used Article XX (b) which allows such measures to protect human life. However, China’s argument was rejected by the WTO Judiciary (Qin 2012). The WTO rulings rejected China’s argument about the environment exceptions under Article XX (b) or (g) as China did not itself reduce domestic consumption. China has practically agreed to make its raw materials available equally to domestic and foreign users without discrimination. China’s argument that export duties on coke, fluorspar, magnesium, manganese and zinc are justified under Article XX (b) and (g) GATT as such raw materials are exhaustible natural resources and also because export duties are essential to reduce the level of pollution and to protect human health. However, this argument was rejected because it was argued that China is unable to invoke exceptions under Article XX to justify measures which are inconsistent with paragraph 11.3 of China’s Accession Protocol. The Panel constrained conservation under Article XX (g) to environmental considerations and regarded China’s argument as part of China’s economic policy rather than being part of environmental protection as it increased domestic consumption of such raw materials while arguing that the exports of such materials should be restricted for the protection of the environment. However, countries have a right to sustainable economic development so that countries are able to provide for the needs of the present and future generation which includes the aspects of economic, environmental and social development. In many ways, bilateral trade arrangements between countries have began to substitute the role of the WTO to promote free trade. Furthermore, it is unlikely that the WTO is able to prevent the United States

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

191

from implementing their tariff policies even though such policies contravene principles of the WTO. The WTO is often being used to enhance the competitive advantage of some nations against others or to try to prevent competitors’ economic development, such as the insistence by the United States that China is giving up its aim of “Made in China 2025”. However, China is resorting to the dispute settlement mechanism of the WTO on these issues. The appeals mechanism of the WTO allows presently the United States to veto any decisions that it may dislike and therefore destroys the proper function of the appeals mechanism. The appeals body should consider the interests of global trade rather than those of any particular country. However, as the WTO is not any longer the main agent for international trade liberalization, more and more countries are concluding their own bilateral and multilateral trade agreements. Multilateral trade balances occur not in a vacuum but are the consequence of a decline in domestic savings; hence to correct multilateral trade imbalances requires a rebuilding of the domestic economy. The WTO promotes free trade above the interests of environmental protection and was not concerned with climate changes. The main criteria in any assessment by the WTO are the promotion of free trade so that risk to health and environmental concerns is often disregarded. However, Farah (2016) argues that in multiple cases, “the WTO dispute settlement body has struck a balance between the protection of public health and trade, while prioritizing the former in case of a serious public health matter” (pp. 79–80). The move towards globalization has to consider domestic issues; otherwise important issues such as the right to food and water, access to knowledge, public health, consumer interests, food safety, protection of the environment and good governance may be ignored to the detriment of the public interest. Almost 95% of all WTO disputes are about trade in goods while the remainder 5% is concerning trade in services or the protection of intellectual property rights (Horn et al. 2010). Most WTO disputes are concerning allegations of excessive import protection. The rules of the GATT/WTO were conceived during times when the nature of global trade was considerable different; for instance, the rise in off-shoring together with the increase in FDI; so that some of the rules may not be applicable (Antràs and Staiger 2012). The sharp increase of off-shoring also makes the WTO and similar institutions less relevant.

192

J. JOSHUA

Debates on possible reforms of the Bretton Woods Institutions are mainly debated on how such institutions should operate, rather than on the actual functions and aims of such institutions. On the other hand, at the time when the World Bank was actually created, debates centred on “what it should do, not just how it should do it” (Gavin and Rodrik 1995, p. 329); this argument may also be applied to the other Bretton Woods Institutions; hence, the aim was already to establish as a fait accompli, before discussions on the operations could begin. Brazil, India and China (BIC) cooperate closely with each other at the WTO to enhance their bargaining power against the advanced economies. Presently, the BIC particularly show the power shift in the WTO. The shift in power is best illustrated with the interaction between China, India and Brazil in international forums; rather than just seeing them as individual countries, they are able to present a unified front and so are able to increase their strength in negotiations. Previously, developing countries were basically excluded from the decision-making process within the major international organizations, and their voices were largely marginalized. The request of advanced economies that China liberalizes its economy caused China to seek greater alliances with developing countries and projects itself as a developing country. Most future economic conflicts will arise between North-South and as the shift in power is towards the South, it is in China’s interest to align itself with the South. China works together with other emerging economies in the G20-Trade (G20-T) and in the Doha Round. The G20-T is a coalition of developing countries led by Brazil and India and it is backed-up by China. The creation of the G20-T in 2003 was a vital change in the decisionmaking process within the WTO. The Doha Round was created in 2001 and its creation was initiated by the EU and the United State which was then opposed by developing countries (Narlikar and Tussie 2004). BIC joined together because of the common threat they faced from the advanced economies. Brazil pushed for liberalization in the trade for agricultural products, whereas China and India were opposed to this because of their large peasant population who felt threatened by agricultural imports (Hopewell 2017). Brazil and India demanded a lowering of agricultural subsidies by industrialized countries. Furthermore, China has an interest in reducing trade barriers for manufactured products, whereas Brazil and India have an interest in protecting their domestic manufacturers from imports. Brazil, China and India also

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

193

demand “special and differential treatment” (SDT) as developing countries, which however was rejected by the advanced economies. Hence, “the emerging powers were united by a common external threat, which proved formidable enough to outweigh their differences” (Hopewell 2017, p. 1387). The alliance between Brazil, China and India is therefore seen as an important strategic policy. The shift in power in the WTO illustrates that the BIC are indeed important strategic partners. Their political power is likely to increase rather than decline. The strategic alliance within the WTO also illustrates quite clearly the greater rift between North-South. Such strategic alliances are not only apparent within the WTO, but it is also seen through the establishing of the AIIB, the NDB and in other international forums. Nevertheless, the WTO has been more open to changes than the IMF or the World Bank; for example, it has included Brazil, China and India into the decision-making process. BIC have become increasingly intertwined in global trade governance because of their large and increasing share of world trade. China progressively adapts to and changes major policies as its economic power increases. China gradually shifted her policies from supporting the prevailing global institutions and their economic policies towards a more reformist approach as she now advocates more alternative arrangements through an experimental approach similar to her approaches in domestic policies; so that with a change in China’s economic power also comes a change in policies.

7.6

The BRICS: Brazil, Russia, India, China and South Africa

The association of the BRICS economies was created in 2006 and may be establishing a new paradigm in cooperation amongst emerging economies. The BRICS consists of five members and each member represents a significant power base at least within its own region. The share of BRICS’s exports of global trade has sharply increased from 3% in 1990 to 19% in 2011 (Srinivasan 2016). BRICS countries contain over 40% of the world’s population and the GDP of the BRICS accounts for just over one-fourth of the world’s total. They possess approximately 43.0% of global foreign exchange reserves while their share is increasing. South Africa joined the BRIC in 2010 to make it the BRICS. South Africa is an economic leader in sub-Saharan Africa; however, the African Continent has been impeded in economic

194

J. JOSHUA

growth as there is still insufficient regional and continental integration. The BRI is involved in multiple projects to foster greater connectivity on the African Continent which is expected to promote greater economic integration. The BRICS are a geo-economic projection and hence finally a geopolitical projection. The BRICS are not only engaged in the construction of infrastructure on a global scale, but it will induce competition and cooperation between nations. The countries participating in the BRI are at different levels of economic development and often also have different economic structures which will have to be coordinated and the vast infrastructure which is intended to be implemented through the BRI can help to facilitate this. At the moment, much of the infrastructure that is required for a sustained economic development is missing. South Africa and Brazil are heavily indebted in US dollars; for example, South Africa has current debts above 50% of its GDP. The BRICS economic partnership could facilitate trade and investment together with the required manufacturing and the exploitation and processing of raw materials. This would require the creation of essential infrastructure as well as the formation of financial integration. Most of the BRI projects which are part of the BRI are financed by financial institutions such as the AIIB, the Development Bank of BRICS, the Export-Import Bank of China, the Silk Road Fund and the CDB; but more funds have to be made available. Investment in infrastructure is a long-term proposition and the return may be uncertain but it is essential to facilitate sustainable economic development. The BRICS could be using political and economic strategies to foster regional integration implemented through enhanced connectivity and cooperation between members of the BRICS; not only in Eurasian countries but it has expanded into other hemispheres, especially into Africa and South-East Asia. However, there are considerable adverse reactions from counties which support a unipolar global power relationship so that such countries may try to prevent the formation of any organization which aims towards a multipolar global relationship. Of all the BRICS countries, China has the highest economic growth rate and is a major force in processes of globalization (Sala-i-Martin et al. 2011). China rapidly moved from an earlier exporter of low-cost cheap manufactured products during the early 1990s, “to an exporter of high value-added products in late 2000s” (Gouvea and Montoya 2013, p. 3). The sharp increase in trade and investments on a global scale has changed the global paradigm of trade towards greater South–South trade

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

195

which may also involve future strategic alliances between China, Brazil, India and other emerging economies; especially as many of the emerging economies complement each other in their trade relations. In this case, emerging economies will be turning more towards trade with other emerging economies rather than with declining Western economies. The financial crisis of 2008–2009 further increased the share of the BRIC in the world economy and accelerated the shift in economic power towards the South. A good illustration of the shift towards South–South trade is the increasing trade relationship between China and Brazil. Brazil is the leading exporter of agro-industrial products to China. The North is generally understood as the association of the G7. As trade between South–South increased, “the emergence of a Sino-centric dynamic in world trade and investment activities” (Wilkinson and Wesz Junior 2013) became apparent. Since the financial crisis of 2008–2009, the BRICS have increased their economic as well as political power. In fact, “the power of the BRIC(S), as a combined entity, appears to be more powerful than the sum of its parts” (Petropoulos 2013, p. 44). Chinese increasing demand for commodities pushes up the prices of raw material and agro-agricultural products. Brazil’s exports of manufacturing exports to China declined, whereas China’s exports of manufactured products increased sharply to Brazil, ranging from cheap labour products to products of high technological intensity; this trend is combined with high Chinese investment in Brazil. Brazil and China are active participants in the IMF, the G20 and the WTO. During the early 1990s, China exported to Brazil mainly cheap, low-quality products; during the early 2000s, China increased its exports of more value-added products such as computers, cell phones, televisions, motorcycles and various types of heavy equipment. Since the late 2000s, Brazil and China began to engage in mutual investment projects and trade (Gouvea and Montoya 2013). China has become a major destination for Brazilian exports of minerals, other natural resources and primary products. Bilateral trade between Brazil and China increased “from US $ 2.3 billion in 2000 to close to US $ 55billion in 2010” (Gouvea and Montoya 2013, p. 7); by 2010, China has become Brazil’s most important trading partner. In 2010, Brazilian exports to China consisted of 88% of primary products, 4% of manufactured products and 8% of semi-manufactured products, whereas China’s exports to Brazil consisted of 96% of manufactured products, and 4% of primary products (Gouvea and Montoya 2013, p. 7). The Brazilian economy gives a low priority to technology and innovation so that knowledge-intensive products are not important in Brazil’s

196

J. JOSHUA

exports. China has also become a major competitor to Brazil as China has increased its exports to the MERCOSUR countries at the cost of Brazilian exports which have declined to those countries. The negligence of infrastructure and the relatively low level of education and low investment in R&D also make Brazil uncompetitive (World Bank 2011). MERCOSUR was established in 1991 and includes Argentina, Brazil, Paraguay, Uruguay and Venezuela. The associate members of MERCOSUR are Bolivia, Chile, Columbia, Ecuador and Peru. The aim of MERCOSUR is free trade; however, it is not a common market but rather a customs union and a trading bloc. Intra-BRICs trade is expected to increase sharply as well as intra-BIICs which include Indonesia instead of Russia. The BRICS oppose protectionism and advocate a multilateral trade system which promotes the economies of emerging and developing countries. The BRICS has many complementarities with other international organizations. The BRICS will cooperate more with the African Union, MERCOSUR, the SCO and the EAEU which eventually lead towards the BRICS+ or even the BRICS++. The BRI has the potential to join up the sub-regions of the Asian Continent, the Middle East, East Asia, South-East Asia, South Asia and Central Asia. International relations are constantly shifting, so are international alliances are shifting as well according to their own perceived self-interests which are mostly guided by economic interests. Pakistan is vital for the implementation of the BRI as it borders three other South Asian countries, that is, Afghanistan, India and Nepal. Pakistan was the first country of South Asia which concluded a free trade agreement (FTA) with China. Eventually, the BRICS may link up with the Eurasian Economic Union (EEU), especially as many members of the EEU are also members of the SCO. China is working on various projects to establish multiple BRICSPlus scenarios. A major aim of the Chinese-led BRI is to merge with the Russian-led Eurasian Economic Union (EAEU). The BRI goes hand in hand with the projects of the Eurasian Customs Union led by Russia, and the projects of the Eurasian Economic Community. The BRI will provide the foundation of its connectivity, both physical and communication wise. The different projects, such as the SCO, the BRI, and the EAEU amongst others, will create a synergy. The SCO and the BRI attempt to promote economic growth through development but it has to be sustainable. The joining of Iran into the SCO is expected to occur eventually, and Egypt and Turkey are likely to follow.

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

197

To be successful, the BRICS also will require a coherent approach towards economic development which they lag at the moment. However, BRICS announced at their 2018 meeting that it will coordinate its macroeconomic policies to encounter protectionism as it is abiding by the WTO rules of international trade. The BRICS formation is intended to redress the North-South development imbalance to create a multipolar world with the intention to introduce a BRICS-wide customs union. If successfully managed, the BRICS may well be part of global restructuring. Other countries are expected to join the BRICS. Non-BRICS countries were for the first time participating in the BRICS meeting during the 9th bloc’s summit in China’s city of Xiamen in 2017. Egypt, Mexico, Thailand, Guinea and Tajikistan were invited to attend; together they are likely to become eventually the BRICS-Plus countries. The BRICS countries may be regarded as a club that promotes their common interest through collective action. Members of clubs may of course pursue their own interests but as a club they are more powerful in pursuing their common interests jointly; for example, they are engaged in a collective effort to challenge and reform existing institutions such as the IMF and the World Bank and create their own institutions such as the NDB (Katada et al. (2017). The BRICS NDB commenced operations in 2015 with a starting capital of $100 billion. If the BRICS rise in their effectiveness as a club, they may also provide eventually a collective challenge to the dominance of the US dollar within the global monetary system. The BRICS countries have each a dominant place within their geographical space; Brazil is dominant in South America, South Africa controls economically much of Southern Africa, China is a dominant economic power and exerts more control in East Asia than other countries, India has a dominant influence in South Asia, and Russia has considerable power over the countries of the former Soviet Union. Hence, members of the BRICS have good reasons to coordinate their political endeavours on a global scale. China is working on various projects to establish multiple BRICS-Plus scenarios. Furthermore, the BRICS are using their own national currencies for the financing of development projects and for bilateral trade between BRICS countries. China and Russia are promoting an energy club within the BRICS organization to be used as an alternative regime to the US-dominated energy rules favouring the international oil companies. Gao (2017) makes the point that there has been a shift in power from the international oil

198

J. JOSHUA

companies to national oil companies of China, Russia and other emerging economies. This is a big change indeed from the time when the large multinational oil companies, referred to by Sampson (1975) as “The Seven Sisters” had a profound influence on the world economy and international relations. It is also a general reflection of the shift of economic power from the North towards the South. According to the IMF, Brazil had the 9th largest economy globally as measured by nominal GDP and the 8th largest economy by GDP (PPP). During the period between 2003 and 2011, Brazil introduced social programmes such as the Bolsa Familia and the Fome Zero (Zero Hunger) as an extension of the previous Bolsa Escola, Brazil introduced a new family allowance scheme. Over 20 million people left poverty behind and the minimum wage was increased by more than one half. China, Brazil and India have an increasing middle class so that there will be a shift in demand; however, there is an increase in the Gini coefficient so that the distribution of income has become more unequal. The increase in the middle class also causes the service sector to expand. Brazil’s exports are highly concentrated; for example, in 2010, 43% of Brazil’s exports consisted of iron ore, soya beans, petroleum, sugar and meat products (Gouvea 2013, p. 45). Brazil was the third-largest exporter of food products in 2011. Brazil’s large exports in commodities require improved infrastructure. Insufficient port facilities impede Brazilian exports, although various new deep-water ports are in the process of being developed. China anticipates the construction of a 300-mile Bi-oceanic Rail Corridor between Brazil and Peruvian ports. In 2010, 88% of Brazilian exports to China were primary products, while manufactured products constituted 4%. On the other hand, China’s exports to Brazil were 96% manufactured products and 4% primary products (Gouvea 2013, p. 45). The vast increase of manufactured imports and the decline of Brazilian exports in manufactured products indicate a considerable degree of deindustrialization of the Brazilian economy; hence, diversification of the economy is vital to facilitate sustainable economic growth in Brazil. Sustained economic growth requires human capital which is insufficient in Brazil and thus provides another bottleneck which detrimentally affects the labour market. The low level of productivity in Brazil is due to low human capital, skills and insufficient investment in infrastructure and education and research and development. R&D investment in Brazil is considerably lower than in other BRICS countries; so that Brazilian productivity is low; for example, between 2000 and 2008, it only increased

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

199

by 0.9% per annum, while in China and South Korea it was 5.2 and 7.4%, respectively, during the same period (Gouvea 2013, p. 50). The ministerial conference of the China-CELAC Forum announced in 2015 a joint effort between China and Latin America to promote a fairer multilateral and a multipolar global order, which are also expected to increase substantially the volume of trade between China and Latin America. A greater use of currency swaps in bilateral trade and an increase of local currency settlements were also announced during this meeting. A high overdependence by China on advanced economies for its exports causes economic insecurity and an increase in trade disputes, so that China has a great interest in cultivating new South–South relations. That China intends to remain in and extends its influence in Latin America is indicated by the vast increase of Chinese students who are studying Spanish and Portuguese. The 33 members of the Community of Latin American and Caribbean States (CELAC) were invited in January 2018 to join the BRI. CELAC was established as a countermeasure to the Organization of American States. Panama joined first the BRI and was followed soon by Antigua and Barbuda, Bolivia, Trinidad and Tobago, the Dominican Republic, Guyana and Suriname. Venezuela accepts the yuan as payments for its sales of oil.

7.7

Conclusion

As global trade has changed, it is inevitable that new international financial organizations have come into existence, such as the AIIB, so that multiple projects in East Asia, South Asia, South-East Asia, in Eurasia, the Middle East, and in South America may proceed. Various international organizations of trade and finance, such as the WTO and the IMF will have to adapt to new situations concerning trade and economic development. It has been argued in this chapter that such projects as constructed under the BRI could not have succeeded without state intervention in regard to the magnitude, direction as well as its finance. China extends more loans to developing countries than the IMF and the World Bank combined. The Chinese economy is now emphasizing more market reforms through the supply side. It also emphasizes quality growth rather than just quantity of economic growth; in other words, instead of just concentrating on an increase of GDP, it attempts to emphasize greater social well-being together with a greater emphasis on a more balanced economic

200

J. JOSHUA

growth between the regions which is essential to cement political and social cohesion. Development banks should aim at equal partnership, one that does not prevail between the World Bank and the IMF with emerging or developing countries that may require funds. Hence, the AIIB has been established in response to the IMF’s and World Bank’s reluctance to adapt to changes within the global economy. As the AIIB may be more effective, it could be seen as an alternative source of finance. The AIIB is a viable source of alternative finance for many developing countries as the AIIB does not set conditions as does the IMF or the World Bank. The AIIB has rapidly increased its membership and eventually more are expected to join. As the world has shifted from a unipolar to a multipolar environment, it is imperative that new development organizations are established to serve more equally the interests of all their members. This also requires the reorganization of various international financial institutions. The financial markets could be structured so that they are able to allocate savings to the most productive usage. The international financial institutions were unable to solve the problems caused by the financial crisis of 2008–2009 and so need to be reformed or eventually may be replaced. International financial institutions should be able to pre-empt similar financial crises. Financial institutions should allocate the voting rights on a more equitable basis between advanced and developing nations. The greater democratization of world trade together with the development of new financial institutions may be expected which could lead towards a new economic and therefore a new financial order which intends to emphasize inclusiveness, shared responsibilities and benefits based on sovereign equality. Decisions about demands for credit should be based solely on economic merit without any political interference. However, the IMF requires an increase in funding and the SDRs would have to increase as well if it is to perform its function properly. The SDR was created in 1969 as a supplementary reserve currency; however, the SDR is not a currency per se, but can be converted to usable reserve currencies. The Bretton Woods gold-dollar system had been abandoned in 1971 and was replaced with a floating dollar. Yee (2014) elaborates the concept of international law of coprogressiveness and advocated that the international law of coprogressiveness should guide international relations. Yee (2014) makes the point that co-existence should be the leitmotiv of international law rather than globalization which does not prevent but rather encourages the

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

201

domination of the weaker nations by the stronger ones through neoliberal economic policies. Co-progressiveness implies not only economic development, but is potentially unsurpassed as a state of moral and ethical advancements (Wu 2017, p. 65), which above all requires an inclusive development that promotes interconnectivity to foster equal access to opportunities to enable a wider community to benefit from the BRI. To accomplish this, it is important that models of economic development have to be adapted to the specific requirements of specific countries as they have different needs. Because of the unbalanced voting quota amongst their members, the World Bank and the IMF are unlikely to represent the interests of emerging or developing countries. Indeed, the World Bank and the IMF are more likely to promote “the so-called ‘Washington Consensus’, which signifies a hardline, neoliberal or market-fundamentalist set of policies, emphasizing GDP growth through fiscal discipline, privatization of state sectors, liberalization of trade and FDI inflows” (Wu 2017, p. 67); such policies are reinforced through a “top-down donor conditionality approach” (Wu 2017, p. 68) by the World Bank and the IMF. The Bretton Woods Institutions, that is, the IMF and the World Bank were created during times when the international financial system was quite different, so that reforms will become essential if such institutions are not to become outdated. The importance of countries within such institutions has to be related to the importance of their economies; for example, emerging economies have increased their economic power within the global economy, so that their shares of votes within international financial institutions have to be adjusted accordingly. Various shortcomings of such financial institutions have been described. This section has argued that imposed policies by the IMF and the World Bank are driven by neoliberal ideologies, so that conditionalities imposed for granting loans are in accordance with such ideologies which have often worsen the social conditions, especially of the lower echelon of the public. It has been argued in this section that some capital controls may be essential to prevent a large amount of capital outflow as occurred during the Asian financial crisis of 1997–1998, so that it is not advantageous to China to completely deregulate the financial sector. The effective power of the traditional financial institutions such as the Bretton Woods Institutions has been reduced through the creation of the NDB, the AIIB, the BRICS Fund and the Silk Road Fund. The successful creation of the BRI will make a new international financial system inevitable. A post-Bretton Woods global financial system is in the making and will be

202

J. JOSHUA

formed largely by what happens with BRI. Countries which stand outside will miss an opportunity to take part in the formation. The United States and Japan ignore organizations such as the AIIB and other initiatives advanced by China to their peril; especially Japan is to lose a lot of opportunities, if it chooses to remain outside of the Chinese initiated schemes. Indeed, Japan would be well-advised to join BRI but political rivalries often take precedents over economic realities.

Bibliography Antràs, P., & Staiger, R. W. (2012). Off-Shoring and the Role of Trade Agreements. American Economic Review, 102(7), 3140–3183. Asian Infrastructure Investment Bank. (2015). The Role of Law of the Asian Infrastructure Bank. https://www.aiib.org/law. AIIB Articles of Agreements, https://www.aiib.org/en. Babb, S. (2013). The Washington Consensus a Transnational Policy Paradigm: Its Origin, Trajectory and Likely Successor. Review of International Political Economy, 20(2), 268–297. Ban, C., & Blyth, M. (2013). The BRIC’s and the Washington Consensus: An Introduction. Review of International Political Economy, 20(2), 241–255. Barro, R. (1996a). Getting It Right: Markets and Choices in a Free Society: Cambridge. Cambridge, MA: The MIT Press. Barro, R. (1996b). Democracy and Growth. Journal of Economic Growth, 1(1), 1–27. Bénassy-Quéré, A., & Béreau, S. (2011). Rebalancing IMF Quotas. The World Economy, 234(2), 223–247. Bi, Y. (2013). Is Dumping Still Harmful? New Thinking on Antidumping in the Global Free Trade. Journal of East Asia & International Law, 6(1), 29–51. Brzezinski, Z. (1997). The Grand Chessboard: American Primacy and Its Geostrategic Imperatives. New York: Basic Books. Chin, G. T. (2016). Asian Infrastructure Investment Bank: Governance Innovation and Prospects. Global Governance, 22(2016), 11–26. Clegg, L. (2016). Contesting Sovereignty: Informal Governance and the Battle Over Military Expenditure at the IMF. Global Governance, 22(1), 117–135. DeJonge, A. (2017). Perspectives on the Emerging Role of the Asian Infrastructure Investment Bank. International Affairs, 93(5), 1061–1084. Donnelly, J. (2006). Sovereign Inequalities and Hierarchy in Anarchy. European Journal of International Relations, 12(2), 139–170. Dreher, A., & Gassebner, M. (2012). Do IMF and World Bank Programs Induce Government Crises? An Empirical Analysis. International Organization, 66(2), 329–358.

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

203

Eichengreen, B., & Woods, N. (2015). The IMF’s Unmet Challenges. Journal of Economic Perspectives, 30(1), 29–52. Farah, P. D. (2016). Trade and Progress: The Case of China. Columbia Journal of Asian Law, 30(1), 51–112. Gabor, D. (2012). Managing Capital Accounts in Emerging Markets: Lessons from the Global Financial Crisis. Journal of Development Studies, 48(6), 714–731. Gallagher, K. P. (2011). Regaining Control? Capital Controls and the Global Financial Crisis (PERI Working Paper Series, No. 250). Gallagher, K. P. (2015). Contesting the Governance of Capital Flows at the IMF. Governance: An International Journal of Policy, Administration, and Institutions, 28(2), 185–198. Gao, S. (2017). China and Global Energy Governance: Integration or Confrontation. Global Governance, 23(2), 307–325. Gavin, M., & Rodrik, D. (1995, May). The World Bank in Historical Perspective. American Economic Review, 85(2), 329–334 (Papers and Proceedings). Gouvea, R. (2013). Core Issues Facing Brazil’s Quest Towards Sustainable Growth. Asian Journal of Latin American Studies, 26(4), 39–65. Gouvea, R., & Montoya, M. (2013). Brazil & China: Partners or Competitors? Designing Strategic Alliances in the Age of Uncertainty. Asian Journal of Latin American Studies, 26(1), 1–23. Gransow, B. (2015). Chinese Infrastructure Investment in Latin America: An Assessment of Strategies, Actors and Risks. Journal of Chinese Political Science, 20(3), 267–287. Güven, A. B. (2012). The IMF, the World Bank and the Global Economic Crisis: Exploring Paradigm Continuity. Development and Change, 43(4), 869–898. Harpaz, M. D. (2016). China’s Coherence in International Economic Governance. Journal of Chinese Political Science, 21(2), 123–147. Hopewell, K. (2017). The BRICS: Merely a Fable? Emerging Power Alliances in Global Trade Alliances in Global Trade Governance. International Affairs, 93(6), 1377–1396. Horn, H., Johannesson, L., & Mavroidis, P. C. (2010). Some Descriptive Statistics. Journal of World Trade, 45(6), 1107–1138. Ito, T. (2012). Can Asia Overcome the IMF Stigma? American Economic Review: Paper & Proceedings, 102(3), 198–202. Jeanne, O., Subramanian, A., & Williamson, J. (2012). Who Needs to Open the Capital Account? Washington, DC: Peterson Institute for International Economics. Katada, S. N., Roberts, C., & Armijo, L. E. (2017). The Varieties of Collective Financial Statecraft: The BRICS and China. Political Science Quarterly, 132(3), 403–433. Kawai, M., & Petri, P. A. (2014). Asia’s Role in the Global Economic Architecture. Contemporary Economic Policy, 32(1), 230–245.

204

J. JOSHUA

Kembayev, Z. (2016). Letter to the Editors: Towards a Silk Road Union? Chinese Journal of International Law, 15(3), 691–699. Kennedy, M. (2012). China’s Role in WTO Dispute Settlement. World Trade Review, 11(4), 555–589. Keynes, J. M. (1967/1936). The General Theory of Employment, Interest and Money. London: Macmillan. McDonald, S., Robinson, S., & Thierfelder, K. (2008). Asian Growth and Trade Poles: India, China and East and Southeast Asia. World Development, 36(2), 210–234. Moschella, M. (2012). Seeing Like the IMF on Capital Account Liberalisation. New Political Economy, 17 (1), 59–76. Narlikar, A., & Tussie, D. (2004). The G20 at the Cancun Ministerial. World Economy, 27 (7), 947–966. Nathan, A. J., & Scobell, A. (2016). Globalization as a Security Strategy: Power and Vulnerability in the “China Model”. Political Science Quarterly, 131(2), 313–339. Nederveen-Pieterse, J. (2011). Global Rebalancing: Crisis and the East-South Turn. Development and Change, 42(1), 22–48. Paradise, J. F. (2016). The Role of ‘Parallel Institutions’ in China’s Growing Participation in Global Economic Governance. Journal of Chinese Political Science, 21(2), 149–175. Petropoulos, S. (2013). The Emergence of the BRICS: Implications for Global Governance. Journal of International and Global Studies, 4(2), 37–51. Qin, J. Y. (2012). The Predicament of China’s “WTO-PLUS” Obligation to Eliminate Export Duties: A Commentary on the China-Raw Materials Case. Chinese Journal of International Law, 11(2), 237–246. Robinson, J. (1979). Aspects of Development and Underdevelopment. New York and London: Cambridge University Press. Sala-i-Martin, X. X., et al. (2011). The Global Competitiveness Index 2010–2011: Looking Beyond the Global Economic Crisis. In The Global Competitiveness Report 2010–2011. Geneva: World Economic Forum. Salter, M., & Yin, Y. (2014). Analysing Regionalism Within International Law and Relations: The Shanghai Cooperation Organisation as a Grossraum? Chinese Journal of International Law, 13(4), 819–877. Sampson, A. (1975). The Seven Sisters: The Great Oil Companies and the World They Made. London: Hodder and Stoughton. Schmitt, C. (1976). The Concept of the Political. Introduction and Translation by G. Schwab. New Brunswick, NJ: Rutgers University Press. Shiller, R. J. (2008). The Subprime Solution: How Today’s Global Financial Crisis Happened and What to Do About It. Princeton: Princeton University Press. Srinivasan, P. (2016, January–March). Causal Nexus Between Export Growth: BRICS Nations. SCMS Journal of Indian Management, 8(1), 67–80.

7

INTERNATIONAL FINANCIAL ORGANIZATIONS AND THE BRI

205

Stiglitz, J. E. (2003). Democratizing the International Monetary Fund and the World Bank: Governance and Accountability. Governance: An International Journal of Policy Administration, and Institutions, 16(1), 111–139. van Kerckhoven, S., & Luyten, A. (2014). The Tale of a Trojan Horse or the Quest for Market Access? China and the World Trade Organization. Revista Bralileira de Política Internacional, 57 (Special Edition), 193–209. Veblen, T. (1953). The Theory of the Leisure Class: An Economic Study of Institutions. New York: The New American Library. A Mentor Book. Vernengo, M., & Ford, K. (2014). Everything Must Change So That the IMF Can Remain the Same: The World Economic Outlook and the Global Financial Stability Report. Development and Change, 45(5), 1193–1204. Vreeland, J. R. (2003). The IMF and Economic Development. Cambridge: Cambridge University Press. Wilkinson, J., & Wesz Junior, J. J. (2013). Underlying Issues in the Emergence of China and Brazil as Major Global Players in the New South-South Trade and Investment Axis. International Journal of Technology Management & Sustainable Development, 12(3), 245–260. Wong, K.-F., & Yu, M. (2015). Democracy and Accession to GATT/WTO. Review of Development Economics, 19(4), 843–859. World Bank. (2011). Missing Food: The Case of Postharvest Grain Losses in SubSaharan Africa, Technical Report. Washington, DC: World Bank, FAO. Wu, X. (2011). No Longer Outside, Not Yet Equal: Rethinking China’s Membership in the World Trade Organization. Chinese Journal of International Law, 10, 227–270. Wu, X. (2017). Friendly Competition for Co-Progressive Development: The Asian Infrastructure Investment Bank vs. the Bretton Woods Institutions. Chinese Journal of International Law, 16(1), 41–76. Xiao, F., & Kimball, D. (2006, June). Effectiveness and Effects of China’s Capital Controls. Conference: WTO, China, and the Asian Economies, IV: Economic Integration and Economic Development, University of International Business and Economics, Beijing. https://faculty.washington.edu/karyiu/confer/ beijing06/papers/xiao-kimball.pdf. Yee, S. (2014, July 9). The International Law of Co-Progressiveness: Descriptive Observation, the Normative Position and Some Core Principles, 13 Chinese Journal of International Law, 485–499. https://ssrn.com/abstract=2545702. Yip, P. (2011). China’s Exchange Rate System Reform: Lessons for Macroeconomic Policy Management. Singapore: World Scientific.

CHAPTER 8

Conclusion

This first volume of “The Belt and Road Initiative and the Global Economy” analyses “Trade and Economic Development”. The BRI now includes over 70 countries with the construction of over $1 trillion at this stage. The geographical area of the BRI accounts for approximately one half of global economic activities. The analysis of the BRI has been embedded within theories of economic development and its political and organizational framework to explain not only the Belt and Road Initiative within the global economy, but to emphasize the consequential changing international financial system and its implications. There are numerous challenges awaiting the BRI but if it is well implemented and managed, it may eventually lead to a restructuring of the global economy. Emerging economies may eventually turn into emerging powers, after all the power of politics is based on a country’s economic power, so that declining economic powers eventually will lose their political power as well. The successful implementation of the BRI can enhance economic growth beyond Keynes’s assumption that short-run conditions of full employment are achieved when the quantity of investment is equal to savings under conditions of full employment (Keynes 1967). However, the BRI consists of long-term projects which may be able to create additional capacity to further enhance economic growth.

© The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28030-7_8

207

208

J. JOSHUA

The construction of infrastructure is vital for economic development as it will facilitate through the implementation of the BRI the required interconnectivity between different regions and countries and so provides the foundation of economic development. Hence, the development of infrastructure is not an end in itself, but it is rather to enhance the economic and social conditions in the countries concerned through the creation of a more inclusive sustainable economic development. Economic development has to take an inclusive approach so that infrastructural developments are vital to connect backward and forward linkages. The status of an economy may be judged by the prevailing standard of its infrastructure as it serves as the essential foundation of economic development. Economic development requires radical changes not only in economic theories but also in social institutions and personal and social attitudes. Economic development differs from economic growth, especially when various obstacles provided by dual economies have to be overcome. The BRI has investments in many different economic sectors; hence, linkages between different economic sectors have to be established or strengthened; for example, a resource curse may occur when linkages are weak between different sectors before a sustainable economic development can be obtained. Infrastructure may enhance economic development by breaking the bottlenecks which otherwise may impede economic and social development. Industrialization and consequently investment lead to economic growth, which both are expected to be delivered through the implementation of the BRI. Free trade only helps those who have a profound comparative advantage in economic productivity until the comparative advantage has shifted. Hence, globalization leads to the impoverishment of some regions and enriches some others. To prevent a future economic collapse, sound sustainable economic growth is required which is based on sound strategies guided by appropriately qualified scientists and other qualified professionals who hopefully not just guided by interest groups but rather by the requirements of the economy as a whole. Economies move up the product ladder through processes of industrialization. China has become increasingly competitive in high-technology sectors and has become a global competitor. Many economists seem to be puzzled by the rise of China as an economic power, simply because they are embedded within a neoliberal paradigm which is unable to explain the rise of China’s economy. China’s economic policies have in many instances not followed the neoliberal paradigm.

8

CONCLUSION

209

Economic development requires radical changes, not only in economic thoughts but also in social institutions and personal and social attitudes. Economic development should benefit the society as a whole, rather than specific interest groups. Economic development has to take an inclusive approach, so that infrastructural developments are vital to connect backward and forward linkages. Investments in the BRI have to confront multiple socio-economic uncertain factors, such as different cultural traditions, different political and economic systems. Different economic models of economic growth have also been described such as the neoclassical and the endogenous growth models. The implications for the international financial system are discussed in Chapters 2 and 3 in Volume II. A successful implementation of the BRI will enhance China’s economy (see Chapter 5 in Volume II). The impact on economic development of the participating countries is described in Chapter 6 in Volume II. The BRI will have an impact on the global integration amongst its members which will also affect their political and economic relations through China’s increasing dominance in trade (see Chapter 7 in Volume II). Hence, the BRI will have a transformative impact on the global economy and international relations (see Chapters 8 and 9 in Volume II). The BRICS countries have become growth engines for the global economy. The consumer market and the pattern of consumption in the BRICS countries is expanding rapidly as the middle class in those countries are fast increasing, especially within the service sector. China is unlikely to be effected by the middle-income trap where a developing economy is unable to move into a higher level of productivity because of an inability to innovate as China has now leaped into an innovative era. China gained its experience in the construction of infrastructure through its vast expanse of urbanization which made the construction of infrastructure essential. Through the BRI, the rate of economic growth will increase in the participating countries and their economies and political association with China will be enhanced, especially within ASEAN and the Eurasian Economic Union (EAEU).

Bibliography Keynes, J. M. (1967/1936). The General Theory of Employment, Interest and Money. London: Macmillan.

Postscript: Prospects and Challenges

Many Western commentators were surprised by the rise of China largely because they often hold philosophical assumptions that ignored other explanations except their own; for example, some find it hard to accept that a country could excel in economic growth without following a neoliberal ideology, so that China may indeed represent a possible alternative path towards economic development. It is argued in this book that projects which are progressing under the BRI are virtually impossible under the guidelines of neoliberal economic ideology. The rise of China provides a challenge to the philosophical, political and epistemological assumptions which are part and parcel of social sciences, including economics. Leadership of international financial institutions should be run on scientific principles rather than on prescribed ideologies which are presented as economic policies; in particular, such institutions should be disconnected from the interests of the major advanced economies. Government policies ought to be science-driven rather than by demagoguery and unsubstantiated ideologies. The IMF and the World Bank were established nominally on the principle of free trade. However, the IMF and the World Bank became part of the Washington Consensus and forced numerous countries to adhere to rules in support of the Washington Consensus. When countries become uncompetitive, they erect trade barriers, for example, through the imposition of tariffs on imports so that the IMF and the World Bank are becoming increasingly irrelevant to emerging economies. © The Editor(s) (if applicable) and The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28030-7

211

212

POSTSCRIPT: PROSPECTS AND CHALLENGES

Consequently, international financial institutions such as the IMF and the World Bank are expected to change as they are presently mainly controlled by the dominant powers. The international financial institutions promote the Washington Consensus and thereby promote American foreign policy (Wade 2007). If China is guided too much by such international financial institutions, some much-needed reforms may not be implemented. The Washington Consensus is still adhered to by the international financial institutions which have institutionalized it; however, change is on the horizon as the American economy is in decline, and the Chinese economy is on the rise. Greater cooperation amongst emerging economies are likely to increase as their economic and political interests in the global arena begin to converge in many instances, and with a united voice such countries will be able to exert more their influence on the international scene which will affect the decision-making process in regard to the organization of the IMF and the WTO, as well as the dominance of the major currencies or regulations encountering climate change and other global issues. As the IMF and the WTO have shown a reluctance to accommodate the interests of emerging economies, various new international institutions have come into existence, such as the AIIB, the Shanghai Cooperation Organization (SCO) and the BRICS.

Bibliography Wade, R. (2007, July/August). A New Global Financial Architecture? New Left Review, 46, 115–129.

Index

A African Union, 178, 196 Arrow, K.J., 52, 68 Asian Development Bank (ADB), 170, 171, 173, 181 Asian Financial crisis 1997-98, 20, 185, 201 Asian Infrastructure Investment Bank (AIIB), 11, 14, 22, 106, 124, 127, 131, 150, 156, 162, 167–174, 193, 194, 199–202, 212 Association of Southeast Asian Nations (ASEAN), 7, 61, 86, 87, 96, 98, 110, 115, 153, 177, 209

B Balanced economic growth strategies, 55, 117, 200 Balassa, B., 49, 65, 97 Bangladesh-China-India-Myanmar Corridor (BCIM), 10, 151, 153, 156 Barro, R.J., 48, 54, 112, 188

Belt and Road Initiative (BRI), 1–17, 19–21, 24, 26, 28–37, 40–43, 48, 50, 52–54, 56, 61, 63, 66, 68, 72–77, 84–86, 88, 89, 91–95, 97–100, 105–117, 119–131, 135–140, 142–157, 159, 161–164, 167–177, 185, 194, 196, 199, 201, 207–209, 211 effect on the global economy, 2, 4, 29, 43, 48, 92, 106, 118, 124, 136, 163, 168, 169, 207, 209 enhances China’s economic and political power, 4, 18, 19, 29, 42, 53, 58, 60, 93, 106, 162 impact on China’s economy, 4, 41, 53, 73, 100, 107, 136, 209 impact on participating countries, 2–4, 13, 14, 19, 26, 42, 48, 53, 57, 76, 99, 106, 108, 111, 115, 116, 121, 129, 130, 136, 147, 148, 164, 209

© The Editor(s) (if applicable) and The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28030-7

213

214

INDEX

interconnectivity, 3, 4, 9, 85, 99, 106, 111, 115, 123, 128, 137, 145, 201, 208 opportunities and crisis, 6, 41, 85, 98, 99, 106, 118, 128, 131, 159, 161, 162, 167, 201 spill-over effects, 92, 99, 100 Bottlenecks elimination. See Infrastructure Brazilian economy, 195, 198 Bretton woods institutions (BWI), 11, 169, 173, 178, 182, 192, 201 Brzezinski, Z., 176 C Chain production process, 50, 68, 156 China changing global trade, 12, 75, 76, 89, 93, 94, 96, 193 economic transformation towards high technology, 18, 59, 70 geopolitical influence, 9, 14, 19, 42, 77, 128, 131, 135 global trade, 7, 9, 17, 70, 75, 84, 89, 96, 98, 159, 162, 193 global trade relations, 2, 12, 84, 98, 195 going out policy, 4, 5, 13–16, 18, 19, 26, 33, 42, 84, 86, 106, 124 high technology innovation, 18, 59, 68, 70, 75, 208 integration into the global production networks, 50, 83 Mongolia-Russia Economic Corridor (CMREC), 144, 147 Pakistan Economic Corridor (CPEC), 9, 10, 121, 135, 136, 154–156 rejuvenation, 37, 39, 40 trade pattern, 59, 60, 65, 67, 74, 93, 143, 209 urbanization, 108, 126, 209

Venezuela trade, 96, 196 China Development Bank (CDB), 11, 96, 124, 126, 167, 194 China Export-Import Bank (EXIM), 126 China-ASEAN Free Trade Agreements (CAFTA), 86 Chinese loans for infrastructure, 109, 172, 183 Community of common destiny, 5, 13, 14, 36, 40, 42, 115, 148, 164 Comparative advantage, 6, 7, 47–49, 58–65, 74, 75, 95, 97, 118, 208 diversification versus specialisation, 6, 7, 47, 49, 64 ladder of, 7, 64, 97 shift, 7, 48, 49, 59, 60, 62–65, 74, 118, 208 Complementary and competitive trade. See Trade Confucianism, 34, 35 Cost-benefit analysis, 31, 128, 130, 131 D Declining Western economies, 106, 111, 193 Development, 1–7, 10, 11, 15, 17, 18, 22, 26, 27, 29–32, 36–40, 42, 43, 49, 52–58, 61, 62, 64, 65, 69, 71, 73–77, 84, 85, 87, 88, 90, 93, 96, 98, 100, 106, 109–126, 130, 136, 140, 145, 146, 151, 153, 157, 159, 160, 162, 163, 171–173, 176, 183–185, 196–198, 200, 208 bottlenecks elimination, 8, 110, 118, 120. See also Infrastructure Development gaps, 6, 7, 57, 96, 100 regional integration, 7, 8 Distribution of income, 5, 38, 51, 55, 58, 74, 76, 88, 198

INDEX

Diversification versus specialisation. See Comparative advantage Dry ports, 122, 123 E Economic development, 1–13, 15–17, 19, 21, 23, 24, 26–32, 37–39, 41–43, 47, 48, 50, 53–57, 61, 63, 64, 66, 68, 70, 72–77, 84, 86, 88, 89, 96, 98–100, 105, 106, 108, 111, 113–126, 128–131, 136–138, 140, 141, 145, 147–149, 153, 155, 158, 164, 167–169, 171, 172, 174, 175, 184, 190, 191, 194, 197, 199, 201, 207–209, 211 transition versus transformation, 5, 50, 77 Economic diversification, 158, 160 Efficiency, 38, 68, 121, 122 allocative, 53 dynamic, 53 Endogenous growth model, 112, 209 Eurasian Economic Union (EAEU), 7, 86, 110, 115, 145–147, 176, 177, 196, 209 Euroasian Economic Union (EurAsEC), 176 Export diversification, 7, 49, 65, 92, 160 F Financial crisis 2008-09, 15, 17, 20, 21, 24, 27, 28, 31, 41, 68, 115, 125, 180–182, 184, 185, 195, 200 Financial deepening, 8, 123–126, 168 Flying geese paradigm (FGP), ix Food self-sufficiency, 88 Free trade agreements (FTAs), 85, 87, 97, 99, 153, 196

215

G Galbraith, J.K., 33 Gaps in development, 6, 7, 96 Gaps in infrastructure, 6, 97 Gaps in integration, 6, 7 Gazprom, 141, 148, 149 Gerschenkron, A., 56, 62 Global economy, 3, 11, 15, 24, 26, 43, 48, 53, 92, 106, 118, 124, 136, 163, 168, 170, 173, 178, 179, 181, 185, 200, 201, 207, 209 slowdown, 4, 58 Globalization, 13, 15, 16, 25, 30, 32–36, 41, 42, 47, 48, 74, 91, 100, 136, 150, 191, 200, 208 international trade, 1, 34, 65, 89, 91, 100, 106, 150, 191, 194, 208 Global trade, 4, 7, 9, 12, 84, 89, 95, 96, 98, 100, 137, 144, 159, 184, 191, 193, 199 structural changes, 75, 76, 93, 130 Gravity model, ix Grossraum. See Schmitt, C. Gwadar, 10, 138, 139, 153, 154, 156, 158

H Heckscher-Ohlin theory, 48, 60, 61 Hegemony, 25, 34, 159 hinterland, 116, 122 Hinterland regions and gate regions. See Hegemony, hinterland Hirschman, A., 56, 116, 117, 119

I Infrastructure bottlenecks elimination development, 8, 110, 118, 120 comparative advantage, 48, 58, 59, 85, 113, 118, 128

216

INDEX

connectivity, 3, 5, 8, 14, 15, 17, 37, 54, 61, 77, 88, 100, 107, 108, 113, 114, 118, 119, 130, 168, 171–175, 194 construction externalities, 58 hard and soft, 105, 123 productivity, 17, 48, 61, 117, 120, 130, 164, 209 for-resources loans, 110 synergizing, 112 Infrastructuring, 108, 112 economic and social development, 61, 108, 113, 120, 130, 208 Innovation, 6, 17, 18, 31, 32, 53, 58, 62, 64, 66–68, 70–72, 74, 75, 84, 90, 94, 111, 120, 125, 130, 195 creative, 6, 47, 49, 66 defensive innovation, 6, 47, 49, 66, 74 destructive, 6, 47, 49, 66, 67, 74 International Monetary Fund (IMF), 11, 20, 22, 24, 25, 28, 63, 127, 167, 168, 170–173, 178–185, 193, 195, 197–201, 211, 212 conditionalities on loans, 182, 183, 201 lender of last resort, 183 voting power, 24, 179 International North-South Transport Corridor (INSTC), 115, 157 K Kant, I., 34, 51 Kazakhstan, 11, 86, 111, 115, 143–145, 156, 174, 176 Keynes, J.M., 182, 207 Keynesian pump-priming, 18, 97 Korakorum Highway (KKH), 154, 155 Krugman, P.R., 70, 88 Kunming-Singapore Railway Link, 153 Kuznets, S., 51, 55, 89, 161

L Ladder of comparative advantage. See Comparative advantage Latin American Bi-Oceanic rail corridor, 162 Learning by doing, 60, 68, 118 Life-cycle costs and benefits, 129 Linkages, 8, 9, 31, 106, 114, 116–122, 131, 138, 144, 164, 177, 208 backward and forward, 8, 116, 117, 208, 209 Lorenz curve, 51 Lucas endogenous growth theory, 48, 54

M Mackinder, H.J., 135 Made in China 2025, 6, 29, 58, 70, 75, 191 Maritime Silk Road, 8, 84, 108, 121, 136, 137, 152, 154 Marshall Plan, 14 MERCOSUR, 196 Monetary policy, 23, 91, 115, 178, 184, 185 Triffin trilemma, 91 Multipolar economic system, 12 Myrdal, G., 55, 64

N Neoclassical theory, 6, 54, 60 New Development Bank (NDB), 11, 124, 127, 131, 162, 167, 169, 172, 173, 186, 193, 197, 201 New global production networks (NPN), 50 Nord Stream 2 gas pipeline, 141, 142 Nord Stream 3, 142 Northern Corridor, 138 Northern Maritime Route, 9, 140, 141

INDEX

Northern Sea Routes (NSR), 3, 9, 135, 139–141, 147 North-South trade, 192, 193, 197

O One-Belt-One Road. See Belt and Road Initiative (BRI) Openness to trade, 84, 89, 91, 92, 94–96, 100, 183

P Piraeus Container Terminal, 142 Polar Silk Road, 135, 139, 164 Production chains, 50, 64, 68, 156 Production cycles, 50 Production ladder, 50, 64, 98, 208 Product life cycle, 67, 112 Protocol of Accession (to the WTO), 190

R Refining industry processing, 31 Regional Comprehensive Economic Partnership (RCEP), 86, 150 Regional Trade Agreements (RTAs), 97 Resource curse, 84, 95, 119, 208 Resource financed infrastructure (RFI), 109 Ricardian model, 48, 59 Robinson, J., 180, 184 Romer, P.M., 51, 92, 98

S Schmitt, C., 177 Schumpeter, J., 49, 53, 54, 66, 67 Seers, D., 64 Sen, A., 88, 96, 100

217

Shanghai Cooperation Organization (SCO), 7, 11, 115, 145, 169, 174–178, 196, 212 Shift in economic power, 71, 171, 180, 192, 193, 195, 198 Silk Road Fund, 11, 125, 127, 149, 167, 186, 194, 201 Silk Roads, 1, 3, 9, 17, 105–108, 121, 136–138, 147, 158, 160, 162, 163, 171 Smith, A., 56, 83, 125 South American Hemisphere, 9, 10, 135, 136, 161 South Asian Association of Regional Cooperation (SAARC), 110 Southern Maritime Route, 140, 141 South Stream project, 142 South-South integration, 66, 199 South-South trade, 100, 194, 195 Spider and snakes production processes, 50 Stages of economic development, 6, 8, 22, 26, 43, 47, 49, 50, 56–58, 62, 72, 74, 76, 89, 112, 120, 124 leapfrogging, 56, 58, 59, 70 Stiglitz, J.E., 25, 28, 180 Strait of Malacca, 135, 139, 140, 152 Sun Yatsen, 120

T Take-off stage, 57 Technological change, 6, 7, 48, 59, 60, 66, 67, 75, 97, 122 Trade, 2–4, 7–12, 16, 18, 20, 23, 24, 27, 28, 34, 36, 37, 41, 42, 49, 54, 58–62, 64–67, 73, 74, 76, 83–100, 106–110, 113–116, 119, 121–123, 131, 136, 137, 140, 143, 145, 146, 148, 149, 152–160, 163, 164, 167, 170, 176, 178, 180, 181, 183–185,

218

INDEX

187, 189–192, 194–197, 199–201, 209, 211 the complementary and competitive patterns, 63, 84, 95 Trade creation and diversion, 7, 97 Transformation of developing economies, 15, 16, 49, 50, 56, 73, 77, 99, 107, 117 Trans-Korean Railway, 141, 144, 146–148 Trans-Siberian Railways (TSR), 138, 141, 144, 146–149 Trickle-down theory, 24, 55 Triffin trilemma. See Monetary policy Turkey, 10, 11, 20, 135, 137, 138, 142, 144, 145, 149, 157, 159, 163, 174, 176, 196 Two-ocean tunnel, 10, 162

V Value-added of global production, 75, 194, 195 Veblen, T., 185

U Unipolar versus multipolar world order, 1, 12, 25, 200

X Xinjiang, 10, 16, 106, 111, 136, 138, 139, 145, 154

W World Bank, 11, 12, 22, 24, 25, 28, 107, 114, 126, 127, 144, 170–173, 178–183, 185, 192, 193, 196, 197, 199–201, 211, 212 World Trade Organization (WTO), 12, 16, 19, 90, 100, 167, 168, 172, 179, 184–193, 195, 197, 199, 212