The Belt And Road Initiative And The Global Economy: Volume II – The Changing International Financial System And Implications 3030280675, 9783030280673, 9783030280680

Table of contents :
Preface......Page 6
Contents......Page 10
List of Tables......Page 11
1 Introduction......Page 12
Bibliography......Page 21
2.1 Introduction......Page 22
2.2 The International Reserve Currencies and Exchange Rates......Page 24
2.3 The Financial Crisis of 2008–2009 as a Precursor of Reforms......Page 34
2.4 The Internationalization of the RMB......Page 38
2.5 The Decline of the American Dollar......Page 44
2.6 The Global Shift of Economic and Financial Power......Page 49
2.7 Conclusion......Page 52
Bibliography......Page 54
3.1 Introduction......Page 58
3.2 Causes and Consequence of Pollution and Environmental Degradation......Page 59
3.3 Causes and Consequences of the Emission of Greenhouse Gases......Page 61
3.4 International Economic Growth and the Effect on the Environment......Page 64
3.5 Renewable Energy Versus Energy Security and Environmental Degradation......Page 68
3.6 Global Trade and the Detrimental Effect on the Environment and Health......Page 70
3.7 Trade Policies and Emission Control......Page 73
3.8 The Political Decision-Making Process and the Protection of the Environment......Page 77
3.9 Conclusion......Page 80
Bibliography......Page 82
4.1 Introduction......Page 86
4.2 China’s Domestic Economy—the Challenges and Opportunities......Page 87
4.3 China’s Labour Market......Page 89
4.4 The Distribution of Income in China......Page 93
4.5 Economic Growth and China’s Domestic Economy......Page 95
4.6 New Markets and Investments......Page 97
4.7 Moving Towards the Innovation Frontier......Page 100
4.8 The Globalization of China’s Economy......Page 102
4.9 Conclusion......Page 103
Bibliography......Page 104
5.1 Introduction......Page 108
5.2.1 The Belt and Road Initiative Enters Africa......Page 111
5.2.2 New Infrastructure—New Opportunities......Page 114
5.2.3 The China–Africa Trade Relationship......Page 116
5.2.4 Trade and the Impact on African Economic Growth......Page 121
5.2.5 Diversification Versus Specialization......Page 125
5.3 The Quadrangle of East Asia: China, Japan, Korea and Russia......Page 131
5.4.1 Overview......Page 133
5.4.2 Infrastructure and Economic Growth......Page 134
5.4.3 Trade Relationships Between China and the Southeast Asian Nations......Page 135
5.4.4 The Impact of Trade Relationship in Southeast Asia......Page 137
5.5 The Implications of China’s Trade in South Asia......Page 139
5.6 China’s Expanding Trade and Investment in Latin America......Page 140
5.7 Conclusion......Page 142
Bibliography......Page 145
6.1 Introduction......Page 150
6.2 The Shift Towards Emerging Economies......Page 152
6.3 Economic Transformation Through the Belt and Road Initiative......Page 154
6.4 The Gravity Model and Regional Economic Growth......Page 157
6.5 The Flying Geese Paradigm (FGP) and the Leading Dragon......Page 159
6.6 The New Global Production Networks (GPN)......Page 161
6.7 Conclusion......Page 168
Bibliography......Page 169
7.1 Introduction......Page 173
7.2 Trade Dependence and Political Dependence......Page 176
7.3 The Belt and Road Initiative as a Globalizing Force......Page 179
7.4 The Counter Push to the Belt and Road Initiative......Page 183
7.5 The Thrust Towards Protectionism......Page 187
7.6 Policies of Sanctions to Maintain Hegemony......Page 190
7.7 The Trade Disputes to Prevent China from Rising......Page 192
7.8 Conclusion......Page 195
Bibliography......Page 196
8.1 Introduction......Page 198
8.2 A Historical Perspective on the Rise and Fall of Nations......Page 199
8.3 The Shift in Global Power......Page 200
8.4 The Construction and Demise of Hegemonies......Page 202
8.5 The Consequence of the Rise in Military Expenditures......Page 206
8.6 Conclusion......Page 210
Bibliography......Page 211
Postscript: The Shift in Global Power and its Ramifications......Page 214
Bibliography......Page 220
Index......Page 222

Citation preview

John Joshua

The Belt and Road Initiative and the Global Economy Volume II – The Changing International Financial System and Implications

The Belt and Road Initiative and the Global Economy

John Joshua

The Belt and Road Initiative and the Global Economy Volume II – The Changing International Financial System and Implications

John Joshua Shui Mu Shan Cheng Fushun, Liaoning, China

ISBN 978-3-030-28067-3 ISBN 978-3-030-28068-0  (eBook) https://doi.org/10.1007/978-3-030-28068-0 © 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 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 to 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 vii

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succeed. 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–benefit analysis has 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, except 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 analysed 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 detail, 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 detail and is seen here as a precursor to

PREFACE  

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reforms. This is followed with arguments about the eventual internationalization of the RMB. The decline of the American dollar is also analysed in detail. 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 analysed in great detail. 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 analysed in great detail, 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 detail; 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 analysed in detail. This is followed with a detailed analyses about the flying geese paradigm and the leading dragon as well as the new global production networks.

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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 analysed in detail. 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 a 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 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 The Changing International Financial System 11 3 International Economic Growth 47 4 The Effects of the Belt and Road Initiative on China’s Domestic Economy 75 5 Effects of the Belt and Road Initiative on the Domestic Economies of Participating Countries 97 6 Effects of the Belt and Road Initiative on the Global Economy 139 7 The Belt and Road Initiative and International Relations 163 8 The Rise and Fall of Nations 189 Postscript: The Shift in Global Power and its Ramifications 205 Index 213 xi

List of Tables

Table 6.1 Eight biggest economies as measured by PPP (billion US $) 143 Table 8.1 Military expenditure by country as a percentage of the gross domestic product (2003–2018) 200

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CHAPTER 1

Introduction

This book is second volume on “The Belt and Road Initiative and the Global Economy” and will analyse the possible implications. This volume begins with a succinct overview of such implications in this chapter. A detailed analysis is then provided of the changing international financial system in Chapter 2. This will be followed up with a detailed analysis in Chapter 3 on international economic growth and the effects on the environment. Chapter 4 will address the effects of the BRI on China’s domestic economy, followed in Chapter 5 with an analysis on the effects on the domestic economies of the participating countries of the BRI. Chapter 6 will analyse the impact that the BRI will have on the global economy. The shift in global power has an impact on international relations, which will be discussed in Chapter 7. Consequently, this will lead us into a discussion of the rise and fall of nations in Chapter 8. A postscript is provided at the end of the book which highlights the shift in global power and its ramifications. Hence, an interdisciplinary approach is taken to explain the impact of the BRI on the global economy. Particular emphasis will be given on the domestic economies of the participating countries as different countries have different requirements in terms of economic development. The implications of economic development and the reciprocal trade relationships between the different countries will affect the participating countries of the BRI to different degrees so that the appropriate policies for economic development may also differ between the participating countries. The consequences of economic growth on the environment will also be © The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28068-0_1

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addressed before the effects of the BRI on China’s domestic economy, on the economies of the participating countries and on the global economy, especially in regard to international trade and economic development. Finally the changing global economy and the impact on international relations will also be addressed. The importance of the complementariness in production between different nations has also been addressed. China’s economic growth requires a large quantity of natural resources, most of it has to be imported, so that China’s economy is complementary to resource-rich nations. China has diversified its supply of resources, largely because of security reasons. As China also has become in 2009 the largest exporter it has a considerable impact on international trade and many national economies, so that China’s effect on the global economy is discussed at great length. The aim of the construction of multiple projects is to enable companies to engage in a “going out” strategy which may involve structural transformation in multiple economies on the way of the BRI. China’s “going out” policy has been extensively discussed in the second chapter of the first volume; this volume will largely discuss the changing international trade relations. China’s “going out” policies will be discussed together with China’s investment policies in multiple countries which are part of the BRI. The level effects and the relative effects which are caused by China’s increase in trade with other countries are described. The level effect shows how much countries may benefit or lose from the expansion of China’s trade; whereas the relative effect shows which countries are most affected. Various possible scenarios in the major countries to promote economic development will be described. Chinese investments and projects in countries which are often not regarded as being part of the BRI, such as South American countries, will also be discussed; rather than confining the analysis just to areas pertaining to the Ancient Silk Road, as the present BRI goes far beyond it. The aim of the BRI is to construct infrastructures across numerous borders to enable an increase in the required interconnectivity to promote economic growth and development. As the participating countries of the BRI are at different stages of economic development, different policies may apply; that is, as countries move through different stages of economic development, priorities will change. Policies may be adapted to the specific requirements of participating countries and the appropriate policies will have to be coordinated between the participating countries.

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However, policies may go beyond the actual projects, but may also consider the social conditions and the conditions of employment. It will be argued that the implementation of the projects has to go beyond the aim to achieve economic growth, but instead could promote inclusive economic development so that the benefits are more equally spread out. The economic development between various hubs for transportation or between trading centres, rather than just the development of transport hubs, will be emphasized. Hence, the BRI can aid the development of countries involved rather than merely using them as a thoroughfare for transportation between different countries. The major participating countries will be analysed for the benefits that they may gain and the contribution that they may make towards the BRI. Various obstacles which may be faced by different countries and their possible solutions have been described; for example, investment must have a fertile ground before it can be productive. The various obstacles faced by the existence of dual economies have also been analysed together with possible remedies. The BRI will be able to increase the demand for labour so that many workers may be drawn from the unemployed and underemployed labour force. The BRI and the creation of infrastructure may bring out impoverished people out of poverty. The possible resulting virtuous as well as vicious cycles in which specific countries may find themselves will also be discussed. Various free trade agreements are explained together with the benefits they may bring for the participating countries. The different effects of exports and imports in various African countries have also been described, together with the displacement effect on African intra-regional trade by Chinese exports in some African nations. The danger of an impending resource curse as a consequence of just specializing in exporting raw material is also explained. Strong linkages between the resource sector and other sectors of the economy should be created; it will be argued that weak linkages retards economic development and also prevents a sustained economic development. FDI in the resource sector may crowd out other sectors, such as the manufacturing sector which are essential for a sustained economic development and so may create a resource curse; hence it may be essential to diversify a country’s economy rather than just relying on the exports of raw materials. Many countries can learn from China’s experience, especially in regard to diversifying their industries. Economies should be diversified whenever possible.

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Various policies of economic development which may lead towards a virtuous or a vicious circle together with the spillover effects will be discussed in details. The countries and regions which are part of the BRI are often unevenly developed, so that different policies may be required. The possibility of absolute or conditional convergence within particular regions will also be explained. Gaps in development have to be narrowed before deeper economic integration can occur; on the other hand, a widening gap in development between countries and regions will present considerable obstacles to the successful implementation of the BRI. The discrepancies between various ASEAN countries are described to highlight such obstacles. The intention is that the BRI will lead towards a win-win globalization which may lead towards economic development. However, international economic growth also causes environmental degradation if it is not well managed. As China is the largest energy consumer in the world, energy cooperation has to be a vital part of BRI. Pollution worldwide causes an estimated 9 million premature deaths globally per annum, but it is largely underreported. Pollution saves money for polluting enterprises at present, but it leads towards higher expenditures in the future paid by those who are less to blame. Most countries which are part of the BRI are low and middle income countries. Hence, the appropriate regulations have to be introduced to reduce the level of pollution and environmental degradation. Governments feel that they are not free but instead are largely controlled by corporations which try to maximize their profits. As economic development spreads across borders, coordination between different governments is essential if the BRI is to succeed which is likely to affect international relations. The BRI is likely to induce profound transformation on a global scale, and so will cause a shift from a unipolar towards a multipolar world order, depending on the types and success of the implemented reforms. A brief outline of each chapter now follows. This chapter provides an introduction and a summary of the main points of each chapter of Volume II. Chapter 2 will discuss the current operations and functions of the international monetary system. It begins with an explanation of the functions of the international reserve currencies and exchange rates. This chapter also explains the mechanism of the regional currency basket. The changes in the international financial system were largely precipitated by the financial

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crisis of 2008–2009; although the weaknesses of the financial system were apparent before the crisis arose. This leads into an analysis of the internationalization of the RMB. Subsequently, the global shift of economic and financial power will be analysed. This analysis is followed up with a discussion of the decline of the US dollar. Finally, the global shift in economic and financial power is described. This chapter explains the changes which are occurring at the moment in the international financial system, and it explains the movement away from the advanced economies towards East Asia to establish a multipolar financial system. The chapter concludes with a succinct summary and emphasizes the main arguments. It is argued that once the RMB has become a major reserve currency it also entails a major shift in the management of international finance. The different effects of the RMB being used as a funding or as an investing currency and their implications of different exchange rate policies are discussed. How the RMB as an international reserve currency may be used as a store of value, as a medium of exchange, and as a unit of account is also explained. The possible emergence of a RMB currency bloc together with the costs and benefits to China, and its effects on the petrodollar and the US dollar are also analysed. How China will be using the RMB to create stronger economic ties is also described. The Chinese currency was already used as an international currency over four centuries ago, at the time when China’s share of global GDP measured in PPP was almost 30% (Horesh 2011). The newly developing gas-oil-yuan-gold mechanism and its implications which indicate a gradual abandonment of the US dollar in international trade is also discussed. Various countries have accepted the RMB as an international reserve currency since 2006. More countries are in the process of disassociating themselves from payments in US dollars and the ramifications will be described. The effects of floating exchange rates and how they may affect trade creation and trade diversion are also explained. The effectiveness of devaluation and revaluation of currencies has been explained together with a discussion on the importance of the Marshall–Lerner condition in determining the effects of elasticities of demand for exports and imports and the effect of fixed and floating exchange rates. Chapter 3 discusses widely the effect of international economic growth on the environment. This chapter begins with an analysis of the consequences of pollution and environmental degradation and proceeds with an

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analysis of international growth and the effect on the environment. This is followed up with a discussion on the effect of trade liberalization and global trade on environmental degradation and health. Subsequently, the arguments of renewable energy versus energy security is discussed in details, followed up with an analysis on trade policies and the political decisionmaking process in regard to emission control. Trade liberalization can lead to the deterioration of the environment when the necessary regulations to protect the environment are not introduced. Some countries are wary of introducing tougher environmental regulations because they may fear losing their comparative advantage. The political decision-making process to promote a more conducive environment is more often than not side-stepped as economic growth is given priority. Chapter 4 will discuss the effect of the BRI on China’s domestic economy. The chapter begins with a description of the challenges and opportunities which are faced by China’s domestic economy, and how China’s economy relates to the BRI. The major challenges of China’s economy are China’s labour market, and the increasingly widening distribution of income, and the maintaining of a sustained economic growth. The major opportunities are the search for new markets for Chinese products, and finding new opportunities for Chinese investment to channel excess capacity towards other countries. Another major opportunity is the Chinese thrust towards high technology and innovations, as well as the globalization of China’s economy. The major aims of the BRI are to find new markets and opportunities for investments and ultimately the globalization of China’s economy. How China is moving towards the innovation frontier and advances towards high-technology research and innovation is explained. Emerging markets and global trading will reduce the technology gap; innovation generally increases the technology gap, whereas imitation and diffusion reduces the technology gap. Economic growth can be enhanced through the use of improved technology which will also increase the exports of manufactured goods. Increases in exports may create positive externalities in non-export sectors and may increase foreign reserves and may improve the balance of payments. China has adopted a “going out” policy as well as the promotion of exports; both policies increase economic growth, or at least prevent it from declining. This chapter will also discuss how the implementation of the BRI will enable China to redirect capital towards the construction of infrastructure

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and other large-scale projects which facilitates global trade. China will be able to acquire the much-needed resources to be used for domestic production. China’s investment in other countries will be able to reduce China’s present overcapacity which will be aided by China’s “going out” policy. Investment strategies have to be coordinated between the countries which are part of the BRI as such investments feed into each other; especially as many of the projects are spread across national borders. Chapter 5 will analyse the effect of the BRI on the domestic economies of the participating economies. The chapter begins with an analysis of China’s trade and investment within the African Continent and explains how new infrastructures create new opportunities for economic growth. The trade relationship between China and Africa are discussed followed with a discussion on how trade will effect economic growth in Africa. The section concludes with a discussion on the arguments about diversification versus specialization. It is argued that greater diversification is required to avoid a resource curse. The construction of infrastructure will be able to establish the required linkages between regions and economic sectors. The next section analyses the quadrangle of East Asia: China, Japan, Korea and Russia as economic as well as political factors are expected to change eventually. The next section will discuss the effects of China’s growing economy on the Southeast Asian Nations. The importance of infrastructure, economic growth and trade relationships between China and Southeast Asia and the implications are explained. The final section discusses China’s expanding trade and investment in Latin America. Chapter 6 will analyse the impact of the BRI on the global economy, through the promotion of trade, investment and economic development. The chapter will begin with a discussion on the present shift of economic power towards the emerging economies, followed with a discussion of how the BRI will lead towards an economic transformation. The gravity model and regional economic growth will be discussed next, followed with an analysis of the flying geese paradigm and the leading dragon. There is an in-depth discussion on the “flying geese” and the “leading dragon” phenomenon in the participating countries of the BRI and the consequential development to facilitate greater connectivity between the countries involved. Particular attention will be paid to the specific requirements needed for economic growth in different stages of economic growth and development. The final section then will describe the new global production networks.

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This chapter will also explain the overall effects of the BRI on the global economy. Western economies are declining in their economic dominance as the trading gravity is shifting away from the West. The BRI goes beyond the Ancient Silk Road so that the impact on the global economy, including a detailed analysis of China’s investment and trade relations with Latin America and Africa will be discussed in details. It will also address how various policies can enhance the economic development of participating countries, considering their particular stage of economic development. Emerging countries such as China are experiencing an accelerating rate of transformation and so could benefit other emerging nations as in the flying geese phenomenon. The implementation of the BRI may be able to open up various economies as well as lead towards domestic economic reforms. Reforms may give rise to new opportunities, which may be followed by other reforms and so may lead towards a virtuous circle if such reforms are implemented successfully. Chapter 7 analyses how the expansion of the BRI will affect international relations. This chapter begins with an analysis on trade dependence and political dependence. Subsequently, the BRI as a globalizing force will be discussed followed with arguments on the development of a counter push towards the BRI. The more successful the BRI will be, the more likely a counter push to the BRI will develop. This section is then followed up specifically with a discussion on the present thrust towards protectionism, policies of sanctions to maintain hegemony and the current trade disputes to prevent China from rising. Opposing forces that may feel threatened by the BRI are discussed in this analysis because the success of the BRI will depend to some extent on whether such countervailing forces will be able to prevent the successful implementation of the BRI. It is argued in this chapter that the global economy may be affected by the successful implementation of the BRI; it is anticipated that it is likely to cause a shift in global power from the advanced economies towards the emerging economies, and from a unipolar towards a multipolar governance and hence a new world order may emerge; as a consequence this will also have an impact on international relations. Chapter seven will describe China’s rise as an economic power and the subsequent countervailing effect that may be occurring in international affairs. China may encounter various obstacles on the way towards economic dominance; such obstacles will be described for their possible effects on China’s construction of multiple projects which are essential for the road towards economic success.

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Chapter 8 discusses the perpetual cycle of the rise and fall of nations, including an extensive discussion on the rise and fall of nations as a consequence of changing economic powers to put the discussion on the BRI and economic processes and developments into context. This chapter begins with a historical perspective on the rise and fall of nations which leads into the following discussion on the shift in global power. This chapter highlights the historical rise and fall of nations which is illustrated through the rapidly increasing South–South trade in recent times and the relative decline of North–North trade and North–South trade. Consequently, the construction and demise of hegemonies will be analysed, which is followed up with a discussion on the increase in military expenditures. The arguments by Mackinder (1904) in “The Geographical Pivot of History” are also addressed in this chapter as they can be related to the current BRI projects with a consequential global shift in economic power. Kennedy (1987) argues that when geopolitical strategic commitments are increasing, they will lead towards increases in military expenditures which eventually overburden the country’s economic base. That the successful implementation of the BRI is a most viable project can be seen by the fact that some countries may try to attempt to prevent its implementation as they see it as a threat to their economic global dominance. It is merely the geopolitical re-engineering of what Brzezinski (1997) perceived to be the danger of a realignment of Eurasia and China. However, the threat to world peace does not come from emerging powers, but rather from those powers that are declining; for the simple fact is that emerging powers have too much too lose during times of conflicts when they are increasing their powers, whereas declining powers may see the promotion of conflicts as the only way to prevent their further decline as they have lost the ability to compete. Brzezinski (1997) simply applies Mackinder’s (1904) heartland theory when he argues that the best way for some countries is to prevent any successful geostrategic expansion and the unifying of the Eurasian continent, and this is exactly what the BRI tries to achieve. A postscript is provided at the end of the book which highlights the shift in global power and its ramifications. This chapter includes a succinct conclusion together with a brief outline of the major arguments of each chapter as discussed in this second volume on the belt and road initiative: its developments, prospects and effects on the global economy.

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Bibliography Brzezinski, Z. (1997). The Grand Chessboard: American Primacy and Its Geostrategic Imperatives. New York: Basic Books. Horesh, N. (2011). The People’s or the World’s RMB Internationalization in Longer Historical Perspective. Economics Research International. Available at www.hindawi.com/journals/111116/201242410.pdf. Kennedy, P. (1987). The Rise and Fall of the Great Power: Economic Change and Military Conflict from 1500 to 2000. New York: Random House. Mackinder, H. J. (1904). The Geographical Pivot of History. The Geographical Journal, 23, 421–437.

CHAPTER 2

The Changing International Financial System

2.1

Introduction

This chapter analyses the changing international financial system. The system of the international reserve currencies and exchange rates are discussed first. The operations and functions of the international reserve currencies and the exchange rates are analysed. The effect of the Chinese exchange rate policy has been explained in details. The RMB may be used as an investing currency or as a funding currency. China has often changed its policies on exchange rates from a peg to the US dollar to a basket of currencies and a managed float. The functions of the SDR, a basket of the euro, yen, pound sterling, the RMB and the US dollar, have been explained. The “Renminbi” or people’s currency is the official denomination (term) of the Chinese currency; whereas “yuan” is the unit of account, so that prices are quoted in yuan; hence renminbi (RMB) will be used throughout the text. The official abbreviation is CNY but RMB is usually used internationally. The RMB has become a foreign exchange intervention currency mainly through the bilateral swap agreements such as have occurred between Malaysia, Japan, Thailand, the Philippines among others. China’s intention is to form stronger economic ties by using increasingly the RMB in international transactions, which eventually will lead to the internalization of the RMB. The creation of regional currency baskets is also discussed and the pegging of the RMB to a basket of currencies which actually reflects more closely the flow of Chinese trade is also discussed.

© The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28068-0_2

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This is then followed with a description of the financial crisis of 2008–2009 which is seen here as a precursor to reforms of the international financial system. It is agued here that the financial crisis of 2008–2009 was largely the consequence of inadequate financial regulations. Developed countries went through a financial crisis in 2008–2009, whereas emerging economies remained relatively stable. This caused “a legitimacy crisis of the international financial order which led to … cooperation between emerging powers in the context of the BRIC grouping” (Stuenkel 2013, p. 612). The 2008–2009 financial crisis made apparent what was already underway before 2008, that is, a global shift of economic and financial power away from advanced economies towards China and other emerging economies. Uni-polarity is moving with an accelerating speed towards multipolarity. As the legitimacy crisis deepens, international changes in the global economies and financial institutions will be inevitable with political ramifications. To prevent future financial crises, countries have to avoid a large amount of foreign exchange denominated debts, maintain large foreign exchange reserves and a floating exchange rate. It is also argued that the Asian Financial Crisis of 1997–1998 and the Global Financial Crisis of 2008–2009 were driven by the financial market, so that the international financial system has to return to a global financial multipolarity. Various possible reforms which have become apparent after the financial crises are explained. How such reforms may enhance the functioning of the international financial institutions and international organization is also analysed. It is argued that such reforms should try to pre-empt such financial crises as occurred in 1997–1998 and 2008–2009. Furthermore, an international reserve currency may be established which is not associated with any national currency and so is more likely to contribute to the stability of the international monetary system. As China has become the largest export country in 2009, and is now the biggest trading nation, a greater internationalization of the RMB is regarded here as important and the implications for international trade have been explained. How a regional currency basket mechanism can be used to stabilize the intra-regional exchange rate is also explained. However, it has been argued that complete liberalization of capital flows may cause macroeconomic instability. Eventually the RMB is expected to float so that the RMB will increase in value and the US dollar will decline; hence China may be expected to disinvest in US treasury bonds. The voting shares, the management and the staffing policies could be revised; for example the head of the IMF is always a European, whereas the

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head of the World Bank is always an American; perhaps executives could be appointed based on merit rather than based on political affiliation. Furthermore, the importance of some countries is undervalued, whereas the importance of some other countries is overstated. The voting shares are not distributed according to the size of the economies; that is, emerging countries are underrepresented. Viable reforms of the financial organizations could ensure that as much as possible members’ interests are equally served. Once the BRI has been successfully implemented, it may lead towards the creation of new international financial systems. An international reserve currency could be established that is separated from any national currency and so does not represent the interests of any particular country. The US dollar is likely to decline in value so that the power of the US dollar as an international reserve currency will also decline. The Triffin dilemma of a hegemon of a hegemonic currency has been described. The Triffin dilemma shows how when a hegemon has a balance of payment deficit, it will undermine market confidence and thereby lowers the status of the hegemon within the international monetary system. The future viability of the petrodollar and the weakening of the US dollar and various currencies swaps are also described. An RMB currency bloc may eventually emerge and the costs and benefits of it to China are also explained. The effects of currency unions have been explained as well. Various schemes such as the payment-versus-payment (PVP) systems and the China International Payments system (CIPS) are explained. The changing role of the RMB as an international reserve currency has been described as well as the operation of China’s exchange rate regime. The importance of the RMB being part of the IMF global currency basket has been analysed. The impact of a multipolar world order on the role of the IMF and the World Bank has been analysed as well.

2.2

The International Reserve Currencies and Exchange Rates

The Bretton Woods system fixed the currencies of all its participant countries against the US dollar so that their currencies were also effectively fixed against each other. All members fixed their currency to the US dollar and the US dollar was fixed then to gold at the value of 1/35th of an ounce of gold. The US dollar has served since the 1950s as the global reserve currency and still serves as the major transactions and trade invoicing currency.

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However, as the liabilities of US dollars exceeded the US holdings of gold stock, this undermined the Bretton Woods fixed exchange rate system. At present about 60% of foreign exchange reserves are denominated in US dollars, however as the value of the US dollar is expected to decline considerably, its power as an international reserve currency will decline. A devalued US dollar reduces the inflow of foreign capital into the United States so that it becomes inevitable that the living standard in the United States, including its economy will continue to decline. A decline of the US dollar will induce a capital outflow from the United States in terms of US Government bonds which will cause a decline of the stock market. China owns about US$1.2 trillion worth of US Treasury bonds and thereby helps the United States to manage its high deficit; a high exchange rate of the US dollar to the RMB is also thereby maintained. However, China has invested too much in low-yielding external assets, that is, in United States treasury bonds, and it is advisable that it invests more in higher-yield assets, and the AIIB should be able to facilitate this. According to the US Dollar index, the US dollar has devaluated by approximately 32% from 1973 to 2002 and almost 50% from 2003 to 2015 (Jones 2011). In 2008, about 77% of world reserves were held by emerging markets (Economic Outlook, Oxford 2008, p. 23). However, before a currency can become an international currency, various criteria may have to be met: the currency has to be stable and the economy has to be of significant size. Frankel (2011) argues that the RMB will not be challenging the US dollar for a considerable time as there is an absence of deep, open and liquid capital markets in China. However, the power of the RMB is likely to increase as China’s economy will continue to expand and more and more countries are likely to enter bilateral swap agreements with China as it may become essential to promote mutually beneficial trade relations. Frankel (2009) states that China sets its exchange rate with reference to the US dollar and the euro; however, the RMB was less linked to the US dollar after 2005–2006 when China pursued a managed floating exchange rate regime; that is, the RMB is based on supply and demand of the market, but it is adjusted in reference to a basket of currencies. The value of the RMB was set in 2005 to a basket of various currencies; while in 2008, the RMB was pegged again to the US dollar. China has adopted a managed float in reference to a basket of currencies since 2010. To align the RMB to a basket which is based on China’s external trade will isolate the Chinese

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economy from any possible fluctuation of the US dollar in regard to major currencies. However, to use the exchange rate was more appropriate during the early 1950s when foreign trade was considerably less and economies were more isolated than since the 1990s. Nowadays, with a more open economy regarding trade and finance, the exchange rate to adjust a balance of trade is less appropriate. Global free trade is being challenged. Countries which cannot compete anymore resort to protectionism and restrict trade under the guise of national security. Other economic blocs take countermeasures, for example China’s CIPS (Cross-Border Interbank Payment System) reduces the ability of Society for Worldwide Interbank Financial Telecommunication (SWIFT) to use economic coercion. China is opposed to protectionism whereas the United States is increasing its use of protectionism; since the financial crisis of 2008–2009, protectionism has increased. China is transforming itself from an export-dominated economy towards a high-tech economy, without leaving its exports behind. A system of exchange rates has to take into account the prevailing economic situation rather than adhering to outdated economic theories on exchange rates that were designed for economic situations with minimal trade. When a currency appreciates relative to other currencies then direct investment moves out of the country and its imports will increase so that fluctuations in the exchange rates can affect the business cycle so that a stable exchange rate can reduce the cyclical instability. McKinnon and Schnable (2012) argues that “the false American presumption that, to reduce China’s trade surplus, the nominal dollar value of the RMB must be appreciated and should be discarded” (p. 678) and suggest that the trade imbalance between China and the United States “corrected by mutual absorption adjustment-spending rising in China and falling in the US” (p. 678). Investment rather than net exports may be regarded as the main driver of economic growth. Investment and exports contribute about half of Chinese GDP, hence Chinese policies have emphasized in the past investment, especially in the export sector. The Chinese economy however has moved more towards increasing domestic consumption. The increase in Chinese exports of manufactured goods contributed to the deindustrialization of the United States (Cline 2005); however, the main reason for the decline of the manufacturing sector in the United States is a decline in national savings which was caused to some extent through a decline of the short-term rates of interest which has led to a capital outflow and lower savings.

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A regional currency basket mechanism can help to increase the stability of the intra-regional exchange rate. A regional currency basket can also be used to adjust a collective exchange rate to correct a global payment imbalance; but this scenario is difficult to be accomplished as long the RMB and other important currencies are pegged to the US dollar; however, the RMB has partly moved away from being pegged to the US dollar. Even though the RMB is not anymore officially pegged to the US dollar, the movements of the US dollar against other currencies still affect the movements of the exchange rate of the RMB according to the exchange rate of other currencies. Hence, international investors may regard the US dollar as a substitute to the RMB, so that the exchange rate of the RMB may depend on investors’ preference for the US dollar. When China experiences higher interest rates than advanced economies, then the RMB may be used more as an investing currency by investors from other countries when the RMB has become an international currency and this would lead to pressures to appreciate the RMB. On the other hand, when emerging countries have higher rate of interests as compared with China, then residents of emerging countries have an incentive to use the RMB as a funding currency. The RMB has joined the International Monetary Fund’s global currency basket in October 2016. The goal is to have a greater convertibility of the RMB by 2020 so that controls on capital movements will have to be gradually dismantled. The central bank widened the trading band of the RMB by 0.5% either up or down based on the daily reference rate. The trading band was increased to 1.0% in April 2012. To reduce the weight of the US dollars in the basket would reduce the exchange rate risk for those who are engaged in China’s merchandise trade. The importance of the RMB as an international currency will also increase when China’s exchange rate regime discontinues its close peg to the US dollar; instead, the RMB may be pegged to the SDRs; so that the RMB would be more widely used as an international currency. A lesser weight of the US dollar in the RMB basket may entail a shift away from the US dollar towards other currencies and so is likely to cause a depreciation of the US dollar and so causes the value of Chinese reserves of US dollars to decline. Oksanen (2012) suggests that less attention may be placed on the yuan-dollar exchange rate and instead pegging the RMB to a basket of currencies which more appropriately reflects China’s global economic relations. In this case, the weight of the euro would increase in such a basket. The Special Drawing Rights (SDRs) were created in 1969 as a result of the financial problems caused by the fixed exchange rate system. The

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composition of the SDRs depends on the currency being widely used and globally traded and it also depends on the volume of exports of the country which issues the currency. The value of the SDR is based on the market exchange rates of a basket of currencies, that is, the euro, Japanese yen, the pound sterling and the US dollar. The RMB has been included since 2016 in the SDR basket. In reducing the holdings of US dollars by the Chinese and Russian economies, their economies also become more resilient to external shocks. A forecast by the World Bank (2011) predicts that the dominance of the US dollar will come to an end before 2025 and consequently the monetary system will be based on the euro, the RMB and the US dollar. The World Bank issues its first bond denominated in the RMB in 2011. China continues to transform its exchange rate regime which is likely to be related to a currency basket. The weight of the euro is likely to be increased to lessen the overall volatility of the RMB exchange rate which also would have a positive effect on the euro. As China trades significantly with the EU, an increased weight of the euro in the yuan basket would increase certainty in financial transactions in China–EU trade. Rahman (2007) has shown that the increasing networks of regional production have led East Asian countries to stabilize their exchange rates amongst each other and consequently moved together against other currencies. The diversification of international currency reserve will also increase the profitability of Chinese financial assets to be optimized through various multilateral channels; China will increase its influence in the global economy and thereby in international relations. One of the most prevalent interventions in the global financial market is exchange rate stabilizations known as currency “pegs”. A change of a peg from the US dollar to a basket of currencies would cause the United States’ interest rates to decline whereas China’s rates of interest would increase. To remove the stabilization policy is likely to increase the interest rate differentials between countries, and will increase the interest rate in the country that abandoned the use of a peg to stabilize its currency (Hassan et al. 2016). Hence, exchange rate stabilization through a basket-peg regime for countries which have close trade relationships is warranted to avoid large exchange rate fluctuations between member countries. When East Asian countries peg their exchange rate to the US dollar, the impact of shocks to the monetary system in the United States will be greater on the European economy than without the peg, because Asian companies are likely to respond to shocks in the United States by adjusting their prices

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which will make European companies less competitive. Markovic and Povoledo (2011) suggest that if China will float its currency, Europe would be less exposed to shocks in the United States. To increase the value of the euro in the basket would decrease the value of the US dollar. The intrinsic volatility of the RMB against the basket and against currencies except the US dollar can be reduced by pegging the RMB to a basket which actually reflects the flow of Chinese trade which would increase the value of the euro in the basket and decline the value of the US dollar (Oksanen 2012). However, this would lead to a downward pressure of the value of the US dollar which would lower the value of Chinese foreign exchange reserves held in US dollars. Exchange rates can have a considerable impact on the rates of economic growth rates. China is often blamed for having an undervalued RMB which, it is argued, causes the large trade surplus of China. However, economic growth depends largely on the supply and demand of modern manufactured products and other goods. If China was to reduce its current account surplus by appreciating the RMB and by increasing domestic expenditures, there will be a shift away from tradables and towards non-tradables and therefore would reduce economic growth in China (Rodrik 2010, May, p. 89). Furthermore, when China is experiencing higher interest rates than in advanced economies, then the RMB could be used as an investing currency by investors (speculators) from other countries when the RMB is being used as an international currency so that the RMB may appreciate and so may adversely affect Chinese exports. When the RMB is an international currency it may be used as a medium of exchange, as a unit of account and as a store of value in international trade as well as in international financial transactions. The RMB has been used mainly as an investing currency rather than as a funding currency because non-Chinese have been holding yuan-denominated assets instead of yuan-denominated liabilities (He et al. 2016, p. 296). Whether residents of an economy would use the international currency as a funding or an investing currency will depend on the relationship between the bilateral exchange rate and the exchange rates of other international currencies and the country’s growth of output. The fiscal tightening to repay debts implies lower consumption. Debts have occurred because of previous overconsumption in comparison to production. Of course, the consequence of the value of the RMB does not only depend on China’s exchange rate policy but also on the value of the

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exchange rate of China’s main trade trading partners; for example, if the euro appreciates by 5% against all other currencies and the weight of the euro in China’s basket of currencies is 25% and if China’s nominal effective exchange rate remains unchanged, the RMB would effectively depreciate against the euro; hence how an international currency compares with other exchange rates of international currencies will also be of considerable importance. Changes in the exchange rate may cause short-term capital movements; that is, when an appreciation of a currency is anticipated it may attract capital into assets which are denominated in that particular currency; on the other hand, a depreciation of a currency may cause capital to move out of that currency. Such a scenario may be self-reinforcing and may cause considerable fluctuations in the exchange rate. China is liberating its capital account with Chinese characteristics. China is removing explicit controls while continuing to preserve various soft controls over capital inflows and outflows, such as administrative and other controls. Some controls should be maintained because a completely open capital account may lead to financial instability and would restrict monetary policies. The increasing dominance of the RMB will to a large extent erode the dominance of the US dollar. If a currency is promoted as a global reserve currency then controls over the capital account have to be loosened; consequently the RMB will appreciate. There are four separate but related processes involved in the liberalization of the capital account: controls over inflow and outflow of foreign investment are relaxed; an increase in the proliferation of the RMBdenominated offshore financial transactions; expanding the use of the RMB in trade settlements; and allowing the repatriation offshore RMB for the purpose of onshore investments (Chang 2012). However, the fluctuation of a currency is subject to financial speculation rather than just to market forces. Liberalization of the capital account caused the financial crises in South Korea (Chang 2007), and also in other parts of Asia. Complete liberalization of the capital flows can cause macroeconomic instability; if the RMB is to be a reserve currency then the capital flow would have to be liberalized at least to some extent. If the RMB is transformed into an international reserve currency it can be easier used for the payments of international transactions, so that the RMB becomes a medium of exchange. The RMB has become the fifth international reserve currency.

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Under the Triffin dilemma when a national currency serves as an international currency, short-term domestic economic objectives will diverge from long-term international economic objectives; however a basket of currencies may be able to overcome such a dilemma. Unless the reserve currency system is revised to provide international financial stability, financial crises will reoccur with increasing severity. The use of the US dollar as an international reserve currency made the Triffin dilemma more apparent which is explained by Triffin (1960). As reserve currencies are an essential part of the international financial system a new system of reserve currencies is evolving. With changes within the global economies new reserve currencies come into existence. A successful implementation of the BRI is expected to enhance the global connectivity amongst the major economic players, and in this case, not only the RMB but other currencies from emerging economic powers are likely to become part of the SDR basket, even though it is likely to be in the more distant future. The Triffin dilemma of a hegemonic currency explains that when a hegemon runs a balance of payments deficit it provides the international monetary system with a common currency available for international transactions and liquidity; but while doing so, it undermines market confidence and eventually undermines its own position within the monetary system. Furthermore, high investment by a hegemon in other countries may reduce its competitiveness by helping other countries to gather strength which may then eventually challenge the hegemon which can also occur with the transfer of technology from the hegemon to other countries. The RMB is expected to float eventually on the open market; in this case it may also replace the US dollar as the international reserve currency and so will become the new petrocurrency, that is, the petroyuan. Consequently, the RMB will rise in value and the US dollar will fall. It will then be inevitable that China will dispose of at least a large part of its holdings of the US Treasury bonds. The aim is to have a currency based on gold for the transactions between BRI countries. China announced the creation of the Shanghai Gold Exchange in April 2016. China in fact has created an alternative reserve currency for countries which want to protect themselves from possible sanctions or other possible financial attacks. Any country which has based its fortunes on soaring debts will decline in much the same way as have all powers that declined for similar reasons in the past. On the other hand, floating exchange rates allow smooth adjustments to shocks to the terms of trade; for example a decline in exports causes a depreciation of the nominal exchange rate, because as demand for goods

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decline so will the demand for money. To keep the money market in equilibrium, the nominal rate of interest will also decline and subsequently the domestic currency will depreciate which lowers the price of goods traded, so that a floating exchange rate can function as an automatic stabilizer. Broda (2001) shows that in the case of developing countries, “flexible exchange-rate regimes can insulate the economy better from real disturbances” (p. 380). Rose and van Wincoop (2001) argue that a national currency may be a significant barrier to international trade and argue for currency union instead, because the benefits of trade resulting from currency union appear to be greater than the cost incurred because of the foregoing independent monetary policy. Rose and van Wincoop (2001) find that trade increased by almost 400% in the case of currency union; when adding country effects, it reduces the economic and statistical impact of the currency union to over 230%. An increase in trade amongst members of a currency union will cause trade creation as well as trade diversion as there will be a decline in trade in some countries and an increase in other countries. China increased the daily floating band of the RMB—US dollar rate to ±2% in 2014 (Oksanen 2015). However, the adoption of a floating exchange regime may not provide an automatic adjustment to the exchange rate to market forces, but instead may create turbulence created by a herd mentality and by exchange rate overshooting which can lead towards cycles of movements in the foreign exchange rate (Frankel and Froot 1986, 1987). Floating exchange rates may insulate an economy from foreign disturbances; Markovic and Povoledo (2011) also suggest that “the transmission of shocks between two countries is dampened when a third country does not peg its exchange rate to one of their currencies” (p. 24). Central Banks in Asia would have to adjust their interest rates along with the interest rates of the United States if they are to protect a peg to the dollar. As China has comparatively higher interest rates than most industrialized countries, the RMB may be used as an investing currency when the RMB is an international currency and so may cause the RMB to appreciate. When a country’s currency appreciates as compared with an international currency in a situation when its growth of output increases, or when output declines and the country’s currency depreciates against the international currency, then residents of that country intend to buy assets which are denominated in the international currency. The BRI can lead towards the deepening of regional production networks, hence it would be prudent for those countries to stabilize their exchange rates and move

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together against other currencies; especially against the US dollar as the United States has an increasing current account deficit and the resulting global imbalance is not sustainable (Rahman 2009). A high rate of reinvestment of foreign exchange earnings into investment projects can also be utilized to support the domestic economy as well as foreign trade. The common assumption is that devaluation reduces imports and increases exports by making a country’s currency worth less as compared with other currencies, as exports will become cheaper for buyers in other countries and imports will become more expensive. However, the underlying assumption here ignores the price elasticities of exports and imports which reflect the buying habits. According to the Marshall–Lerner condition, when the total of the elasticities is greater than unity, a devaluation or revaluation will be effective; if less than unity, it will not be effective; that is, devaluation will only be effective when exports and imports have high elasticities of demand. Furthermore, there are also time lags which produce a J-curve effect so that it will take time for a change in the exchange rate to become effective. In any case, a change in the exchange rate has to be seen within the context of a country’s macroeconomic policy; for example, when a country’s economy is overheated, it will draw in imports from other countries. According to the Marshall–Lerner condition, balance of trade will improve as a consequence of a revaluation of the currency of a trading partner; hence, the United States assumes that a revaluation of the RMB will narrow the balance of trade deficit of the United States; so that the assumption is that when the value of a country’s currency declines, its production increases and so does the rate of employment. As imports decline as a consequence of devaluation it may also reduce the level of production because of adverse supply effects (van Wijnbergen 1986). This is especially relevant as production chains cross multiple borders. Devaluation cause prices of imported intermediates to increase and also may increase wages. A devaluation of the RMB will increase Chinese exports and decrease Chinese imports. When the RMB devaluates in the case of fixed exchange rates, or depreciates in the case of floating exchange rates against other currencies, Chinese produced goods become less expensive and imported goods become relatively more expensive; that is, while devaluation/depreciation leads to an increase in the volume exported and a decrease in the volume imported, the price effect leads to more money being spent on imports. As the domestic currency depreciates in the case of a floating exchange rate or devaluates under a fixed exchange rate against

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a foreign currency, prices of exports become relatively cheaper for foreigners to buy and imported goods become relatively more expensive. The volume effect improves the balance of trade and the price effect worsens the balance of trade. The net effect will depend on the demand elasticity of imports and exports. If the sum of the elasticities of the demand for imports and exports are greater than unity, it will improve the balance of trade.

2.3

The Financial Crisis of 2008–2009 as a Precursor of Reforms

The devastating effects of the financial crisis of 2008–2009 were felt globally but some countries were less affected than others. Hong Kong, South Korea, Malaysia, Singapore and Thailand were more affected than China, Indonesia, the Philippines, and Vietnam. The reason is that countries which rely more on global markets of commodities and global finance are more vulnerable to disturbances in those markets; that is, when global demand and prices of assets fall, these countries experience a decline in their economy, whereas when global demand and prices of assets increase, it may be anticipated that these countries perform well. Kindleberger (1989) argues that during a boom there is a fast increase of credit which transmits the boom to other sectors of the economy. The increase in demand as a consequence of credits leads to higher prices. Expected returns are based on capital gains and the inflow of further investment rather than on productive assets. When confidence declines, it will lead to a collapse of investment. The financial crisis of 2008–2009 was made primarily in the United States and some other advanced economies; it was not caused by the emerging economies. It was caused by the fiscal impudence by the advanced economies and their overspending. They relied on an ever-increasing consumption without giving too many thoughts to long-term investments; especially in renewing their decaying infrastructure. On the other hand, the Chinese economy had available huge reserves, some of which were used to stimulate the economy, which also helped the global economy. The financial crisis has highlighted the need for various reforms of various international organizations; for example, the voting shares, the management and the staffing of the IMF could be reconsidered; it may be more appropriate to appoint the heads according to merit and expertise, rather than being based on nationality. At the moment, the head of the IMF is always a European and the head of the World Bank is always an American

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by convention. Furthermore, the IMF and the World Bank did not respond to the financial crisis of 2008–2009 appropriately. The global financial crisis of 2008–2009 was due to some extent to inadequate financial regulation and insufficient oversight of the financial markets. The Triffin Dilemma illustrates well that countries that provide global liquidity cannot maintain the value of the reserve currency, so that it will be prudent to create a reserve currency that is disconnected from any national currency; for example, the SDRs could be converted into a global reserve currency. The uncontrolled printing of money, the imposed sanctions and tariffs together with an increasing rate of interests, spells doom for the global economy and causes instability of the global economy so that gold is expected to rise to a new high level. To avoid future financial crises it is essential to avoid a large quantity of foreign-exchange denominated debts, to maintain a large foreign-exchange reserve, a floating exchange rate, and foreign-exchange liabilities should be kept low compared with reserves. It is also important to keep the level of public debts low. There are huge global imbalances, such as the huge deficit in the United States and great surpluses in China which are not sustainable. As American debts are sharply increasing, the US dollar is unable to remain the major reserve currency in the long run. The United States has a deficit of over $21 trillion so that the United States needs other countries to trade in US dollars otherwise the United States cannot sustain its huge deficit. Initially an increasingly high level of debts by the US government increases the role of the US dollar as the dominant reserve currency; however, when the debts rise too high, that is, when it becomes unsustainable, the safety of the dollar is jeopardized. US Treasury securities help to finance the United States budget deficit. China is the largest holder of such securities and so keeps the real interest in the United States low. As the US dollar serves as a reserve currency it has led to a current account deficit of the United States. However, the US dollar may be challenged during another financial crisis like the one of 2008–2009, so that the current reserve currencies should be replaced with a reweighted market-based basket of currencies. Marx (1906) explains how debts grow exponentially dragging the payments of compound interests out of the economy. A pre-capitalist rentier class is re-emerging which extracts funds out of the productive sector. The greater the financial burden, the less income is available for the consumption of goods and services. An increase in economic rent and payments of

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interests crowds out expenditures on goods and services. The aim has to be to increase real output rather than increasing unproductive overhead. Financial expansions are intended to increase rent extraction rather than as a way to gain profits from productive activities. Most credits by banks are used to finance the transfer of property and financial assets rather than to provide credit to finance tangible capital investments which are required for further production. Hot money is speculative in anticipation of an appreciation of a currency. Hot money consists of inflows and outflows of capital into a country for short-term speculative profits which can hurt the economy; like in the case of Malaysia during the Asian financial crisis of 1997–1998. Speculation through hot money can be partly reduced by requiring funds invested for a fixed term so that they cannot be withdrawn at short notice. The Asian Financial Crisis of 1997–1998 and the Global Financial Crisis of 2008–2009 were both market-driven; that is, driven by the financial market, including speculative finance. The problems of over-financing or “casino capitalism” were the main cause of the deep recession after the financial crisis of 2008–2009 (Bhattarai 2015). The ethics of the financial institutions cannot be improved unless speculative trade is curtailed. Asset speculation and property bubbles may provide a systemic financial risk if not dealt with in time. The Asian financial crisis of 1997–1998 was largely the consequence of currency speculation, especially in the case of Thailand, Malaysia, Indonesia and South Korea; although Malaysia was able to establish a counter-speculative programme which then was able to protect the Malaysian Ringgit. The Asian financial crisis spread from the financial sector to the productive sector. Excess capacity and productivity resulted in overproduction that caused the financial crisis as foreign exchange earnings in Asian economies on trading accounts were unable to support the speculative bubble. Asian economies, especially China and Malaysia, emerged from the financial crisis relative unscathed as they continued to maintain controls over capital exports. It is inevitable that the internationalization of financial and trade institutions will eventually be remodelled. It is important to strengthen a country’s industrial base rather than pursuing short-term profitability such as may be obtained in short-term financial speculation, insurance and real estate speculation, which are rather unproductive, and therefore do not increase a nation’s productivity. Keynes (1980) advocated the “disarming of financial markets” during the 1940s to establish a multipolar international monetary system (p. 57).

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The financial crisis of 2008–2009 strongly indicates that the macroeconomic policy of various countries and the international financial institutions are in need of being overhauled. Aizenman and Sengupta (2013) describe the trilemma of having to maintain monetary independence, stability of the exchange rate and achieving financial integration. The main argument here is that there is a trade-off when adopting policy instruments; for example, to aim for higher financial integration may entail a decline of the stability of the exchange rate and may also lessen monetary independence. Over the last 30 years China as well as India have moved towards financial and trade liberalization. Major emerging economies have converged towards the middle ground in their economic policies, so that they have moved towards greater financial integration and managed exchange rate flexibility supported by large international reserves (Aizenman and Sengupta 2013). The global financial crisis of 2008–2009 led many developing countries to question the legitimacy of the conditionalities imposed by Western donors. The international monetary system has to move towards a multicurrency system consisting of the major international currencies according to the size of their trading. Such a multicurrency system would replace the US dollar as the major trading currency as the present international monetary system is unsuitable to the new emerging economic order, so that the international financial system is expected to return to global financial multipolarity. Slow economic growth and over-financing were the main causes of the financial crises of 2008–2009; whereas the financial deepening in China and India was used in support of economic growth. However, after the financial crisis of 2008–2009, Chinese exports and imports as a percentage of GDP declined between 2009 and 2015, which is reflected in China’s declining economic growth since 2007 which since 2012 has even more declined (Neely 2017). Schumpeter (1934, 1949) argues that financial development is essentially a pre-condition for economic growth; whereas Robinson (1953) opined that financial development is merely a consequence of economic growth. However, their arguments do not account for the effect of speculative capital. The global financial crisis lowered global confidence in open financial markets and so reduced any confidence in the Washington Consensus as well. Many countries, especially emerging economies are moving towards a new ideology of state-managed capitalism (Halper 2010). However, Halper (2010) goes considerable further and argues that future market capitalism

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will be combined with autocratic or semi-autocratic politics; whereby political oppression is combined with a rise in living standard and largely economic freedom. As long as living standards are increasing for the masses, this would be a viable option for most people. The financial crisis of 2008–2009 caused a considerable decline in economic growth, less so in emerging economies than in advanced economies. Nishimura (2016) indentifies three “seismic shifts” in the global economy as a consequence: first, the property booms and bust during the last decade; second, the advance of information technology which has caused unemployment in advanced economies which eventually will be followed by emerging economies as well; third, the population of advanced economies has been ageing and many emerging economies will eventually follow the demographic transition. The financial crisis of 2008–2009 resulted into a downturn of nations’ economies and consequently a sharp decline in the prices of commodities; a decline in exports and a decline in FDI worldwide and in nations’ GDP. A shift has occurred in the global economy without any concurrent adaptation of the rules required for international economic cooperation, because the prevailing economic theories cannot explain the financial crisis of 2008–2009. There is a profound distinction between the process of theorizing and its eventual outcome; that is, the actual theory (Swedberg 2014). The theorizing is always permeated with ideological interference which may intervene with an objective analysis; Swedberg’s (2014) “creative theorizing” (p. 8) may be related to Schumpeter’s (1949) “creative innovation”.

2.4

The Internationalization of the RMB

An international currency is a monetary unit which is widely accepted for international financial transactions used for the purpose of invoicing and payments by importers and exporters and it is used to facilitate international investment. Goldberg (2010) makes the point that the dollar accounts for 60% of total foreign exchange reserves, and the use of the dollar for all foreign exchange transactions constitutes 85%; approximately “65 percent of all US banknotes are in circulation outside the country” (Goldberg 2010, p. 2); even though “the United States accounts for less than a fifth of global GDP at purchasing price parity and 23 per cent of market exchange rates” (Eichengreen 2013, p. 364). The present international status reduces the transaction costs in international trade and finance; but it also transmits

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economic and financial shocks in the United States to the rest of the world; above all, it insulates the US economy from economic shocks in other countries. However, the Chinese currency is again on the way towards internationalization. The last time, the Chinese currency was used as an international currency was about 400 years ago. The Chinese currency was the first decimal currency using banknotes as well as metal coins which have been in use since the ninth century. The internationalization of the RMB in the near future is the consequence of the present quagmire of the international financial system, such as the Asian financial crisis of 1997–1998 which was followed by the international financial crisis of 2008–2009. International financial institutions are inclined to search for short-term solutions, especially when they are politically convenient, rather than to reach long-term solutions. The Asian financial crisis of 1997–1998 was caused largely by currency speculation which caused Asian currencies to fall and also caused China’s exports to fall which also declined during the global financial crisis by 16% from 2008 to 2009 (Bowles and Wang 2013). The financial crisis of 2008 exposed the weakness of the global financial system; this also was the beginning of the process to internationalize the RMB. The People’s Bank of China has introduced a PVP system for the RMB and the rouble transactions. China intends to introduce a similar system for a wide range of countries, the China Foreign Exchange Trade System (CFETS), nominally to reduce the risks for holding certain currencies. Of course, there is no risk in transactions in RMB and rouble, so that the perceived risk is rather to be independent of other currencies, other than the RMB and the rouble. China created the CIPS and China signed an agreement to cooperate with the SWIFT. Japan and China have both signed with India a bilateral currency swap agreement as a possible safeguard against possible future financial shocks and possible future economic sanctions and tariffs which could be imposed. When the BRI countries will conduct bilateral currency arrangements amongst themselves, they will effectively be bypassing the US dollar and so will reduce China’s dependence on the US dollar. The US dollar will eventually become very unstable and the RMB is likely to take its place. The internationalization of the RMB is proceeding fast. The RMB will be used widely for investment purposes, for international trade transactions and as a reserve currency. Japan has now included the RMB in Japan’s foreign exchange reserves. It will be worthwhile to move from competition towards cooperation.

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The RMB has become in 2013 the eighth most traded currency on a global scale, and has become the fifth most traded currency in 2015 to settle international financial transactions. In 2013, the RMB has become the second most widely used currency for purposes of finance of global trade transactions leaving the euro in third place and the RMB has become in 2015 the third most traded currency after the US dollar and the euro. The internationalization of the RMB is further advanced by the increasing use of the RMB amongst members of the BRI as more and more transactions are being conducted in the RMB currency, so that the internationalization of the RMB will be largely linked to the BRI which may lead eventually towards a RMB currency area. However, an optimal currency area implies a territory within which only one currency circulates, so that it is not a viable option for countries of the BRI as the economies are too different from each other, even within Eurasia; although the RMB may be widely used for transactions in certain geographical areas. China’s increasing regional and global trade nowadays will lead to an increase in the use of the RMB, first as a regional currency and eventually as a global trade settlement currency; this will eventually lead to the emergence of an RMB currency bloc; that is, currencies worldwide will follow the RMB, rather than the US dollar. There are of course costs and benefits to China when the RMB has become an international currency. Benefits will include amongst others: a reduced risk for Chinese companies of the exchange rate fluctuations, and an increase in cross-border trade. The costs are the requirement to reduce capital controls and there is the possibility of an increase in currency speculation. The issuance of RMB bonds will also promote the internationalization of the RMB. The construction of huge infrastructure of the BRI will accelerate the RMB as an international currency; so that trade settlements and invoicing and project financing will be conducted in RMB. The use of the RMB is expected to proliferate in the Eurasian region as well as amongst the BRI nations which will lead to an appreciation of the RMB. As the status of the RMB increases once it has become an international currency, the RMB will be used as a store of value. When more trade is paid for through the use of the RMB, it can also be used an international unit of account. To be an international currency, it has to be able to fulfil all three functions. When the RMB has become an international reserve currency, China is less exposed to exchange rate fluctuations risks and it would expose China less to United States economic policies and the US dollar exchange rate. The

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internationalization of the RMB is expected to lead to an appreciation of the RMB. An international currency has to satisfy three criteria, that is, it must be able to serve as a medium of exchange, unit of account and store of value. The international status of a reserve currency may rise and subsequently fall in much the same way as mayor economies do. The status of a reserve currency depends on a reasonable strong economy, a stable monetary policy and viable financial market liquidity. However, the current account and fiscal deficit of the United States, its huge external indebtedness and huge expanding military expenditures are not sustainable. China’s huge and increasing investment in other countries and its large exports and imports will promote the RMB as an international medium of exchange and as an international reserve currency. The process of internationalising the RMB will increase the exchange rate of the RMB; hence a decline in Chinese exports will follow. It is in China’s interest to diversify its exports of raw materials for economic as well as security reasons. China accounts for 69.3% of world imports of iron ores and concentrates, but 81% of China’s imports come from just three countries, that is, Australia (40.1%), Brazil (25.7%) and India (15.2%). China’s investments in mining corporations in other countries do not necessarily increase China’s security of supply. China also accounts for 54% of global imports of soya beans, but 98% of such imports have come so far from United States, while the remainder comes from Brazil and Argentina. The RMB has become an official foreign exchange intervention currency mainly through the bilateral swap agreements (Bowles and Wang 2013). The Chiang Mai Initiative resulted in bilateral currency swap agreements between South Korea, Malaysia, Japan, Thailand, Indonesia and the Philippines between 2001 and 2004, followed by China signing bilateral currency swap agreements with twelve more countries and so progresses the internationalization of the RMB. A large proportion of trade between China and Russia consists of informal cross-border transactions. Russia has signed currency swap agreements with China, India and Iran. China signed a currency swap agreement with Indonesia and other countries, including with Japan for trade up to $30 billion. Russia and Iran are China’s two most important supplier of oil and together with Venezuela, they accept RMB for payments for their sales of oil. As China is the biggest importer of oil, the acceptance of the RMB as payment for oil purchases will increase the global importance of the RMB. For transactions within the China–Pakistan Economic Corridor, the RMB has become the major currency for payments.

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The extension of currency swap agreements will also reduce transaction costs. However, moving away from the US dollar will take at least 15 years as China’s international trade is still largely based on the US dollar. A part of the BRI is the introduction of various swap facilities amongst participating countries which utilize the RMB as a transaction currency. The promotion of free-trade agreements amongst the participating countries known as the Regional Comprehensive Economic Partnership (RCEP) so far includes 16 countries which amount to about 40% of the global GDP. India pays with roubles for the Russian S-400 air defence system and pays with rupees for Iranian oil. India also signed a currency swap agreement with the United Arab Emirates. Turkey uses national currencies in its trade with China, Russia, the Ukraine and Iran. Trade in natural currencies protects trading countries against external influences and minimizes fluctuations in exchange rates. Trading in national currency is a means to bypass sanctions imposed by the West on Russia and it will advance the RMB as an international currency. China commenced the RMB-denominated oil futures on the Shanghai International Energy Exchange. The Russian Direct Investment Fund and the China Development Bank establish a combined 68 billion RMB fund for various investment projects, including some within the BRI. The RMB will become an international currency as more and more trade transactions are conducted with the use of the RMB. The implementation of the BRI will accelerate the internationalization of the RMB as trade amongst member states of the BRI will increase and increasingly paid for with RMB. The convertibility of a currency and a currency’s international usage are distinct concepts, and neither of them is a necessary or sufficient condition for the other, even though to be accepted as a reserve currency, a currency has to meet both conditions. The internationalization of the RMB may move from the RMB being initially used for the settlement in crossborder trade, moving along towards regionalization and eventually towards full globalization; that is, the RMB could move from being a settlement currency, towards a denomination currency and then towards a reserve currency. A country which issues a reserve currency has to run a continuing balance of payments deficit, while countries with a balance of payment surplus will accumulate reserves. Lee (2014) advocates a multicurrency reserve system to provide an alternative, whereby countries can diversify their foreign exchange holdings; and further makes the point that the RMB “has great potential to become a new international reserve currency” (p. 43).

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The global economy has moved from a unipolar system towards a tripolar system; that is, the United States, EU and Asia. Lee (2014) allocates one reserve currency for each region of the tripolar system; that is, the US dollar, the Euro and the RMB, but argues that the internationalization of the RMB will be a gradual process, but in the longer term it would contribute towards greater global financial stability. The demand for currencies also depends on transactional needs. If a country imports a large quantity of goods and services from an issuer of a reserve currency, then the importing country is likely to hold such currency as a reserve. As China’s global trade increases, countries will hold more RMBs. Investment in a reserve currency is also a matter of optimal portfolio selection. Since the financial crisis of 2008–2009, the American dollars declined considerably, so that it is not a good store of value; furthermore, the yields of the US Treasury bonds have also declined. Hence, the opportunity cost of holding US dollars denominated assets is quite high. The actual decline of the US dollar also increases the demand of the RMB. By increasing dollar reserves by buying US treasury bonds countries are unable to maximize the value of reserve assets; hence to accumulate US treasury bonds has purely a political motive as the holdings of such bonds has nothing to do with a desire to optimize the value of their reserve assets, neither is it driven by transactional needs. China needs to export to America, which explains China’s holdings of a huge amount of US treasury notes as a means to curry favour; however, considering current China’s and US trade disputes, this is now becoming less likely. The greater the relationship between China and other countries, the greater will be their holdings in the RMB. Furthermore, Liao and McDowell (2016) find that “a higher UNGA voting affinity score with China is statistically significant and positively associated with holding RMB reserves” (p. 284). Countries’ preferences towards international order largely determine their choice of whether to hold and to what extent RMB as a reserve currency. Liao and McDowell (2016) find that political reasons were able to explain better the increasing demand for RMBs as a reserve currency rather than purely economic considerations. The internationalization of the RMB is guided by politics (Liao and McDowell 2016) and out of economic necessity. Multiple countries still support the neoliberal US-dominated status quo, whereas others opt for the alternative Chinese order. The holdings of international reserves in RMB will increase as China’s economic power increases, especially in countries

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which are part of the BRI. As the United States is declining in its economic and political power and as the importance of the RMB increases, it is inevitable that “like hegemons before it, China will attempt to fundamentally revise the system; it will seek to replace existing liberal ideas and structures with alternatives that reflect its own priorities and values” (Liao and McDowell 2016, p. 277).

2.5

The Decline of the American Dollar

The biggest oil importer is China, and Russia is the biggest oil exporter. China and Russia announced in 2016 that they will settle their oil trade in their own currencies; that is, in RMB and the rouble. Thus, China buys oil and gas from Russia and pays in RMB which can be converted into gold according to the Shanghai International Energy Exchange, so that this gas-oil-yuan-gold mechanism indicates a progressive abandonment of the US dollar in international trade. Saudi Arabia is the second biggest oil exporter and oil imports by China from Saudi Arabia have declined as China has increased its imports of oil from Russia and Iran instead. If Saudi Arabia is not to lose further its share of the oil market, it may have to accept eventually payments for its oil exports to the world’s biggest economy in RMB. The world has changed from a uni-polar towards a multipolar global economy, which some countries will find hard to accept. Qatar is rich in gas resources and has increased its trade with China and maybe replacing the US dollar with the RMI. Qatar has joined the development of great gas fields with Iran. Oil has been important for economic growth. Every recession in the United States, except one, was preceded after the Second World War by sharp increases in prices of oil (Hamilton 1983). Prices of oil are also expected to increase substantially in the near future, so that it will have a detrimental economic impact, especially for emerging economies with faster economic growth. The oil shock in prices has an impact on the economies through monetary policy, multiple macroeconomic channels and consequential changes in investments. Increases in the price of oil may be caused through the usual supply and demand channels; but within times of political rivalry, it may be caused through political pressure and sanctions to prevent another economy from prospering. However, no reserve currencies should be used to induce difficulties in other economies. Hence, from the Chinese point of view it may be of an advantage to use the Petroyuan or the currencies of the trading partners. Oil could also be accessed through

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alternative supplies and through alternative routes of transport to increase the security of supply. This applies not only to access to the supply of oil but is equally applicable to the supply of any strategic raw materials. A considerable increase in the supply of price of oil can induce high inflation and shocks to the exchange rate, so that precious metals, such as gold, platinum and silver, may be used to protect against currency fluctuations and inflations; hence the price of gold is linked to the prices of oil (Jain and Gosh 2013). The flow of trade and investment within the BRI will increase the flow of currencies between China and other members of the BRI. Gupta and Goyal (2015) find a strong correlation between the price of oil and the behaviour of investments in stocks. Movements in oil prices are followed by movements in the stock market within two months. China and India import a significant amount of oil so that an oil shock will have an effect on their trade balances. The BRI enables China to obtain energy sources; however, the infrastructure to ensure the supply of energy sources has to be safeguarded. It is also advisable to diversify sources of energy, including renewable sources of energy. Various countries are disassociating themselves from payments in US dollars because the United States is using the US dollar payment system to impose sanctions and so exclude countries which are out of favour with the United States from the payment clearing system. The weaponization of the US dollar brings short-term benefits to Washington but it will have disastrous consequences in the longer terms. The weaponization of the US dollar is conceived by the “arrogance of power” (Fulbright 1970) and so provokes resentment amongst countries that have so far relied on the US dollar as a means of exchange for their trade but many of them are likely to abandon the US dollar and are likely to trade in their own currencies and thereby is likely to accelerate the de-dollarization and so re-establishes countries sovereignty. Washington’s economic power comes from the use of the US dollar as an international reserve currency. However, as countries are less trading in US dollars the influence of the US dollar will decline also. By politicizing a reserve currency, such as the US dollar, it will lead towards a loss of confidence in the US dollar so that it will decline. Hence, the European Union is trying to create a non-dollar payment system to continue trade with countries such as Iran on which the United States has imposed sanctions. China and Russia have been setting up a payment system as well to pay in their own currencies for oil.

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No country should be barred from the use of SWIFT, and the fact that the United States can compel the SWIFT system to prevent some countries to use the international payment system, implies that the international financial system is dysfunctional as it has been weaponized. The dollar hegemony is being used to assert US economic hegemony as the SWIFT system of international finance is being misused to enforce the foreign policies of the United States. Consequently, China and Russia are accumulating more gold reserves to reduce their exposure to the US dollar. If the US dollar declines, the American hegemony will decline with it, including its military power. The United States weaponized the US dollar, for example through the imposition of sanctions, to enforce its foreign policy through the imposition of sanctions; hence more countries are disinvesting in the US dollar. If no currency of any country is being used as a reserve currency, such problems could be overcome; instead an international reserve currency like bankor, a supranational currency, should be adopted, which is what has been proposed by Keynes, instead of the US dollar. Another solution might be the creation of a “super-sovereign” currency, such as the SDR (see Bowles and Wang 2013), so that it may contribute to the stability of the international monetary system. A greater internationalization of the RMB will allow Chinese companies to engage in foreign trade, without being exposed to the risk of currency fluctuations. As the United States uses the dollar payments system to impose their will on other countries, it may be expected that some countries will eventually discontinue using the US dollar as payments for financial transactions. China and Russia are discontinuing using US dollars in their financial transactions and if enough countries will follow the Chinese and Russian example, the US dollar may eventually become redundant as far as international financial payments are concerned and so may also cease as a world reserve currency. The US dollar is a credit-based currency and is not a stable currency and so may not be an ideal international currency. The volatility of the exchange rate may have negative effects on the volume of international trade. When the US dollar depreciated during the 2000s, the prices of international commodities increased and thereby caused inflationary pressure for China as it is a major importer of such commodities. An international currency which is based on a credit-based national currency, as in the case of the US dollar, is essentially risky and may lead to a global financial crisis. Instead, an international reserve currency could be established which is separated from

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any national currency and so would be disconnected from the economic conditions and the economic interests of any single country. The US dollar was established as a reserve currency without addressing how the global reserve currencies are to be managed. The United States has accumulated since the 1980s deficits in its current accounts. Generally, a zero-sum mentality prevails in the political decision-making process; that is, it is assumed that a country’s gain or loss is balanced by the losses or gains of other countries. Beggar-thy-neighbour policies are often adopted during times of recession which may then lead towards a depression; rather than to an improvement of economic growth. However, trade is not a zero-sum game. As the United States increases its deficit, its industries further decline and job losses accumulate. According to the rules of the WTO, the use of protectionism is unacceptable. Advanced economies began to make claims that China’s RMB is undervalued and consequently causes China’s trade surpluses. During early 1950, it was thought that the use of manipulation of the exchange rate is a viable way to control a trade imbalance (Meade 1951, chapters 1 and 2). An undervalued currency can serve as an import tax as well as an export subsidy; however article XV: 4 of the GATT agreement does not really prohibit the use of undervalued exchange rates. A misalignment of a currency is the deviation from the real equilibrium exchange rate. Qin and He (2011) find that the US dollar and the euro are strongly overvalued against other currencies. Hence, “the present misalignment is due more to overvaluation of the USD and the euro than to undervaluation of the RMB” (p. 1303). Rather than engaging in a reevaluation of the RMB to correct trade imbalances between the US and China, it is more appropriate to promote a going out policy for China to increase investments in other countries. It will also help to invest Chinese foreign reserves into more diversified assets, rather than investing in US Treasury bonds and other US dollar nominated assets. As China and Russia continue to increase their gold reserves, they become less dependent on the US dollar in future trading. As the importance of the US dollar decreases together with a devaluation of the US dollar, it will cause economic transformations which will also have considerable political ramifications. An increase in gold reserves will diversify a country’s national financial resources, so that it becomes less dependent on the US dollar and thus less vulnerable to the exchange rate of the US dollar. China and Russia are most likely to be joined by members of the

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Shanghai Cooperation Organization (SCO) and various members of the BRICS in creating a new working architecture of a new monetary system. The central bank of the Philippines was the first central bank to accept the RMB as a reserve currency in 2006; this was followed by Belarus, South Korea, Malaysia, Cambodia, Nigeria and Japan, which was the first developed country which holds the RMB as an international reserve currency (Bowles and Wang 2013). The RMB as an international reserve currency may be used as a store of value; as a medium of exchange, when it is being used as a currency for foreign exchange intervention; and as a unit of account, when it is used as an anchor for pegging a currency (Cohen 1971). As the petrodollars are denominated in US dollars, the purchasing power of the petrodollar depends on the exchange rate of the US dollar and the rate of inflation in the United States. If some trading partners choose to trade in their own currencies, for example if China will buy oil and pays with RMB, it eventually will cause a decline in the petrodollar and the US dollar so that the world reserve currency is shaken; while at the same time China and Russia are buying a greater amount of gold. China’s intention is to use the RMB to form stronger economic ties. Russia is the fourth-largest producer of gold after China, Japan and the United States. Eventually, China will use the RMB backed with gold. The influence of the US dollar on the global economy is basically the result of three factors; that is, the US dollar is the main reserve currency, the existence of the petrodollar and the non-convertibility of the US dollar into gold since 1971; all three factors reinforce each other. The introduction of the petrodollar required the end of the gold standard. Countries that wanted to buy oil must acquire US dollars and so increases the demand for dollars worldwide. On the other hand, the end of the petrodollar system implies a lower demand for the US dollar worldwide. As more and more countries are buying oil with their own currencies such as China, the foreign exchange rate of the US dollar will decline which increases US exports. A decline of the US dollar increases inflation in the United States sufficiently for the American central bank to increase the rate of interests. To counter US, sanctions, Venezuela intends to trade its oil for RMB. Venezuela has a close trading relationship with China and uses the RMB to pay for imports from China. The BRICS intend to bypass the US dollar and the petrodollar in international financial transactions; when trading in RMB it will be fully convertible into gold on the Shanghai and Hong Kong stock exchanges. The rouble-yuan swaps have been in existence already for

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a considerable time now. Such arrangements are expected to include all the countries of BRICS-Plus with detrimental consequences for the US dollar. The petrodollar is expected eventually to collapse which has given the US dollar considerable strength and privileges over the past few decades. The US dollar still dominates the international financial system despite the weakening of the US dollar. However, changes within the international financial system have become inevitable. Looking at the present financial situation, the RMB is likely to become eventually the most important reserve currency. While the present financial system is the product of political decisions of the past, the RMB is likely to dominate the international financial system in the future. The decision-making process regarding the financial system is politically based, rather than based on financial and economic facts. A change towards the RMB becoming the major reserve currency would entail a global power shift in the management of international finance. However, at present, the increasing indebtedness of the United States is strengthening the role of the dollar as the most important reserve currency; however, once the debts of the United States become unsustainable, the US dollar is expected to lose its status as a major reserve currency. The US dollar is rapidly declining in value ever since the 2008–2009 financial crises, so that China is selling much of its US dollar holdings which eventually will lead towards the internationalization of the RMB; hence the RMB will be more and more used as a means of international payments, especially to facilitate the huge projects along the One Belt and One Road. As domestic demand in China increases, the value of the RMB will increase as well. Furthermore, the United States policy of its oscillation between weak and strong dollar cycles is highly profitable for the US financial institutions, but it is highly damaging to the growing and emerging economies.

2.6

The Global Shift of Economic and Financial Power

During the 1950s and 1960s, the United States had a strong current account surplus; however, the United States manufacturing lost its comparative advantage and the gold standard of the US dollar was abolished. The United States has had for decades a trade deficit and a budget deficit. If the dollar is to remain the main reserve currency it is required to have a trade deficit; that is, it has to export dollars and it has to import goods which will cause difficulties in the long term. The Triffin Paradox highlights the

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conflict between short-term domestic and long-term international objectives that arises when a country’s currency is also a global reserve currency. Instead, the creation of a global reserve currency would be more appropriate. The amount of US dollars in worldwide circulation is greater than the amount of gold. The adoption of a global reserve currency would make the international financial system more stable, otherwise, it is not sustainable in the long run. China’s export-oriented development provides the United States with access to low-cost manufacture imports as well as cheap credit. However, China’s expanding trade causes the United States to accumulate a current account deficit and so may imperil the long-term viability of the dollar. “Since 2008, China has been the largest foreign creditor of the United States” and holds over $1.2 trillion in US Treasury bonds in 2013 (Hung 2013). If China ever chooses to get rid of its US Treasury bonds, it implies a sharp depreciation of the US dollar and the rate of interest in the United State will increase. China has bought a huge number of US Treasury bonds and holds a large amount of US dollars which prevent a sharp decline of the US dollar, leading to a high rate of inflation in the United States. China benefits from United States’ imports of Chinese exports and a sudden dumping of the US Treasury bonds would sharply reduce the value of Chinese dollardenominated foreign reserves. Hung (2013) refers to this dilemma as a “dollar trap” in which China “has few choices apart from continuing to purchase US debts and other dollar assets to help perpetuate the hegemonic role of the dollar” (p. 1355). As the RMB is closely aligned to the US dollar China buys US treasuries as China has large trade surpluses with the United States. As a large share of China’s foreign exchange reserves are denominated in US dollars, a fall in the US dollar will cause a capital loss for China. China can reduce the risk of capital loss by diversifying its investments in other currencies. The launch of the petroyuan will accelerate the process of dedollarization. The devaluation of the US dollar leads to higher unemployment in developing countries and their exports become more expensive to the consumers of the United States and other countries. Higher inflation will also increase the prices of inputs required in developing countries which are imported by them, so that it is to their advantage to engage in the process of de-dollarization. The petroyuan system has been established by China, Russia and Central Asian countries. China is the largest importer of oil and increasingly has the ability to request their payments for oil imports

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to be made in RMB which eventually will turn into the petroyuan. The petroyuan allows Chinese oil companies to pay in RMB and thereby are able to avoid the oscillation of foreign exchange. If other countries will start using the petroyuan instead of the petrodollar, then the US dollar falls which will then affect the holdings of the US Treasury bonds and consequently a crisis in the global currency market will occur. China’s move to pay for oil in RMB which can be converted in gold through its move to the petroyuan will weaken the US dollar as the world’s reserve currency. This will also decline American consumers’ purchasing power in terms of its imports and weakens American ability to impose economic sanctions. Furthermore, it reduces the risks to exposure to US currency fluctuations by countries which are engaged in the oil trade, such as Russia and China. As China is moving from an export-oriented economy towards a consumer-oriented economy, the RMB will appreciate which will increase the prices of Chinese exports and so lowers demand for Chinese exports in the short-term. An appreciation of the RMB also leads to greater imports as the RMB increases its purchasing power. The appreciation of the RMB then induces the creation of a financial investment-driven economy. The accelerating shift of the industrial centre of gravity is moving steadily from the North Atlantic towards the faster growing Asian economies which are relatively poorly endowed with natural resources and so has also increased the exports of natural resources from resource-rich economies. The industrialization of resource-poor but densely populated countries makes them highly complementary with lightly populated, but highly endowed countries which have vast raw materials in Africa, Australasia, Latin America and the Middle East (Anderson and Strutt 2014). Asia’s faster-growing emerging economies will contribute a greater share of future economic growth in the foreseeable future. Anderson and Strutt (2014) estimate that the aggregate share of world GDP as measured in 2007 US$ of developing countries is expected to increase “from 27 per cent in 2007 to 46 per cent in 2030, and for just developing Asia from 14 to 32 per cent” (p. 595); whereas Europe’s share is expected to fall from over onethird to just above one-quarter”, while “the per capita of developing Asia is projected to rise from 25 to 57 per cent of the global average” (p. 595). As Western economies decline, China’s exports to those countries decline also. The IMF argues that China should increase domestic consumption; however this appears to have more to do with trying to prevent the decline of Western economies by increasing western exports to China. Western economies are declining so that eventually Asian production will

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be for Asian consumption. The production chains will be changing as well. Various Asian countries will produce components and send them to China and India for final assembly. China will then become the new driving force of the global economy as it is connected through the BRI from China across Southeast Asia, South Asia and onto Africa. China has brought into multinational companies and continues to do so; much the same way as the UK and the United States used to do when their economies where flourishing. Now China is doing it and the UK and the US largely disinvest. China’s thrust of huge foreign investment in other countries will divert China’s foreign reserves towards more lucrative investments. China is now diversifying its holdings of international reserves by channelling its investment into sovereign wealth funds and a sharp increase in foreign investment in other countries which are either part of the BRI or stand apart from it. Most of such investment is going into the resource sectors and the construction of much needed infrastructure in emerging and developing countries. China’s foreign exchange reserves stood at more than $4 trillion in June 2014, but declined to $3.19 trillion by August 2016 (Neely 2017). Such developments have made the present Western-led financial institutions and exchange rate system outdated. The US economy has lost its strength to support a US dollar dominated international exchange rate system, so that the BRI countries may eventually be led by a RMB currency system.

2.7

Conclusion

This chapter analyses the changing international financial system and begins with a detailed analysis of the international reserve currencies and exchange rates, followed with a discussion on the financial crisis of 2008–2009 as a precursor of reforms. Subsequently, the internationalization of the RMB has been analysed in detail followed with a discussion on the decline of the American dollar and the global shift of economic and financial power. The international status of the RMB is rapidly changing and it is on the way of becoming an international currency as a consequence of China’s economic development and extension into foreign markets. It has been argued that eventually the RMB is expected to float and may become the new petrocurrency which will cause the RMB to rise and the US dollar to decline. How floating exchange rates operate and their effect has been described as well. The common assumption that a devaluation of a country’s currency reduces its imports and increases exports has to be rethought

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by analysing the condition which pays attention to the price elasticities of exports and imports. The world of change is facing an interregnum whereby the old constellations of forces are dying but the new faces too much opposition by the decaying order to be born. Since the Asian financial crisis of 1997–1998 and the global crisis of 2008–2009, there has been a drive towards the internationalization of the RMB which was strengthened through the growing Chinese economy. Through the increasing use of bilateral currency swap agreements countries will be bypassing the US dollar so that the US dollar becomes unstable and the RMB will gain in status. Hence the RMB will be used more like an investing currency, as a reserve currency and for purposes of international trade. Various members of the BRI could eventually form a currency bloc based on the RMB. The costs and benefits to China when the RMB has become an international currency have been explained. An international currency has to satisfy three criteria; it has to be able to serve as a medium of exchange, unit of account and as a store of value. This leads to a subsequent discussion on the decline of the American dollar. However, it takes time for consumers to react to changes to the exchange as indicated through the J-curve effect which illustrates that a trade balance worsens first before it can be improved after a depreciation. As the dollar hegemony is being used to assert American power by weaponizing the international financial system, it is becoming dysfunctional; so that it has been argued in this chapter that no currency of any country should be used as a reserve currency. Furthermore, an international currency which is based on a credit-based national currency is essentially risky, and so may contribute towards a financial crisis. Hence, an international reserve currency could be created instead which is disconnected from any economic conditions of any country. Even though the US dollar is weakening, it still dominates the international financial system. As the global financial and economic power relationships are changing, the RMB may eventually replace the US dollar as the dominant reserve currency. If the US dollar is to remain a major reserve currency, the United States is required to maintain a trade deficit. An increase in the use of the petroyuan instead of the petrodollar will lead to a decline in the US dollar which will then lead to sales of US treasury bonds. It has been argued in this chapter that there is a shift away from the North-Atlantic towards Asian economies. A hegemonic currency may be faced with the Triffin dilemma; that is when a hegemon runs a balance of payments deficit it provides the international monetary system with a

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common currency and thereby undermines market confidence so that the hegemon’s power declines. The major dimensions of an international monetary regime consist of the role of exchange rates, the control of international capital movements and the composition of the reserve assets (Cooper 1975); however the enforcement of international monetary regimes may compromise a nation’s sovereignty. There is no one coherent global monetary system. Some currencies are fixed in relation to another more important currency; other currencies float up and down on foreign exchange markets; other currencies move within a narrower or broader band against each other. The euro, the yen and the pound float against each other (Horwitz 2010). Anderson and Strutt (2016) using a conservative growth rate, estimate a larger share of increase in the global economy over the next two decades; the share of GDP of the emerging Asian economies is expected to increase “from 27 per cent in 2007 to 40 per cent in 2030” (p. 177), most of it will occur in East Asia; whereas the share of Europe is expected to decline from “36 to 29 per cent” (p. 177). The power of a nation depends on economic prosperity, without economic prosperity, political power cannot be obtained. China is progressively liberating its capital account by removing explicit controls but maintaining various soft controls over capital movements. However, complete deregulations of capital controls may lead to financial instability. The BRI is likely to promote interconnectivity between multiple trading nations which is vital for international trade and economic development. The world of change is facing an interregnum whereby the old constellation of forces is dying but the new faces too much opposition by the decaying order to be born.

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He, D., Luk, P., & Zhang, W. (2016). Internationalization of the Renminbi as an Investing and a Funding Currency: Analytics and Prospects. Pacific Economic Review, 21(3), 295–323. Horwitz, S. (2010, January/February). Deflation: The Good, the Bad and the Ugly. Freeman 60. www.thefreemanonline.org/featured/deflation-the-goodthe-bad-and-the-ugly. Hung, H.-F. (2013). China: Saviour or Challenger of the Dollar Hegemony? Development and Change, 44(6), 1341–1361. Jain, C., & Gosh, S. (2013). Dynamics of Global Oil Prices, Exchange Rate and Precious Metal Prices in India. Resource Policy, 38(1), 88–93. Jones, J. (2011, April 21). Dollar Crashes to Record Low, Investment Research Since 1978. Available at: http://www.youngresearch.com/authors/dollar-crashesto-record-low. Keynes, J. M. (1980). The Collected Writings of John Maynard Keynes, Volume XXV, Activities 1940–1944, Shaping the Post-War World. The Clearing Union, Royal Economic Society. London: Macmillan and Cambridge University Press. Kindleberger, C. P. (1989). Manias, Panics, and Crashes: A History of Financial Crises. New York: Basic Books. Lee, J.-W. (2014). Will the Renminbi Emerge as an International Reserve Currency? The World Economy, 37 (1), 42–60. Liao, S., & McDowell, D. (2016). No Reservations: International Order and Demand for the Renminbi as a Reserve Currency. International Studies Quarterly, 60(2), 272–293. Markovic, B., & Povoledo, L. (2011). Does Asia’s Choice of Exchange Rate Regime Affect Europe’s Exposure to US Shocks? Economic Issues, 16(2), 1–38. 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. McKinnon, R., & Schnable, G. (2012). China and Its Dollar Exchange Rate: A Worldwide Stabilising Influence? The World Economy, 35(6), 667–693. Meade, W. (1951). The Balance of Payments, chapters 1 and 2. London: Oxford University Press. Neely, C. (2017). Chinese Foreign Exchange Reserves, Policy Choices, and the U.S. Economy. Federal Reserve Bank of St. Louis Review, Second Quarterly, 99, 207–231. Nishimura, K. G. (2016). Three ‘Seismic Shifts’ in the Global Economy and the Policy Challenges They Pose. International Finance, 19(2), 219–229. Oksanen, H. (2012). Re-pegging the Renminbi to a Basket: Issues and Implications. Asian-Pacific Economic Literature, 26(1), 18–33. Oksanen, H. (2015, November). Managing the Renminbi: Should China Peg to a Trade-Weighted Basket? Asian-Pacific Economic Literature, 29, 18–29. Qin, D., & He, X. (2011). Is the Chinese Currency Substantially Misaligned to Warrant Further Appreciation. The World Economy, 34(8), 1288–1307.

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CHAPTER 3

International Economic Growth

3.1

Introduction

The main problems of environmental degradation, pollution and the emission of greenhouse gases are caused by overpopulation; without a decline in the growth of overpopulation, people eventually will breed themselves out of existence as the present increase in population is not sustainable. Legislations for the protection of the environment are a “top-down” approach as they are aimed to prevent individuals from committing acts which are detrimental to the environment. Another approach may be to convince individuals of the degradation of the environment and so encourage them to engage in environmental actions which are of their own benefits in the long-term, which may be regarded as the “bottom-up” approach. Carbon dioxide and the consequential costs of health due to the use of fossil fuels are not included in the assessment of profitability. Fourier was the first physicist who argued in the early nineteenth century that the atmosphere acts like the glass of a greenhouse; such phenomenon eventually became known as the greenhouse effect which is essential to sustain life on earth. However, Arrhenius found that anthropogenic activities, such as the use of fossil fuels increase the level of GHG which then increases the greenhouse effect exponentially. When the atmosphere holds more water because the air has become much warmer as a result of the greenhouse effect, the multitudes and power of hurricanes, typhoons and monsoons are the consequence. Air and ocean currents direct much of the toxic emission towards the Arctic which thus has © The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28068-0_3

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become a sink for toxic releases. How greenhouse effects develop and affect people’s lives will depend on the geographical location. 92% of the deadly consequences of pollution occur in low and middle income countries; for example India has topped the list with 2.5 million deaths due to pollution in 2015, followed by China with 1.8 million deaths (Lancet 2018); however governments are generally more inclined to accommodate the greed of those who contribute towards pollution. The greenhouse effect is merely the natural reaction of inadequate coordinated government policies. The causes of pollution and the emission of GHG and the consequences resulting from economic growth and the detrimental effect on the environment are well known. There is often a major concern about renewable sources of energy and energy security. The vast increase in economic growth and global trade has detrimental effects on the environment, but the political decision-making process is often slow to respond and trade liberalization further hinders the implementation of the appropriate policies. The following discussion will analyse the environmental policies of various countries which are part of the BRI in regard to the mitigation of GHG emissions. The carbon intensity in China relates to its extensive use of fossil fuels, so that even if China reduces its usage of fossil fuels in industrial activities, there still will be high energy-related emissions as a consequence of transportation, heating, cooling and lighting. During the 11th Five Year Plan (2006–2010) the National Climate Change Programme and the first White Paper regarding energy conservation and efficiency was introduced and the use of renewable energy became more widespread.

3.2

Causes and Consequence of Pollution and Environmental Degradation

The consequence of global capitalism, especially the high use of fossil fuel in the United States and the rapid economic growth in China has worsened the environmental problems with which the global community s faced. The levels of particulate matter 2.5 exceed WHO guidelines in most parts of China and the United States. China increases its renewable energy capacity faster than any other country worldwide, but it also continues to instal coalfired power stations (PM 2.5 indicates that their diameter is 2.5 microns). Unless the causes of climate change are being addressed, the number of people living in poverty will increase by 100 million by 2030 (Hallegatte et al. 2016). Hence, investments in the BRI have to concentrate more on low-carbon and climate-resilient infrastructure.

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China has increased its efforts in mitigating the detrimental impact of climate change and China could introduce similar policies in BRI countries. However, some of the governments of the participating countries of the BRI are more concerned with implementing economic growth rather than trying to reduce its possible detrimental effect rather than reducing the impact on the environment. The detrimental cost has been a devastating assault on the environment through a vast increase in pollution, greenhouse gas emission and the degradation of the environment and the ecosystem with disastrous consequences; for example, the rate of desertification is increasing. It is not sufficient to replenish the environment by planting trees and engaging in research of renewable energy if global carbon emissions are not reduced. India will become the most populous nation by 2025 and will increase its greenhouse gas emission. Every single addition in population adds to pollution, no buts or ifs; at the present rate of population increase and increasing environmental degradation, the human race will breed itself out of existence. India is presently the second-largest burner of coal; it is also the third-largest importer and consumer of oil. However, governments are reluctant to take appropriate measures, mainly for two reasons: governments lack the understanding of the causes and effects of greenhouse gas emission, and secondly, they are driven by the fixed idea promoted by multinational corporations, that economic growth regardless of the costs are of paramount importance; however, there will be not much of an economy left to grow if greenhouse emissions are not minimized. The extreme weather conditions at present are relatively minor compared what will be in store when no corrective measures are taken. Costs of externalities resulting from a Pigouvian analysis may compel polluting companies to consider the marginal costs of their polluting activities to the wider public. The BRI is to facilitate economic growth but may also result in an increase in the damage to the environment which may endanger a sustainable economic development in the long run. The relationship between economic growth, consumption of natural resources and pollution and the deterioration of the environment is illustrated through the environmental Kuznets curve (EKC) which shows an inverted U-shaped curve. The EKC hypothesis states that during the initial stage of economic growth the emission of carbon dioxide (CO2 ) will increase, while it will decrease after reaching a threshold level of income per capita. High economic growth leads to greater consumption of energy so that CO2 emissions have increased as well (Joshua 2017, pp. 142–143).

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As income increases, so does consumption and therefore pollution, until a given threshold of income has been reached, consumption of resources are expected to decline and the environment will improve again. Perma and Stern (2003) found no evidence for the existence of the EKC when using statistical methods. Hence, empirical results on research on the EKC are inconclusive and lack sufficient support. This should not be of any surprise as government policies are subject to the pressure of interest groups. However, Yaguchi et al. (2007) find evidence for the EKC in the case of Japan but not for China. Such differences may also highlight that the EKC depends on the stages of economic development; as Japan is still more economically developed than China and as the public is more concerned with pollution and other consequences of economic growth as their level of income increases. Shahbaz et al. (2017) confirm the existence of the EKC hypothesis in the case of China. Even though the existence of the EKC has been confirmed by numerous authors, such as by Grossman and Krueger (1991), Heil and Selden (2001), Vollebergh and Kemfert (2005), and Spangenberg (2001) found that the EKC exists in some cases but not in other. Shahbaz et al. (2017) argue that “any attempt to reduce energy consumption will result in declining economic growth in China” (p. 930).

3.3

Causes and Consequences of the Emission of Greenhouse Gases

Climate change is merely the natural reaction to inadequate government policies. Global warming is the consequence primarily of the accumulation of too much carbon dioxide (CO2 ) in the atmosphere so that it then acts as a blanket which traps heat. Most of the CO2 emission comes from sources of energy (25.9%), forestry (17.4%), agriculture (13.5%), industry (19.4%), transport (13.1%), residential and commercial buildings (7.9%) and waste and wastewater (2.8%) (IPCC 2007). The major GHGs are carbon dioxide, methane, nitrous oxides, and chlorofluorocarbons (CFCs). Nordhaus (1991) analyses the costs and benefits of the greenhouse effect and environmental policies by using two separate functions, that is, the greenhouse damage function and the abatement cost function. The first function shows the economic and social costs of changing climate; the second function assesses the costs involved in mitigating the greenhouse effect. An efficient policy is where the damage curve intersects with the marginal cost curve. Nordhaus (1991) argues that the optimal

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degree of control of GHGs is where the marginal costs of mitigating the effects of GHG emissions are equal to the discounted marginal damage resulting from GHG emissions. Shahbaz et al. (2017) find that “a 1% rise in real GDP will raise CO2 emissions by 2.56%” (p. 944) while the negative sign of squared term appears “corroborate the delinking of CO2 emissions and the real GDP at the higher level of income” (p. 944) which confirms the EKC hypothesis for China. They also find that “a 0.7317% increase in CO2 emissions is linked with 1% increase in coal consumption” (p. 944); however, by keeping other things constant “a 1% increase in globalization will lower CO2 emissions by 0.5519%” (p. 944). This also indicates that China is making an effort in reducing the emissions of CO2 . The social cost of CO2 emissions is the monetized damages to human health, damage caused by floods, degradation of the ecosystem, and the decline of agricultural productivity. Remedial practices also consume vast quantities of natural resources which has a detrimental effect on the environment as well. Strong economic growth also implies greater responsibility for the damage caused to the environment. Global warming is caused by human activity and so can be reduced by human activity. Climate change is largely a consequence of anthropogenic emissions of carbon dioxide. Reluctance by governments to take appropriate action will make it more difficult to reduce the greenhouse effect later. Global warming is mainly caused by the emission of carbon dioxide (CO2 ), methane and nitrous oxide. Many solutions to reduce greenhouse effects are available but are not palatable to governments. The efficiency of the use of energy has to be improved. The use of renewable has to be increased for example through the use of solar and wind power, bio energy and geothermal energy. The emission of greenhouse gases has increased most through transportation which can also be reduced through greater efficiency in the use of energy. Much of the greenhouse effects is caused by deforestation and the emission of greenhouse gases from agriculture which represents almost 30% of greenhouse gas emission. Electric vehicles cause pollution from the emission from the smokestacks of power plants which charge them. Vehicles using petrol likewise will cause pollution. Subsidies for the use of electric vehicles are demand and pull innovation policy. No change is possible as long as economic growth relies on the use of fossil fuels. Hurricanes and floods differ from heatwaves which are comparatively persistent and cause little damage to physical capital but cause considerable

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harm to human health and thereby cause economic loss as well through losses in productive working time and productivity. Pollution is largely the consequence of promoting economic growth over the environment. Pollution travels across countries; for example, Japan and South Korea receive a great amount of pollution from China, mainly from particulate matter, especially PM 2.5 and PM 10 (PM 2.5 has a diameter less than 2.5 micrometres and PM 10 which has a diameter between 2.5 and 10 micrometres). Apparently, 30–50% of all PM in Seoul has arrived from China (Richey and Daewon 2016). Cooperation between China, Korea and Japan is therefore essential to reduce air pollution in those countries. An increase in the temperature of the atmosphere will enable the atmosphere to hold more water; consequently, there will be more heavy rainfall followed by flooding. Intensive heatwaves dry out the soil and subsequently, more intense heatwaves which result in more bush fires. However, greed evolves into addictive behaviour, so that “money-making” is seen as the utmost goal regardless of the environmental consequences. However, higher temperatures will reduce economic growth, hence profits decline. The increase in carbon energy will cause eventually a carbon bubble, but industries which cause such bubbles are never held responsible and politicians have only a very short-run perspective. Usage of water rapidly increases with economic development (Shi et al. 2013). The overexploitation of groundwater lowers groundwater tables and reduces total terrestrial water storage, lowers soil moisture; and the use of groundwater irrigation increase local evapotranspiration and lowers the temperature in the soil surface and the lower troposphere. Irrigation will then interfere with the carbon cycle as well as the water cycle. Once the tipping point has been reached it will lead towards rapid irreversible changes which reinforce each other. The thawing of permafrost, the decline of the Antarctic and Arctic sea ice and the release of methane hydrates will then lead to a domino effect so that a mere reduction of the emission of greenhouse gases will be insufficient to maintain an inhabitable earth. However, the creation of various technologies to reduce the amount of carbon dioxide in the atmosphere, better soil management in agriculture and forestry can help to a large extent. There are greater differences in emission intensity between countries than across products (Ahmad and Wyckoff 2003) and there is great variation of carbon emission intensity within countries. Various problems are global in nature and cannot be solved just at a regional level; for example, the consequences of global warming on the environment, issues of security

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or needed reforms to the global financial system and international trade organization. It is of vital importance that an inclusive climate model is developed which incorporates the environmental effect of the BRI to assess the environmental sustainability of the projects and their greenhouse emission effects as a consequence of the BRI. An inclusive climate model may guide the management of projects which requires coordination between the different countries involved, so that the environmental consequences are properly considered for their impact on sustainable economic development. New projects have to be assessed for their viability in regard to the environment and overall sustainable economic development. The carbon capture and storage (CCS) technology is one way of reducing the detrimental impact of climate change. As it becomes increasingly apparent that climate change is real, green energy will be more and more demanded. However, there is a tipping point beyond which the impact of greenhouse emissions will be virtually impossible to reduce. The degradation of the environment is caused by unsustainable levels of consumption, so that an improvement of the environment without a change in the quantity and types of consumption cannot occur; but human behaviour is difficult to change without the appropriate legislation and its enforcement; especially in the case of raw materials, energy and biomass. Some countries will run out of raw materials sooner than others, but countries have to develop an adequate industrial and technological base to enable them to maintain their living standards. Advanced economies have been living beyond their means as they imported their raw materials from countries being part of the South for over two centuries. On a per capita basis, countries such as China and India cause less environmental degradation than advanced countries, even though they are the biggest polluters on a global scale (get stats).

3.4

International Economic Growth and the Effect on the Environment

The rapid economic growth has caused China to become a major energy importer. The emission of greenhouse gases will increase over the coming years and so will global warming. An increase in droughts will have a detrimental effect on farming and therefore will decline agricultural production, whereas the mortality arising from droughts is indirect, mortality caused by heatwaves is direct and will reach thousands of the population unless

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appropriate actions are undertaken to reduce pollution and environmental degradation. Viola and Basso (2016) make the point that “between 1990 and 2012, Chinese GHG emissions increased more than 230%, and, in the same period, Chinese share in global emissions increased from 9.48% to 22.44%” (p. 1). Policies on reducing the level of GHG emission is guided by vested interests, especially as energy producers and exporters will be losing large amounts of revenues; for example, Russia is a prime exporter of fossil fuels, particularly natural gas; however, “its emissions decreased more than 18% between 1990 and 2012 and its global share of emissions halved in the same period – from 8.18% to 4.73%” (Viola and Basso 2016, pp. 2–3). On the other hand, India is a large importer of energy and its “emissions increased 140.18% between 1990 and 2012”, and its share of global emissions almost doubled during the same period (Viola and Basso 2016, p. 3). Brazil’s emissions from its energy sector increased by 120.65% between 1990 and 2012 (Viola and Basso 2016, p. 3). However, polluting industries are concerned about the costs which are involved in reducing the greenhouse effect; but without a viable environment, there will not be a viable economy in the long run. However, governments which are less concerned with the environmental effect of economic growth in their domestic economy are unlikely to give much priority to environmental concerns when their priorities are economic growth. International treaties would have to be signed which would make businesses accountable for the environmental harm they create. The conversion of rural to urban land causes statistically significant changes in the precipitation, near-surface humidity and speed of wind in urban areas. Ren et al. (2008) investigated the data from 282 meteorological stations in North China and concluded that urban warming affected the annual temperature whereby the average increase of urban warming was estimated to be 0.11 °C every 10 years. However, pollution and environmental degradation is also more and more experienced by citizens on the individual level. The exposure to arsenic contributes to multiple vascular disturbances, for example Blackfoot disease, and it also causes a greater risk of diabetes. Exposure to arsenic is especially detrimental to development in young children. China’s averages about environmental degradation and greenhouse gas emissions disguise the real effects of pollution. Instead, such effects have to be assessed on a provincial and regional level as the detrimental

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impact of pollution various according to the levels of consumption, individual lifestyle, endowments of resources and the economic structure. Even though pollution travels, policies have to be enacted at the source of pollution. The need to reduce carbon emission without reducing the level of economic growth is a problem that governments are faced with. The difficulties of environmental degradation have to be addressed at the level of fossil fuel demand as well as supply side. Government intervention is essential to reduce the impact of CO2 emission. Free market economies are more interested in increasing profits for corporations rather than considering the impact of climate change. Rather than talking about global climate change, it may be more appropriate to talk about and shift to pollution which redirects the issues towards local condition to which the average person may be able to better relate. Act locally to address global issues. The melting glaciers are not something that is experienced everyday by the average citizen but it is nevertheless a consequence of local pollution, whereas pollution is experienced by the average citizen on a daily basis. Globalization furthers technological progress which can also reduce environmental degradation and also leads to an increase in overall per capita income. Globalization can only be sustainable in the long run when the environment is also sustainable which then may lead towards sustainable economic development. As economic growth requires the use of energy sources it becomes imperative that energy efficiency is constantly improved. Coal provides about 70% of total primary energy in China and contributes more towards carbon emissions than any other source of energy; hence the use of coal as a source of energy should be sharply reduced and eventually phased out altogether. The use of cleaner sources of energy is a viable option such as hydroelectric power, wind power, solar power amongst others. Various legislations and regulations can be implemented to increase efficiency of energy usage together with the appropriate fiscal policies. The construction of infrastructure has also a negative impact on the environment of the participating countries of the BRI; especially in the case of the construction of hydropower projects, which may also have an impact on the level of agricultural production through flooding. The decoupling of resource use from economic growth and the decoupling of the environmental impact from the use of resources may be referred to as “double decoupling”; whereby both types of decoupling elicit different policies. Policies to reduce environmental harm may entail innovation in the improvement of the efficiency in the use of resources. However,

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any decoupling processes are difficult to quantify accurately, so that it may be difficult to set appropriate targets in reducing the detrimental impact of economic growth on the environment. However, Wang et al. (2013) explain two different ways of decoupling. One way is the decoupling process which was used by the OECD (2002): Df = 1 −

(EP/DF) end of period (EP/DF) start of period

where Df stands for the pressure exerted on the environment, and DF is the driving force which is the GDP. The second indicator is elasticity (Wang et al. 2013, p. 619) which refers to the ratio of % change of one variable as compared to another variable, and so may be used to assess the relationship between economic growth and environmental degradation. For example, the impact of public and private transport on the environment can be assessed by using the following formula: E=

%VOL %GDP

whereby E refers to the GDP elasticity of transport, %GDP, %VOL refers to the percentage change in the volume of the transport, and %GDP refers to the change in percentages of GDP (Tapio 2005). Wang et al. (2013) find that there is greater decoupling in the use of resources and emissions from the growth in the GDP in the case of the United States and Japan as compared to China and Russia and explain this by the different stages of economic development of the four countries. The two OECD countries are mature economies with lower growth rates in their GDP, whereas the BRIC countries of China and Russia experiencing relatively high economic growth rates as a consequence of a high rate of industrialization. The decoupling indicators may fluctuate within a country depending on a country’s environmental policy; for example, the 11th Five-year Plan, China included two mandatory targets; that is a 20% decline of energy consumption per unit of GDP and a 10% reduction in the emission of SO2 . Hence, China’s decoupling indicators for the use of energy and the emission of SO2 declined between 2000 and 2005, but increased between 2005 and 2007. Of course, the decoupling indicators may also improve in countries because they produce many goods in foreign countries and use up the resources of those countries. Hence, international trade and international investment will affect the decoupling

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process between countries and therefore ought to be considered in trade and decoupling policies. The change in the rate of the use of resources and the emission of waste can indicate the level of environmental performance whereas decoupling indicators indicate whether the link between economic growth and the use of resources and the emission of waste has been broken. Wang et al. (2013) make the valid point that China had a higher decoupling indicator than the United States, but the rate of increase in the use of energy in the United States was 1.6% as compared to 8.1% in China; simply because the United States is an economy in decline. Hence, even though countries may have the same decoupling indicators, they will have different rates of change in the use of resources.

3.5

Renewable Energy Versus Energy Security and Environmental Degradation

China and the European Union import large quantities of gas from Russia which creates an energy security triangle. Much of the gas supplied from Russia to the Chinese market will come from the Chayandinskoye and Kovytinskoye gas field in East Siberia. The fastest way to replace coal at present is through natural gas, so that Russia’s supply of natural gas to China will be important for China to meet its target of reducing its GHG emissions as it reduces its consumption of coal. Gazprom has a contract with China National Petroleum Corporation for 1.3 trillion cubic feet of natural gas per annum and delivery is expected to commence in December 2019. China is slowly replacing the use of coal with gas for power generation and industrial and manufacturing use. As China is the world’s fastest growing market for gas, the flow of gas from Siberia will become handy. China can only advance in the longer term by advancing technology which may serve as a foundation for sustained economic development; this includes the replacement of fossil fuels with new types of energy to feed into sustainable economic growth. China is evolving new-energy vehicles by means of electric cars run on batteries which require cobalt. Hence the Congolese mining company has joined the Chinese Nonferrous Metal Mining Group to extract cobalt to feed into the electric car battery market. It is therefore of no surprise that research and development has become a prime priority of China; especially in new energy and artificial intelligence.

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China’s rapid increase in solar energy trade networks really only commenced during the mid-2000s and was largely the consequence of deliberate industrial policies which rapidly increased China’s manufacturing industry and pushed it closer to the technological frontier. Asian cores are mainly engaged in the newer solar PV technology, and so maybe said to be engaging in a Schumpeterian solar energy cycle. However, there are alternative energies available and their usage is increasing and the use of coal is declining, even though China is still the largest producer and consumer of coal which is the largest producer of CO2 emission. Unless drastic actions are undertaken to reduce CO2 emissions, eventually the environmental degradation as a consequence of the depletion of natural resources, desertification, deforestation, the thinning of the ozone layer and generally the warming of global temperatures will make future economic development unsustainable. The major problem is that governments are not sufficiently qualified in the areas in which they make decisions so that they submit unduly to pressure groups. Governments which make decisions based on scientific principles would be less guided by ideologies and pressure groups. Environmental regulations have increased and they have become more stringent; however, the enforcement of such regulations still leaves much to be desired; although the implementation has improved. The Chinese government is also introducing the greater use of alternative sources of energy. However, some progress is being made in reducing pollution and environmental degradation. In China from 2019 onwards, car makers which import or produce over 30,000 cars in China must ensure that 10% must be electric cars, to be increased to 12% in 2020. Penalties are imposed on companies which do not comply. China is using nuclear technology fuelled by thorium which does not cause meltdowns and also produces less radioactive waste to overcome China’s deficit in electricity supply. China intends to increase its power supply by 20 times but at the same time also intends to reduce its reliance on the use of coal over the next 20 years. The development of green development technologies and innovation and the strengthening of scientific endeavours are vital for a sustained economic development. The development of green technologies may be incorporated within the global multi-dimensional BRI projects. However, consideration of safety and pollution may not be too much of an immediate concern when large projects such as the BRI are implemented. Nevertheless, the BRI will have an environmental impact which will have to be addressed if the BRI is to promote sustained economic development.

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China is developing alternative sources of energy, such as solar panels and wind farms to reduce the degree of environmental pollution. Mutually beneficial joint ventures can lead to a “win-win” situation. A deposit could be charged on recyclable materials and goods which is then partly refunded when such goods are returned for recycling. The rest of the deposit can be used to pay for the cost of recycling the materials. Deposits can be placed virtually on all recycled commodities, such as computers, car batteries, amongst others. The electronic industry creates a lot of waste materials which may be reduced when electronic waste is made the responsibility of the manufacturer or the importer of such goods. Electronic waste recyclables are a major source of persistent organic pollutants with the vicinity of landfills.

3.6

Global Trade and the Detrimental Effect on the Environment and Health

An increase in global trade is likely to increase the carbon footprint on a global scale which will be differently distributed across the globe. Wiebe (2012) shows that the increase in trade between countries of the OECD and the increasing demand for goods and services within the BRICSA countries (Brazil, Russia, India, China, South Africa, and Argentina) is causing part of the increase in carbon emissions and the extraction of materials. The geographical division of the extraction and the processing of raw materials, and the manufacturing and the consumption of the final products lead us to the question of responsibility of the sharp increase in the pollution and environmental degradation to be able to maintain a sustainable economic environment. The present territorial accounting approach accounts for the emission of greenhouse gases and the extraction of raw material at the location of production so that the country of production becomes responsible for the detrimental impact on the environment, whereas a consumption-based accounting system allocates costs along global production chains and allocates the costs on to the final consumers (Wiebe 2012). The increase in CO2 emission and materials extraction in BRICSA is due to the high demand for their products in the OECD countries. The outsourcing of the production of pollution caused through the production processes by OECD countries to BRICSA countries is an important strategy by OECD countries to divert the responsibility for the resulting pollution to BRICSA countries. In this

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case pollution merely shifts from one location to another, but the total production on a global scale remains much the same. In reality of course, both the consumer and the producers are responsible for the global emission of greenhouse gases and the degradation of the environment. Consumers and producers should be liable for the damage that they cause rather than trying to shift the blame. Economic growth will increase the consumption of energy and so causes an increase in CO2 emission, other greenhouse gases and consequently an increase in the degradation of the environment. To overcome such problems, more investment should be forthcoming in renewable energy sources such as wind power, solar power, bio-fuel or hydropower as well as the construction of energy efficient infrastructures. According to the World Bank (2007) CO2 emission contributes 58.8% of the GHG. Hsiao and Hsiao (2011) investigates the Granger causality relations between increases in GDP, exports and FDI for eight rapidly developing countries in East and Southeast Asia and find that the results of the penal data causality FDI has unidirectional effects on GDP through exports and also found a bidirectional causality between exports and GDP. Research by Kuo et al. (2014) examines the Granger causality between increases of CO2 in Thailand and found a robust relationship between such variables whereby “every variable had a feedback relationship to each other” (p. 61). China’s economic growth is steel-intensive which has increased global demand for steel and consequently to sharp increases in prices. The fast industrialization and urbanization in China have led to the steel intensity of China’s economic growth which has increased over the last 40 years. In 2013, China’s steel production accounted for approximately half of global steel production so that a decline in the steel intensity in the production process in China will sharply reduce demand for Australian exports of iron ore (Allen and Day 2013). As a result of increase in export prices, Australia is depleting iron ore reserves and coking coal at a faster rate. Allen and Day (2013) argue that the depletion rate is calculated by taking into account the price elasticity of the demand for exports, the global interest rate and the increase in the demand for exports. They also find that the growth in export demand over time will reduce the rate of resource depletion over time. Growth in exports causes economic growth and economic development through economies of scale by increasing the efficiency and the size of the market (Giles and Williams 1999; Singh 2010). Griffith and Bhutto (2008) propose a concept of triple bottom line to assess not only the economic performance, but also the environmental and

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social performance of infrastructures. However, feasibility studies of infrastructures are less concerned with the environmental and social impact of projects when assessing infrastructures. An Environmental Impact Assessment (EIA) law became effective in 2003; although a Social Impact Assessment (SIA) law is still lacking in China (Li 2014, p. 17). International trade causes transfer of CO2 emission (Ahmad and Wyckoff 2003). China’s international trade consists of a large amount of processing exports where China imports part and components from other countries and then assembles them for exports. Processing exports have a lower emission of CO2 than non-processing exports, so that they have to be distinguished from each other; otherwise CO2 emissions derived from China’s exports may be overestimated (Dietzenbacher et al. 2012; Weitzel and Ma 2014). Jiang et al. (2016) show that China’s net exports of CO2 emissions are highly overestimated when China’s heterogeneity of trade is considered. They also find that the “global CO2 emissions would decrease by 19 to 62 Mt [million tons] if China’s processing activities were shifted to other countries, such as the USA, Europe, or Brazil” (Jiang et al. 2016, p. 513). They conclude that policies to reduce the detrimental impact of climate change due to increasing CO2 emission become more important, “China may consider prioritizing the reduction of CO2 emission intensity, particularly in electricity generation, to avoid possible transfers of processing activities out of China” (p. 513). China’s economic growth and sustainable economic development requires natural resources from other countries, and it also requires access to foreign markets. The BRI facilitate access and thereby enhances globalization. In the trade between China and Russia of forestry products, China captures the major part of the value-added as most products are less processed. There are different aspects of globalization which have to be appraised individually. Shahbaz et al. (2017) distinguishes between economic, political and social aspects of globalization. Economic globalization refers to the international flow of trade in goods, capital and foreign investment and services. The political aspects of globalization refer to government policies, that is, the political engagement with other countries and the international organizations, such as the WTO, the IMF and others. Social aspects of globalization refer to social interactions between communities, including the increasing number of students who are learning Chinese and the increasing flow of tourism between China and other countries. Political engagement also includes the increasing importance of China in international

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affairs, such as the increase in the number of countries which increasingly vote in line with China in the United Nations or see it as advantageous to switch their diplomatic recognition from Taiwan to the People’s Republic of China, which may be referred to “chequebook diplomacy”. The economic success of the BRI may also promote a “chequebook diplomacy” in various instances.

3.7

Trade Policies and Emission Control

Mukhopadhyay (2009) makes the point that trade liberalization “leads to environmental degradation either as a result of relocation of polluting industries from countries with strict environmental laws or due to increased production in existing polluting industries” (pp. 83–84). The assumption of many trading nations is that by imposing tougher environmental standards they may lose their comparative advantage so that polluting industries will shift their operations to pollution havens. Mukhopahyay (2009) argues that the pollution terms of trade (PTOT) indicates which country gains environmentally from trade without mentioning that the PTOT merely shows a possible shift in pollution towards other countries, however it does not necessarily imply a lessening burden of pollution for the global economy. A country of course gains in terms of its environment when it imports commodities with higher content of pollution than it exports, but the total level of pollution remains the same. Furthermore, countries are vulnerable to pollution created in other countries as pollution travels with the “spaceship earth” (Boulding 1966). A new economy based on renewable energy and other alternative sources of energy increases economic growth; but there are too many vested interests involved to prevent the implementation of viable policies. The costs of carbon emission to the environment are deliberately underestimated while the benefits of alternative energy are also underestimated. Clean energy and sustainable infrastructure reduce the detrimental costs of climate change, such as in health services. Subsidies to fossil fuel should be phased out and the price of carbon should be substantially increased. The technology to produce a viable green technology is available, but there is no political leadership because it is too inconvenient for them to implement it. Greenhouse gases should be regulated as pollutants, including a carbon tax on pollution. Accelerating and

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increasing urbanization reduced the level of poverty for the vast population. China was able to lift more than 800 million people out of poverty, so that it must have been doing something right. Yang et al. (2019) find that environmental regulations have a negative impact on FDI; however, the results were not significant across the country. FDI enters developing countries as they often have a large amount of natural resources and do not have strict environmental laws, while trade disputes will impede the development of renewable energy. The pollution haven hypothesis argues that polluting industries will move to countries with weak environmental regulations. However, when more environmental regulations are introduced in more countries, there will be fewer options for polluting companies to avoid countries with stronger environmental regulations; hence coordinated environmental legislation to control pollution may not reduce total FDI. The sharing of advanced technology to reduce pollution will also lower the detrimental impact of pollution. Environmental regulations may be imposed by direct regulation through the setting of standards or by command; they may be enforced through economic instruments, such as tradable emission permits, pollution charges or tax on pollution; or they may be imposed by less restrictive means, such as environmental certification or agreements with the resource industry. Yang et al. (2019) find that there is a significant spatial correlation between FDI and regional environmental regulations. In any case, to lower environmental regulations may not increase FDI as other economic factors are important as well. Nevertheless, for economic development to be sustainable, the conservation of energy and the reduction of pollution will reduce total energy consumption. Greater efficiency of production may improve the environment. Environmental regulations and innovations of environmental technology in the eastern provinces of China are more advanced than in other parts of China. When there are differences in intensities of emission between countries then trade policies discriminate against a country more by product; so that higher trade barriers could be used against countries which have a higher rate of emission. However, would be in conflict with WTO regulation which disallows such discrimination. Ahmad and Wyckoff (2003) shows that large differences in the intensity of emissions between countries are often larger than between products. Various International Investment Agreements (IIAs) may impede government policies to counteract climate change. Condon (2015) explains how policies to counteract climate change can be justified under exceptions

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or may avoid application of IIS obligations. The burden of proof plays an important role in deciding the outcome of international investment litigation regarding effects of certain measures intended to reduce detrimental environmental factors; such measures will involve on the one hand the protection of the public interest, and on the other hand, the safeguarding of private interests. Global externalities caused through the emission of greenhouse gases, the extraction of raw materials and the degradation of the environment has to be internalized which can be achieved through trade policies. Various trade policies may be used to encourage the reduction of emissions which may be implemented unilaterally by individual countries or multilaterally between countries. Trade barriers may be increased on high carbon products, as well as on products that are inputs to high carbon processes. Trade policies can be utilized to enforce the internalization of the global external costs associated with carbon emission and climate change (Dong and Whalley 2010); while PTOT merely shift pollution towards other countries, but the total amount of pollution remains the same. International investment law may have a stifling effect on regulations which are aimed to reduce the detrimental effect of climate change or environmental degradation. Whenever climate change regulations are legitimate, foreign investors should not be compensated. The IIA treaty structure regarding the allocation of the burden of proof may also create obstacles to the introduction or effective implementation of bona fide climate change regulations. The Stern Review argues that the global GDP may decline by approximately 20% per annum unless appropriate actions are undertaken; whereas the appropriate reduction of carbon emission to avoid drastic change in climate may cost only about 1% of GDP. China’s 13th Five Year Plan (2016–2020) intends to promote environmental protection (DeJonge 2017). “Chinese institutions model themselves on global templates, but preserve sufficient flexibility to retain maximum control over local implementation” (p. 1065). Furthermore, there are various environmental regulations but the enforcement is not properly implemented. Pollution moves from one country to another, so that policies to combat greenhouse gas emission have to be coordinated between different countries. To subsidize renewables without the imposition of a carbon tax will lead to a faster depletion of oil resources which is referred to as the Green Paradox (van der Ploeg and Withagen 2014). It also causes more oil to be left in situ while renewables will be introduced more quickly. However,

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the net effect on greenhouse gas emission is ambiguous (van der Ploeg and Withagen 2014). Nevertheless, an increasing carbon tax is required to reduce demand for fossil fuel and eventually to switch to a carbon-free economy; especially as renewables are infinitely elastic in their supplies. The usage of fuels through coal gasification “would be 10–20% more energy efficient than burning coal and would produce 99.8% less SO2 emissions and 99.9% less dust” (Li 2014). The use of environmental taxes can improve environmental conditions by reducing overconsumption and resource degradation should be avoided, so that subsidies and tax policies that result in excessive exploitation of natural resources could be eliminated to enhance environmental conditions. Subsidies could be eliminated for the use of fossil fuel which is causing carbon pollution. To reduce the emission of carbon, technology transfer to developing countries will help. The argument that controls of pollution will reduce economic growth and living standards is misconceived; pollution controls will only reduce living standards when the costs of pollution controls are greater than the benefits of a pollution-free environment. In any case, if pollution controls are postponed then the necessary control of pollution will increase at a later stage as it will be more costs effective to reduce the level of pollution when the environment is less degraded. As the control of pollution is postponed, the costs will accumulate at a later stage. Global fossil fuels were subsidized in 2012 in the order of US$544 billion (Kulovesi 2014). The damage caused to the environment and health differs between countries and so do their subsidies to the use of fossil fuels. The environment and health costs are ignored when setting fossil fuel prices as companies are mainly guided by the profit motive. Corruption is endemic in all power structures; however China is making considerable efforts to reduce the level of corruption; whenever corruption prevails, then corporations will gain. Whenever corporate finance is channelled towards individual politicians, the common good is likely impeded. Politicians cannot serve both the common good and mammon. Two masters who have different goals cannot be served by one and the same person; one will serve one and despise the other. The term “mammon” is Syriac and refers to “money” or “riches”. Corruption was unavoidable during the early period of economic and political reforms in China when the economy was opening up (Mahoney 2014). China’s policies on climate change are to reduce environmental degradation and air pollution but it is also concerned to achieve energy security

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for its economic growth and development. China has made a considerable effort to increase the supply of renewable energy and aims to reduce the emission of carbon dioxide by 40–45% by 2020 as compared with the level in 2025 (Kulovesi 2014, p. 349); consequently China sharply increased its wind energy sector and has also become the world’s largest manufacturer of solar panels. However, China has been criticized for subsidizing the production of renewable energy; which vested interests will dominate largely depends on the relationship between policies to minimize climate change on the one hand and on the other hand, the production of cheap solar panels and the imposition of antidumping duties. Eventually trade policies are expected to include environmental agreements. The global climate policy as advocated through the United Nations Framework Convention on Climate Change (UNFCCC) has to be reconciled with WTO rules which try to prevent unfair trade practices. China has agreed to lower its carbon dioxide emissions per unit of GDP by 40–45% by 2020 as compared with the level of 2005, China attempts to secure energy supply while concurrently tries to reduce the level of air and water pollution. China introduced policies of local content requirements which increased to 70% in 2010 (Kulovesi 2014, p. 349).

3.8

The Political Decision-Making Process and the Protection of the Environment

China has a huge need for exhaustible natural resources to feed into economic growth but also has to preserve such resources for the purpose of environmental protection, so that it has imposed export restrictions to make such resources available to domestic consumption. However, when acceding to the WTO China has committed itself to eliminate export duties so that its resources are available to domestic and foreign users on a nondiscriminatory basis. This is the consequence of the “WTO-plus” obligation under which China agrees to eliminate export duties. Some of the foreign green barriers are motivated by protectionist policies especially in the case of the United States and the European Union, rather than because of a concern with a cleaner environment. China joined the WTO in 2001 and Russia in 2012 but they had to accept the “WTO-plus” commitments which other developing countries did not have to commit themselves to the “WTO-plus” regulations. Even developed countries, including the United States and the EU are not subject to the “WTO-plus” regulations; that is, to the commitment not to impose taxes on most exports.

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China is improving its environmental regulations and China’s regulations are becoming stricter and are more strictly enforced; China is more likely to challenge foreign companies which themselves do not strictly adhere to regulations to improve a green environment. The concept of triple bottom line reporting refers to corporate disclosure about the economic, environmental and social activities of a company so that it essentially goes beyond merely reporting on a company’s financial performance. However, some aspects of performance are virtually impossible or difficult to quantify, for example the consequences of pollution of the air or the waterways, or the degradation of the environment. The consequences to people’s health are also difficult to quantify. Assessment of financial performance may include investment in research and development and in plant and equipment, including the costs of training of employees to minimize the detrimental impact of hazards cost by a corporation. Social performance may include investment in health and safety. Environmental performance should include the impact of pollution and greenhouse gas emission. China is in the process of transforming its economy away from the use of coal to hydrocarbon fuel (natural gas) which opens up export opportunities for natural gas producers, particularly for Russia. For security reasons, China has to diversify its supply of resources. However, many economic activities are detrimental to the environment, but are usually not taxed, such as the discharge of effluents. The consumption of fuels is often subsidized or under-taxed. Taxes imposed to reduce negative externalities as in the case of discharge of effluents, congestion and pollution amongst others can reduce such activities as well it can expand the tax base. However, if economic activities which are detrimental to the environmental decline, tax revenue collected will decrease. Tax revenue collected through the imposition of pollution tax can be used to pay for abatement technologies or cleanup programmes. Fines for polluting activities may also be imposed and charges can be levied on effluents and emissions. Standards can be set for standards of abatement technology emissions and abatement standards. Energy subsidies are negative environmental taxes and are best phased out. According to the IMF (2013), China was the second-largest subsidizer of the use of energy in 2011 which comprised 15% of global energy subsidies; whereas the United States was the largest subsidizer which comprised of 26% of global energy subsidies. On the other hand, subsidies could be provided during the initial stage of the introduction of abatement technology. Excise taxes can also be imposed on the inputs in the production process according to the level of externalities caused. This would take

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account of the different levels of externalities caused by the same input; for example, coal used for heating in urban areas contributes more to pollution than when coal is used in rural areas. Carbon taxes may be imposed on the content of carbon of fossil fuels based on the carbon intensity; that is, carbon per unit of energy. China has introduced the concept of “Ecological Civilisation” in its policies which has been written into the constitution of the country. Governments which are less centralized are less likely to be able to control financial corporation and corporations whose bottom line philosophy may contravene the common good. However, climate change is not a prime concern for most government. The interests of future generations are regarded as irrelevant when it comes to the short-term interest of powerful interest groups which governments are inclined to satisfy. No government is so powerful that it does not have to obey nature; if it tries to compete with nature, it will come back with a vengeance, which may be called natural justice. The market is controlled by capital as it is manipulated and distorted by capital; hence capitalism is a more appropriate term to be used rather than the market to describe the present economic relations, as governments are ruled by vested interest. Capitalism is disguised as competition but in reality is akin to predators’ instincts of survival. Galbraith, John K. (1967) describes how corporate needs are being put ahead of the need of the people; whereas Galbraith, James K. (2008) has gone further as the corporate state has indeed progressed, and describes how the state has become a predator by being the servant of corporations. A government that follows the dictate of the corporate state cannot be a government of the people, for the people and by the people, but instead becomes a government of corporations, for corporations and by the corporations. The design of appropriate energy policies has to take into account the different sectors of the economy as globalization and the greenhouse effect has different effects on the different sectors, such as agriculture, transport, industries as well as households. The amelioration of the greenhouse effect provides challenges and new opportunities. The challenges lie in the fact that economic growth requires energy whereas opportunities come from new technologies which can promote a cleaner environment. PM 10 and PM 2.5 are Group 1 carcinogens and are the deadliest particles emanating from air pollution. Weather forecasts may introduce also the daily PM 2.5 level, rather than just saying whether it will be sunny or cloudy. The common argument of polluter pays’ principle could be replaced by negotiations,

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whereby the affected countries pay the polluting countries to eliminate pollution. Using the Coasian theorem, it may be as rational to pay China to reduce air pollution as it is to pay for the costs of consequential health problems, loss in productivity and other associated costs (Coase 1960). Even though pollution can be severe in China at various times; it is unlikely that Chinese corporations are too much concerned about the presence of pollution in countries which are part of BRI, especially as China is a major importer of energy because of its relatively fast economic growth. Zhou et al. (2018) argue that China has taken steps to protect the environment within the BRI framework. There is a real shift in China’s policy towards policies promoting a green environment, especially in the area of electric power generation within China’s domestic economy; however, it takes time before the new green environmental policies will be introduced in BRI countries. Even though financial institutions, such as the AIIB, the NDB and the Silk Road Fund are committed to environmentally friendly policies, many BRI economies may be reluctant to promote environmentally friendly policies, as their main concern is economic growth.

3.9

Conclusion

The PTOT has been discussed, but it only shows a possible shift in pollution towards other countries, it does not show a decline of pollution on a global scale. International treaties could be introduced which make governments accountable for their policies and companies could be made accountable for the environmental damage they create or fail to mitigate. Governments and corporations could be compelled to submit progress reports on the prevalence of pollution and the actions undertaken to reduce it, and they could be subjected to heavy fines, if the standard set has not been met. Various alternative use of energy will also be discussed, for example natural gas is a cleaner and more efficient alternative to coal. Initiatives as proposed by the Natural Resources Defence Council (NRDC) to Green the Belt and Road initiative has also been addressed. China is feeding approximately a fifth of the world’s population on less than a tenth of the available global arable land (Wang and Shen 2016). China is “approaching the threshold of the maximum capacity” of the available agricultural land (Wang and Shen 2016, p. 1294) which has led to the overuse of chemical fertilizers and pesticides which has led to the degradation of the environment and deteriorates human health. Wang and Shen (2016) find that eastern China is the leader in innovation of national

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agricultural environmental technology; whereas central and western China lags behind and so detrimentally affects the developmental capacity there. The increasing rural–urban income gap has led to the degradation of the agricultural environment. The widening rural–urban income gap induced peasants to increase the use of pesticides and fertilizers and thereby increases the discharge of pollution; however, as the negative effect of the rural–urban income gap is lower in eastern China it would contribute less to the environmental degradation. The use of resources and the degradation of the environment is associated or coupled with economic growth. To prevent further deterioration of the environment, it is essential that the increase of economic growth should be decoupled from the environmental consequences, which implies breaking the link between “environmental bads” and “economic goods” (OECD 2002). Trade policies and emission control and the political decision-making process in regard to the protection of the environment are discussed. However, much of Chinese investment in infrastructure in the countries which are part of the BRI is still concentrated in traditional transportation and energy usage; as such projects are long-term, such traditional technology will be locked-in for some decades. It is advisable that lowcarbon development gains greater emphasis; however, vested interests may counteract green development. Even though China has some good laws in regard to the consumption of energy, however; they are often insufficiently enforced as in the case of coal thermal power plans. Nevertheless, there have been some advances: many obsolete power, iron and steel plants have been shut down and China also increased the use of more energy-efficient technologies (Viola and Basso 2016). Anthropogenic climate disruption is caused by greed, human overpopulation and pollution. Unless drastic changes are implemented there will be more people on less habitable land; it will get crowded, and many of the population will get crowded out from the use of essential raw materials unless the required legislation are introduced and enforced on a global and reciprocal scale. The political decision-making process should be guided by scientific principles; rather than controlled by pressure groups. However, economic growth at any costs is by many politicians regarded as of paramount importance, especially as the detrimental effect of pollution lies too much into the future, so that the problems of pollution are often sidestepped. The BRI is likely to increase economic growth and economic development in various countries, but like all economic growth, it may have a

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detrimental impact on the global environment if it is not managed well, so that various possible measures to reduce such detrimental effects have been explained in details. A globalized economy has to be distinguished from an international economy as a globalized economy is merely the externalization of the domestic economy of the main hegemonic powers, so that it suits the dominant powers; so that the global market is just a way for finding markets for the main industrial powers, so that a globalized economy gives power to multinational companies. In the traditional geopolitical framework, national interests are defined by each State. However, GHG emission is a global issue and therefore has to be resolved through harmonious international policies which could be enforced through global governance, so that the traditional interpretation of sovereignty has to be rethought.

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CHAPTER 4

The Effects of the Belt and Road Initiative on China’s Domestic Economy

4.1

Introduction

This chapter will highlight the most important issues that China is presently faced with and how such issues may affect the operation of the BRI. The most pressing challenges and the important opportunities to overcome such challenges are discussed. All such issues have been thoroughly discussed throughout these two volumes. China is in need for vast resources to feed into its economy and it has to find new markets for its goods and services, so that it is vital for China to go out into the global market and find new markets, as well as to find new opportunities for investment. The BRI is likely to enable the generation of demand to overcome the excess capacity of supply within China’s economy. China has also a huge potential market and requires high technology to service its domestic and foreign markets to maintain sustainable economic growth. China is expected to become a high-income economy before 2030 (The World Bank and Development Research Center of the State Council 2014). China’s rapid move towards the innovation frontier and high-technology has been emphasized, especially the implementation of the “Made in China 2025”. The “going out” policy is vital for China’s domestic economy and the BR to obtain the required raw materials to feed into China’s domestic economy and to find new opportunities for markets and investments. The BRI will greatly increase the demand and supplies of goods and services in China. The importance of balanced economic growth has also been emphasized.

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China is reducing fast its overdependence on advanced economies so that South–South trade is accelerating. The market reforms and the opening up of the economy to foreign companies and capital inflow into China contributed towards economic growth which caused an emerging middle class to rise; whereas many of the unskilled and the lowest income earners are being left behind. Market reforms may not be implemented equally in all regions at the same time; while successful reforms in one region may have positive spillover effects in neighbouring regions. Some regions may take off before other regions because of various reforms which could then at a later stage act as a leading goose to be followed by other regions. Depending on the internal conditions of specific regions and the specific reforms undertaken, reforms may lead towards virtuous and vicious cycles, depending on the specific regions involved; that is, not all regions and countries which are part of the BRI will benefit equally.

4.2

China’s Domestic Economy---the Challenges and Opportunities

China has the longest land borders, stretching over 22,000 km, bordering 14 countries. It also has eight maritime neighbours. China’s diplomacy attempts to promote amity, security, mutual benefit and inclusiveness (qin, cheng, hui, rong) amongst its neighbours as enshrined in ancient Chinese philosophy. China intends to pursue a policy of “community of common destiny” (minyun gongtongti) or a “community of shared fate” which would be China-centred. China is a major economy full of contrasts; some sectors are expanding and growing at an accelerating rate while others are staying behind and are unlikely to benefit from the BRI, and others are in decline. Unless appropriate policies are implemented China will become increasingly a divided society as a consequence of “Capitalism with Chinese Characteristics”. Western economies have illustrated that the neoliberal assumption that the benefits of economic growth will eventually percolate down to the lower level of society is a myth, but China is able to introduce corrective policies if it chooses to do so. China’s economic transformation and the increase in inequality imply that not all citizens benefit from such transformation. China has successfully reformed its economy on a large scale since 1978; however, it now faces various complicated governance challenges (Jing

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2017). China is experiencing an increasing social polarization, greater economic inequality, a greater separation between the rural and urban communities, and environmental degradation and environmental pollution. China is making an effort in overcoming some of the difficulties. China’s changes are driven by “incremental learning and adaptation” (Jing 2017, p. 37). China’s success is the consequence of “adaptive and reactive fine tuning” (Jing 2017, p. 38), while the shift to performance-based legitimacy has been decisive” (Jing 2017, p. 38). China’s fast economic growth has been of great benefit and the opening up of its economy since the economic reforms of 1978–1979 to China’s domestic economy and its people. China’s economic growth has also affected to a large extent the global economy. The globalization of China’s economy has enhanced China’s domestic economy through its exports (Chen 2011; Rodrik (2006) and imports (Chen and Ma 2012) as well as through foreign direct investment (Yao 2006). High transportation costs will lower the rate of regional divergence, so that low transportation costs will lead towards greater convergence (Krugman 1991a). China is committed under the obligation under China’s WTO accession rules to let foreign freight forwarders to enter the market. The containerization of freight is essential to promote sustainable economic development. China has gained most from new multiple imports primarily from Japan and Germany, while countries that have considerable natural resources such as Australia, Indonesia, Iran and Russia also made significant contribution towards the welfare gain in China. According to the US Energy Information Administration (2018) China has surpassed the United States as the World’s largest crude oil importer in 2017, importing 8.4 million barrels per day. China diversifies its energy-importing sources for security reasons. The BRI could open up additional vast mineral resources and oil reserves and natural gas for the Chinese domestic economy as well as transporting such resources to other countries. China’s huge imports for agricultural products and raw materials have increased their prices on a global scale. China is also the largest exporter and importer in Asia. China’s open-door policy has moved China from a basically autarky system towards free trade which of course brings both, opportunities as well as challenges. China’s international trade has different effects on different countries, different economic sectors and on different social classes. “Foreign firms account for 26 per cent of China’s gross value of industrial output, but account for 69 per cent of industrial exports and for 90 per cent of exports of high-technology products” (Nolan 2014, p. 754).

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The success over the last decade of multiple Chinese state-owned corporations has largely shown the irrelevance of the Washington Consensus (Nolan 2014). Multinational firms have made significant contribution to China’s economic growth, especially within “high-technology sectors where foreign-invested enterprises account for around two-thirds of overall value-added” (Nolan 2014, p. 752). In the internationalization of the growth of Chinese corporation through the implementation of the BRI state-owned enterprises (SOEs) play an important role in increasing expansion into foreign countries when it is regarded as of strategic priority for the state (Hong et al. 2015). The BRI facilitates the imports of much needed raw materials and accelerates the growth of China’s domestic economy, including China’s border regions through cross-border trade which brings participants of the BRI closer to China in economic as well as political terms. China and India constitute more than two-fifth of the world’s population and combined with their rapid industrialization has a considerable impact on the demand for primary industries, including sources of energy. Citizens’ confidence in their country’s economic performance may increase consumer spending and investment. China’s increase in confidence in their country’ economy is not based on “how well China has been performing in absolute terms, but how China has been performing relative to its neighbouring countries” (Zheng 2014, p. 36). According to the Economic Confidence Index, China improved its confidence score from 65 in 2009 to 73 in 2012, whereas in the case of India, it improved from 7 to 16, for Russia, it improved from −30 to 5 and for Japan, it declined from −49 to −56 during the same period (p. 39). After making a comparison about China’s and India’s performance on the economy and human development indicators, Aijar (2013) ask the profound question: “What does one make of the fact that the Chinese autocracy has been more concerned about human development than governments elected by a democracy” (Aijar 2013 cited by Zheng 2014, p. 46).

4.3

China’s Labour Market

In 2006, China’s agricultural sector consisted mainly of approximately 200 million small-scale family peasant holdings of less than 0.5 hectares (Gao et al. 2012) which leads to higher cost of production and inefficient use of

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the land. However, the introduction of large-scale farms to increase agricultural productivity would imply the displacement and the impoverishment of millions of small-scale peasants. Kongsamut et al. (2001) show the importance of structural changes from the agricultural sector to industry as a consequence of higher income elasticities of manufactured products in contrast to agricultural products. On the other hand, an increase in the labour force in the agricultural sector has a negative effect on economic growth. Masden (2009) argues that openness to trade enhances economic growth by reducing trade barriers through the acquisition of knowledge which is embodied in imports and through an increase in competition. The interaction with foreign markets can lead to improved product quality through processes of learning-byexporting externalities when the foreign markets demand higher product quality compared with the domestic market. Capital accumulation has been the main determinant of economic growth in China and other East Asian economies (Collins et al. 1996). The high increase in the Chinese demand for food imposes pressure on land, both within the Chinese domestic economy and in countries which supply much of the food to China. An additional 21% of cropland is required by 2030 to grow the additional food (Yu et al. 2016, p. 593). China increases its urban population by an annual 4% which puts further pressure on the land (The World Bank and Development Research Center of the State Council 2014). Between 1997 and 2008, 12 million hectares (Mha) of cultivated land has been lost as a consequence of urbanization (Yu et al. 2016, p. 593). Within a decade, 70% of China’s population will live in urban areas. China’s urban population increased from 18% in 1978 to 54% in 2013 (Taylor 2015, p. 108). The current urbanization in China progressed rapidly whereby rural people turned from food producers to urban consumers. As urbanization moves on, self-sufficiency in food declines. At the same time the agricultural sector becomes more commercialized with the introduction of an increase in the number of larger agribusinesses. The growing swine industry in China increased pressure on the grain market to feed the pigs. China’s increase in the usage of grain is expected to increase “from 12 to 32 per cent of the global total” (Yu et al. 2016, p. 600), so that this will have to increase China’s imports of grain. China’s increase in its consumption of fossil fuels is projected to increase from 12 to 25% and that of other minerals from 27 to 61% of global consumption (p. 600).

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Before the economic reforms after 1978, China was one of the poorest countries but has shown a fast economic growth since. According to GDP measured through the purchasing power parity (PPP), it has become the biggest economy which induced various structural changes which require various adaptations towards new social conditions. However, poverty breeds complacency and much of the rural population is unaware of the required changes and often resist any changes largely because the Chinese social structure did not provide any incentives beyond living from day to day for the lower social classes. China has almost 300 million workers that serve as the reserve army of labour who are being utilized for the completion of various construction works, including those which are part of the BRI. Peasants are largely involved in subsistence agriculture because there are inadequate transport facilities in the countryside; the successful implementation of the BRI can make a difference. There are still too many individuals who are habitually raiding dustbins in the hope to find some worthwhile disposals which could be of use. Chinese economic growth relied in the past to a large extent on cheap labour for exports. Chinese wages were also low as a percentage of labour productivity (Ceglowski and Golub 2007). However, wages in China have increased faster than productivity from 1998 to 2010 for skilled as well as for unskilled workers, the average growth rate per annum of real wages was 13.8%, whereas the increase of real GDP during this period was 12.7% (Li et al. 2012, pp. 59–60). Wages in China have also increased faster than in developing countries. Compared to labour productivity, Chinese wages have become more expensive since 1997. Many workers are self-employed, so that Liu and Huang (2016) highlight the distinction between “necessity entrepreneurs” and “opportunity entrepreneurs”. Self-employed workers have less financial, human and social capital than workers who work for a wage, but have higher income. China has increased its productivity of labour; although Chinese wages have increased, output per worker has increased also. China has moved on from labour-intensive exports to the production which increasingly depends on innovation, technology and an increasing scale of production. Growth in productivity in China has increased overall. Brandt et al. (2012) find that China has increased its productivity between 1998 and 2007 in the manufacturing sector by 8.0%; so that productivity growth is an important driver for China’s economic growth, especially its export growth.

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China’s labour market is now mostly market-driven. During the early 1980s, open unemployment increased as many of the youth that had been sent down to the countryside returned to the cities. Self-employment was encouraged because few jobs were available. Most jobs in the cities available to migrants from rural areas are considered as 3D (dirty, dangerous and demeaning) jobs. Much of the unemployment of rural migrants is structural as there is a considerable mismatch between available skills and available jobs. The sharp increase in the enrolments in colleges and universities leads to a lowering of the quality of education. Urban workers are protected from competition from the rural labour force so that the discrimination against rural workers is intended to protect the living conditions of urban workers. The urban population is able to obtain better education and so is more likely to benefit from skill-biased technologies (Meng 2012). An increase in education is required in China for sustained economic growth; including that of the rural population, as much of the workforce will be drawn from rural areas. When China has reached the Lewis Turning Point, the internal migration from rural to urban areas will largely cease and this will increase the industrial wages; so that inequality of income will decline, and the labour share of GDP will increase as well. The structural power of the market counteracts worker solidarity and prevents collective action. Workers’ rights are unlikely to be enhanced during the foreseeable future. Since 2003 China has changed from labour surplus (mingongchao 民工潮) to a situation of labour shortage (mingonghuang 民工荒). Institutional restrictions on rural–urban migration have to be considerably reduced to overcome the labour shortage in unskilled labour; without an easing of the institutional restrictions to access to social welfare and social service in cities for rural migrant workers industries will become more capital- and technology-intensive so that China is moving towards higher value-added industries. Nongmingong (农民工) people have a rural hukou but have migrated to urban areas without obtaining an urban hukou. The rural migrant workers who do not possess an urban hukou have less rights and less protection than urban workers with an urban hukou. Since the economic reforms, particularly since globalization, Chinese cities have expanded rapidly leading to urban sprawl, which has caused environmental deterioration. The concentration on the capital-intensive resource sector may lead towards resource dependence which can prevent a country from fully developing. Increased economic growth may “co-exist with, and indeed in some

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cases, causes absolute poverty (Kaplinsky 2013, p. 1299) which is largely the consequence of capital-intensive innovations whereby the labour-saving technological progress causes structural unemployment. However, cheap labour will eventually decline, provided economic growth increases the level of income but also makes the distribution of income more equal (Garnaut 2010). There is a shortage of labour, especially skilled labour in multiple urban areas while concurrently there is still a surplus of labour in many rural areas, largely because of the mismatch between available jobs and skills demanded for newly created jobs. When the transfer of rural workers to urban areas ceases, the inflection point has been reached. The fast increase in wages is partly explained by a shrinking pool of the labour force as a result of a decrease in the population. Labour shortages are occurring in various areas, especially in China’s coastal areas which are further increased as a result of a decline in the rural–urban migration. Furthermore, the population of China is also ageing fast as a consequence of the previous one-child policy. The return to education increased while the return to college education increased fastest from approximately 7.4% in 1988 to 49.2% in 2009 (Li et al. 2012, p. 67). Universities have expanded according to industrial needs; knowledge that is not regarded to foster human capital for corporation is denigrated and regarded as irrelevant; faculties of economics have become faculties of business.

4.4

The Distribution of Income in China

Inequality in income and educational opportunities in China may be a drag on Chinese future economic growth, even though inequality may increase economic growth during the earlier stages of economic development. The Gini coefficient has increased considerably and if it continues to increase as at present, China may become a divided country whereby older citizens will remain behind and are unlikely to benefit greatly from China’s economic growth; indeed, as the economy grows the costs of living increases as well, but the income of the lower classes may not increase to the same extent. Before the economic reforms, the Gini coefficient in China for urban areas was less than 0.2, and for rural areas, it was between 0.21 and 0.24 (Xue et al. 2014, p. 3). The Gini coefficient has constantly increased ever since. However, the Gini coefficient may not be a true indicator of inequality in China because it ignores regional differences in costs of living in

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different provinces which are developing at different rates. In more developed provinces, the income is considerably higher but so are the costs of living. Migrant workers are also excluded from most household surveys; hence the Gini coefficient is not absolutely accurate. However, the increasing Gini coefficient indicates a Mathew effect of accumulated advantage, whereby the richer get richer and the poorer get poorer. According to Sun Yat-sen, the concept of minsheng—popular well-being balances the requirements of production with the welfare of the producer; this may be applied to the agricultural sector in China where the requirements of food security is balanced with the livelihood of the largest section of China’s population. However, China may be described as a divided rather than as a harmonious society; for example discrimination in the labour market pushes down wages of migrants from rural areas and reduces wage increases of this group (Meng and Zhang 2001). The wage gap has not closed as yet. However, a large number of the younger and new labour force of the urban population were able to increase their wages which caused in many instances an expectation inflation and so has caused many borrowers to increase their debts at a rapid rate. In China, rising income caused first a car boom, followed by a housing boom. The housing boom is now sharply decelerating as the Chinese economy is declining and borrowers of home loans have to repay their loans at an accelerating rate as debts for housing has grown sharply. On the other hand, the emphasis on income equality during the first thirty years of the People’s Republic led to the equalization of poverty. More than 800 million Chinese did rise above the poverty line and over 300 million Chinese have joined the middle class. In contrast, the numbers of living globally below $1.25 per day (the Millennium Development Goal benchmark [MDGI]) declined by 165 million for the period between 1990 and 1998. A further decline of 454 million occurred between 1999 and 2008; a total reduction by 619 million while the decline in China during the same period was 510 million (Kaplinsky 2013, p. 1297). However, the Chinese growth rate has declined and is expected to slow down further as a normal process of going through the stages of economic development; hence more advanced economies are expected to slow down. However, through the successful implementation of the BRI, together with China’s “going out’ policy, China may not follow the traditional path of economic development and may continue its growth rate at a higher rate than is usually expected.

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4.5

Economic Growth and China’s Domestic Economy

China has now a huge domestic market which continues to grow; for example, China is the largest as well as the fastest-growing car market. The successful implementation of the BRI will reduce its dependence on economic growth in Western economies, especially those of the United States. The relatively high economic growth in China may suggest a low rate of unemployment; however, the rate of hidden unemployment is large in China; furthermore a large proportion of workers are underemployed. Without the informal sector, unemployment would be much higher so that disguised unemployment is high. Much of the rural labour force is engaged in labour-intensive agriculture so that the average GDP per capita in rural regions is low and the average income per head is also low. Hence an appreciation of the RMB could further increase the rate of unemployment which may be in various areas socially unacceptable. Furthermore, an increase in GDP may have little effect on well-being; but instead what is of importance is how such increases in GDP are distributed. Poverty has increased in the United States and the distribution of income has become more unequal in the United States as well as in China according to the Gini coefficient; although the level of poverty has considerably declined in China. The major problem China is faced with is unbalanced economic development between different regions in China. China is making considerable efforts to reduce pollution and poverty; nevertheless, there is an increasingly unequal distribution of income. China has reduced the level of pollution as well as the level of poverty, but a more balanced economic development is required to further contribute towards a reduction in poverty, pollution and inequality of income. Domestic consumption in China accounts for about 55–60% of Chinese domestic growth in consumption; it is not anymore primarily export-driven. Krugman (1991b) made the point that when industries are concentrated in the coastal provinces, it will attract other industries to these provinces so that they may benefit from the backward and forward linkages. The BRI also facilitates agglomeration in border provinces and in coastal provinces. As wages in China will increase, various labour-intensive exporting industries are expected to move to countries which have lower wages than China. The discrepancy between the eastern coastal provinces and the internal provinces has existed before the reform period (Kim and Knaap 2001). Guizhou is according to virtually all economic indicators the poorest

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province whereas Xinjiang has experienced faster economic growth, so that there are multiple regional equilibria. China still experiences highly unbalanced economic growth and development which may become more balanced through the successful implementation of BRI whereby internal, especially western provinces will be able to benefit economically; Xinjiang will be especially of considerable importance. The coastal provinces have high demand for resources which were mainly available from the interior regions of China. Zhang et al. (2008) argues that “because of the institutional arrangements regarding property rights of natural resources, most gains from the resource boom have been captured either by the government- or state-owned enterprises” (p. 7). More efforts are being made now to develop the Western Provinces; nevertheless the gap in economic development between the coastal and interior provinces has increased as the per capita growth in consumption has progressed faster in the coastal provinces. China realized the importance of balanced economic growth and the need to promote technological change. Hence, China is upgrading professional and technical education rather than just in business schools, which are less in numbers in China than in Western Countries. China is now developing high-tech industries, based on local patents and acquiring the required engineering skills. China is also increasing its high-tech investment in foreign companies, both in the domestic economy and in foreign countries. Rather than importing machinery from other countries, China bought or invested in the manufacturing enterprises producing such machinery and thereby acquired technology and also improved thereby its own technology. China spends large sums on fixed capital investment in the domestic economy; BRI will be able to extend such capital investments through the implementation of various projects, especially in building new infrastructures. Food self-sufficiency in China is expected to decline so that countries associated with the BRI will be increasing their food exports to China; however, the sharp increase in grain consumption in China is largely due to the increase in domestic demand for livestock; although the import of meat products are also increasing. The economic growth of countries associated with the BRI is largely associated with economic growth in China; that is, when China’s economy declines, the economies of BRI related economies are expected to decline as well due to the close interconnectivity between China’s economy and the other economies.

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Sustained economic growth and development requires that the Chinese economy is to be rebalanced away from the corporate and government sectors towards households. The consumption level in China is approximately 47–50% of GDP which is the lowest level of any major economy (Yang 2012, p. 142). More funding has to be channelled towards education and research, health care and social security. Japan used to be a model of economic growth, but not anymore; the lifestyle is deteriorating. It is in sharp contrast to China which promotes alternative sources of energy; areas of extreme poverty have been virtually eliminated. Japan will do better when it follows China in devising independent economic policies rather than following the Washington Consensus which constrained Japanese changes in economic and social policies. Economic development inside China is still largely unbalanced and the BRI is expected to facilitate economic development of Chinese provinces, such as Jilin, Yunnan and Xinjiang. China’s economic aid through BRI will help participating economies as well as its own domestic economy to grow and prosper. Western countries were not much interest in creating infrastructure so that China is able to fill a financial gap and such investment is a viable alternative to US Treasury bonds which is also of importance as the US dollar becomes more unstable. China has a national savings rate at almost 40% of GDP and the current surplus is about 2% of GDP so that funds for investments are available.

4.6

New Markets and Investments

Marketizaton implies that the economy is driven by market forces and by corporations rather than by the state. However, infrastructures have to be constructed before marketization can be successfully applied, and projects such as the BRI cannot be successfully initiated and completed by corporations who are driven by their search for profits. The transition towards a market-driven economy has been uneven amongst the provinces in China (He et al. 2008). Coastal provinces in China are more market-oriented and local governments intervene less. The reforms of 1978 and beyond introduced a policy of “reform and opening up” (gaige kaifang, 改革开放). China’s economy was relatively backward before the economic reforms which began in 1978, so that China had a large need for catching up in economic growth which partly explains the fast increase in GDP since 1978 as China was closing the productivity

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gap. China’s economic transformation is a process of greater decentralization, marketization and globalization. Greater decentralization increased the incentives of local governments to establish sources of revenues and the promotion of economic development within their jurisdiction. The Chinese economy is heavily influenced by government policies, which favour the government and corporate sectors and exports, instead of the wellbeing of the public. Various policies have been introduced in China to open up its economy. During the 1980s and 1990s special economic zones (SEZs) providing various input-cost advantages and tax concessions in coastal provinces were made available. In 1996, all provinces were opened up to FDI. China’s transformation of its economy resulted in greater marketization, more devolution of power and increased globalization (Wei 2001). Marketization resulted in the liberalization of prices, markets, investments and trade, as well as partly the privatization of the state-owned companies. SOEs were privatized on a large scale, so that by 2015 “there were only 106 SOEs directly supervised by the central government” (Jing 2017, p. 39). SOEs are owned by central, provincial and municipal governments but are not managed by them. The devolution of power led to greater incentives for local governments to create revenue. Globalization opened up the domestic economy to foreign international investment and Chinese investment in other countries. The main driver of economic growth in China is caused through increases in domestic investment which has been largely commodityoriented rather than consumption-oriented; however, consumption has increased recently and has to increase continuously within the domestic economy if China’s economic growth is to be sustained. Successful investment policies require coordination between different governments at the level of countries and regions, if they are to succeed in supporting various BRI projects. China’s size of its economy and the achievement of sustained economic growth and development require access to global markets. Through the BRI China will be able to find new markets for its products and new venues for investment for its large capital stock. China will be buying energy with RMB from various countries which are part of the BRI which is the biggest trade-infrastructure project ever seen. The projects of the BRI will increase demand for Chinese goods and services,especially in those countries which are part of the BRI. Chinese consumers will continue

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to increase their purchasing power but the earnings of the Chinese workforce has to increase as well to do so. Presently wages are kept relatively low because of the huge rural-to-urban migration, although it is increasing. An increasing urbanization in China as well as in India increased the demand for raw materials which largely increased the South–South trade. China’s economic rise is primarily based on the emphasis of exports, huge investment in infrastructure and the conversion of agricultural land for the development of real estate. The “going out” policy is using excess productive capacity in the domestic Chinese economy and finding markets for Chinese products. China is rapidly reducing its overdependence on advanced economies for its exports and instead is expanding its exports to emerging and developing countries. Advanced economies are declining and so are their demands for imports. On the other hand, trade volume between China and South America has increased by over 30% per annum between 2001 and 2014 (Yu 2015, p. 1049). China overtook Germany in 2009 in exports and is now the largest exporter in the world. BRI is able to open up new markets for Chinese exports and for China’s foreign direct investment and concurrently gains access to sources of energy and raw materials. China is in search for greater markets under the “going out” policy in addition to its huge domestic market. The size of the market is also important as a determinant of innovation activities (Schmookler 1966). An increase in the size of the market leads to greater demand and so increases returns on investment in technological change (Joshua 2015, pp. 82, 91–95). Schmookler (1966) illustrated this through the demand–pull theory of technological change. China’s economic growth has brought greater opportunities and challenges for other countries through the interaction of global trade. China’s large domestic market has a need for large imports of raw material and goods and services for domestic production as well as for consumption; hence foreign investment has moved to China. Chinese economic development with imperial characteristics is designed to obtain raw materials from underdeveloped nations for the development of one’s own domestic economy. The BRI will help in assisting to reduce much of China’s present overcapacity so that China has adopted a “going out” policy. China has a large surplus of savings and much of it will be invested in countries which are part of the BRI to ensure continuous supply of raw materials and the supply of energy. China has to secure resources, especially to ensure sufficient supply

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to satisfy China’s high demand for energy; so that China has invested heavily in other countries’ development which has become an important role in China’s drive towards a sustainable economic growth. China is promoting an active “going out” policy to encourage Chinese investment in foreign countries to maintain high sustainable economic growth and an expanding economy. The BRI will also vastly increase Chinese exports and imports. Export growth can promote economic growth in other areas as well (Buffie 1992); they may create positive externalities in non-export sectors, for example improving production techniques; they also attract foreign exchange which will improve the balance of payments (McKinnon 1964), and it increases factor productivity because of increasing returns to scale (Makki and Somvaru 2004). Economic growth may also increase exports because of increases in productivity which may lower the costs of production (Kaldor 1967). Balasa (1985) shows that an outward-oriented policy together with the promotion of exports in response to the oil shock 1973 had favourable effects of economic growth. Balassa also shows that lower income countries can increase economic growth by using modern technologies and the exports of manufactured goods. Balassa (1978) shows the beneficial relationship between exports and economic growth in developing countries which had already established a manufacturing base. The BRI will also provide opportunities for Chinese investment, and not only in the construction of infrastructure to facilitate the concept of “going out” (zouchuqu) to find new markets and to create an international financial market for the RMB which will help to establish the RMB as a major international reserve currency. The BRI will also affect China’s political and economic relations with Europe as the constructed infrastructure will be able to transport exports and imports more efficiently between China and Europe which will also benefit countries situated in between.

4.7

Moving Towards the Innovation Frontier

On the other hand, Rodrik (2006) finds that China’s exports are skewed towards high-productivity goods which is considerably more than other countries export at the same income level as that of China, and makes the valid point that China’s economic growth rate would have been very much lower if China had only exported goods that other countries exported at the same level of income as China.

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Newly emerging economies are new sources of innovation with structural implications. Newly emerging markets generate growth and new innovations which are then sold in developed economies whereby previously it was the reverse. Imitation and diffusion will reduce the technology gap, whereas innovation tends to increase the technology gap. Whereas China’s economy was previously based on the acquisition of new innovation and secondary innovation to further minor improvements as in the case of production processes and various technologies. China is moving now towards the innovation frontier. It has begun to innovate itself and also exports various new innovations. China is moving up the volume-added chain as it becomes more innovatively driven. China is going through a transformation from “Made in China” towards “Innovated in China” to enable it to move up the global value chain (Liefner and Wei 2014). The BRI will enhance the “Made in China: 2025” project which is expected to promote China as a global leader in high-tech. The “Made in China: 2025” targets robotics, aerospace, AI, and shipping and shipbuilding as priorities. A big part of “Made in China: 2025” is China’s “blue economy” as indicated through its vast construction of port infrastructure and shipping to reduce costs in maritime trade and enhance interconnectivity between members of the BRI. “Made in China” 2025 is intended to consolidate its manufacturing power in the first stage and is expected to be followed by stage two which is aimed at enhancing China’s technological competence and thereby increases its competitiveness. This stage is to be accomplished by 2035. Stage three is intended to be completed by 2029, the 100-year anniversary of the foundation of the People’s Republic when China intends to advance and lead innovations in its own right to gain a competitive advantage over other nations in the creation of advanced technology. The drive towards “Made in China” 2025 is a combined effort between government, educational facilities, research institutions and the technological application towards processes of production. In its rush to become the world’s manufacturer and the largest industrial power, quality control in China has not been given any priority; Japan went through similar stages of economic development during the early 1950s. “Made in China 2025” is intended to change China’s economic transformation from fast economic growth towards quality. “Made in China 2025” faces numerous hurdles; wages are increasing and China has to find new markets for its excess capacity. There are considerable environmental constraints and China has to rely on the supply of natural resources brought

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in from other countries. The BRI is intended to close such gaps without a strong manufacturing base there cannot be widespread well-being in the nation. The BRI together with “Made in China 2025” is intended to capture the market for advanced technology products; but at the moment China still depends to a large extent on foreign technology, but it is moving towards an innovative economy. Quality of production is relatively low in conformity to Engels’ law (Joshua 2017, pp. 183–188). The aim is to turn China’s economy into one driven by world-class high-technology; first in high-speed rail technology and moving into the innovation and production of electric vehicles, robotics, AI technology, aircraft, and eventually other leading-edge technologies to become self-sufficient in technological know-how.

4.8

The Globalization of China’s Economy

China’s economic transformation not only affected its domestic economy but it has an impact on a global scale. The deepening integration of China in the global economy will affect the international labour market; for example, the rate of unemployment. Autor et al. (2013) shows that import competition accounts for one-quarter of the aggregate decline in employment for the period between 1990 and 2007 within the manufacturing sector of the United States. However, not all such changes in employment may be the consequence of Chinese competition, as technological change also contributes towards the rise of unemployment. However, when imports from China are increasing the level of unemployment in countries which compete with China for the same market, then it may not change the level of unemployment in countries which receive the imports of those countries. China and other emerging countries promoted an export-led growth and their surplus has been invested in financial assets in the deficit countries, primarily in the United States; hence financial globalization led to imbalances. Financial globalization promotes export-led growth in emerging economies and leads to increasing deficits in the advanced economies. It may be overcome by providing an elastic supply of liquidity. To reduce financial instability, uncontrolled capital flow must be changed towards greater controls of capital flows. Indeed, Keynes (1933) argues that finance should be primarily national. During the 1980s and the 1990s, the Washington Consensus advocated open trade and liberalization of capital flows, regardless of an individual economy’s situation; including the privatization of SOEs and the imposition of strict fiscal policy discipline.

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4.9

Conclusion

This chapter discussed the impact of the BRI on the domestic economy of China. It has been highlighted that the most important challenges and opportunities which are faced by China are the labour market and the widening distribution of income. It has been argued that an increase in economic growth leads to a widening distribution of income. It has been emphasized that for the Chinese economy to grow it has to globalize its economy, so that it may be able to find new markets and opportunities for greater investments; although China has an increasing large domestic market as well. China will be able to find new markets and new sources for the required raw materials. China’s self-sufficiency in food is declining and members of the BRI will be able to increase their food exports to China. China’s policy of “going out” will result in greater investment by China in the countries which are included in the BRI; China will find new markets for China’s domestic production, and will also increase the international financial demand for the RMB which is expected to become a major international reserve currency. The BRI will also facilitate interconnectivity between China and Europe, and other countries which are not part of the BRI; hence, China’s trade relations are expected to intensify with countries beyond the BRI. However, globalization works best for countries which have the comparative advantage, so that it was advocated by the United States as long as it could compete on a global scale; now as the economy of the United States is in decline and China is gaining a comparative advantage, it opposes globalization as it has lost its comparative advantage. China’s economic growth and the internationalization of China’s economy are causing a shift in global trade. As China’s domestic market becomes more and more integrated within global markets, prices within China’s domestic economy are expected to be affected by the conditions of demand and supply within the international economy. China has become the biggest trading nation and is increasing further its share of global trade. The BRI will go a long way to achieve such aims. Various reforms are discussed which may lead towards a sustainable economic development. Various processes of transformation will also be discussed. However, China’s domestic economy is being unevenly developed; hence policies have to be adapted to the specific requirements of particular

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regions; for example, various regions have a higher degree of underemployment and hidden unemployment than other regions where there is a shortage of labour, so that different policies may be required. Poverty has declined considerably in China but the distribution of income has become more unequal. The implementation of BRI may be able to reduce the present imbalances of economic growth between various provinces; especially the western provinces are likely to benefit. Economic growth in China is mainly caused through domestic investment to produce commodities; although consumption has also greatly increased. China’s move towards high-technology research; especially through its “Made in China 2025” programme is also seen as an important move. China is expected eventually to advance from this programme towards an “innovated in China” push and is expected to emerge as a global leader in high-technology. The “going out” policy is also seen as vital for China’s future success in economic growth and economic development which implies a greater shift of global trade towards emerging economies, and eventually a shift from a unipolar towards a multipolar world order. Almost 90 countries and various international organizations have signed BRI coordination agreements with China. However, there are various obstacles which are faced by a possible successful implementation of the BRI; nevertheless it has been argued that the BRI may be able to facilitate sustainable economic development in various countries. However, a sustainable economic development would have to go beyond the narrow projects, as the conditions of the countries have to be considered as well, so that it may promote a more inclusive economy which may spread out the benefits of the BRI more widely and equally.

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CHAPTER 5

Effects of the Belt and Road Initiative on the Domestic Economies of Participating Countries

5.1

Introduction

China–Global South relationship is “characterized as a new centre–periphery global network power based on investment and trade” which they refer to as “Asian Consensus” (Vadell et al. 2013). China has increased its direct investment in other countries sharply; between 2003 and 2009, China’s direct investment increased by a factor of seven from US $33 billion to US $230 billion (Cheung et al. 2012, p. 201). China has now emerged as the main provider of capital on a global scale. As countries of the BRI are placed in different stages of economic development, they compete with China and other countries at different levels, so that different complementarities can be established between different regions, as well as on a national and global scale. Many of the BRI members complement each other in terms what they have to offer and what they require to facilitate their economic development. The level effects and the relative effects of trade in the participating countries resulting from their trade with China will have to be considered as well as the complementarities and competitive factors of trade in individual countries. Various participating countries have different needs for infrastructure to integrate markets and production facilities so that economic development can proceed along with new projects of the BRI. However, as the participating countries in the BRI are not a homogeneous bloc, specific economic policies are required to enhance economic development of particular © The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28068-0_5

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regions, so that the obstacles faced by dual economies have to be considered so that they may be eliminated or reduced. The marketing system, managerial skills and operative skills in various regions of the participating countries are often inadequate and may have to be improved. A common market entails that the financial system in the integrating regions are harmonized and their economic policies are unified to pursue a common goal. Regions, even when they have successfully integrated generally have a hegemon which is able to exert its power as a consequence of its economic dominance which then establishes its political dominance. Hence, China is a hegemon in East Asia and Southeast Asia, India is a hegemon in South Asia, Brazil is a hegemon in South America, Russia is a hegemon in Central Asia, and South Africa is a hegemon in Sub-Saharan Africa (SSA). Integration then implies not only an economic integration but also a geopolitical one. The implementation of the BRI will be able to create the required connectivity within and between countries to enhance their economic growth and development through the promotion of trade. Once the BRI has been successfully implemented it may further facilitate infrastructures across numerous borders and may also facilitate the coordination between various foreign policies. The integration of various types of infrastructure is not expected to change much of the present location of production facilities within the participating countries. However, much of the trade of gas and oil could be processed in countries from where such raw materials have originated; if the necessary human capital is not available employees can be trained. There is no anticipation at present that production facilities in one country will be used to serve the market in other countries, so that there is a greater emphasis on connectivity. As countries which participate in the BRI are diverse in economic development, this appears to be a sensible policy so that participating countries are able to maintain their present production facilities which may then be expanded as new requirements will arise. This also requires that countries connected with the BRI are not seen as a homogeneous bloc as countries which have become part of the BRI vary considerably from each other, so that the specific economic and social characteristics of the countries involved have to be taken into account. Hence, the economic conditions of the major participants of the BRI have a significant impact on trade arrangements between the major countries. Whereas some of the trade relationships between those countries complement each other, others may compete with each other; so that the countries involved

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will not benefit equally; hence some countries will benefit more from the BRI and contribute more than others towards the BRI. However, 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. 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 and thereby may avoid a resource curse. 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); however many projects are presently implemented, especially in Xinjiang, which are expected to improve the situation. 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. However, without the necessary linkages greater benefits of an increase in openness of trade may not be realized when openness is used only to exploit natural resources, while leaving the rest of a country’s economy undeveloped; especially when the benefits of openness are not equally shared. The BRI is expected to have a considerable impact on China’s domestic economy, the economies of the participating countries as well as on the global economy. The endogenous changes in international trade have led to greater bilateral cooperation. Since 2005, various bilateral trade agreements have been signed by China which is expected to change the trade relations as well as the political landscape. Various bilateral trade agreements between China and other countries have been explained. Bilateral agreements between governments or corporations could be made in payments of a nominated currency, such as the yuan, or may be traded for other goods and services.

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5.2

China’s Trade and Investment Within the African Continent 5.2.1

The Belt and Road Initiative Enters Africa

The African continent is inhabited by over 1 billion people in 54 countries which differ profoundly from each other in term of resources and economic development, so that the BRI will affect such countries to different degrees. Africa is the world’s poorest continent and has over thirty least developed countries (LDC) (Vickers 2013). There is a high level of synergy between China’s imports of agricultural products and China’s exports of goods and services, and China’s requirements of raw materials. Africa possesses 50% of global world reserves, 95% of the world’s diamonds and over 30% of the world’s cobalt and chrome. Africa has vast natural resources which could be partly domestically processed with the implementation of the right policies. China has become the dominant foreign power on the African continent and for many African nations China has become the main trading partner. The Forum on China–African Cooperation (FOCAC) was established in 2006 to create multilateral deals and projects between African countries and China for the promotion of sustainable economic development. This forum was attended by 54 countries in September 2018 in Beijing. At this meeting, China and Algeria signed an agreement for Algeria to join the BRI. China also provides free military aid to the African Union. FOCAC includes China and all African countries, except Eswatini, known as Swaziland before 2018. Eswatini is the only African country that diplomatically still recognizes Taiwan instead of China (PRC). The non-recognition of Taiwan as a separate country is imposed as a condition for loans granted by China. SSA consists of 47 countries with large differences between them in economic, social and political make-up, so that the BRI will affect them to a different degree. China has become the largest trading partner for SSA and China’s foreign direct investment (FDI) has reached approximately US$16 billion in 2011 (Drummond and Liu 2015, p. 318). Drummond and Liu (2015) find that China’s domestic investment has a significant positive effect on its imports from SSA, moreover such impact is greater than on the rest of the world. The increase in trade between China and SSA is partly the consequence of the economic growth in both China and SSA which is considerably faster than in western advanced economies, and

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partly as a result of China’s requirements of raw materials for its economic growth. During times of the colonial era, African countries have not benefited from the exploitation of their resources by their colonial masters. However, the relationship between African countries and the emerging economies “appears to be increasingly symbiotic” (Vickers 2013, p. 673), whereby resource diplomacy, the seeking of new markets, and the building of consensus around a newly emerging global order which may be more inclusive and multilateral driven by multinational corporations. China–Africa community of common destiny is a common leitmotif to lead to shared prosperity. The assumptions that China might act just as colonizers are largely rejected by Africans who would regard a partnership with China as a better alternative to the Western colonialists who plundered the African Continent and so expect the Chinese partnership to be more beneficial to the African continent (Anyu and Ifedi 2008). After 1978, China’s engagement with African countries concentrated on commercial relationships (Schiere 2010). The BRI is consolidating China’s previous gains in African and other countries. China’s “Going Out” policy encourages Chinese corporations to become global multinationals. Schiere (2010) refers to the Africa–China relationship as one of “commoditiesfor-infrastructure” (p. 619) relationship. With an increase in trade comes an increase in the requirements for infrastructure, such as roads, airports and railways. China has become the biggest investor in SSA and also has become the biggest investor in Latin America. As Sub-Saharan African countries (SSAs) export to China and increasingly to emerging economies it has helped them to avoid the detrimental effects of the financial crisis of 2008–2009 when advanced economies drastically reduced their imports from SSA whose well-being improved by importing cheap consumer goods from China. Sub-Saharan African nations certainly have more sovereignty than they ever had under European colonial powers who not only have stolen Africa’s raw materials, but its people too by implementing the slave trade. Western nations largely insist on multiple conditionalities when providing loans which curtail the recipients’ autonomy and sovereignty. There is a “spatially complex state-capital dynamics” (Mohan 2013, p. 1263) in operation, whether in China itself or in countries where China is engaged in the construction of large projects. Chinese capital is divided between large scale and often state-dominated TNC, and multiple smaller independent companies which are largely autonomous. Different social classes are adamant

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“to transform both the Chinese state and its African counterparts in pursuit of their class interests” (Mohan 2013, p. 1263) which are pushed forward through processes of negotiation and contestation by local, national and transnational actors. Conditionalities which are imposed by international financial institutions contributed in various instances to the low investment in infrastructure in developing countries so that it is able to enhance economic development when China provides loans without any conditions. Presently, the construction of infrastructure with the creation of the appropriate human capital should be given priority and China is able to oblige without too many strings attached. Chinese loans generally have a longer grace period and also a longer repayment schedule as compared with loans from western countries. China offers various loans together with packages in support of multiplepurpose development projects, especially in regard to the construction of infrastructure, particularly in the natural resource sector. China provides loans at low and subsidized interest rates for various infrastructure developments, such as ports, communications, transportation and hydroelectric power. Such financial arrangements are known as the “Angola mode” (Bing and Ceccoli 2013). As China requires natural resources and African countries are in need of development, China and Africa relationship is complementary to each other. Angola has virtually no linkages between the petroleum sector and other sectors of the economy (Hodges 2004); much the same applies to other African economies. China generally adheres to various principles when providing aid to other countries, such as providing economic aid through interest-free or lowinterest loans; or providing support for independent economic development and promoting self-reliance; providing best quality equipment provided by Chinese manufacturers at international market prices; and respect the sovereignty of the recipient country; hence China may offer a viable alternative to Western aid. China is able to provide competitive loans as it has a huge reserve of US dollars invested in US Treasury bonds and so have low opportunity costs with low yields (Schiere 2010). The constructions of infrastructure in Africa are using RMB for financial transactions. The fact that loans are often granted to Chinese contractors may also imply that such loans are effectively tied aid; much of such loans require the use of Chinese labour, materials, equipment and technology (Kopinski ´ and Sun 2014). As funds usually are paid directly to the companies which have won the tender and so directly bypass the government there is a lesser

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possibility of corruption so that funds are used for its proper purpose. Much of the required equipment is provided by Chinese corporations. Kaplinsky and Morris (2009) make the point that much of the loans are paid by the Ex-Im Bank directly to Chinese corporations who are engaged in the construction of the projects and thereby are able to prevent corruption in the host country or it also reduces political uncertainty when funds may be expropriated. Resource-backed loans are mortgaging future revenue and thereby limit a country’s ability to use such future revenue; however it does provide the country with the required infrastructure. 5.2.2

New Infrastructure—New Opportunities

The African Continent has an infrastructure gap. China is able to close the gap and thereby is able to obtain natural resources at a considerable discount. China’s investment in Africa will also increase its political influence in multilateral organizations, for example, the Chine’s investment in Africa will lead to many votes in the United Nations in support of China. The BRI will encounter various obstacles before its successful implementation; for example the maritime route between China and Africa is vital for their trade relationship; however, China lost influence in the Maldives which was regarded as vital for China to protect its maritime links to the Middle East and Africa, while Mauritius, Madagascar and Seychelles are playing off Beijing against New Delhi to see who will give them a better deal; however China gained more influence in Sri Lanka. The alternative Asia–Africa Growth Corridor (AAGC) proposed by India and Japan is at present not a real alternative as it is not economically feasible as most trade between the Asian and the African Continent are conducted between China and Africa. The construction of infrastructure will enhance trade because of greater efficiency in transaction and a decline in direct and indirect transport costs, for example, transport costs for sending products from Angola to South Africa is similar to sending them to China (Broadman 2007, p. 22). Hence, the improvement of trade will require an improvement of infrastructure to connect supply and demand factors to open up new market opportunities. Chinese construction of infrastructure will improve connectivity between African countries and with the rest of the world and thereby lowers transaction costs which will lead to an increase in trade and economic growth. The speed of completion of Chinese projects is considerable faster than those conducted by western countries, and the costs of Chinese projects

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are also cheaper; for example, the projects by the European Union will take about ten years to complete road-building projects, whereas Chinese projects do not extend over four years. This is partly due to the fact that European projects are conducted by independent consulting companies whereas Chinese projects are internally evaluated by the companies (Bénazéraf 2014). Nevertheless, such evaluations in the case of European projects seem to be exceedingly long. However, the faster completion of projects may save costs in the short-run, it often increases costs in the long run because of necessary works to repair the projects of road construction and housing in Nairobi. The BRI will foster interconnectivity between the nations, creates employment and economic activities in the manufacturing sector and increases marketing opportunities. The construction of infrastructure is especially important as about 40% of Africans live in landlocked countries. Exports from Africa to Asia have grown by 15% between 1990 and 1995 and by 20% between 2000 and 2005 (Broadman 2007, p. 9). The Cameron-Chad-Sudan (CCS) Silk Road attempts to connect the Red Sea with West Africa so that the Atlantic Ocean is connected with the Red Sea through the Sahelian-Saharan Silk Road (SSSR) to Senegal. If implemented it would reduce the travel time as transport does not have to go around the Cape of Good Hope and so connects the West African markets faster to Gwadar port which is the CPEC terminal. However, the West-Central African CPEC would go through Cameroon which is ripe for another Colour Revolution. The building of extensive infrastructures may enhance the convergence of economic growth between the regions; although it is more likely that cross-region income distribution may congregate into richer and poorer regions, so that twin-peaks may arise (Quah 1996). Absolute convergence makes the assumption that there is a common steady state whereas conditional convergence allows for differences in steady states and therefore considers local differences whereby regions may converge to each other along long-run growth paths which depend on various variables specific to the regions. “The long-run prospects for lagging developing regions may hinge on a race between economic growth in China and India and population growth in the lagging regions, particularly Africa” (Chamon and Kremer 2006, p. 400). However, population growth has slowed down considerably in China so that it has become less of a problem to economic growth and development. China is the biggest provider of finance

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to developing countries and offers aid to several countries without any preconditions and so is a viable alternative to Western aid which is provided on various conditions. However, that the economic benefits of economic growth do not necessarily percolate down to the lower echelon of society is illustrated by the increase in poverty in Africa living below $1 per day, despite considerable economic growth. Most of the global poor reside in relatively fast-growing middle-income economies. The impoverished population can be divided into two groups; that is, those who are living in Lewis’s traditional sector are making a living in subsistence agriculture or are employed in low-paying employment, and those who are marginalized without access to formal employment (Kaplinsky 2013, p. 1298). Greater globalization channels the increases in income towards those who have the required skills, access to natural resources, patents and entrepreneurship. A North–South structure of commercial relationship has developed between China and the African Continent whereby African countries import manufactured products and export raw materials and agricultural products (Bénazéraf 2014). The high demand for raw material increases their prices which increases the bargaining power of those countries which supply such raw materials. However, western economies undermine the agricultural production in Africa by exporting agricultural products to Africa while at the same time are subsidizing western farmers to grow their products; without such subsidies they would be unable to compete while giving loans to African countries to buy the subsidized agricultural products from western countries. For African countries to move up in the value chain, exports will have to be diversified to enable them to take part in the global production chain (Broadman 2007). The BRI is able to facilitate and intensify such networks to promote greater South–South trade. Network trade would begin initially in the production of labour-intensive products and services but could move up the production chain to produce higher-value-added goods where capital and higher human capital is required. The development of infrastructure is vital for greater regional and global integration. Foreign investment in African countries has to create positive spillover effects. 5.2.3

The China–Africa Trade Relationship

China has become Africa’s largest trading partner in 2009. The increasing trade between China and African countries enables them to diversify

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their exports; however SSA has also become more susceptible to spillovers from China. The BRI is likely to kick-start various economies through state-initiated finance which will increase domestic demand in the participating countries as well as their exports. However, the liberalization of trade may not always enhance economic growth and may retard economic growth; for example income in less developed countries may grow slower as compared to higher-income countries, so that trade openness could lead to income divergence between trading countries rather than convergence (Baliamoune-Lutz 2009). The situation however has changed considerably as the incomes in many emerging countries are growing now at a faster rate. Even though China has become the largest trading partner of the SSA, China’s trade was until recently mainly concentrated on a few countries. Angola, South Africa, the Democratic Republic of the Congo, the Republic of Congo and Equatorial Guinea contributed about 75% of SSA’s exports to China, mainly raw materials, such as petroleum, copper and cobalt; while South Africa, Nigeria, Liberia, Ghana, Benin and Angola contributed about 80% of SSA’s imports from China (Drummond and Liu 2015, p. 321). China’s FDIs in Africa are mainly in natural resources and the potential of markets for Chinese imports. Economic development in China contributed greatly towards the alleviation of poverty largely because of the improvement of rural infrastructure which increased the local conditions for production; however, without a deliberate government-led anti-poverty programme this could not have been possible. Micro-loans and various training programmes for the poor also went a considerable way in reducing poverty. Many countries which are part of the BRI could adopt various programmes which have been used in China. SSA was largely unaffected by the financial crisis of 2008–2009 due to its large trade relationship with China. As there is a close relationship between China and SSA economies, a decline in Chinese investment will have a detrimental impact on SSA economies, especially those that export commodities to China and are part of the regional supply chain economies. As China is now turning more towards being a consumer-oriented economy, China’s investment may slow down so that sectors of the SSA economies may be adversely affected but those that produce consumption goods may gain. Drummond and Liu (2015) find that a one percentage point increase in real fixed asset investment (FAI) in China’s growth of real domestic investment is associated on average with a 0.6 percentage point increase

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in exports by SSA countries. However, the impact is greater for resourcerich countries in SSA, especially in the case of oil exporters; whereby a one percentage point increase in the growth of China’s domestic investment correlates to a 0.8 percentage point increase in their growth of exports. SSA is also more vulnerable to shocks emanating from the BRICs, so that SSA countries have to take into account business cycle synchronization (BCS) whereby possible sustained economic growth in SSA is affected by economic growth in the BRICs and their bilateral trade relationships which is especially important as the share of BRICs global trade will be increasing. Diallo and Tapsoba (2016) find that “SSA’s business cycles and trade are increasingly tied with those of the BRICs” (p. 261). The effect on the BCS will be stronger in non-resource-rich SSA countries because of the effect of “aggregate demand on output correlation and the synchronizing effect of intra-industry trade” (Diallo and Tapsoba 2016, p. 261). They find that “trade with the BRICs has the strongest impact on BCS” (p. 267) which is four times greater than with the G7 which however is the greatest trading bloc within the SSA region. Outputs of countries in SSA are more and more decoupling from the G7 and instead are increasingly related to emerging economies, especially the BRICs countries. The increase in trade between BRICs and SSA is mainly due to the exports of resource materials from resource-rich African countries to the BRICs and the imports of manufactured goods from the BRICs to SSA countries. Hence, diversification of SSA countries is important to prevent a dependence on the export sector of raw materials. Intra-African trade is able to some extent to soften the impact of negative business cycle shocks when they may occur in BRICs countries; diversification of the economy will also increase intra-African trade. The impact of trade flows of the BRICs is about one half of that of the G7. African exports are expected to become more diversified rather than supplying the world with raw materials and agricultural products. SSA is likely to emerge as a new manufacturing factory once the infrastructures of the BRI are implemented following China’s example. By 2017 China has lent to African nations over $100 billion; most portfolio and direct investments have been provided to Algeria, Angola, Cameroon, Chad, the Democratic Republic of Congo, Egypt, Ethiopia, Morocco, Niger, Nigeria, South Africa and Zambia. However, Africa has insufficient capital which is required for sustained economic development. Africa has a potential consumer market as well as large deposits of natural resources, so that the economies of China and Africa complement each other.

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Chinese economic activities in Africa caused trade, FDI and aid to increase. African exports, mainly in terms of raw materials, have increased. The Chinese high demand for African exports increased global prices for raw materials and so improved African terms of trade (Zafar 2007). Africa has also increased the countries to which it exports and so makes it less volatile to changes in the demand for exports. He (2013) makes the point that African producers are able to use low-cost Chinese inputs in production instead of obtaining them from more expensive advanced economies. Free trade agreements contribute to African trade; however, as many African countries are landlocked, this has a detrimental effect on exports (Giovannetti and Sanfilippo 2009). Their results show that an annual increase of 1% in Chinese exports corresponds to a decline of 0.07% in African exports for the same product; hence there is a displacement effect (p. 520). An increase in Chinese exports to SSA leads to a decline in intraregional trade. Overall, an annual increase in China’s exports leads to a decrease in exports from Africa. Public and private Chinese companies are also exporting to Africa its urban planning and design practices. Africa consists of 55 countries, 50 countries are situated within SubSaharan Africa (SSA) and 5 of them lie within North Africa. North Africa comprises Morocco, Algeria, Libya, Tunisia and Egypt. The rise of China in the global economy provides greater opportunities for exports from North Africa, because the traditional markets for exports from North Africa to the United States and the European Union have been declining for many years. North African exports to the European Union declined from 1995 to 2006 while China’s competition intensified and trade increased (Brenton and Walkenhorst 2010, p. 578). Trade between Africa and China has increased from less than $10 million during the 1980s to over $120 billion in 2010 (Bing and Ceccoli 2013, p. 121). Egypt increased its market share whereas Morocco’s share of the global market has declined between 1995 and 2005 as a result of greater Chinese competition (Brenton and Walkenhorst 2010). While wages in the Sub-Saharan part of Africa are much lower in the textile sector, productivity is much higher in the Chinese textile sector (Giovannetti and Sanfilippo 2009). There was an import surge in Egypt in 37 products in 2006 and such import surges have increased since in Egypt, Morocco and Tunisia. However, as Brenton and Walkenhorst (2010) shows, the increase in imports from China was not at the cost of domestic producers but rather at the cost of other countries whose exports to Egypt have declined.

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The trade–investment relationship in Africa is a win-win situation: China gains raw materials such as copper, cobalt, uranium and oil to feed into its industries, while Africa gets improved roads, ports and other infrastructure. China intends to cultivate great economic relationship with SSA. There is an increasing demand for resources from various African countries, especially from Asian countries. However, Chinese investments in African states are not only in resource-rich countries; China has considerable investment in Rwanda, Senegal and Mauritius which are poor in resources. Producerdriven networks are coordinated by large corporations who have direct ownership, whereas buyer-driven networks generally do not involve direct ownership. There is a strong complementary relationship between Chinese investment and the construction of infrastructure and global trade as the main purpose is to facilitate exports. The increase in African exports to China can facilitate greater export diversification in products as well as in destination. Domestic economic growth can be further increased through the participation in global network trade which can intensify forward and backward linkages and thereby can facilitate regional economic integration. African imports from developing countries can also increase the diversification of African bilateral trade flows (Amighini and Sanfilippo 2014). Diversification also implies that African countries may not only increase their productivity in the agricultural sector but diversify into the manufacturing sector as well as into the service sector. Greater diversification eventually leads to a shift in comparative advantage. The key policy factors which affect trade and investment between China and the African continent are “at-the-border” trade and investment policies; “behind-the-border” and the conditions of domestic markets; “between-the-border” factors (Broadman 2007, p. 42) and the complementaries between investment and trade (p. 42) which reinforce each other. Broadman (2007, pp. 42–43) argues that the effects of formal trade and investment policies are likely to be of equal importance to the behind-theborder and between-the-border factors and suggests that policies concerning the interaction between investment and trade flows should take priority. However, Broadman (2007) specifically excludes the petroleum industry in his study because of its disproportionately large scale of investments and instead concentrates on flows of merchandise trade and investment and partly on trade and investment in services.

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5.2.4

Trade and the Impact on African Economic Growth

Trade between China and African countries has been fast increasing over the last 20 years and economic growth has been increasing since the early 1990s (Kummer-Noormamode 2014). China’s economic growth has increased China’s demand for African exports of various raw materials which thereby have increased the prices of commodities. African imports of manufactured goods from China have also increased. The impact of trade between China and African countries depend on the particular African countries involved. Countries specializing in the exports of raw materials benefit most, whereas countries which are engaged in the production of consumption goods are detrimentally affected. Hence, trade between Africa and China does not benefit all economic sectors; neither do all sections of the population benefit equally. The ChinAfrica concept contains a number of various myths such as the importation of a large number of cheap Chinese workers. Imports of consumer goods and cheap manufacturing products from China may be replacing local production but consumers may gain, so that there will be a distributional effect between consumers and local producers. However, under the “Angola mode“when Chinese investments are paid for with oil and raw materials, it will reduce the local content and African countries have less change to participate in such projects so that African countries do not have full opportunities to enhance their learning-by-doing; especially as under the guidelines of the Ex-Im Bank at least 50% of the materials used are to be sourced from China (Habiyaremye 2013), so that there are inadequate backward linkages in local economies. However, any surplus created from the exports of raw materials has to be reinvested into the local economy; otherwise the country may enter an underdevelopment trap whereby sustainable economic growth cannot occur. Furthermore, a sharp increase in the exports of resources may increase the exchange rate and so can make it more difficult to utilize the resources required to create a viable competitive export industry. As China expands its trade with Africa the RMB will be used as a trading currency, especially as China has become the largest investor in Africa. Busse et al. (2016) find that African imports from China have a detrimental impact on African economic growth; whereas African exports of raw materials to China have a positive effect on the terms of trade. To promote sustainable economic growth, the export earnings on development programmes especially in regard to the building up of infrastructure and the provision of education. Attention also has to be paid to the avoidance of

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a resource curse (Carmignani and Chowdhury 2012). Busse et al. (2013) find that the importation of non-resource goods from China had only a modest effect on African economic growth; however, this contradicts the results by Baliamoune-Lutz (2011) who finds a positive impact of imports from China on SSA economic growth. However, Baliamoune-Lutz (2011) lumps resources and non-resource goods together and uses a shorter period for the investigation. An improvement in the African terms of trade can result from an increase in the purchasing power of African consumers of manufactured goods and an increase in African exports in raw materials to China. Economic growth in Africa comes mainly from the exploitation of raw materials which is capital-intensive so that the acquisition of human capital is not essential in this case to promote economic growth. However, an increase in exports of raw materials may crowd out the manufacturing sector because of an exchange rate which is becoming overvalued. The Dutch disease is defined as the displacement of the manufacturing sector with resource exploitation. On the other hand, Baliamoune-Lutz (2011) argues that African countries which are exporting primary products to China and importing from China have a positive effect on economic growth in Africa. Africa’s concentration on the export of raw material and imports of manufactured products is in line with the Heckscher–Ohlin model whereby African countries exports raw materials where they have a comparative advantage, and import labour-intensive manufactured products where they have a disadvantage. Chinese exports to African and other countries often replace domestically produced goods in developing countries. China is able to provide African countries with low-cost consumer goods and capital goods as well as the opening of new market opportunities. China may not only displace domestic labour in countries where it exports to, but may also cause a decline in the exports of the countries to which it exports. The argument that imports from China by African countries are likely to displace domestic products in African countries may underestimate China’s declining cost advantage which has also been argued by Shafaeddin (2004) in regard to exports from developing countries to other countries. However, most analyses confine themselves on the exports of labour-intensive products as a group whereas Shafaeddin (2004) considers exports at a disaggregate level because products within the same group are usually not homogeneous. The increase in imports from China has largely displaced domestic production in textiles and apparel in African countries, including those of the SACU; many of such African countries

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have also been crowded out from the EU and the United States because of greater competition from China and other low-cost Asian producers (Munemo 2013). Anyanwu (2014) finds that openness does not positively and significantly affect economic growth in Africa, whereas it has a positive effect in China. The reason is that exports from Africa consist primarily of traditional primary commodity exports, whereas China has rapidly shifted towards manufactured products. African economic growth between 1990 and 2013 has been more than 5% on the average, but such growth of the GDP has not been equitably shared and the rate of unemployment in many African countries is often more than 50%; especially amongst the youth (Anyanwu 2014). Anyanwu (2014) shows that an increase of one per cent in trade openness increases economic growth in China by 4.2%. The multiplier effect of FDI shows how much additional income is generated by one dollar of FDI in the country of investment; generally the multiplier effect is larger when FDI is invested in the light manufacturing sector than in the petroleum industry or mining sector, so that the multiplier effect in China would be much larger than in resource-dominated African countries. FDI as a percentage of GDP is rapidly increasing in many African nations whereas it has been declining in China because of increasing complementary domestic investment in China; although the absolute level of FDI in China has been increasing. FDI as a percentage of GDP is rapidly increasing in African nations which are dominated by the mining sector, but GDP grows at a slower rate than inflows of FDI as a consequence of a lower multiplier effect and less complementary domestic investment. The sharp increase in economic growth in Africa has started from a relatively small base, it is nevertheless indicative for potential economic growth, especially in e-commerce. Most of the growth occurs in the hub economies of Egypt, Morocco, Nigeria, Kenya and South Africa, and the market economies of Algeria, Ethiopia, Ghana and Sudan. The sharp increase in e-commerce will assist in achieving cooperation and connectivity. African countries could gain if China shares its experience in economic development and so may develop various African nations into a new manufacturing powerhouse. China has become the most important trading partner of African nations. Total turnover between China and African nations has increased from $10 billion in 2000 to over $220 billion in 2014. The impact of Asian economies on African economies may be competitive or complementary which have direct as well as indirect effects. The

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direct consequence of competitive trade is the displacement of local production. The indirect impact of competitive trade is the competition in other export markets. The direct consequence of complementary trade is the growth in export markets while the indirect effect of complementary trade is the positive shift in trade (Jenkins and Edward 2006). African countries have become more open towards international trade, so that their trade/GDP ratio has been increasing. Different products of exports will have different effects on economic growth. Baliamoune-Lutz (2011) finds that concentration of exports of particular products in China increases economic growth of the exporting country rather than diversified exports. It was also found that the share of China in a country’s total imports has a considerable positive effect on economic growth for the period between 1995 and 2008. African consumers who import low-cost consumer goods and producers who import low-cost intermediate goods from China also gain; this increases the welfare effect for consumers in terms of lower prices, and producers as they become more competitive. Sustainable economic growth requires that linkages between foreign investment and the wider domestic economy have to be established to spread the benefits of FDI. Technology spillovers from FDI can enhance the competitiveness of domestic producers. Different African countries will be affected differently as the complementarities of trade between China and various African countries will differ, and the industrial competitiveness and the degree of export diversification will differ too. However, an overreliance on exporting raw materials may lead to an increased risk of a resource curse; hence care should be taken to diversify the economy whenever possible; for example through the reinvestment of revenue earned from the export of raw materials. China exports mainly consumer goods whereas African countries largely import consumer goods; while China has become the main manufacturer of the world, whereas African exports primarily commodities. As a result of the restructuring of the economies of the Chinese coastal provinces, some labour-intensive enterprises have relocated to other developing countries, especially in Africa. China and the South African Customs Union (SACU) which comprise Botswana, Lesotho, Namibia, South Africa and Swaziland, are likely to benefit from intra-industry trade in manufactured products where they hold a comparative advantage. Munemo (2013) suggests that more than the

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reduction of tariffs is required to facilitate trade, and proposes the implementation of parallel MFN trade liberalization, improve trade complementarity and lower the barriers to intra-industry trade. 5.2.5

Diversification Versus Specialization

Africa’s concentration of exports of resources and African imports of labour-intensive manufacturing products from China reflects the Heckscher–Ohlin model, except in the case of South Africa which imports from and exports to China largely non-resource goods. However, the Heckscher–Ohlin model on comparative advantage ignores the level of technology, the level of human capital and infrastructure, as well as government policies which may compensate for inadequate factors of endowments, and therefore is not always the best indicator of comparative advantage. Furthermore, changes in trade patterns also have an important effect on the balance of trade. Exporting companies are usually more productive as such companies are “learning by-exporting“. The differences between extensive and intensive margin in the changes in trade patterns; that is from exports of new goods and the exports of previously exported goods and the increases in trade may also cause a shift in comparative advantage. Chinese FDI in Africa between 2000 and 2012 contributed about 4% of total inflows of FDI to Africa, but it is increasing faster than those of other countries (Busse et al. 2013). Chinese FDI is mainly concentrated in resource-rich African countries, except in the case of South Africa. The improvements in the terms of trade of SSA countries is the consequence of an increase in prices of raw materials, especially for oil and metals and a decline of import prices as African countries import a large quantity of lowcost Chinese manufactured goods. China’s high demand for raw materials has increased market prices of raw materials and has improved the terms of trade of African exporters of such raw materials. African countries can also gain from the imports of Chinese manufactured products which allow local African production costs to fall when such imports are used as inputs in local production; this also allows African countries a greater diversity of consumer goods (Busse et al. 2016). Heavy concentration of the exports of raw materials often lead to a decrease in diversification in exports as occurred in the Republic of Congo. Many emerging countries have succeeded in their economic development because of their policies of diversification (Berthélemy and Sönderling

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2001). Sustained economic development is unlikely to occur without diversification of the economy. Baliamoune-Lutz (2011) advocates policies that facilitate imports of investment goods, including capital goods as they increase the importing countries’ productivity and employment; much of such investment will be forthcoming to countries which are participating in the BRI. African economies will have to diversify their economies. Lin et al. (2017) find that export sophistication lead to income growth; whereby a 1% increase in export sophistication is associated with an increase of approximately 0.08% of GDP per capita; however, SSAs have one of the lowest export diversification (Hesse 2008). The sophistication level of exports will differ between countries and regions; it not only varies between countries within the sub-Saharan area, but it also shows profound differences between SSA countries and Asian countries whereby SSA countries are greatly lacking behind in export diversification as compared with Southeast Asian countries (Lin et al. 2017) find that an increase in income resulting from a boom in the agricultural sector decreases the diversification of export and also lowers the degree of export sophistication and consequently has a negative impact on economic development. South–South trade provides greater opportunities for export diversification the North–South trade. Amongst the BRICs nations, China’ exports to SSA have the strongest effect on intra-SSA trade diversification (Didier 2017). Chinese exports to SSA countries caused infra-SSA trade to increase by 64% (Didier 2017). The geographical diversification of infra-SSA trade was largely due to the complementary effect of trade and through a technological transfer effect. Intra-African trade was extremely low after such countries gained independence, however it increased since the mid1990s which further increased with the entrance of BRICs as trading partners (Baliamoune-Lutz 2011; Brenton and Walkenhorst 2010; Diaw and Lessoua 2013). The importance of export diversification has been recognized already by Prebisch (1959) and Singer (1950) during the 1950s. Export diversification can reduce vulnerability and sources and diversify the spreads of economic spillovers. A greater South–South trade can also enhance the ability to learn first in less competitive markets to accumulate economies of scale which may then be utilized to enter the North’s market. Imports by China from Africa are highly concentrated by country as well as products; for example in 2008 over 70% of Chinese imports from Africa consisted of crude oil and 40% of such imports came from Angola and 11% came from Sudan. Furthermore, almost 100% of Angola’s and Sudan’s

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exports to China consisted of crude oil (Baliamoune-Lutz 2011, p. 205). Hence, Sino-African trade consists of a high concentration of exports from Africa to China, whereas African imports from China are highly diversified. Exports which are driven by capital-intensive sectors such as crude oil may not generate economic growth in the long term as there are low spillover effects to other sectors of the economy and hence are unlikely to create much employment. The increase in African exports to China and India is mainly driven by the high demand for natural resources as a consequence of fast-increasing industrialization and increasing domestic consumption. Petroleum, ores and metals are the largest exports from Africa to China and India. Technological transfer and skills to the local African population are largely impeded for mainly two reasons: when foreign skilled workers are brought in by the investing company and they do not impart technological knowledge to local workers. There is also often insufficient education and training at the local level which makes the transfer of knowledge more difficult. Skilled and managerial positions are often occupied by Chinese staff in Chinese companies in Africa, but local staff understands the local market and are better at handling local workers. Africa has exported for decades vast resources of raw materials to Western countries so that it has failed to develop its economy. The situation has changed with Chinese large infrastructure developments in exchange for access to resources especially in the case of oil-rich African economies (Habiyaremye 2013). The lessening of infrastructure bottlenecks has contributed greatly to Sino-African trade and fast economic growth in oil-rich African countries. Exports to China have grown substantially “mainly under a trade structure known as the ‘Angola mode’, in which African natural resources are exchanged for the financing and construction of infrastructure projects by Chinese companies” (Habiyaremye 2013, p. 636). Foreign skilled workers often inhibit transfer of technological skills to local workers. Skills can be enhanced through learning-by-doing at the local level and by learning-by-exporting. The possible negative aspects of China’s strong demand for raw materials may increase the risk for resource-rich African countries to deepen the symptoms of Dutch disease. Chinese demand for resource may lead to a “Dutch disease” whereby activities in the agricultural and manufacturing sector are replaced by resource exploitation. Absence of regional production networks in Africa may make it difficult to utilize the “flying geese” model from East Asia. An increase in the exports of raw materials is also likely to cause an overvaluation in the exchange rate which would

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reduce the manufacturing of products. The exploitation and the exporting of raw materials and sources of energy can also promote rent-seeking and corruption (Busse and Gröning 2013). Corruption reduces the benefits of investment for economic growth. Resource-rich countries have to invest in their local economy but there has to be the required absorptive capacity before a structural transformation can take place. The creation of human capital and the formation of infrastructure are essential for building up the required absorptive capacity. Different sections of the economy require different types of human capital. Even though there is a need for human capital, there will still be much of the workforce that will remain unskilled; so that various industries can be promoted to absorb at least a large amount of unskilled surplus labour that would help to enhance long-term economic growth and development. Human capital will have to be improved if a country is to engage in export diversification. The countries of the Economic and Monetary Community of Central Africa (CEMAC) specialized mainly on the export of raw materials and did not engage in a diversification of the economy. Kummer-Noormamode (2014) finds that for the period from 2000 to 2012, China has contributed to economic growth in Africa largely through its imports of petroleum. African increasing exports “had no effect in terms of social welfare, specifically poverty reduction through increased employment” (Diaw and Lessoua 2013, p. 190); especially if the benefits accruing to the petroleum sector are not reinvested in other sectors of the economy. CEMAC countries comprise six countries: Cameroon, Central African Republic, Chad, Equatorial Guinea, Republic of Congo and Gabon. To build up a comparative advantage in sectors which have greater spillover effects on other sectors will have a positive effect on economic growth, whereas “specialization in the primary sector seem to have weakened the growth of the CEMAC member countries” (Diaw and Lessoua 2013, p. 196). Diaw and Lessoua (2013) describes the China–CEMAC trade relationship as “a win-win situation as it positively affects economic growth” (p. 198), however, as the contribution to economic growth depends largely on the stages of economic development it was not significant overall. There has to be a spillover effect in other economic sectors to lead to sustainable economic growth, so that profits from the natural resource sector have to be reinvested in other economic sectors. An improvement of the intra-regional trade relationship between the CEMAC

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countries will contribute towards greater sustainable development; however, presently CEMAC countries appear to be competing amongst each other in terms of trade. The construction of the appropriate infrastructure is essential to make better use of FDI for sustainable economic development to enhance trade complementarities amongst the CEMAC countries. Akamatsu (1962) develops a multi-tiered hierarchical flying geese model of economic development to explain the industrial development in East Asia. The flying geese model illustrates how industrialization moves from developed to developing countries. The first-tier economy of a developed economy leads the second-tier or developing economies which are subsequently followed by the third-tier economies which are the least developed economies. However, the flying geese model requires regional production networks which presently are underdeveloped in SSA. Broadman (2007) finds that investments from China to SSA are complements rather than substitutes for bilateral flow of exports. Of course, the application and the implications of the flying geese model will depend on the specific conditions of particular economies. As economies generally differ from each other, the application of the flying geese model will differ. The main problem faced by African countries is that they generally have small productive capacity and insufficient diversification of their economies. A greater diversification of the economy may lead towards a higher growth rate in the long run which is essential as the average annual population growth rate in Africa was 2.3% between 1999 and 2009, and is continuing to rise; hence any growth rate below this would lead to a decline in the GDP per capita. African countries will have to engage more in diversification of their economies to prosper. China has invested in various sectors in various African countries which may increase their economic performance. China’s investment in Africa as part of the BRI provides the required technologies and finance for economic development. After the financial crisis in 2008, global FDI declined considerably, but China’s foreign investment increased and largely filled the gap in finance. China’s investment in other countries “more than doubled in 2008 with the part going to Africa actually more than tripled that year and increasing steadily thereafter” (Shen 2015). Chinese enterprises investing in African labour-intensive manufacturing sector are advancing much-required industrialization and create jobs for the local population (Lin 2012; Dinh et al. 2012). China extended its investment in Africa in the mining sector, capital equipment sector, as well as in the domestic production areas. It also has

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expanded its market share in the African consumer market. African performance in its exports is largely caused by the poor infrastructure which impedes the flow of trade. African countries have a strong need for infrastructure which China can provide in exchange for enhanced trade relations. China’s importance in international trade offers many countries trade opportunities so that the South African Customs Union (SACU) intends to intensify its trade integration with China. The elimination of tariffs on imports from China will increase trade but it may also adversely affect low and intermediate technology products which are labour-intensive but are important for the creation of employment and the reduction of poverty (Munemo 2013). Through the construction of infrastructure, there will be a decline in trade costs which will also diversify export destinations; for example, Shepherd (2010) finds a decline of 10% in the costs of trade results in a 5–6% increase in the export destinations in the case of developing countries. African countries have small productive capacities and also have a low degree of diversification within their economies. The growth of trade between China and Africa has mainly occurred after the year 2000 when the China–Africa Cooperation Forum (CACF) was launched. The intention of this forum was to facilitate an increase in investment and trade relations. China has become the fastest-growing market for many African countries and African imports from China have also grown faster than those from other countries. Diversification will help policies of sustained economic development, rather than just specializing in the exploitation and the exportation of raw materials. As the natural resource sector is largely capital-intensive, an expansion of the resource sector will not much contribute towards the lowering of unemployment. Munemo (2013) finds that the expansion of trade is more significant in the case of South Africa than for the other SACU partners. Except for Namibia, trade creation is greater than trade diversion in the SACU, so that the welfare effect has increased in those countries. Most African exports consist of raw materials. Many African countries would benefit through the diversification into new manufacturing and service sectors; however only a small share of FDI supports such policies. African countries differ widely from each other in their natural endowments, such as raw materials, so that many countries do not get any benefits from other countries investing in African resources. The investment in African raw materials without any attempt to diversify the economy could lead some African countries towards the resource curse. The higher demand

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for raw materials will also lead to price increases of such raw materials, so that resource-poor countries in African have to pay a higher price for their imports of such raw materials; hence not all African countries will benefit to the same extent from Chinese investment in the African continent; depending on their trade and investment in specific countries. African countries may be able to engage successfully in future sustained development provided they are able to maximize the complementary effect with China and other countries from which FDI are sourced; however, such a policy would require a deliberate policy which could be made a part of development strategies which could be subject to trade negotiations with countries which invest in African natural resources. There is a complementary effect when China increases its demand for another country’s exports, and there is a competitive effect when there is an increase in the demand for Chinese exports in the domestic market of another country which crowds out local producers. African exports to Western countries and the lack of economic growth and diversification created in many African countries resource dependence. However, the present policy of infrastructure-for-resource has led to an improvement in some countries economic sustainability, especially through industrialization which may overcome infrastructural bottlenecks. The consequential structural transformation can open new opportunities for economic development and so may overcome the dependence of the export of natural resources. The bottlenecks of infrastructure prevent the optimal utilization of natural resources and industrialization which is essential for economic growth.

5.3

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

China is Russia’s largest trading partner and Russian sources of energy will remain the main driver of economic growth for China, Japan and South Korea. It is vital that China, Japan and South Korea and a future reunited Korea put their political differences aside as their mutual economic benefits will be substantial. The three East Asian countries combined would constitute approximately one-fifth of the world’s total GDP and has a combined population of 1.5 billion. China and South Korea are the first, second and fourth largest economy in Asia, respectively. They are an integral part of the supply and production networks. The prospects of a close association

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between China, Japan and Korea (South and North Korea) are intertwined with the BRI. Infrastructures in the three north-eastern provinces of China are in the process of being connected to Russian and North Korean ports. The development of the ports of Chongjin, Rajin and Sonbong will be able to connect the north-eastern region of North Korea with South Korea, South China and Japan. The Trans-Siberian Railway will also be connected to North Korea. This will accomplish China’s plan to gain access to the East Sea which is deemed as essential for the revitalization of China’s north-eastern provinces (Yoo and Lee 2013). The most important project in this regard is the Changjitu Development Project in Jilin which aims to facilitate further the Changjitu pilot zone construction to improve interconnectivity between the Changjitu area with other Chinese domestic regions and to facilitate economic development of the Tumen River region in the border region between Jilin and North Korea. The projects are to be connected through roads, ports and airports with regional developments and to Northeast Asia (Yoo and Lee 2013). Trade between China and North Korea has increased sharply after 2000 when it was $0.49 billion and has increased to $3.46 billion in 2010 which is an increase of over 600% (Yoon and Lee 2013, p. 22). North Korean exports to China consist primarily of raw material such as iron ore and anthracite; whereas imports from China consist primarily of strategic goods such as oil and machinery which is concentrated mainly in trade between North Korea and the Chinese provinces of Liaoning, Jilin and Heilongjiang. Chinese investment has increased in the construction of infrastructure and the development of natural resources. Resource development consists of over 70% of Chinese investment in North Korea in 2010 (Yoo and Lee 2013, p. 24) and the investment in infrastructure in the trans-border regions is related to the extraction and transportation of raw materials. The economic relationship between China and North Korea has changed over time; whereas China previously exported primarily merchandise, North Korea has become an important destination for foreign investment by Chinese enterprises, especially in manufacturing and the mining of natural resources. China contributes over 50% of North Korea’s foreign trade since 2010 and has reached 77% in 2013 (Lee and Gray 2016, p. 295). China’s large investment in infrastructure also increases trade between China and North Korea. North Korean workers are employed in the border region of China in numerous joint ventures, and numerous Chinese

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manufacturing companies are outsourcing to North Korea. Trade between China and North Korea surpassed US$1 billion in 2003 which has increased to US$6.54 billion in 2013 (Lee and Gray 2016, p. 297). Closer economic cooperation between China and North Korea would help develop the North Korean economy as well as Heilongjiang, Liaoning and Jilin. Dandong which is close to the industrialized western region of North Korea is the more important transit point for trade between China and North Korea. Japan has multi-billion projects in the Far East of Russia, never mind Western-imposed sanctions, and there are more negotiations between Japan and Russia regarding new projects, including the constructions of pipelines for the transmission of energy from Siberia and the Far East to Japan. Japanese investments in Russia’s Far East and East Siberia can be expected to increase once the disputes between Japan and Russia about the South Kurile Island have been solved. The small Kurile Islands Kunashir and Iturup, make up the South Kurile Islands and are together approximately 8.6 thousand km2 . If Russia chose to return the South Kurile Islands to Japan, Russia will lose fish stock and sea products of million tons and a huge amount of raw materials, including gold. Russia was the third largest gold producer in 2013 behind China and Australia. Japan also shows a strong interest in joining the BRI in the construction of the infrastructure as Japan realizes the economic advantage of it. In this case, North and South Korea will not be far behind once North and South Korea come to arrangements to join forces once again. Japan is also negotiating trade cooperation with ASEAN, not as a countermeasure to China, but because Japan does not want to be left out in the cold once the shifting sand develops into a possible sand storm.

5.4

China’s Effect on the Economies of Southeast Asia 5.4.1

Overview

The ASEAN Economic Community (AEC) which was established in 2007 attempts to create a single market of ten countries and over 600 million people for free trade movement of goods and services, foreign investment and skilled labourer. ASEAN+6 (the six Free Trade countries are Australia, China, India, Japan, Korea and New Zealand). China, Japan and

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Korea are participants in the Regional Comprehensive Economic Partnership (RCEP) so that cooperation between China, Japan and Korea are important for the further integration of East- and Southeast Asia. China promotes cooperation through the ASEAN-led RCEP between the Southeast Asian Nations (ASEAN) members and the six states with which they have FTA; that is, Australia, China, India, Japan, Korea and New Zealand. China entered the WTO in 2001 which provided challenges and opportunities to ASEAN members. In 2010 the China–ASEAN free trade area became effective. However, China’s economic growth had already a positive impact on the ASEAN economies before China entered the WTO in 2001, it merely magnified China’s impact on ASEAN countries. Government-business relations are closely intertwined through donations and patronage networks and thereby control government economic policies; hence it is not surprising that trade liberalization and protection policies, especially non-tariff measures, are implemented side by side; for example, within the ASEAN economies, 186 non-tariff measures were introduced between 2009 and 2013; most of such measures were imposed quotas and technical regulations (Dosch 2015, p. 3). Hence, the greatest hurdle in the implementation of an AEC is the “mismatch between political ambitions and the capabilities and often, political will – or maybe better: political autonomy” (Dosch 2015, p. 3). Full integration is also handicapped through the difference between ASEAN economies in economic development; for example, it includes Singapore as the richest economy and Myanmar as the poorest economy in terms of GDP per capita. 5.4.2

Infrastructure and Economic Growth

Various infrastructures are proceeding in ASIAN countries such as the Kunming-Singapore railway link, an integrated maritime transport system, ASEAN power grid and gas pipelines and high-speed information technology interconnections which all will increase the interconnectivity between ASEAN members and Eurasian countries. Such infrastructures are anticipated to further integrate markets and production facilities. It may also facilitate economic development along the corridors, if it is well managed; rather than just connecting large cities and leaving everything in between underdeveloped. However, the development of areas between the cities requires a deliberate effort, so that economic development will be sustained

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and inclusive, rather than just be the development of the main trading centres. Initially, the implementation of an inclusive economy cannot be left to private enterprises but instead requires considerable government initiatives. Trade is supported by the growing infrastructure in Laos; especially through the Greater Mekong Subregion project which will improve crossborder infrastructure, such as through the construction of the North–South Economic Corridor which connects Kunming in Yunnan and Bangkok and the East–West Economic Corridor which connects Mawlamyaing in Myanmar with Da Nang in Vietnam. 5.4.3

Trade Relationships Between China and the Southeast Asian Nations

ASEAN countries introduced during the 1980s and early 1990s outwardlooking policies and consequently attracted a large inflow of FDI which transformed most ASEAN nations into fast-growing economies. The Asian financial crisis during 1997 slowed down the economies of the ASEAN countries because of large currency fluctuations largely because of financial speculation. Since the 1990s the manufacturing exports of ASEAN has increased from two-thirds in 1990 to three-quarters in 2010 (Petri et al. (2012, pp. 95–96). ASEAN as a bloc is China’s fifth-largest trading partner. China has a huge trade surplus with the United States but a trade deficit with most ASEAN countries. Singapore had a relatively comparative advantage in advanced production compared with China during the 1990s, but China has now an advantage in lower- and mid-range of industrial products. Tariffs and exchange rates can have a profound effect on international trade; they have an inverse relationship with the value of trade. The ASEAN nations to a large extent integrate with the Chinese economy. The ASEAN nations formed the ASEAN free-trade zone and now include China to form the ASEAN+1. Intra-BRI countries trade linkages could be formed with the aim of developing the economies of those countries and so could intensify production in areas where they already have a comparative advantage and concurrently could also diversify their production process to foster economic growth in their countries which would expand trade with other countries. Laos has experienced rapid economic growth, although it has remained largely a rural society with a greater emphasis on commercial agriculture and a shift away from subsistence agriculture. Laos achieved an economic growth rate of 5.6% in 2006 and 4.5% in 2007 (Goto 2011, p. 69). The

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agricultural sector has declined from 60% of GDP in 1990 to less than one-third in 2008. In 2003, 82% of the labour force was employed in the agricultural sector (Goto 2011, p. 71). Laos is relatively rich in natural resources, for example it possesses zinc, potassium, coal, lignite, copper and gold which are not sufficiently exploited as yet. Much of the trade across borders is informal so that trade is underreported; for example, approximately 30–40% of cross-border trade between Laos and China is informal and in some cases it is over 80% (Goto 2011, p. 84). Presently, Laos depends overwhelmingly on the exports of its raw materials, so that there is a need to diversify its exports to avoid a possible resource curse problem (Sachs and Warner 2001) which may be achieved through the implementation of labour-intensive industrialization. China may expand its exports at the cost of some Southeast Asian economies; however, Southeast Asian economies are also expanding their exports to China; for example, some of the Chinese exports include various intermediate manufactured inputs produced in Southeast Asia. China has become the biggest exporter in 2009 which provides greater opportunities as well as greater competition for other countries for their exports and within their domestic markets as there will be significant changes in future global trade. China’s increase in trade has an effect on the trade of its neighbouring countries. Kong and Kneller (2016) distinguish between two different effects: the level effect, that is, how much countries benefit or suffer from Chinese trade expansion, and the relative effect, that is, which particular countries are most affected. The ASEAN free trade area (AFTA) has increased trade amongst its members (Kien 2009). Arthukorala (2012) argues that the vast expansion of trade has been the main factor of Asia’s rise within the global economy. Too much trade liberalization can cause considerable trade deficits as not all participating economies are equally competitive; for example, the creation of an ASEAN+6 FTA can expand exports for Lao but will also increase its imports and so has a detrimental impact on Lao’s balance of trade. As Laos is primarily a net importer of intermediate and capital goods (Suvannaphakdy and Toyoda 2014); although this may correct itself over the longer term as such imports will eventually improve its domestic productivity through the imports of productivity-enhancing technology and so may be able to improve its trade balance.

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5.4.4

The Impact of Trade Relationship in Southeast Asia

The development of the economies of ASEAN is much in conformance to the Kuznets process whereby the agricultural sector declines followed by an increase in the manufacturing sector and then by the service sector; so that the requirements for different types of human capital also changes (Joshua 2015, pp. 110–130). The considerable development gap amongst ASEAN members may prevent deeper economic integration and thus may lead some ASEAN members towards seeking bilateral trade relations with other countries which are not members of ASEAN; hence ASEAN as a trading bloc may be weakened whereas some members of ASEA may increase their strength such as Singapore and Malaysia in their reciprocal trade relationship with, for example, China. The development gap between ASEAN members may become detrimental to further economic integration. However, depending on the exact development of particular members of ASEAN, it may also provide complimentary preconditions for ASEAN cooperation and economic integration and may result in “external pressure for the less developed members to accelerate their domestic reforms” (Bui and Vo 2007). By 2011, the ASEAN–China FTA (ACFTA) has been the only regional economic integration agreement (REIA) concluded between China and ASEAN. The ACFTA intends to eliminate tariffs on goods traded between China and the ASEAN-6 and more ASEAN members are expected to sign the agreement on zero tariff. The ACFTA became effective in 2010 and by 2011 was the third biggest regional trading bloc in value. Kong and Kneller (2016) did not find any evidence of a displacement effect as a result of Chinese exports on the exports from East Asian countries. Kong and Kneller (2016) find that in the case of trade in final goods, the capital–labour ratio plays a more important role, whereas in the case of trade in parts and components, exports which are more endowed with human capital benefit more from the growth in exports from China. However, the greater role of human capital in the production of final goods in China could only be seen during the period before China joined the World Trade Organization. Roland-Holst and Weiss (2005) find no evidence that China’s trading partners are losing any comparative advantage in more skill-intensive or higher value-added activities and suggest that East and Southeast Asia can gain from ASEAN plus3 association which could then serve as a stepping stone towards further globalization.

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FDI introduce advanced technologies and management skills and promote opportunities of employment in the host country. Crowding out implies competing with. Crowding in implies complementing. China’s investment may have a creation effect, a diversion effect or it may have a neutral effect. Chinese exports had the greatest crowding out effect on Asian economies in the case of consumables (Eichengreen et al. 2007); similarly, Greenaway et al. (2008) find that Chinese exports had the greatest displacement effect on more advanced consumables, such as electronics (Eichengreen et al. 2007). Napoli (2014) finds that China has been crowding out ASEAN from Western markets, although this did not affect ASEAN countries’ GDP and exports, because their decline in exports to Western markets was more than compensated for through an increase of ASEAN exports to Chinese markets. China’s economic growth crowds out other countries’ exports but also provides new opportunities as China domestic imports increase. China’s investment in countries of the BRI can promote economic growth and thereby may include also FDI from other countries so that there is a crowding in effect, as other countries attempt to join the bandwagon effect. Indeed, this happened in ASEAN countries as China’s FDI in ASEAN countries induced more FDI from other countries (Chantasasawat et al. 2004). However, they did not find such a crowding in effect in the case of Latin American and Eastern Europe as a consequence of FDI from China; instead FDI inflows was related to the FDI inflows from the region to which the recipient country of FDI belongs, which may be referred to as the regional agglomeration effect (Chantasasawat et al. 2008). China engaged in an engineered market-creation process which proceeded in stages. A continuing increase in economic growth in China and India will contribute towards Malaysia’s economic growth, especially through an expansion of Malaysia’s exports of raw materials and agricultural exports; however it will reduce exports in manufacturing products; as a “Dutch” disease effect may develop. Different countries will be affected differently as a consequence of China’s growing economic impact. Most crowding out effect on ASEAN countries are in consumer goods whereas ASEAN countries benefit by exporting more capital goods to China; that is, lower income countries will be detrimentally affected whereas high-income countries will benefit through their increase in the exports of capital goods. Exports from ASEAN countries to the United States were 19% in 2000 which declined to 9% by 2012,

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whereas 16% of ASEAN exports went to the EU in 2000 which declined to 10% in 2012; whereas ASEAN exports to China increased from 4 to 11% during the same period (Napoli 2014).

5.5

The Implications of China’s Trade in South Asia

Sustained economic development is of greater importance for the wellbeing of nations, rather than in engaging in political rivalry which only magnify their perceived differences. In 2006, trade from Pakistan to India reached only 30% of its potential, and trade from India to Pakistan reached only 24% of its potential which was well below the average Indian and Pakistani trade performance and the global average (Armstrong 2015, p. 317). The potential of enhancing trade relations between China and India could be easily achieved if deep-seated distrust and animosity towards each other could be eliminated, but the political decision-making process is not guided by rationality; even though it would be highly beneficial to China as well as India. China is negotiating with Pakistan a Chinese naval base on Pakistan’s Jiwani peninsula, just west of Gwadar; while the newly created and fast-developing Indo-Japanese Asia-Africa Growth Corridor is part of the emerging South–South Economic relationships and is intended to compete with China’s BRI but is unable to compete with China’s infrastructure developments. The world is moving fast towards a multipolar world which has to accommodate China as well as India for the mutual benefits of both countries with the greatest market opportunities. Both countries are important in shaping the emerging multiple world order; both are members of various international organizations, such as the SCO and the BRICS, the AIIB, the New Development Bank. They both together have the opportunity for developing a close partnership. In fact, both nations complement each other to a large extent by having the “factory” of the world in the case of China, and by creating the “office” of the world in the case of India. China has become India’s largest trading partner in 2008. India is the second-largest shareholder of the AIIB. There are multiple areas where China and India could coordinate their cooperation in multilateral forms. China and India have similar growth path at constant prices; however only China has a strong appreciation in the exchange rate because of the increase in GDP per capita. After the Asian crisis China and India became more integrated into the global economy which has implications for trade in Southeast Asia. Before

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1993 ASEAN-6 gained more FDI than China; however by 2008 China has been attracting more than three times as the ASEA-6 countries.

5.6

China’s Expanding Trade and Investment in Latin America

China is now the main engine of economic growth on a global scale. This chapter will address how the participating countries in the BRI will be affected by trading with China. China has increased its involvement in the Caribbean through an expansion of trade and Chinese investment and numerous construction projects. China provides assistance for economic development to countries which have diplomatic relations with China instead of with Taiwan. Mercado Común del Sur (MERCOSUR) was implemented as a trading bloc in 1991; however the new Pacific Alliance created in 2012 may eventually replace MERCOSUR to become the main Latin American trading bloc to establish trade relations with Asia. Latin America consists of Central America, South America and the Caribbean. Trade between China and the Caribbean has increased because of China’s exports rather than Chinese imports from the Caribbean, so that the Caribbean trade deficit with China has widened; however, the expanding Chinese domestic market provides export opportunities for the Caribbean. Caribbean main exports consist of bauxite, alumina, asphalt and lumber; however, Caribbean exports to China have been relatively minor in contrast to South America which has increased its exports to China which has become the largest export market for Brazil in 2008. Other exports to China from South America come from Argentina, Chile and Peru. The trade deficit between China and the Caribbean has substantially increased whereby Argentina, Brazil, Chile and Peru have a trade surplus with China. Imports from China have largely substituted imports from the United States since 2010 (Bernal 2015). The durability of Chinese imports may be questionable at times, but “affordability is more important than durability” (Bernal 2015, p. 1412). Imports from China are price competitive and their qualities are improving. Imports from China to the Caribbean consist mainly of electronics, television sets, cargo vessels, tankers, floating docks and footwear. In some areas, Chinese products may compete with local production, such as in the case of processed food, apparel and furniture (Bernal 2015).

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Beginning during the mid-1980s Latin American and Caribbean countries experienced a paradigm shift away from industrialization for importsubstitution towards the promotion of export-led economic growth. Consequently, such countries became more open towards international markets. However the countries in Latin America and the Caribbean experienced different degrees of diversification depending on the size of their economies and the availability of the appropriate human capital (Taylor 2003). Specialization in the raw materials sector is likely to lead such countries away from intra-regional trade towards the exporting of raw materials which however is unlikely to lead towards sustainable economic growth. China has greatly increased its trade with Latin American countries as well as its investments in those countries since the early 2000s. On the one hand, Chinese demand for raw materials has increased the prices of the exports of raw materials worldwide. Latin American countries also experience more competition from Chinese goods and services in their domestic economies as well in the global economy. China invests in various projects in Latin America to improve productivity and enhance interconnectivity. Chinese engagement with Latin American and Caribbean countries is primarily based on economic cooperation to promote trade, infrastructure, resources and energy. China has joined the Inter-American Development Bank (IDB) in 2008 and contributed US$350 million for various public and private sector projects. In 2015 China hosted the first China–CELAC (Community of Latin American and Caribbean States) forum which was established in 2011 and consists of 33 countries in the Americas, but Canada and the United States are not included. China is actively promoting a going out policy which is primarily concerned with Chinese companies investing in foreign countries. The main purpose is to obtain the natural resources required for China’s sustained economic growth and to expand the global market (Gransow 2015). China is a major buyer of iron ore from Brazil, soya beans from Argentina, and crude oil from Venezuela. Brazil exports mainly raw materials, food and manufactured products to China. China largely invests in Brazil in the mining sector, infrastructure and the oil fields. China’s trade with Brazil progressed from the export of cheap and lowquality products during the early 1990s, and then progressed towards value-added products during the early 2000s such as television sets, computers, mobile phones and heavy equipment. During the late 2000s, Brazil became an import destination for Chinese investment. China’s economic

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growth caused Chinese import of Brazilian raw materials and primary products and in 2010 Brazil has become China’s biggest trading partner and has become the biggest foreign direct investor as well. China has become Brazil’s largest trading partner in 2009.

5.7

Conclusion

The BRI can specifically promote economic development in individual countries together with the economic development between various trading centres and transport hubs through its multiple projects so that the participating countries will be able to integrate more fully into the global economy. Economic development involves a multidisciplinary approach towards economic and social change. It requires deliberate economic and social policies and involves a redistribution of political as well as economic power; as this is a continuing process national objectives are redefined as time passes; especially as economic development goes through various stages. New opportunities will arise, not only for corporations and the investing countries, but also for social policies to reduce the level of poverty, reduce the rate of unemployment and ensuring that the discrepancy in the distribution of income does not widen which is also of importance to foster social stability. Seers (1969) argues that: “If one or two of these central problems have been growing worse, especially if all three have, it would be strange to call the result “development”, even if per capita income doubled” (p. 3). Hence, local people should be employed in projects of the BRI as much as possible. If qualified and experienced labour force is insufficient, then they should be given the required training whenever possible. Policies may go beyond the narrow requirements of the projects, but social and work conditions and conditions of employment may also be considered. Employees should be adequately paid so that the distribution of income does not worsen, that poverty declines, and that the rate of unemployment decreases. However, the parameters of economic growth are merely averages or aggregates, so that the level of economic growth disguises the level of unequal distribution of income and therefore living standard. Nevertheless, economic growth can improve the living standard for the vast population, provided the right policies are implemented. However, a country must have the absorptive capacity for capital investment, otherwise it cannot be productive. Investments have to cover their costs as well as to increase income. Investments into the BRI may connect

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and widen the various projects which are part of the whole programme; but such projects have to be coordinated with the participating countries and regions. Many of the participating countries of the BRI have a lack of an efficient marketing system; for example peasants may be selling a few produce on the streets. The working practice of peasants is enshrined as a social institution which has become ingrained within their social value system; while the economy elsewhere in the country passes them by at an accelerating speed, leaving the peasants behind. Peasants often have a fatalistic attitude towards life, taking life as it comes, looking not beyond the present. Low living conditions are another factor which may lower the level of productivity. There is also a cultural aspect, that is, peasants are very conservative by nature; it is their culture, not just a way of living; hence they are slow in adapting new agricultural techniques. Managerial skills are often inadequate or not present at all amongst the peasantry; hence agricultural techniques have to be improved if policies are to promote an inclusive economy. Operative skills could be taught in technical colleges and in polytechniques, and apprenticeship schemes could be introduced. When dual economies are present, they cannot be ignored but their practices have to be improved before certain investments can be productive. Traditional practices in agriculture are inefficient, so that educational programmes, such as extension programmes may be used to enhance productivity. The aim of technical education should be to increase the effective utilization of abilities to increase efficiency. However, techniques of large-scale farming cannot be introduced in countries where peasants are scattered wide and far and cultivate small plots of land; hence, it is difficult to spread the required techniques amongst the peasants. This is especially the case when peasants are illiterate. A way around this difficulty is to establish model farms which can be used as teaching facilities to illustrate new techniques in practice. The BRI can have a positive effect on the economic well-being of the participating countries; however, the well-being could be further enhanced by increasing the absorptive capacity for capital investment. FDI is often related to specific export sectors, especially directed to the resource sector; but may adversely affect the labour market, including labour standards and the bargaining power of trade unions. It may increase economic growth and development at least in the short term. However, FDI in the resource sector may crowd out other sectors, such as the manufacturing sector which are essential for a sustained economic development and so may create a resource curse; hence it may be essential to diversify a country’s economy.

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The possibility of a resource curse has to be considered when there are insufficient linkages between the resource sector and other sectors of the economy. Resource exporting countries often have a vast population that is relatively poor so that more connective economies may help to alleviate at least partly some of the poverty. Policies may be adapted to ensure that the standard of living will actually increase as a result of the exports of raw materials from the countries which are participating in the BRI projects. Furthermore, under a resource curse scenario, an increase in the resource sector may lead towards an appreciation of the currency of the country, so that its exports become more expensive which may slow down its economic growth. The creation of the right infrastructure to enhance connectivities between and within countries can create a local multiplier effect which is vital to economic development and eventually sustainability. Furthermore, as Mohan (2013) makes the valid point that an understanding of the political economy of China in Africa has to take into account the trajectory of China’s development because the exports of many countries will largely depend on China’s economic growth. The African Continent has a vast increasing middle class and hence a promising market for Chinese exports and an increasing number of African study in Chinese universities. China has also more security and military arrangements with African countries, including the selling of Chinese arms to African nations; and Africa has a great amount of natural resources. An understanding of China’s economic interaction with other countries, especially through the BRI cannot ignore the geopolitical dynamics that is involved. The BRI is expanding fast into areas where China is extending its economic investment and trading activities, for example into the Middle East. China’s investment and trade in Europe are also expanding. If managed right the BRI will be able to strengthen the EU economy and it could lead eventually to the greater liberalization of trade between China and the EU and thereby reduces the trade between Europe and the United States. The EAEA (Eurasian Economic Union) has been established in 2015 as a trading bloc between Belarus, Kazakhstan and Russia which was followed by Armenia and Kyrgyzstan; this bloc can be combined with the Eurasian Economic Community (EAEC) as a potential link between Asia and Europe; however, full integration implies that there are no discrimination measures between regions, so that a common market between them is created (Balassa 1961). Central Asian economies would benefit especially from China’s economic growth because of the high demand for energy by

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China. Russia may be regarded as the linchpin between Europe and East Asia to form Eurasia driven by economic imperatives.

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CHAPTER 6

Effects of the Belt and Road Initiative on the Global Economy

6.1

Introduction

This chapter discusses the effects of the Belt and Road Initiative (BRI) on the global economy. The gravity of economic growth has shifted towards the emerging economies, especially towards China, which will have an impact on global trade. The successful implementation of the BRI is likely to lead towards a global economic transformation which is expected to lead towards greater regional integration and thereby enhances further economic development in those regions which will also have an impact on international relations. The chapter begins with a discussion on the shift towards emerging economies which is followed by an analysis of the economic transformation as a consequence of the BRI. Subsequently, the gravity model and regional economic growth is described followed with an analysis of the flying geese paradigm (FGP) and the new global production networks (GPNs). The rapid economic growth in emerging countries and the concurrent decline of Western economies is resulting in a shift of trading gravity towards Asian economies. Hence, China’s economic growth has implications not only for the structure of world economies, but it will also shift the global economic power towards Asia. The shift of global economic power towards East Asia has commenced during the Asian financial crisis of 1997 and subsequently accelerated since the financial crisis of 2008–2009. As China’s economy

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is rising, it is becoming more influential in international trade and international affairs. China has been replacing the United States as the main trading partners in numerous countries; for example, South Korean trade with China is now more than its trade with the United States and Japan combined; correspondingly the security alliance between the United States and East Asia are weakening. International relations are intensifying between the South–South, especially in regard to its economic cooperation. However, the conventional concept of the South–South has become largely outdated as many of the South are situated in the northern hemisphere, whereas the North includes many developed countries situated in the southern hemisphere. Furthermore, most economic growth of the South is attributed to China, India and Brazil; although some other countries from the South are also contributing increasing to global economic growth. Eventually, it may be expected that the G7 declines in economic and political power whereas the G20 will increase theirs. The gravity model of economic growth and trade has been described; how it relates to China’s changing global trade relationships with other countries has also been explained. The FGP will change the processes of production as well as the types of products and consequently international trade relations. Many of the BRI projects may be able to act as “flying geese” to promote economic development. The FGP is also discussed in this chapter to explain the capabilities in the production of an economy and so may produce new products through new techniques for new markets. The FGP entails changes in the process of production and trade relations. Production processes may change from labour-intensive light industries to the heavy and chemical and then to information technologies. The chapter ends with an analysis of the new GPN which have resulted in the integration through trade, investment, service as well as intellectual property (Baldwin 2013). The new GPNs which will further economic integration through trade and investment will be analysed next. China is moving up on the production and value chain which is further enhanced through the implementation of the BRI which increases China’s economic interaction with numerous countries.

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6.2

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The Shift Towards Emerging Economies

China intends to advance the BRI as a Silk Road Globalization and to strengthen its engine of South–South economic integration. Ultimately, successful implementation of the BRI will form its own bilateral trade agreements amongst its members and so to a large extent supplements the WTO and may eventually make the WTO largely irrelevant. Wang et al. (2011) suggest that the conventional view of a North— South bipolar world has to be changed into a tripolar world, that is, the North, the Large South, and the rest of the South as most of the economic growth contributing to the North–South gap after 1990 has come from China, India and Brazil, particularly from China. They found a narrowing gap between the South and the Large Three group and the North and the Large Three groups. The group of the Large Three also play an increasingly important role in the governance of international organizations (Gu et al. 2008). However, the interactions between countries of the South are even more rapidly increasing. Wang et al. (2011) observe that “the world economy is shifting at an accelerating rate towards the Large South, and with it are rapidly growing economic and financial links that are emerging among the large Southern countries” (pp. 2–3). The North includes the developed countries and is not geographically confined to the northern hemisphere, whereas the South refers to the developing countries, many of them are situated in the northern hemisphere. Wang et al. (2011) find that by using GDP in constant US dollars, the North–South GDP per capita gap narrowed by 28% between 1990 and 2009, while the gap between the North and the Large Three narrowed by 58%. China grew fastest amongst the Large Three and its GDP per capita narrowed its gap with the North by 77% from 1990 to 2009 (p. 5). When purchasing power parity (PPP) rates are used the gaps become even smaller. The gap in the GDP per capita between the North–South narrowed considerably after the mid-1990s and is moving towards convergence in more recent times. The PPP exchange rates try to equalize the price of the consumption of a basket of consumption goods across different countries; however only differences in prices rather than the actual differences in purchasing power can be determined in this way; furthermore the quality of the goods between countries will also differ. Amongst the Large Three countries of the South, China has contributed 81% between 1990 and 2009 in closing the North–South gap (Wang et al.

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2011, p. 12). They find that there is a “rapid narrowing of all gaps except the North-Brazil gap” (p. 14). The North–China gap is expected to close most rapidly. Their projections indicate that the “North-South GDP per capita will narrow by 34% between 2009 and 2030” (p. 15). Wang and Zheng (2013) make the point that the New Economic Geography (NEG) explains “why economic agglomeration occurs, but they are largely unconcerned with where the agglomeration arise” (p. 62). The gravity of global economic growth has shifted towards the emerging economies away from the industrialized countries; for example, the China–Latin American trade relationship has become more important and so have the political and economic ramifications. China’s investment in the oil sector and its trade relationship with the oil sector in Venezuela can illustrate China’s interaction with Latin American resource-based economies (Sun 2014). The emerging economies of Brazil, India, China and South Africa (BICS) are expanding at a rapid rate so that this will change the patterns of world trade. The production structure of the emerging economies, especially of China has moved up the productivity possibility curve and their export structures have also become more similar to those of advanced economies (IMF 2011). However, different emerging economies will have different effects with different patterns of trade (McDonald et al. 2008). Several developing countries have reached the technological frontier and have taken their place as important exporters of manufactured products and also have increased their holdings of international reserves; such scenarios contradict the dependency theory. Table 6.1 provides the GDP for the first eight biggest economies according to the measurements by the PPP (billion US $) and is ranked accordingly. The last column provides the nominal GDP figures (billion US $) as a comparison. The G20 is expected to replace the G7 which indicates also the new power shift. Economic growth and economic development in most developing countries depend more on China than on the G7. Economic growth has increased faster in developing countries than in advanced countries, so that South–South trade has become more important within the global economy.

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Table 6.1 Eight biggest economies as measured by PPP (billion US $)

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Rank

Country (PPP)

GDP (PPP) (billion US $)

GDP (Nominal) (billion US $)

1 2 3 4 5 6 7 8

China USA India Japan Germany Russia Indonesia Brazil

25,238.56 20,412.87 10,385.43 5619.49 4373.95 4168.88 3492.21 3388.96

14,092.51 20,412.87 2848.23 5167.05 4211.64 1719.90 1074.97 2138.92

Source IMF Estimates for 2018; World Outlook Database, 6 May 2018

6.3

Economic Transformation Through the Belt and Road Initiative

International relations are going through profound changes; issues which were addressed in the past at the multilateral or at the global level are more and more addressed at the regional level. As the West’s power declines and various regional leaders are increasing theirs, Krickovic (2015) raises the question whether all international politics will become regional and argues that a complex and dynamic system of governance is likely to evolve which incorporates a wide range of political actors that will operate on multiple and overlapping levels. Krickovic (2015) analyses this question in regard to Brazil, China and Russia which are all part of the BRICS. Regional Integration can promote the diversification and modernization of emerging economies; liberalization of trade occurs primarily at the regional level. The integration of regional economies can induce the restructuring of the economy so that they may move towards the production of higher value-added goods rather than just remaining at the level of producing lower value-added goods. The international relations are rapidly changing so that it has become inevitable that international institutions and their rules which have been set up over half a century ago will also be changing. The system of global economic governance should not infringe on a country’s national sovereignty; hence there should be no interference in the internal affairs of other countries. As international problems are global in nature, they require global

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solutions. Shield (2013) makes the point that China’s perception regarding the present global economic governance is that it is basically unjust because it is undemocratic and unequal; that global economic governance is subordinated to domestic interests; so that China’s engagement in global economic affairs will be based on “realpolitik” where national interests will dominate. Changes within the power relationship within international relations can be described as systemic changes and changes in the distribution of power which consequently lead to changes in international relations. Political strategies remain mostly constant, but political actors may change; presently the United States wants to keep Russia out, the Chinese down and themselves in; whereas during the Marshall Plan of 1948–1951 the intension was to keep communism out of Europe by keeping the Russian out, the Germans down and the Americans in. The successful implementation of BRI helps China to prevent complete encirclement by competing powers. The rebalance or pivot to Asia initiated by the United States in 2011 from which China had been deliberately excluded, illustrated to China the policies of deliberate encirclement by adversary powers, if any illustration was needed. The pivot to Asia or the Trans-Pacific Partnership frustrated many of China’s ambition in the Pacific. Consequently, China seeks greater opportunities elsewhere; hence the BRI began to develop. China also asked for greater voting share at the IMF which was not granted at that time, hence China established the AIIB. Emerging countries such as China are experiencing an accelerating rate of transformation and so could benefit other emerging nations as visualized in the flying geese phenomenon. Policies of the BRI may be able to open up various economies as well as leading towards domestic economic reforms. Reforms may give rise to new opportunities, which may be followed by other reforms and so may lead towards a virtuous circle if such reforms are implemented successfully. Growth in some areas could also produce spillover effects towards other locations; although regional protectionism may prevent spillover effects from being fully realized. However, regions which are part of the BRI make up a heterogeneous world so that multiple equilibria will evolve depending on the initial conditions of particular regions; although various detrimental initial conditions may be overcome through an improvement of connectivity between the regions and so reduce the differences between the regions. Some regions may lag behind in their development so that multiple equilibria may arise whereby different clubs may show different growth behaviours from each other, while the same growth behaviour may be observed within the same

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club. Policies of sustained economic development should aim to prevent certain regions to become just a thoroughfare from one region to the next, to be used just for the purpose of transit; instead policies may pay attention to the local conditions to facilitate local sustained economic development and economic growth. To engage in rapid transformation of their economies, countries may have to move away from producing traditional goods and move towards the export of non-traditional products. As developing economies go through their economic transformation more opportunities of trading occur which could provide useful lessons for other emerging countries as well. Processes of transformation lead to changes that are unknown; even though the process applied may be much the same; they are implemented in different countries within different socio-economic situations. A high-wage labour force is able to adjust better to structural changes as they generally have a higher level of education, whereas a labour force with low education finds it more difficult to adjust to economic changes. Global trade brings structural changes so that workers with lower wages lose from trade as they are unable to adjust; for example, the manufacturing sector of the United States is in decline as it has become uncompetitive on the global market, and unskilled workers find it difficult to move out of the manufacturing sector; hence as the manufacturing base shrinks, such workers generally become unemployed. China’s slowdown of its economy would have a detrimental impact on the participating countries of BRI and others on their economic growth as China has reduced its imports of commodities. The increase in China’s service sector however has little effect in the short-term on those countries which export raw materials to China, which is not only a large importer of raw materials but has also become the dominant investor on the African continent. China has become the main source of foreign direct investment (FDI) since 2013. The implementation of the BRI narrows the inequality of income between many of the participating countries, so that the greater inequality of income within countries is offset by the decline in income between countries (Bourguignon 2016). The decrease in inequality between countries is caused by the convergence of the participating countries of the BRI; however, inequality within countries has increased overall on the average by “more than two percentage points in terms of the Gini coefficient between 1990 and 2020” (Bourguignon 2016, p. 13). Bourguignon (2016) argues

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that “inequality within countries is not rising fast enough to offset the rapid decline in inequality among countries” (p. 13). The Differences in income levels between advanced and developing countries decline as long as the rate of economic growth continues to be faster in developing countries than in advanced countries. Despite the global slowdown of economic growth, China’s huge domestic market may ensure further economic growth. However, smaller economies within the BRI may be adversely affected if they primarily depend on exports of commodities and the revenues are not spread amongst the nation. Furthermore, commodity prices are expected to remain depressed; especially if such countries experience a “Dutch disease”. A large proportion of the population is left behind as they cannot cope with the rapid changes occurring within a transforming economy. Globalization has caused a decline in income inequality between nations and an increase in income inequality within nations; for example a shift of production facilities from the United States to China increases the income in China, whereas the income of workers in the United States declines. Furthermore, the outsourcing of production increases the profits of the corporations, but declines the real wages for unskilled labour within the domestic economy of the corporation.

6.4

The Gravity Model and Regional Economic Growth

The gravity model was first introduced to the study of international economics and trade by Tinbergen (1962) and followed-up by Pöyhönen (1963). The gravity model has been further extended by Anderson (1979), Anderson and van Wincoop (2003), Helpman and Krugman (1985), and Bergstrand (1985). The gravity model relates the level of trade to mass, such as the size of GDP, population and to distance which relates to the costs of trade. Gravity Model s are used to exam factors that influence the cross-country flows of trade. The gravity model takes account of multiple factors, such as the magnitude of supply and demand of GDP and per capita GDP of the exporting and importing countries. It also takes account of geographical distance between trading partners, cultural and historical ties, and economic distance, such as preferential trade arrangements between the trading partners. The augmented gravity model also includes analyses of domestic behind-the-border business constraints and between-the-border

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factors and formal trade policies (Broadman 2007, p. 97). Between-theborder factors include customs efficiency, internet access, quality of infrastructure at airports and seaports. Behind-the-border factors include factors of barriers to engage in business and the quality of domestic soft and hard infrastructure. The gravity model correlates flows of bilateral trade to the size of the GDP, geographical distance and various other factors. The gravity model may also incorporate fluctuations of the exchange rate, and the workings of trade organizations. However, the differences in the costs of trade have an effect on possible integration. The gravity model relates trade between countries, bilateral trade barriers and the distance between importers and their trading partners (Anderson and van Wincoop 2003). However, the gravity model may be used to arrive at more accurate predictions about trade in services than in goods (Kimura and Lee 2006). The gravity model illustrates the main links between trade flows and trade barriers. Poor infrastructure has a different impact on trade across countries. Costs of trade may be imposed by tariffs, quotas and other trade policies. Trade costs may also be imposed by transportation, insurance and other environmental factors. Between-the-border factors increase transaction costs such as transport costs, costs associated with compliance with procedures with border transaction, compliance to procedures for the collection and processing of transactions, and search costs associated with finding trading and investment opportunities. Didier (2017) uses a gravity model and finds that Chinese and Russian exports to Sub-Saharan Africa (SSA) increase intra-SSA trade more than the other BRICs countries from 1948 to 2012. Greater imports from China also increase the purchasing power of the population of the importing countries. Local producers also gain as their production costs decline as a consequence of cheaper inputs. Jenkins and Edwards (2006) arrived at similar conclusions in the case of trade between China, India and sub-Africa. However, China’s greater impact on intra-SSA trade is also largely through the preponderance of China’s exports which constitutes about 70% for the period between 1995 and 2010 (Gao et al. 2014). However, China is moving now more towards capital and technological-intensive exports. There has been a sharp increase in intra-industry trade compared with inter-industry trade of final goods and services. Greater value is extracted in the downstream production where finished and semi-finished goods are produced in contrast to upstream production dominated by raw materials. The associated economies of scale resulting from such integration facilitate

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more economic growth. Such production chains move from the production of labour-intensive, low value-added products to the production of higher value goods. However, the participation of African countries within such chain production is rather limited. Oil minerals and primary agricultural commodities are the major exports by Sub-Saharan African countries; although a few countries are engaged in network production and trade in the production of food, apparel and automotive components and assembly which are exported to foreign markets. Gravity model s of bilateral trade flows can highlight the importance of policies on pattern of trade flows between nations. Gravity models are able to assess trade policies; that is, at-the-border factors, and the intensity of domestic business constraints, that is, behind-the-border factors. It is also able to assess institutions and infrastructure which affects trade, that is, between-the-border factors (Broadman 2007, p. 13). Various factors contribute towards the high costs involved in engaging in business transactions in Africa: infrastructure is of relatively poor quality such as roads, railways, power supply and access to reliable internet. However, economic growth of emerging economies is shifting the gravity of economic centre towards East Asia. China and India are relatively poor in natural resources so that their economic growth will increase sharply the consumption of energy and raw materials on a global scale. China does not place any tariffs on highly demanded raw materials such as ores, crude petroleum, but imposes moderate-to-high tariffs on other imports (Broadman 2007, p. 123). However, China has zero or close to zero tariffs on 45% of its imports (Broadman 2007, p. 124).

6.5

The Flying Geese Paradigm (FGP) and the Leading Dragon

The FGP was originally proposed by Akamatsu (1961, 1962). This model explains the evolving industrial production capacities in developing countries and the resulting structural changes. The emergent new industrial capacities will affect a country’s exports, imports and foreign investment. However, in contrast to Akamatsu’s (1961) model whereby the sequence of trade begins with imports, Kasahara (2004) argues that goods may be produced without having been imported first; including the required technological know-how. Once a country has been immersed within a FGP it induces profound changes in production processes and trade relations; a country may change

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from being an importer of various goods and services to being an exporter, and being a producer of goods previously imported. Of course, a country may produce products without having previously the need to import them. Previously leading countries may be transformed into following countries which then will relate partly to how nations rise and fall, which then will affect a country’s foreign exchange and relationship to international financial markets. Countries along the way of the BRI may follow the leading goose or leading dragon (Chandra et al. 2012; Lin 2011) to invent new products and techniques and thereby may gain new markets. How an individual country is embedded within such changes will depend not only on processes of production and the types of products produced, but also on the political decision-making process. Structural changes in the production process may move from labour-intensive light industries to heavy and chemical industries producing resource-intensive commodities to the manufacturing of assembly-based goods to industries engaged in research and development, and finally to industries based on information technologies (Ozawa 2006). Division of production will occur with different labour, capital and technology intensity; hence sequences of production may shift to different countries with increasing added value. Moving jobs offshore further declines the living standard of the working class and further concentrates wealth at the top. China increased sharply its imports of petroleum products and China has also experienced a strong increase in demand for petroleum productive capacity and refining. China’s development of its refining and petrochemical industries is a good illustration of the flying geese model of development; the Chinese petroleum industry is state-led and has shown a sharp increase in productive capacity to meet domestic demand. Garcia and Palazuelos (2014) argue that the production in oil-related industries in East Asia conforms to the FGP. The FGP should not be understood as a neoclassical view on development as a consequence of globalization. Garcia and Palazuelos (2014) identify four separate variables and relationships within the FGP which highlight the functioning of the FGP paradigm within the refining and petrochemical industries in East Asia: first, the importance of developmental processes in promoting structural change; second, the development and enhancement of productivity in response to external changes; third, the consequential inter- and intra-industry changes; and forth, the evolving hierarchies of countries as a consequence of structural changes resulting from greater productive capacities as a result of greater capital intensity and technological changes.

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The refining industry steadily declined in Japan from 1997 onwards, whereas South Korea, Thailand, China and Indonesia then joined in the processing of refined products. In China, the refining and petrochemical industry has an oligopolistic structure which is controlled by the state. The two major state-owned companies of Sinopec and the National Petroleum Corporation (CNPC) are engaged in the extraction. Singapore, and Taiwan increased their productive capacities to replace imports; whereas Malaysia is refining, and China National Offshore Oil Corporation (CNOOC), which is also state-owned, and various transnational companies contribute marginally to total production. CNPC and Sinopec also dominate the production of lower and various intermediate goods in the petrochemical industry. There is also some participation by transnational companies in the production of intermediate and final products. The FGP also emphasizes state intervention as a driving force for economic development (Garcia and Palazuelos 2014); even though the development of productive capacity relates to the emerging high demand by the domestic sector rather than to engage in the need for important substitution. The relationship between an increase in domestic demand and an increase in output is also of great importance in some FGP and so relates well to economic growth in China. Akamatsu (1961, 1962) proposes the flying-geese hypothesis and Kojima (2000) takes up this hypothesis and argues that latecomers to economic development will catch up with leading economies which eventually will lead towards a shift in comparative advantage (Joshua 2015, pp. 188–189). The shift in comparative advantage has resulted in the deindustrialization of various parts of the global north, a lowering of relative wages and declining living standards. Many of the BRI projects could act as “flying geese” or as a “leading dragon” phenomenon which may pull other projects along toward economic development.

6.6

The New Global Production Networks (GPN)

The global value chains (GVCs) or the GPNs have become important to economic growth and have led to deep integration through trade, investment, service and intellectual property (Baldwin 2013). As countries move through different stages of economic development, they move through different production cycles and thereby move up the product ladder, whereby eventually the quality of products improves; partly because of new techniques of production and partly because of a change towards higher quality of products as explained through changes in consumption of different

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goods at different levels of income (Joshua 2017, chapter 7, section 7.5). An increasing rate of industrialization implies an accelerating movement up the product ladder; whereas countries which are inclined to continue to specialize in the production of primary products are likely to remain underdeveloped. During early stages of industrialization, the requirements of raw materials to produce energy and steel are quite high and decline as the economy matures; hence the comparative advantage of the mining sector declines as an economy becomes industrialized. However, stages may be skipped and the process of development may be accelerated under the right economic and social conditions and the appropriate policies. China is moving up the value chain and product chain and is becoming increasingly competitive in technology-intensive sectors. China’s impact on other economies has become global and a successful implementation of the BRI will magnify such global impacts. China has to face some considerable obstacles; for example there is increasing inequality, there is a sharp increase in the deterioration of the environment; however, none of such obstacles are unsolvable and in contrast to many economists and political commentators, it is highly unlikely that China’s economy will crash with a hard landing, perhaps not even a soft landing; even though the economy is declining. China has moved away from just being a market for consumer goods for Western economies, but instead China has emerged as a strong global competitor. However, the rise of China’s economic power cannot be explained through a neoliberal paradigm. The growing global connectivity also implies that a new GPN is evolving which determines how goods and services are produced, distributed and consumed and so integrate national economies on a global scale (Henderson et al. 2002). As the production process has been globalized, valueadded production shifts between different location and not all of it is captured in the location in which it is produced. Different nations compete for different stages in the production of value chain (Grossman and RossiHansberg 2008). Factors of production, such as technology, skilled and unskilled labour, raw materials, and managerial skills may be joined in different locations with different effects on the value-added at different stages of production. The slicing up of the GVC, a term coined by (Krugman 1995) follows from what is perceived to be a comparative advantage according to countries’ factor endowments. How the value-added is distributed will have an impact on the prosperity of the various locations of the production process.

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By forging links between GVCs and the adaptation of local manufacturing and industrial clusters, manufactured products travel along product chains whereby value is added in different countries (Feenstra 1998). Liu and Deng (2016) show that antidumping “measures against Chinese-made intermediates will create barriers in the global production network and further injure importing countries’ interests” (p. 34) and advocate trade policies which differentiate between intermediate and consumer products. Productive capacities for the production of intermediate goods may cater for the increasing demand of higher technological development or they may replace industries which concentrate on lower technological content; such transformations in production occur in domestic and in neighbouring companies situated along the One Belt and One Road projects. Trade in intermediates can be seen as a fragmentation of production and trade; that is, different parts of a product are produced in different locations which are furthered by lower transport costs and comparative advantage between different locations. Technological capabilities create comparative advantages so that gains may be obtained from the fragmentation of the processes of production. China started off from labour-intensive manufacturing; however China has become now more technology-oriented. China was able to transform its export sector from low-skilled cheap labour and labourintensive products towards hi-tech commodities which increased also its value-added. Arguments about cheap labour in China which gave China a comparative advantage are becoming outdated as wages in China are increasing, especially as compared with developing countries. As an economy develops, labour-intensive manufacturing decreases while capital-intensive manufacturing and the service sector increase. While a shift in comparative advantage is intensifying, China also is increasing the number of sectors in which it has a comparative advantage. Arthukorala (2009) argues that China’s development as a major assembly centre has increased East Asian countries’ opportunities to produce parts and components to be assembled in China; however, more of the components are now manufactured in China. There is also a gradual shift of the production chain from China to countries located along the BRI road. Emerging economies however are producing more and more capitalintensive goods, so that the share of low-skilled human capital is declining. The multinational corporations govern the production chain, rather than the domestic company which may be involved in the final stage of production in the chain production. Baldwin and Venables (2013) describe two distinctively separate forms of the chain production process: “spiders”

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and “snakes”. In the case of “spider” processes, multiple components are brought together from various location to a single location where such components are assembled either to make up a new component or a final product; whereas “snake” processes constitute the sending of intermediate goods from one location to another location and then incorporate other intermediate goods send onto yet another location which then finally reach the location where the final assembly takes place. Production chains usually involve a combination of these forms. Chateau et al. (2015) assume that global GDP will increase by 3% per annum over the next 50 years. They expect that until 2030 global economic growth “will be sustained by a rising weight of China and India with high albeit declining growth, while after 2030 fast growth in Africa is expected to support world growth” (p. 79). A GPN integrates operations of production across borders and so integrates national economies (Henderson et al. 2002). The impact of intra-and interregional economic development largely depends on how the creation of value at each production stage is “associated with wages, working conditions, labour forms, innovation, managerial control and the rest” (Henderson and Nadvi 2011, p. 288). However, the transformation process has to allow much of the value created to be captured within the particular location of production. GPNs combine raw materials, human capital, technology and production techniques from different geographical locations and the contribution to the different stages of the value chain will differ. However, local workers and local companies should be employed whenever possible, so that there will be transfer of knowledge to the local population, rather than just deciding where and how much value is produced within the GPN production chain. W. Zhang (2014) estimated that FDI and foreign trade have a strong positive effect on the manufacturing sector, both in terms of output and exports; however, the effect on technological and industrial upgrading was rather limited. Furthermore, the coastal areas of China benefited much more from FDI and foreign trade than the inland areas. Increases in FDI are generally associated with increases in exports. Access to resources is vital if production is to be profitable. Chinese Investments in the BRI countries will also have to consider where to locate the value-added activities. There is a reciprocal relationship between trade and FDI, that is, FDI facilitates trade and trade attracts FDI. However, whether an inflow of FDI is accelerating economic development in the receiving country will depend on potential technology transfer and on the positive spillover effects onto

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other sectors within the economy. Human capital, technological innovation and the construction of infrastructure are highly important to an increase in industrial performance. As global production systems have become increasingly important in emerging and developing countries the BRI can establish the required interconnectivity amongst different growth centres by facilitating local investment which will enhance the productivity of local industries and connecting such production centres with new domestic as well as global markets. New growth centres can have positive spillover effects which results in the training of human capital at different levels. Production increases lead to greater economies of scale. It will take time to overcome the dualistic nature of some of the countries participating in the BRI; however, spillover effects may minimize the dualistic nature of economies which otherwise may impede sustainable economic development and thereby slows down industrial development and the creation of jobs. The value-added of global production chains are usually highly concentrated and the greater the technology used the greater the concentration will be. K. H. Zhang (2014) makes the point that: “to build genuine technological capabilities in complex activities, countries/regions have to go through a slower, costlier and riskier process of advancing from assembly to real manufacturing, and from there to local design and development” (p. 271); otherwise, foreign investment without beneficial spillover effects on other sectors may crowd out local industries. Once a manufacturing base has been established there will be spillover effects, but the question is how far the spillovers will spread. As a result of economies of scale, the set up of manufacturers will only occur in a limited number of places, largely determined by demand; as the greatest demand is in urban areas, manufacturers are generally based in urban areas. Myrdal (1957) refers to this phenomenon as “circular causation” (Myrdal (1957). More jobs and products are available in urban areas so that they will attract more of the population and so causes the phenomenon of urbanization. Various private companies such as Lenovo and Huawei have established production networks outside of China, for example in India and Mexico. Other privately owned Chinese companies have become part of the manufacturing industries in SSA. However, most Chinese investment is done by SOEs in the construction, mining and energy sectors (Haglund 2009). Chinese companies often show reluctance in employing local workers and instead employ Chinese workers (Haglund 2009) who are contractually tied and brought in from China as in the case of the Zambian Copper

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sector. However, the situation of employment depends largely on the particular investment projects and often there is not the required skilled labour force available. Countries have become deeply integrated into production networks which allow components to be produced where they are cheapest to be made and then are exported to be assembled in yet another country. The increasingly integrated global markets have resulted in a fragmentation of production processes between countries. However, data on trade statistics do not state the value-added by each segment of the production process as they “double-count” the value-added. Vertical trade networks and supply chains have become important, especially since China has become a global hub for manufacturing since the 2000s (Ferrarini 2013). The developing countries in East Asia have become more integrated into the East Asian production network during the 1990s. Koopman et al. (2008) estimate that foreign value-added in Chinese exports was approximately 50% between 1997 and 2002 which has increased to over 60% by 2007 (p. 3), most of such increases have occurred after China has joined the WTO in 2001. However, such content differs between sectors, but is lower amongst more sophisticated products; however, the local content has been increasing in such products considerably over the last ten years which even has been increasing before 2008 (Schott 2008). The sophistication of Chinese exports becoming increasingly similar to those of high-income counties. Kwon and Ryou (2015) also show how China has increased its share of intermediate exports in the GPN. An appreciation of the RMB has a lesser impact on Chinese exports when such exports have a lower share of domestic content. The GVC is able to assess the sources of value-added and the destination within a global value network; so that the value-added at each stage can be differentiated from the value-added in trade. Boffa (2018) finds that trade integration between countries of the BRI has increased from 30.6 to 43.3% between 1995 and 2015; such increases were mainly the consequence of the movements of intermediate goods. Trade between the BRI increased from 21 to 37% of global trade (Boffa 2018); whereas for non-BRI countries it declined from 79 to 63% between 1995 and 2015 (Boffa 2018, p. 6). The exports of intermediate goods for BRI countries increased from 23 to 42%, and exports of final goods increased from 16 to 24% over the same period. Most of the growth was due to the increase in economic activities in China, East Asia and the Pacific area as well as Europe and Central Asia.

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Gross trade flow measures total exports, whereas net trade flow measures export net of imported intermediate inputs. As the increase in trade is often the consequence of offshoring by placing different stages of production in different countries, actual trade may be overstated. At each production stage, value is added so that the value-added in countries being part of the production process may be counted multiple times in the trade flow (Costinet et al. 2011). However, China has reduced its imports of components overall. One-third of global trade consists of intra-firm trade and trade between constituent entities of single corporation has been increasing over time; trade of intermediate goods has also increased faster than the trade in final goods (Broadman 2007, p. 275). The fragmentation of production enables firms of labour-intensive production to access foreign markets without the need for expenses of marketing, and considerable knowledge spillovers may also occur. Globalization and product fragmentation requires the availability of well-skilled workers who are able to adapt to changing situation and changing requirements. The availability of a trained workforce improves interconnectivity between regions and so enhances the productivity of the GVCs. Formal vocational training is therefore essential, including the possibility of retraining as human capital requirements are constantly changing. In fact, a stagnant labour force in terms of expertise is associated largely with a stagnant economy. Profits accrue mainly to those who organize the production chain. Essentially the production chain merged production with distribution. Through the financialization the financial and commerce sectors become dominant over production whereby multinational corporations organize production and distribution, but the financial section produces very little. Production is being outsourced and subcontracted through the rearranging of monopsonistic structures of buyers against the producers. Capitalism is in decline for the simple reason that it is now based on the financialization of market forces rather than on new innovation in production and products; hence the new form of capitalism is the predatory form of capitalism. If Chinese Capitalism will eventually submit to unrestrained financialization of the market forces, it may follow American decline.

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157

Conclusion

The gravity model has been used to explain trade relationships, and the trading gravity has been shifting towards the emerging countries, especially towards Asia, while western economies have been in decline. The BRI may enhance the trade relationships between different countries as it may be able to integrate many countries into the global economy, depending on nations’ competitiveness. However, an increase in trade will not only increase economic growth and development, but it will also have implications for international relations as well as for the international financial system; for example it may be expected that the RMB will eventually increase in its importance in international trade transactions. Infrastructure contributes to an increase in connectivity and thereby increases trade between and within nations and thereby is able to facilitate the phenomenon of the “FGP”. The “flying geese phenomenon” highlights processes of economic development. The effect of dual economies on economic development and how the FGP relates to economic development has also been explained. The FGP is well illustrated with the organization of the refining and petrochemical industries in East Asia. The increase in global connectivity implies that a new GPN is evolving amongst the participating countries of the BRI. New division of labour and production will occur and shift to other countries. The increasing global connectivity can be illustrated through the new GPN. How global connectivity can be enhanced through a new GPN. The sharp increase in China’s domestic consumption and the relatively fast economic growth has increased China’s requirements for the imports of raw materials and other resources to feed into domestic production. The implementation of the BRI will be able to meet the demand of at least some of the required resources. The economic performance of the North has declined significantly ever since the 2008–2009 financial crisis and the international relations and global trade between South–South have intensified, especially between China and economies of the South. Hence, it may be expected that the G7 are also declining as compared with the G20. The gap between Northern and Southern economies in the global trade has narrowed considerably, while China, Brazil and India take on a prominent role. The rising economic powers of the BRICS have also an effect on regionalism as numerous regional and bilateral agreements have been concluded. Chinese investments to a large extent concentrate on the construction of infrastructure

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which is in high demand in the countries along the BRI to facilitate economic development, but China is also able to import raw materials to feed into its domestic economy. Development is progressive rather than static and the BRI can accelerate the evolution and sustainability of economic development.

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CHAPTER 7

The Belt and Road Initiative and International Relations

7.1

Introduction

This chapter explains how the Belt and Road Initiative (BRI) fits into the global power play of major powers. The seeds for a shifting horizon in global international politics have been sown. The importance and the impact of international trade cannot be adequately assessed without considering the politics that may enhance or interfere with global trade relations; hence the success of the BRI will be largely determined by political decisions which may oppose or enhance the development of the BRI. The gravity of global trade is shifting towards the emerging economies, especially towards China, but also towards India and Russia. This chapter on the BRI and international relations begins with an analysis on trade dependence and political dependence and then proceeds to discuss the BRI as a globalizing force. However, China’s rapid rise and the implementation of the BRI provokes a counter push to the BRI by opposing countries; this counter push will be discussed next, followed with specific analyses on various measures which are part of the counter push, such as the thrust towards protectionism, policies of sanctions to maintain hegemony, and the trade disputes to prevent China from rising as an economic power. The assumption that an increase in trade and greater trade dependence between nations will lead towards greater foreign policy conversion is discussed. It is argued that dependency theory which divides the world into an industrial core and a periphery, where the periphery supplies commodities to the

© The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28068-0_7

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industrial core, has become outdated, because nation’s comparative advantages as well as global political forces have shifted towards various emerging economies. Nevertheless, an increase in trade and trade dependence may lead towards greater convergence of foreign policies as can be seen by the greater allegiance of members of the BRI with China’s foreign policies on multiple issues. Moreover, China’s importance in international affairs is largely due to China’s rise in economic power. International relations may be conducted through the application of soft, hard and smart power (Nye 2004, 2009). China’s exercise of soft power as activated through the BRI is in effect a network of partnerships consisting of a huge number of projects. Furthermore, the consequence of the RMB as an increasingly powerful international currency will also affect the international monetary system and so will have an impact on international affairs as well. The shift of economic power from the industrialized towards emerging economies, including the growing importance of South–South trade; for example the greater importance of China’s trade relationship with African nations, the Middle East and South America will also have an effects on international affairs. The Eurasian Economic Union (EAEU) will also exert greater influence on international affairs. Political instabilities in Afghanistan, the Middle East, Myanmar and other geographical locations may present various obstacles for the BRI. It has been argued that processes and prospects of the BRI cannot be understood by resorting just to theories of international economics or trade theories, but the various obstacles that will be confronted by the BRI have to be considered as well. The creation of various obstacles as a counter push to the BRI has also been discussed. It has been argued that China institutionalizes its global power through globalization with Chinese characteristics. Furthermore, the thrust of the BRI has some neoliberal features with Chinese characteristics. China sees its status of a global power as inevitable, but pursues a gradual approach. It does not seek to replace the international financial system based on the US dollar; but seeks a greater role within the current system, including the internationalization of the RMB. One of the major aims is the BRI is to internationalize China’s domestic economy and to connect the global economy with the China’s economy which will have considerable spin-offs, both economically and politically. The gravity of the global economy is shifting towards the emerging economies, especially towards China, India, and Russia. An increase in trade relationships may enhance economic relationships which may also improve

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international relations and greater foreign policy convergence. As there is a shift in power from advanced countries to emerging economies, international institutions are likely to be reconstructed. Other newly formed international institutions such as the SCO are likely to present a countervailing force to the advanced economies. The SCO and similar institutional power relationships together with the BRI are likely to present a countervailing fore to the present unipolar world order. Various international organizations, such as the SCO have been established to serve as a countervailing force to the anticipated counter push to the BRI. China shifted its foreign policy from one of keeping a low profile towards one of modernization, spreading across different spheres from the economy to the PLA, especially within areas of high-technology. Policies of protection may help declining economies whereas globalization is likely to help emerging economies. However, the imposition of tariffs contravenes the policies of the WTO. Various policies have been adopted to contain the BRI. However, the counter push to the BRI has pushed Russia and China closer together; neither do sanctions have the intended effect. There are objective trade barriers, such as geographical characteristics, and there are subjective trade barriers, such as the imposition of tariffs and sanctions; this chapter deals with subjective trade barriers. Trade sanctions and tariffs have a multiplying an accelerating impact on foes and allies alike. Protectionism is imposed by countries which are unable to compete, whereas free trade is advocated by those who have a competitive advantage. Sanctions and trade disputes between the United States and China will compel China to intensify its “Made in China 2025” programme which will lead to more Chinese made and designed technology. The more appropriate trade policies are agreements which provide access to international markets and reject any imposition of an optimal tariff. Fulbright’s (1970) concept of an arrogance of power has been explained and the danger of open conflict is more acute when an arrogance of power is blocked by other countervailing forces, especially when it is combined with a realization that these policies cannot be implemented and may react with force out of desperation. This leads us to a discussion of the Thucydidean trap.

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Trade Dependence and Political Dependence

A major shift is occurring within the global economy away from the major industrialized economies towards the emerging economies; especially towards China, India and Russia. Political conflicts and international relations can interfere with trade between nations and consequently will affect their economic relationships. Political tensions based on misguided rivalry create barriers to economic integration. On the other hand, an increase in trade can facilitate economic integration which can reduce political tensions. As China’s rise in economic power and its trade relationships with other countries is increasing, China will also increase its influence in international relations. Flores-Macías and Kreps (2013) find that countries that have high levels of trade with China “are more likely to converge with China on important foreign policy issues” (p. 358). This confirms Hirschman (1945) argument that an increase in trade and greater trade dependence lead to greater foreign policy convergence; obviously, the greater the trade between nations the greater the costs of any interruptions to trade between them. Hirschman (1945) argues that countries that have less to lose in a trade dispute are in a stronger bargaining position. According to Hirschman (1945, 1980), an increase in trade and trade dependence results in a convergence of foreign policies simply because interruptions to trade will increase the costs the greater the trade relationships are; hence a convergence of foreign policies will lead towards fewer costs. The greater a country’s reliance on trade the greater will be the country’s willingness to grant concessions. Of course, a country may obtain concessions not because of its dominance in trade but rather because it is powerful and so may impose its will; unless weaker nations form alliances amongst each other, and so may cause a countervailing effect to the more powerful nation. Flores-Macías and Kreps (2013) using ordinary least squares (OLS) and two stage least squares (2SLS) for their investigation in the case of African and South American countries find that China and its trading partners are more likely to converge on foreign policy issues the more they trade. Flores-Macías and Kreps (2013) find that China’s trade volume with African and Latin American countries has increased, and as a consequence there has been a convergence of foreign policies of those countries with China. According to the dependency theory, the world economy is divided into an industrial core and a periphery which produce the commodities.

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The periphery consists of developing countries which produce largely lowvalue products, mainly within the agricultural sector to be exported to the developed countries situated in the industrial core; such situation is assumed to reflect the comparative advantage of the core and the periphery; however, not only are the comparative advantages of nations shifting, but so are the global economic and political forces. The dependency theory is incapable of explaining such rapid changes and much of economic theories have no explanation for the financial crisis of 2008–2009. Indeed, the financial crisis was largely confined within advanced economies, especially within their financial sectors. Hirschman (1945) makes the point that trade can be used as a political tool. Economic dependence can lead towards political dependence. The construction by the BRI of infrastructure establishes greater interconnectivity and is expected to create political support in the participating countries for China. Furthermore, as China’s economy grows, China will gain greater influence in the decision-making process of those countries participating in the BRI. The greater a country’s foreign trade the greater will be its importance in international affairs. The United States has since the financial crises of 2008–2009 declined in its importance resulting from its decline as an economic power which also has implications for foreign affairs. However, a political power vacuum is quickly filled again. The shift of gravity of economic growth from the industrialized to the emerging economies has become a global phenomenon; hence China’s trade relationship with South American countries has become more important; especially within the oil industry, the agricultural sector, high-tech industries and the construction of infrastructure. The Chinese and Venezuelan economies complement each other. China has diversified its imports of crude oil partly because of its fast increase in demand for oil. Suppliers of oil also realize that China with its considerable economic growth is a sustainable strategic importer of their oil; at the same time, they reduce their reliance on the United States to purchase their oil. South America supplied almost 10% of China’s oil imports in 2013. Hongbo (2014) points out that “the Sino-Venezuelan Cooperation Model is a plural collaboration pattern with the oil sector as the principle cooperation axis, which is extended to the infrastructure, high-tech, agriculture and other fields under an intergovernmental institutionalized cooperative framework” (p. 652). Chinese financial institutions provide the finance to be repaid with crude oil exports from Venezuela. The China–Venezuelan Joint Fund was set up in 2007 by the China Development

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Bank (CDB), the Chinese National Oil Companies and the Venezuelan Oil Companies. Finance was provided through loans, not in the form of equity. Such cooperation between China and Venezuela has now been extended to the agricultural sector, infrastructure and high technology areas. Venezuela has a trade surplus with China and China has become Venezuela’s secondlargest trading partner. The Security of oil supply is regarded by China as a priority in its national security policies. However, like in the case of some other participating countries of the BRI, Venezuela is politically unstable as a consequence of political interference by countervailing forces which are opposed to the BRI. Crisis of attempted regime change such as in Venezuela is a means to counteract China’s influence in South America; especially as China cooperates with Venezuela’s PDVSZ in the production of oil. As China has global investments, new political reconfigurations will affect China’s economy as well as its international relations, and consequently the viability of the BRI. Political changes since 2011 resulting from the “Arab Spring” in the Middle East and in North Africa have affected the supply of crude oil to Asia, especially to China which is highly reliant on crude oil deliveries from the Middle East. India is building up a partnership at sea with China which includes Japan and Australia, while still advocating concurrently a US Indo-Pacific strategy; obviously it is trying to hatch its bets, but India’s dialogue with China is intensifying. However, it is highly unlikely that India will join the anti-China strategy for too long as its attitude towards China is changing. The Quad countries of Australia, India, Japan and the United States have formed a coalition specifically to oppose the BRI; especially to patrol the East and South China Seas which are now referred by the four countries as the area of Indo-Pacific instead of using the previous term of Asia-Pacific. However, rather than seeing the BRI as a danger to the participating countries, it will enhance the domestic as well as international trade relations with other countries. The Quad proposal which was first announced in 2005 provides Australia with severe contradictions in its policy. Australia sees an alliance with the United States as in its best-perceived security interests which conflicts with Australia’s trade interests based in East Asia. Australia’s trade with China has increased greatly, and it has also increased with Hong Kong, Japan and South Korea; whereas it has declined with the European Union and even more so with the United States. Australia’s future obviously lies within the East Asian-Pacific region. Japan cooperates with China on a project in the construction of a tunnel and a bridge connecting Japan with

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the Eurasian mainland, and India is a member of the BRICS and the SCO and is attempting to build a transportation route across Iran and Azerbaijan to Russia which interferes with India’s geopolitical alliance with the United States. Hence, Australia’s interests may be best served if it joins the BRI; especially as a new quadrangle is evolving in Eurasia between China, India, Iran and Russia; indeed, China, India and Russia have great potential to create a new multipolar world. The Eurasian duopoly of Russia and China is fast intensifying its economic and political cooperation; while at the same time, a new quadrant is taking shape between China, India, Iran and Russia: the quadrant of Eurasia. The sanction will push Iran more towards Russia and China who are willing to take up new opportunities. China has opened a new rail link between Bayannur in Nei Mongul and Teheran although various projects are still to be completed.

7.3

The Belt and Road Initiative as a Globalizing Force

Globalization is usually understood as the “liberalization of trade”, that is, “free trade across borders, production, investment and even cultural exchanges” (Khan and Marwat 2016, p. 104). However, globalization is also the externalization of the domestic economy of a hegemonic trading power. Khan and Marwat (2016) argue that “the process of globalization allows increased penetration of national economies” (p. 104) through international organizations such as the IMF, World Bank and the WTO which in the process leads to the “marginalization of developing countries” (Khan and Marvat 2016, p. 104). Globalization may be perceived as reducing barriers to trade, such as tariffs, quantitative restrictions and the promotion of the free movement of factor of production which is often initiated by major economic powers to expand their domestic markets. The aim of the CDB has been described as the “Internationalization of China’s economy and the Chinalization of the international economy” (Hongbo 2014, pp. 657–658). China is able to institutionalize its global power through globalization with Chinese characteristics. Chinese pragmatism is by far more flexible than policies which are guided by ideologies which will be subject to a paradigm shift eventually. China’s fast economic growth beginning in 1978 increased its power of negotiations and soft power in international affairs as well as its military force.

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The mutual development of the BRI and the EAEU can easily complement each other, so that discussions about Chinese and Russian rivalry in Central Asia are often overblown; however, what is of greater concern is the rivalry between China and the United States for the success of the maritime route in East-, Southeast, and South-Asia, especially in areas bordering the South China Sea (SCS) and Kashmir and other areas. However, the maritime route will be able to improve ports along shipping lanes from South China to Indonesia, Africa, the Middle East, and Europe. Jammu and Kashmir is strategically situated and borders China, including the autonomous region of Tibet, and Pakistan. India and Pakistan are the two largest economies of South Asia but trade between them is considerable less than their potential; however trade could be vastly improved through the construction of the appropriate infrastructure between India and Pakistan, but political antagonism often wins out over the well-being of the population. The insecurity in Afghanistan is also another obstacle as it will impose instability in Xinjiang which is China’s door to the West for the BRI. Afghanistan is also the nexus between Central-, West-, and South-Asia, and instability in Afghanistan can disrupt the flow of traffic between and within such regions. A good relationship and bilateral cooperation between China and Afghanistan are therefore vital for the successful implementation and the functioning of the BRI. It may be argued that China’s diplomatic approach is geared to serve its economic interests, so that in the past, China kept a low profile, which in recent times has been more or less abandoned. At the 18th Party Congress in 2012, it was announced that China is to emerge as a maritime power which China regards as essential to rejuvenate the Chinese nation; whereas until recent years, China was and still is, concerned with the “maintenance of regional stability”, it has now partly shifted towards the “defending of sovereign rights”. China has announced at the 19th Party Congress that China will give priority to economic development as well as to the modernization of the PLA to become a first-rate military power by 2035. China’s aim is for greater economic cooperation and an increase in trade which is expected to lead to greater political influence. As emerging nations rise and present powers decline, international institutions such as the United Nations will be reconstructed to avoid a decline in their advance (Stiglitz 2015). The IMF has essentially adopted the Washington Consensus which calls for various austerity measures, such as balanced budgets which often intensify the adverse economic conditions which they intend to overcome, as in the instance of the East Asian financial crises.

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Stiglitz (2015) makes the point that Malaysia recovered relatively quickly as it rejected the IMF requests. An economic model that does not serve the majority of its citizens cannot be regarded as a role model. The average American families are worse off than they were some 25 years ago and the proportion of the population living in poverty in the United States has increased while approximately 500 million people were able to move out of poverty in China (Stiglitz 2015), by 2018 the number of people who have moved out of poverty increased to over 800 million. The SCO or other similar realignments of global power is likely to present a countervailing force to the domination of the world by the US and its allies. The SCO will also supplement the BRI. Most people in the West are not aware of the importance of the BRI and SCO, and are inclined to belittle such organizations. However, the BRI is expected to create eventually the greatest trading block based on the RMB which will have considerable political implications. It is on the way to unite Eurasia and so is inclined to shift strategic power away from Western domination. It is shifting the financial power away from the US dollar as the major reserve currency towards the RMB as the major reserve currency as part of a basket of other reserve currencies. The BRI was officially announced in 2013 and by 2015 Russia joined in a linkup between EAEU and the BRI and so became the Greater Eurasia. Presently, various parts of the BRI are in the process of being reconstructed through renegotiations between China and Malaysia, the Maldives, Ethiopia and amongst several other countries. Various scenarios to make geographical areas of the BRI appear to be unsafe can be expected to prevent possible success of the BRI; especially in areas which are highly important for the BRI, such as the province of Baluchistan in Pakistan. The Maldives are situated across the transport route for hydrocarbon; whoever controls the Maldives can exert pressure on their geopolitical opponent. Yemen is strategically important for the flow of oil as it connects the Mediterranean with the Red Sea via the Indian Ocean and Suez Canal through the Bab el Mandab which is close to Djibouti at the Horn of Africa, hence the war in Yemen was not unexpected. China commits hundreds of billions of dollars to global infrastructure through the BRI but the creation of Hybrid Wars which includes the dissemination of false perceptions in many of the participating countries of the BRI, may make the BRI at least in some countries unviable at present. Once a country has been destabilized, China will lose its markets in those countries which then may lead to an economic downturn so that they are

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unable to repay their debts to China. China is using constructive regional economic policies, especially in Xinjiang and through various developmental projects along the border with North Korea. Luttwak (1990) argues that states resort to geo-economic substitutes when their geopolitical importance declines. However, the aim of politics remains much the same, so that geo-economics merely recasts geopolitical endeavours (Cowen and Smith 2009). Economic issues have become increasingly important in international relations; the expansion of economic power by one is often regarded as a threat to the security by the other. A rising power has much to lose in the case of a war, whereas a declining power that feels threatened is more likely to assume that a show of force may prevent its decline. Political power can also lead to an arrogance of power (Fulbright 1970) and those who are affected by it are unlikely to resort to diplomatic discourse in the belief that they have all the answers. An understanding of the economic processes of the BRI cannot ignore Regime Change which may affect changes in the international financial system which has political implications affecting the global economy (Keohane and Nye 1977). Hence, an analysis of the BRI is not only a matter of theories of international economics or trade theories, but issues of international Regime Change and other obstacles to the BRI will also have to be addressed. Keohane and Nye (1977) argue that technological change and an increase in economic interdependence have made existing international regimes obsolete. Economic powers are reluctant to adapt to changes in regimes which have served them well. Instead, protectionism often increases when economic interdependence is on the rise. The imposition of tariffs on imports is a sign of economic decline as those that impose tariffs are unable to compete. As the powerful states make the rules it is inevitable that such rules change as the rulemaking states decline in their power. Protectionism has been increasingly adopted by several countries as a consequence of the decline of many economies after the financial crisis of 2008–2009. However, trying to adopt beggarthy-neighbour policies such as the imposition of tariffs only deepens the financial crisis.

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The Counter Push to the Belt and Road Initiative

The intercontinental trillion dollar project of the BRI will diminish opposing countries influence and the counter push will lead towards an overreach as the resources of the United States are diminishing, whereas those of China are expanding. The widening conflicts between the contending nations have already become wide on the economic and technological front. A country’s power is based on its economy so that the irrefutable aim of the United States as a declining power is to incapacitate China’s economy; it has less to do with reversing the American unfavourable trade balance. The “Made in China 2025” project is vital for China’s economic expansion, so that this programme is financially supported by the Chinese government; especially in areas of high technology, such as in artificial intelligence, robotics and computer microchips. As the future will be dominated by high-tech areas, it is vital for China to excel in those areas; hence great emphasis is placed by the Chinese government on research in high-tech areas, including in areas which support it, such as R&D and education. International relations are conducted through the use of “soft power”, “hard power”, and smart power” (Nye 2004; 2009). The BRI may be classified as the application of smart power. It increases China’s economic power and diminishes unilateralism; hence the power of the United States declines. Nations often see themselves as unique and superior and if they have acquired power, it may lead to an arrogance of power as Fulbright (1970) argues, and so are disinclined to learn about other civilizations. However, China is likely to accumulate diplomatic goodwill in many countries as China is engaged in projects which develop various economies in contrast to western countries which are reluctant to do so. The danger of international conflict is greatest when the exercise of arrogance is being blocked by countervailing forces, and it may become more dangerous when an arrogance of power is combined with frustrations resulting from a realization of their inability to implement their policies which then derives from a power of disillusionment. It may be argued that a power of arrogance is less dangerous when a country has real power rather than when a country suffers from its arrogance of power when such power is in real decline. When nations do not know how to react, they act with force out of desperation, such as trade sanction or a new cold war. Advanced economies do not want to relinquish the unilateral global economic order which has served

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them well, and so intend to prevent the new global order from coming into existence. Rising powers demand greater influence and established powers are resentful towards rising powers which may lead towards a Thucydidean trap, named after Thucydides who lived from c.460 B.C. to c.400 B.C. Such a risk may become greater when the civilizations concerned are perceived as being irreconcilable; for example the ideologies which drive them and form the fundamental concepts which underlies their political actions, such as the role between the economy and the state and governance of international relations. The rivalries between rising and declining powers may lead towards a Thucydidean trap which is especially acute when the exercise of an “arrogance of power” (Fulbright 1970) is combined with the realization that their policies cannot be implemented as they are faced with countervailing forces. The trap is caused by types of rivalry which has confronted rising and established powers, which in most cases has led towards war in the past as occurred between Athens and Sparta during the fifth century B.C. which gave rise to the Peloponnesian war (431–404) which was caused by the rivalry between Athens and Sparta. Thucydides (1954) argues that war between Athens and Sparta was caused by the fear of Sparta of the rise of Athens. Now it is the United States that fears the rise of China. Society is guided by egoism and animus dominand, or the lust for power (Morgenthau 1974, pp. 191–196). Thucydides’s analysis illustrates how superpowers relate and react to one another’s power changes in their relationship. Avoidance of war necessitates a change of attitudes in the countries involved. Furthermore, military alliances are unlikely to promote peace, instead peace and international security may be furthered through sustained economic development; on the other hand, the successful development of the BRI may foster the interconnectivity and development between the nations involved in the BRI. However, international disputes in the longer term are unlikely to be able to prevent the rise of China as an economic power, but they may provide various obstacles on the way which will have to be overcome if the BRI is going to succeed. In a similar fashion, when multiple corporations compete amongst each other, the competition of one may crowd out other competitors. China is now the largest economy as measured through the purchasing power parity (PPP) and it is the second-largest economy when measured through the market exchange rate, and it is on the way to be the biggest economy on this measure in a few years as well.

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State interventions may be detrimental to the economy when they are based purely on power politics; for example some of the sanctions against Russia are intended to prevent the implementation of the Nord-Stream 2 gas pipeline and thereby attempt to force the European Union to buy US natural gas which will be to the detriment of the European Union. US policies have driven Russia towards China and present American policies may do the unspeakable and drive Germany towards Russia in the longer term, Germany and other European countries would thereby gain greater access to the BRI projects. Due to Western-imposed sanctions Russia is engaged in reforming its agricultural sector, hence Russia’s agricultural sector has expanded to supply the domestic market as well as exports of dairy products, livestock and various crops to Asian markets. After the implementations of sanctions, Russia has now created a flourishing agricultural sector. Sanctions against Russia lower the value of the Russian rouble; however a weak rouble reduces imports to Russia and increases exports from Russia and thereby increases Russian profits, especially when the price of crude oil and gas has increased. Various policies of the United States can be seen as an attempt to contain China, including China’s attempt to implement the BRI. However, intimidation was seldom a successful policy but rather entrenches nations’ attitudes. Such containment policies include various forms of sanctions and the imposition of tariffs. However, the imposition of sanctions and tariffs do often not have the intended effect. Sanctions such as those imposed against Russia are hurting more the EU than Russia. Sanctions against Russia caused agriculture to boom in Russia and have made Russia selfsufficient in agricultural products and also have turned Russia towards China, so that China and Russia now cooperate even more than before. Sanctions are more likely to backfire as the target country is likely to intensify R&D in the area which has been sanctioned; this scenario has been referred to by Miyagiwa and Ohno (2015) as the “paradox of sanctions”. There are two different types of trade barriers; there are objective trade barriers such as based on geographical characteristics, for example distance. The costs to the trade of such barriers may be reduced through the construction of viable infrastructure as is being constructed through the BRI. On the other hand, there are subjective barriers which are imposed barriers to trade, such as tariffs. Bilateral trade may be assessed by using the trade intensity index as used by Kojima (1964); however, the trade intensity index approach combines the effects of the objective and subjective trade barriers so that it becomes difficult to design the more appropriate

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policies to overcome such barriers. Trade may also be assessed by using different gravity models; however they are unable to assess and compare barriers between countries. Hence, Chen and Li (2014) combine these two approaches through the use of a “gravity model adjusted trade intensity index” (GMATI) to show “the short run trade barriers while controlling for the long run ones under global trade context”. Protection may help declining economies whereas globalization helps emerging economies. Trade and investment are the main driving forces of a successful BRI through the promotion of connectivity. The unilateral measures and protectionism are incompatible with the rules of the WTO. The current protectionist policies are intended to preserve the economic dominance of the United States and to prevent the functioning of a multilateral world order. In such a situation it will be difficult to come to an agreement on climate change with detrimental repercussion on the future well-being of the human race. Present unilateralism is eventually pushing the four big economies of Euro-Asia of China, India, Japan and Russia closer together. Hence, it is expected that Japan will find it necessary to sign a peace treaty with Russia, and India is increasingly cooperating with Iran to diversify its sources of energy, and it is also buying the Russian S-400 air defence system. More and more countries find it necessary to consolidate the multipolar world to cement multipolar relations between countries. As the economy of the United States is declining; it resorts to protectionism, whereas globalization, for example through BRI helps China as it has developed comparative advantages in many fields. Throughout history, protectionism has been used by countries which fear competition within the global economy. Instead, China will use BRI to foster trade and will transform the global economy through the construction of multiple infrastructures. Imposed sanctions or tariffs on one country may divert trade and investment towards another country; for example, when the United States embargoes investments of energy with Iran or when the United States revoked investments in Sudan, Iran increased its trade with China and Sudan became China’s largest producer of oil. Likewise, any sanctions directed against China would be futile. China is less dependent on imports from the United States, but the United States is an import led economy as it has a relatively weak manufacturing base. Most of the commodities available on the shelves in the United States, such as textiles, electronics, toys, television sets, computers, and mobile phones are made in China. Many companies in the United States produce little in

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the United States, but instead may produce in China, by subcontracting to Chinese or international companies based in China. However, political decisions are not always taken according to the best options available, which may be the consequence of what Fulbright (1970) referred to as the “arrogance of power” which is illustrated through “a psychological need that nations seem to have in order to prove that they are bigger, better or stronger than other nations” (p. 17). However, as long as countries’ policies are dominated by fear, they will be unable to optimize the benefits of closer economic and cultural association between the countries engaged in the projects of the BRI. India has a lot to gain, including the construction of a vast network of infrastructure, such as a high-speed railway system, by putting its fear of China aside. In much the same way, North Korea and South Korea have a lot to gain if they joined once again. Indeed, military power can destroy another country’s economic power, but it cannot substitute for it. Without economic power, military power will be counterproductive as it depletes much-needed resources.

7.5

The Thrust Towards Protectionism

The changing paradigm in the global governance of trade and finance has entered the stage where it operates as an accelerator and multiplier and eventually will affect the global economy. Since the financial crisis of 2008–2009 protectionism has been on the increase. China has been regarded in numerous studies as a competitor with other countries, possibly because such studies focus mainly on horizontal specialization in trade rather than considering also vertical integration which has been becoming increasingly important for China’s integration into the global production networks which is rather complementary to other economies in East Asia. China already had a significant effect on the growth of GDP of its neighbouring countries before it entered the WTO (Abeysinghe and Ding 2003). However, China’s accession to the WTO has reinforced such trend. If the trade disputes intensify, it will affect the United States as well as China; consequently, China will emerge as its own designer of numerous products and will engage in import substitution in the technology sector. In the long run, this will assist the Chinese technological sector and will accelerate China’s “Designed and Made in China” policy as defined in China’s “Made in China 2025” policy. If the trade dispute intensifies, China will become less dependent on foreign supplies. China’s industrial policy of “Designed and Made in China” will not be relinquished by China

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but instead will export such China designed products to other countries, especially towards the participating countries of the BRI. China plans to implement “Made in China 2025” and at the same time intends to leapfrog other countries in next-generation technologies such as artificial intelligence, Cybersecurity and 5G wireless which will be the foundation of future comparative advantage for industries but also enhances military capabilities. The initiation of a trade war with China through the imposition of tariffs will also not prevent the successful implementation of the BRI. The United States deficit with China helps to sustain America’s retail economy and thus helps to increase American GDP. As the United States is an import led economy and as the United States has a weak manufacturing base and its industrial base is fast eroding, it is heavily dependent on imports from China. “Made in China” plays an important role in the American consumer economy, especially in areas of electronics, toys, TV sets, mobile phones, hardware, and clothing. Hence, the United States trade deficit with China increases the profits of the consumer economy in the United States. The trade war has little to do with the US trade deficit with China but has everything to do with China’s project of “Made in China 2025” to prevent China from emerging as a high-tech powerhouse. The “Made in China 2025” vision encompasses robotics, high-speed railways, biomedicine, aerospace, artificial intelligence and much more. It is vital for China to continue its projects under the “Made in China 2025”, after all without innovation a nation moves backward. China has been regarded by the United States increasingly as a political, economic and military competitor in the Asia-Pacific Region. However, Washington’s policies of protectionism and “American First” may eventually push Japan closer to China. Japan is already engaged in a closer rapprochement with Russia to promote further large investments in the Russian Far East; which is similar to the situation when European countries are increasing their trade with Russia. As the United States embargoed investments of energy with Iran or when the United States revoked investments in Sudan, Sudan became China’s largest producer of oil. Trade wars conducted by the United States in forms of the imposition of tariffs and sanctions will cause China to intensify negotiations with other countries, such as through the Regional Comprehensive Economic Partnership (RCEP) and with members of the BRI and so may foster greater economic integration between those countries. The RCEP attempts to negotiate a free trade deal between ten nations of the ASEAN and six AsiaPacific countries of Australia, China, India, Japan, South Korea, and New

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Zealand. The implementation of the RCEP would constitute the largest economic bloc in terms of market size. The United States perceives the BRI as a threat, so that countries involved with it may experience difficulties. China has already offered to help Syria in its reconstruction after the war, and so has Russia. Iran links the BRI and the EAEU. Iran is waiting in the wings to join the SCO. While Western countries are reducing their trade with Iran, China is increasing it and so fills the gap. China has also increased its purchases of Iranian oil. While Total and Renault moves out of Iran, China picks up the pieces. China has increased the imports of Iranian oil, using Iranian ships while Iran is paying for the insurance as well. China is more likely than not to pay for its imports of oil in RMB which are backed by gold. As Iran is vital for the BRI and the Eurasian integration China will intensify its economic relations with Iran. Antidumping policies are also often used as a way to protect one’s economy, however Lee et al. (2017) find that antidumping actions reduce the volume and the value of imports from China and they also cause a price increase of those Chinese goods in the US market. They also find that the effects are only short-term and that they also cause a substitution effect; that is, they increase US inputs from other countries instead of China. Hence, US antidumping actions do not really protect US producers. Even though protectionist measures bring a net loss of welfare, they are introduced because producers are able to lobby for protectionist measures (Olson 1974). However, a trade war between China and the United States is a lose-lose situation for China and the United States. The main reason why the United States has a huge trade deficit with China is that the United States is a high-income economy and it does not have a competitive advantage in labour-intensive production which China has. Trade sanctions are imposed on China as a counter-push to prevent the rise of China as an economic power. However, countries which impose such sanctions will also bear themselves considerable costs in terms of their trade (Roach 2017). Present protectionism is the biggest barrier to international cooperation. Sanctions may lead eventually towards a de-dollarization, at least in countries on which sanctions have been imposed. A worldwide decline in the use of the petrodollar will also lower the US dollar so that China’s value of its dollar reserve holdings will decline. In fact, the current sanctions and the impositions of tariffs imperil the present international financial and economic world order; especially as it accelerates the de-dollarization of international finance to counteract imposed sanctions.

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As the United States is declining in its economic power it resorts to protectionism, whereas globalization, for example through BRI helps China as it has developed comparative advantages in many fields. Throughout history, protectionism has been used by countries which fear competition within the global economy. Instead, China will use BRI to foster trade and will transform the global economy which will be further facilitated through the construction of multiple infrastructures.

7.6

Policies of Sanctions to Maintain Hegemony

The present sanctions against Rusal the Russian aluminium supplier to Europe will damage the European aluminium companies as it leads to a shortage of aluminium in Europe and therefore will damage the European car industry, especially Volkswagen; however, demand for cars will not shift to American cars but more likely to Chinese cars. The repercussions of sanctions are not very well thought out. American and European sanctions improved further the trade between Russia and China and now China is Russia’s largest trading partner so that 15% of Russian international trade was with China in 2017 which has increased to 17.2% in January 2018. Largely as a consequence of a sharp deterioration of Russia’s relationship with the West and sanctions imposed on Russia, Russia increased its economic relations with China and other non-Western countries, so that trade and cooperation between those countries substantially increased. Conflicts in participating countries can be timed to occur at the very moment when China becomes dependent on their transit and are relying on their domestic markets. Conflicts in the participating countries will lower entrepreneurs’ confidence and investment will decline. The construction of the BRI enables China to minimize the use of the Strait of Malacca and the SCS for transit, but conflicts along routes of the BRI may counteract such intentions which may endanger China’s cooperation with the participating countries of the BRI. Such scenarios are highly probable considering that regime changes have been used in the past for economic reasons and indeed are continuing to be used for such purposes. New governments which come into existence because of regime change are unlikely to honour their debts to China, especially as many Chinese loans are provided in return for the supply of raw materials. The sanctions imposed by the United States have deepened the rift between the United States and those countries which suffered most from

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the sanctions; that is, some Western European countries, especially Germany experiences a considerable loss of trade with Russia. It is highly unlikely that Europe and Russia are being kept apart from each other in their trade relations in the long term. Europe, especially Germany requires resources, especially gas which Russia can provide; hence sanctions against Russia over the Crimea issue are also likely to be disbanded in the long term by Europe because it requires access to Russian resources to prevent any possible deterioration of their economy. Sanctions imposed on Russia and its deteriorating relations with the West have also pushed Russia towards China and so have become beneficial to the BRI. Schmitt (1976) made the point that “economics has become political and thereby the destiny” (p. 78). Trade sanctions and imposed tariffs have an accelerating and multiplying detrimental impact on trade, both on imports and exports as well as on investment and thereby increases the magnitude of multipolar power and reduces the power of unipolarity. When policies of sanctions take the place of diplomacy it is the consequence of a power shift, whereby a declining hegemony is being replaced by another. When diplomatic incompetence takes place, sanctions often take its place. Sanctions imposed on Russia by the United States and the tariff dispute between China and the United States are drawing China and Russia closer together, especially in regard to their cooperation between energy sectors. Hence, the vicious cycle of measures and countermeasures in the current trade disputes between China and the United States has a multiplier and an accelerator effect which will also affect other trading nations. Once sanctions are imposed on the friends of one’s enemies, it will go out of hand and are not sustainable and interfere with countries’ sovereignty. The only reason that China is being sanctioned is that it has become the biggest economy measured by the PPP. Western concern with Xinjiang has nothing to do with freedom of religion or human rights, but instead is concerned with the geopolitical strategic situation of Xinjiang. Similarly, Syria and other regions which are important to the functioning of the BRI can expect political difficulties. Regime Change is attempted in countries that are important for the progress of the BRI, such as in Brazil, Myanmar, Nicaragua, Syria or Venezuela. Other Regime Changes have been attempted in other countries for varies political and economic reasons, such as the Tulip Revolution in Kyrgyzstan, the Rose Revolution in Georgia, or the Orange Revolution in Ukraine. However, constant United States-led Regime Changes to cover their own weaknesses are not sustainable. The

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SCS is another potential area of conflict as it connects the Pacific Ocean with the Indian Ocean. The SCS has also a large amount of oil and gas reserves. The United States puts on pressure on China as well as on the European Union; hence it is likely that eventually China and Europe are being drawn closer together, especially as the volume of trade between China and Europe is already greater than between the European Union and the United States. If the trade conflict intensifies between China and the United States, China may channel its investment more towards the European Union, Russia and other venues as it then provides greater opportunities to China and Europe; furthermore more bilateral trade between China and Russia is expected to be conducted in RMB and roubles, and the increasing trade between the EU and Russia will also increasingly use the Euro and rouble.

7.7

The Trade Disputes to Prevent China from Rising

The imposition of tariffs by the United States is a protectionist intervention and contravenes the aim of the WTO. The WTO rules are broken when sanctions are imposed for political reasons and often also to gain a competitive advantage; hence various countries, such as China and Russia call for the de-dollarization. China has been the largest oil importer in 2017 and Russia is China’s largest oil supplier. China imported 8.4 million barrels of crude oil per day (U.S. Energy Information Administration 2018). The imposition of tariffs may spill over to currency devaluation. The devaluation of the RMB may then be the consequence of market forces rather than because of a deliberate official Chinese policy. The huge United States budget deficit caused an increase in the rate of interest to finance the trillion-dollar deficit over the next decade. The increase in the rate of interest causes the US dollar to appreciate and so the values of currencies of emerging countries decline so that US tariff policies become ineffective. A trade war in the form of imposed tariffs on Chinese exports would weaken the RMB. A decline in the euro will partly counterbalance the tariffs imposed by the United States, so that European exports will increase. Trade wars are not confined to the imposition of tariffs but there are various non-tariff barriers available as well. While imposed tariffs affects those countries which have imposed such tariffs and are recipients of such a trade policy, currency devaluation between the United States and China provokes a chain reaction with

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global ramifications. A trade war between China and some advanced economies will induce China to divert even more investments towards the BRI as a countermeasure which diverts more trade towards South–South economies. China also concludes more trade agreements with other countries which are not strictly part of the BRI which may be referred to as an extended BRI. The trade war will not only have detrimental impacts on China and the United States but will also affect such countries as Europe, Australia and Canada. Furthermore, as China exports less to the United States, it will seek alternative markets for its exports, so that trade along the BRI is likely to be intensified, because countries will increase their trade with China when they realize that the United States rejects free trade, so that they will come to trade more with China which will promote trade between China and other countries, and not only countries which are part of the BRI. The real reason for the conflict between China and the United States results from China’s technological catch-up as envisaged in China’s “Made in China 2025” initiative. A trade war of course will force China to become more innovative. Once the trade war is over, it may be difficult for the United State to get its technological market back. The present tariffs imposed on Chinese trade are an attempt to prevent China to excel technologically and to prevent China from achieving its project of “Made in China 2025”. However, the effect will be that China will intensify its technological avant-garde research. Trade policy is one of the main factors which shape trade competitiveness. A trade war will intensify China’s technological growth. Through the BRI, China will be able to diversify its export markets as well as its sources of raw materials which China requires for further economic growth. Sanctions by the United States against China has nothing to do with trade but instead is intended to prevent China from reaching technological dominance in new technology, especially in cybersecurity, robotics, and artificial intelligence. The trade war however will undermine the status of the US dollar as a reserve currency. The United States needs China because China has a great trade surplus with the United States and because China holds a huge number of United States treasury bonds and so lends money to the United States which allows the United States to live beyond its means. Tariffs are imposed to prevent Chinese economic strength from gathering force as it also underlies military strength. The newly imposed sanctions against China by the United States are largely directed against the ten large

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industrial sectors; hence the sanctions are being imposed to block China’s advance as a global economic power and control of the most important technologies, such as robotics, artificial intelligence, quantum computing, aerospace and aeronautical equipment, modern rail transport equipment, new-energy vehicles, high-tech shipping, advanced medical products, bio-pharma, power equipment, and agricultural equipment; much of such endeavours will support the BRI. The mutually imposed tariffs by the United States and China will have a detrimental effect on global economic growth through a decline in investment and trade which causes financial market volatility. China has exported 46 million TEU in 2015 by container shipping while imports were 21 million TEU. Trade will remain unbalanced as the volume of exports by container shipping will be about 2.2 times greater than the volume of imports by containers in the foreseeable future (United Nations 2017, p. 47). Logistics constitute about 12% of global GDP (United Nations 2017, p. 68). By imposing sanctions on various countries, the United States ensures that countries are losing confidence in the US dollar. The US imposed tariffs on Chinese goods will divert more trade towards emerging economies, especially South–South trade is likely to increase, and trade between Europe and Asian countries is also expected to increase; for example, sanctions imposed on Iran will benefit China as well as India because they will continue to import resources from and export products to Iran. China and India are at the forefront of the emerging South–South trade relations. The United States argues that the imposition of tariffs on Chinese goods are essential because of unfair trading practices by China; however when American companies manufacture in China and sell their products on the American consumer market, such products are classified as imports from China. American corporations gain from offshoring, so that their profits increase, shareholders’ capital gains rise and job vacancies decline in America and American workers lose. Hence, it is not the case that China steals American jobs, instead American corporations export American jobs to China. Tariffs are often imposed by countries which face a debasement of their currencies, which occurs especially if a country is overwhelmed with printed money which lowers the exchange rate, so that imports become relatively cheaper and the purchasing power declines. However, the imposition of tariffs makes the situation worse. The imposition of tariffs increases the costs of consumption and the economy is driven by consumption, rather than by production.

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Conclusion

Policies of sanctions and the imposition of tariffs are intended to contain countries which do not follow the unipolar model of global governance. Protection may help to some extent declining economies, whereas globalization may help emerging economies. Trade wars are indeed ancient and it is a sign that trading nations are unable to compete on equal terms which may be reflected in currency wars, patent wars, or any other forms of trade wars. To request China to discontinue its project of “Made in China 2025” implies that those who make such requests fear that they may be unable to compete. Tariffs and sanctions may be seen as purely protective measures and are indeed counterproductive in the long-run. Imposed tariffs and sanctions are more likely to induce China to intensify its own R&D; China is unlikely to abandon its “Made in China 2025” programme; instead it is likely to intensify to gain even greater comparative advantages in numerous areas. It may be argued that a successful implementation of the BRI is seen as a challenge if not a threat to the Washington Consensus. Putting roadblocks in the way of a successful implementation of the BRI threatens the security of those regions which are vital to the operation of the BRI; put in place by those who feel that their hegemony is dwindling. Trade wars merely redirect trade towards other countries; it compels China to seek greater trade alliances with other countries, for example through the RCEP agreements. Rather than imposing sanctions, countries may instead increase their economic competitiveness. The escalation of a trade conflict between China and the United State is an indication of the rivalry not only in terms of trade but it is also the consequence of conflict within the global hegemony which eventually may lead towards a reconstruction of the global multilateral trading system. As emerging economies gain greater influence, established powers tend to oppose such a shift in power and thereby may lead towards a Thucydidean trap. The United States now fears the rise of China and many policies of the United States are intended to contain China, including the successful implementation of the BRI. However, Mearsheimer (2001) argues that the United States pursued an “offensive realism” during the twentieth century and the United States is accusing China of what the United States has done itself. China just wants to be a great power.

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Bibliography Abeysinghe, T., & Ding, L. (2003). China as an Economic Powerhouse: Implications on Its Neighbors. China Economic Review, 14(2), 164–185. Chen, B., & Li, Y. (2014). Analyzing Bilateral Trade Barriers Under Global Trade Context: A Gravity Model Adjusted Trade Intensity Index Approach. Review of Development Economics, 18(2), 326–339. Cowen, D., & Smith, N. (2009). After Geopolitics? From the Geopolitical Social to Geoeconomics. Antipode, 41(1), 22–48. Flores-Macías, G. A., & Kreps, E. E. (2013). The Foreign Policy Consequences of Trade: China’s Commercial Relations with Africa and Latin American, 1992–2006. The Journal of Politics, 75(2), 357–371. Fulbright, J. W. (1970). The Arrogance of Power. Harmondsworth and Middlesex, UK: Penguin Books. Hirschman, A. O. (1945). National Power and the Structure of Foreign Trade. Berkeley: University of California Press. Hirschman, A. O. (1980). National Power and the Structure of International Trade. Berkeley: University of California Press. Hongbo, S. (2014). China-Venezuelan Oil Cooperation Model. Perspectives on Global Development and Technology, 13, 648–669. Keohane, R., & Nye, J. S. (1977). Power and Interdependence: World Politics in Transition. Boston: Little, Brown. Khan, S. A., & Marwat, Z. A. K. (2016). CPEC: Role in Regional Integration and Peace. South Asian Studies, 31(2), 103–112. Kojima, K. (1964). The Pattern of International Trade Among Advanced Countries. Hitotsubashi Journal of Economics, 5(1), 16–36. Lee, M., Park, D., & Saravia, A. (2017). Trade Effects of US Antidumping Actions Against China. Asian Economic Journal, 31(1), 3–16. Luttwak, E. (1990). From Geopolitics to Geo-Economics: Logic of Conflict, Grammar of Commerce. The National Interest, 20(2), 17–23. Mearsheimer, J. (2001). The Tragedy of Great Power Politics. New York and London: W.W. Norton. Miyagiwa, K., & Ohno, Y. (2015). Nuclear Bombs and Economic Sanctions. Southern Economic Journal, 82(2), 635–646. Morgenthau, H. J. (1974). Scientific Man Versus Power Politics. Chicago: University of Chicago Press. Nye, J. (2004). Soft Power: The Means to Power in World Politics. New York: Public Affairs. Nye, J. (2009). Get Smart: Combining Hard and Soft Power. Foreign Affairs, 88(4), 160–163. Olson, M. (1974). The Logic of Collective Action: Public Goods and the Theory of Groups. Cambridge, MA: Harvard University Press.

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Roach, S. (2017, August 28). America and China’s Co-dependency Trap. Project Syndicate. https://www.project-syndicate.org/commentary1/trumpchina-trade-war-by-stephen-s-roach-2017-08. Accessed October 10, 2017. Schmitt, C. (1976). The Concept of the Political (G. Schwab, Trans., with Introduction). New Brunswick, NJ: Rutgers University Press. Stiglitz, J. E. (2015). China Century. http://www.vanityfair.com/news/2015/ 01. Thucydides. (1954). History of the Peloponnesian War (M. I. Finlay, Ed. and R. Warner, Trans.). Harmondsworth: Penguin Classics. United Nations. (2017). Economic and Social Commission for Asia and the Pacific Review of Developments in Transport in Asia and the Pacific, 2017. Transport for Sustainable Development and Regional Connectivity. Bangkok: ESCAP. U.S. Energy Information Administration. (2018, February 5). China Has Surpassed the United States as the World Largest Crude Oil Importer in 2017. Washington, DC.

CHAPTER 8

The Rise and Fall of Nations

8.1

Introduction

This chapter begins with a historical perspective of how nations rise and fall, followed with a discussion on the shift in global power and the consequences of the rise in military expenditures. China has re-emerged as an economic power. Maddison (2007) shows that the share of global GDP of the United States was 30% at the end of the Second World War but has declined to about 25%. The financial crisis of 2008–2009 was a turning point and a precursor to economic reforms. It is argued that a nation’s economic power depends on its technological edge over other countries. Mackinder (1904) in “The Geographical Pivot of History” argues that the heartland consists of Asia, Europe and Africa (World Island). According to Mackinder, whoever controls the World Island also controls the world. He regarded Japan and Britain as offshore islands. The outlying islands included North and South America and Australia. Mackinder (1904) argues that the response by the maritime to a continental coalition was a type of containment policy. In much the same way, present policies of the United States are intended as a means to contain China as well as Russia; the United States especially fears an alliance between China and Russia. The cycle of the rise and fall of nations repeats itself. The biggest challenges to the BRI are possible regime changes. China is re-emerging as an economic power which will change the present global order, and so will have an impact on international relations as political and economic forces

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are intertwined. A new chapter of world history has begun. As the economic and political power of emerging economies increases, the model of core and periphery regarding emerging economies’ behaviour merely as a reaction to the economic power to the dominating economies has become increasingly outdated.

8.2

A Historical Perspective on the Rise and Fall of Nations

Nations and their powers have life cycles, progressing from birth to youth to maturity to old age and finally to death. Nations are born and they die. Kennedy (1987) published his book on the rise and fall of nations in the same year when the United States lost its status as the largest creditor nation in the world. Emerging economies are moving towards the central stage within the global economy. Many projects of the BRI and its related international organizations, such as the BRIC and SCO, may be perceived as a way to reduce the power of the West and are inclined to increase the power of China and Russia. The bridge between East and West has always been the crossroads of civilization for over 2000 years. The centre of gravity is shifting again towards the East. China was dominant in the world economy between 100 and 1800 so that China’s emergence as a global economic power, including its technological sophistication is really a re-emergence (Hobson 2004). Hobson (2004) provides considerable evidence based on empirical data for the economic pre-dominance of China over Western civilization before the nineteenth century. Hobson (2004) shows that Great Britain was conducting wars 52% of the time between 1688 and 1815 (pp. 244–248). China promoted open markets and relied on techniques of production and banking, whereas Great Britain relied on military conquest and tariff protection and engaged in a “divide and conquer” policy. The United States is now engaged in similar policies. On the other hand, China promotes at present a foreign policy of non-interference in other countries’ domestic affairs. Chinese modern economic growth did commence in 1950, through the agrarian reform, through the establishment of infrastructure and the provision of land for cultivation, not after 1979 as it is often argued; although China experienced detrimental consequences of the Great Leap Forward (1958–1961) and the Cultural Revolution (1966–1976). After 1980, free public education and health care and subsidized public housing were dismantled. China has a strong economy but is a weaker

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military power, whereas the United States has a stronger military but a weaker economy. As China is increasing its expenditure on the military, it will also shift resources away from the economy. However, China is vulnerable as it still has to import most of the required strategic resources for a sustained economic growth and development. Many Chinese economists who have been schooled in neoliberal economics propagate the unconstrained liberalization of financial markets but are unaware that this was largely the cause of the 2008–2009 global financial crises as financial institutions channelled much of savings towards non-productive activities; an unrestrained liberalization of China’s financial sectors may well undermine China’s growing economy. The global economy declined during and after the global financial crisis of 2008–2009 because financial oligarchs crowded out the productive sectors. Regardless whether China will be able to overcome the various obstacles which it has to overcome before it can excel in further economic growth, it does not change the fact that the United States is a declining power as a consequence of economic and political factors which will lead towards a decline in the hegemonic power of the United States. Maddison (2007) shows that the share of global GDP of the United States was 30% at the end of the Second World War, and it has declined ever since to approximately one quarter. Maddison begins his analysis with the Roman Empire and explains the main factors underlying economic development in Africa, Asia, the Americas and Europe. The financial crisis of 2008–2009 is generally referred to as a global financial crisis, even though it was largely confined to the United States, Canada and Europe; whereas East Asian economies were largely left unscathed as they did not apply neoliberal economics unreservedly; instead, the Chinese government used a large stimulus package to counteract the detrimental impact of the financial crisis. The core principle of the international financial institutions (IFI), such as the IMF and the WTO were centred on the concept of the free market.

8.3

The Shift in Global Power

The power of a nation depends on its technological edge over other countries, including artificial intelligence which will dominate future military warfare, whether in space or cyber-warfare. Declining global powers suffer from their own self-imposed arrogance of power (Fulbright 1970) which blinds them to see the reality and limitations of their powers. Countries that

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suffer from an arrogance of power are incapable to conclude agreements with other countries but are inclined to try to impose their will on other countries. The history of declining powers constantly repeats itself. Veblen (1953) assumed that economic depressions are the expected outcome of a business-enterprise economy which is then relieved by war and expansion into other countries; Veblen also assumed that capitalism is essentially unsustainable in the long run. Western countries are experiencing slowing economic growth, ageing populations, increasing debts and anti-social behaviour amongst the masses. Western countries promoted a free market, the rule of law and representative government; all of them have declined (Ferguson 2014). Ferguson (2014) argues that the great recession presently underway is just the outcome of a more profound Great Degeneration as there is a general decline of economic, social and political efficiency in western countries. More and more individuals find it necessary to self-medicate to overcome social disempowerment. However, false hope serves as a palliative; as Jung, C. G. (1953) pointed out “until you make the unconscious conscious, it will direct your life and you will call it fate”. As the nation staggers, the people will stagger along with it and so they both degenerate together. Society is schizogenic: there are wars fought for humanitarian reasons, but killing more people in the process than it was intended to save; to be humane refers to be compassionate and helpful, but the human race is anything but compassionate; wars are being fought to fulfil the greed of the human race. Poverty amongst the masses is profitable for the elite driven by greed. The biggest challenges to the BRI are regime changes imposed by foreign powers; governments which do not accept the preordained political ideology may experience attempts of regime change. Possible regime changes in several countries which are part of the BRI provide a challenge to the successful implementation of the BRI. Progress of economic growth and sustainable economic development is often difficult to predict because the success or failure usually depends on political decisions which are more often than not driven by ideologies. Russia has shifted towards East Asia, especially towards China because Russia was not accepted by Europe. It was the intransient policy of unilateralism that created this countervailing effect. Even the Far East and Siberia were regarded by the Russian elites just as a source of raw materials rather than thought of as a region for sustainable economic development; however now it is regarded as a potential for economic development.

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A country’s destiny lies in its economic dominance and politics is merely a means to achieve its end. Universalism is merely another form of pursuing economic imperialism. Unilateralism is embedded in the ideological framework of the past and is unable to adjust to the reality of a new world order. The dissonance between nations can only be dissolved through diplomacy rather than through the imposition of unilateralism which disregards any opposing world view (Der Derian 1987). A re-emerging China as a global power will lead towards a new global order and governance which affects not only economic global forces but political relationships. Greater economic influence leads to greater political influence and subsequently to a reordering of military alliances. The international geopolitical relationships are shifting and former alliances are disrupted. Japan and Russia are expected to establish new relations based on pragmatism to foster economic cooperation. Japan is increasing its investment in Russia’s Far East region and seeks more efficient access to European markets through the North Arctic Sea Route and the Trans-Siberian Railway. A Russian-Japanese Strategic Partnership rather than antagonize China may eventually lead towards a Chinese-Japanese rapprochement out of pragmatic necessity. Rather than speaking of “the end of history” (Fukuyama 1992) after the dissolution of the Soviet Union, we may now speak of the beginning of a new chapter of history with the economic growth of China which illustrates a shift in global power.

8.4

The Construction and Demise of Hegemonies

The concept of hegemony has two separate components, that is, a structural hegemony and an ideological hegemony. Rodman (1995) defines structural hegemony as “the concentration of economic resources” (p. 107), and defines ideological hegemony as “the ability of the dominant state to persuade other actors to accept its frame of reference as their own” (p. 107). A hegemon is able to impose terms of trade, set the agenda and the rules and so leads to the domination which does not lead to international stability in the long run. It is virtually impossible to argue that a hegemon will not exploit his position as a hegemon which has the power to dominate. Furthermore, non-hegemonic political or economic actors are not homogeneous; historically, once political actors will gather strength or seek power alliances they are likely to challenge the hegemon. Powers that are able to set the agenda and set the framework of political discourse of course have a distinct advantage (Gramsci 1971). Agenda

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formation may involve a shift in the balance of power, it may be used to postpone a hegemon’s decline in power and subsequently may determine or influence other agendas. Gramsci (1971) states that “every relationship of hegemony is necessarily an educational relationship and occurs not only within a nation, between the various forces of which the nation is composed, but in the international and world-wide field” (p. 350). Ikenberry and Kupchan (1990) argue that “The socialization of elites into the hegemonic order leads to a consolidation of hegemonic power; the rule based on might is enhanced by rule based on right” (p. 286). Socialization tries to induct the public into the hegemonic order through the legitimation of hegemonic power. “The socialization of hegemonic power has left a loose normative consensus embedded in the rules and institutions of the postwar system; these rules and institutions should persist well beyond the inflection point of hegemonic decline” (Ikenberry and Kupchan 1990, p. 315). Gramsci (1971) makes the important point that hegemony encompasses the ability to draw people together and to form a collective consciousness. The formation of people’s consciousness may occur through the media, or it may be reinforced through the entertainment industry. It may also occur through formal education; for example, schools of economics have been largely renamed as schools of business studies which reinforce the neoliberal framework of how economics is taught now in universities as compared with forty years ago. Subjects of economic history, history of economic thoughts and other similar subjects are virtually eliminated from the curriculum; hence students do not learn to question the underlying neoliberal ideology, so that students when they enter the work force are more likely to support the present social order. When a hegemon is a primus inter pares, then it is able to impose its rules in the economic, military and political spheres, which is reinforced through an effective power of veto in international financial organizations such as the IMF. The governance of the IMF, World Bank, the WTO amongst others is to keep the present hegemonic structure intact. The authority of a hegemony is kept in place by economic, and if need be, by military supremacy. Socialization can reinforce a hegemon’s power; socialization leads to the acquiescence by other states, including their public. Indirect coercion works through international organizations, such as the INF or WTO. If indirect coercion fails, a hegemon may resort to overt coercion such as the imposition of tariffs and eventually through the use of military force or regime change.

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Hegemony is a way to create wealth and a means to accumulate power so that political and economic processes are merely tools to achieve accumulation for its own end. When hegemonies expand there will be a high level of investment in infrastructure to facilitate more economic exchanges which occur through worldwide logistical interlinkages (Gills and Frank 1991). On the other hand, Keohane (1980) argues that stability in world politics requires one stabilizer, whereby one hegemon determines the framework which sets the rules and agenda of the international economy. Keohane (1984) makes the point that once a hegemony has been established, cooperation may exist between major powers. However the present unipolar system is rapidly changing so that presently the United States feels threatened, so that cooperation will be more and more replaced with mutual rivalry. Morgenthau, H. J. (1967) defines political power as “means to the nation’s ends and international politics, like all politics, is a struggle for power” (p. 25). Similarly, von Clausewitz (1968) argues that war is just a continuation of politics. In other words, war is just the consequence of a failed diplomacy. War may therefore be seen by some theorists as a political instrument to achieve one’s aim. Even though the American hegemony is in sharp decline, it is nevertheless still kept in place through the ideologies which have been implanted in political elites and the public at large; but eventually such ideologies will be replaced through a new paradigm shift. A decline in hegemonic states is in most cases accompanied by social and political conflicts, such as attempted regime changes and wars. However, during the “down” phase a hegemon may be unable to accumulate adequate resources, and without economic power, the hegemon is doomed. Hegemonic powers may rise and fall, but cycles of birth and decay repeat themselves, so that economic power is also constantly shifting. Kindleberger (1973) argues that for a world economy to be in harmony and to be in balance, there “has to be a stabilizer, one stabilizer” (p. 305). However, it hardly can be argued that the United States, the major power when Kindleberger published his book, was a stabilizer for the world as a whole. After all, a leading power will always assert its influence and power to its own advantage. A unipolar framework rejects a power relationship based on a balance of power, but aims for hegemony and thus promotes a win-all, rather than a win-win solution. A hegemony may create a stable international economic order, so that a decline in a hegemonic power leads to global instability and insecurity. Kindleberger (1989) argued that a hegemon is essential but not sufficient

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to provide stability and without a hegemon, a depression is likely to worsen. However, a hegemon is more likely to act in its own interest which may deepen a depression. A hegemon needs followers if the hegemony is to persist and followers are reduced when the power of a hegemon is declining. The weaker a hegemon becomes, the more followers will decline to follow the hegemon which is simply the consequence of American declining power; furthermore, as China gathers economic strength it will gain more followers. Even though a hegemon may advocate free trade, once the power of a hegemon is in decline, it is likely to impose tariffs when it loses its competitive advantage. However, the strength of a currency is not initially related to a nation’s economic power; although once the power of a hegemon declines, its currency eventually will follow. As the unipolar world order is in decline, so is the American power as a hegemon, so that its power to set the rules and agenda as well as the political framework, also is in decline, which is especially shown in its decline to set the rules within the WTO. The demise of the old and birth of the new hegemon leads to a new paradigm shift. The successful implementation of the BRI may lead eventually towards the creation of a new hegemony; whoever has control over materials and intellectual resources will be able to establish a hegemony to serve their own ends. It is a means to consolidate power. Kindleberger (1973) argues for the necessity of a benevolent despot to provide institutional public goods, the benefits of which will go to the hegemonic power. It is unlikely that hegemonies are benevolent most of the time, especially when they advance their own purposes; they may be seen rather as coercive. The concept of hegemonic stability has an American origin and puts the United States into a privileged situation. The underlying theory of hegemonic stability is that the presence of a hegemon will lead to greater stability and that such greater stability will benefit all states which are part of the system. Snidal (1985) argues that “the politics of international economics (especially free trade) originally inspired the theory of hegemonic stability”. Now that the United States has lost its comparative advantage in too many areas, it opposes free trade. The distribution of power or the rebalancing of power can only change with reciprocal change in the power of one or more other states. A hegemon will try to change any power relationship to its advantage, whether in the economic, political or military field. The power of the hegemon enables it to set rules and agendas to suit its own advantage, so that no coercive force is necessary; but if the hegemon should fail to assert its power, the

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use of sanctions is always an option. Krasner (1976) argues that a hegemon will try to implement an international order to promote its own interests. Furthermore, even when not all states benefit, they may not withdraw from the hegemonic system, because they may lack the independence to do so or are sufficiently intimidated.

8.5

The Consequence of the Rise in Military Expenditures

Many citizens of a declining hegemony do not understand the decline of their nation; but the world is always embedded within a continuous perpetual change. In real terms, power does not so much come out of the barrel of a gun but out of economic power, although it may be preserved for a limited time through military power and intimidation; but it does not preserve power indefinitely. Military powers drain the financial resources of their nations which accelerates their demise as a global power. The United States is engaged in a struggle for global hegemony to counteract its economic decline. Increasing military expenditures are used to defend their present hegemonic position which further erodes the economy as it diverts much-needed resources away from a productive economy. The subordination of economic welfare to rising military expenditures implies a decline of people’s living standards. Rival powers compete for muchneeded resources to support their military endeavours to maintain global geostrategic dominance rather than excelling in raising the productivity of their economy. The United States suffers from “imperial overreach” (Kennedy 1987) which eventually destroys the economy so that America’s control over other countries is eventually eliminated. The costs of running an enormous number of military expeditions and facilities are plainly unsustainable. Military spending beyond a country’s capacity furthers the decline of the nation; the previous Soviet Union eventually dissolved largely because of military spending that went beyond its financial capacity. The United States deficit, as measured by the ratio of government debts to GDP, is about $20 trillion. As military expenditures sharply increase, the United States deficit is likely to reach $30 trillion by 2028 which is plainly unsustainable. Military spending comprised over 2.5% of the global GDP in 2011 (Seiglie 2016). A country that is being led by the military and financial elite is unable to foster industrial competitiveness; for example, the United States has a

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surplus of armaments and has an increasing trade deficit. Military expenditures divert resources away from more productive economic activities, the construction of infrastructure, investment and social security programmes (Shieh et al. 2002). Kennedy’s term of overstretch describes this scenario well. von Clausewitz (1968) argues that “war is a mere continuation of policy by other means” (p. 119). von Clausewitz regards war as not just a political act but a political instrument, whereby the goal remains the same; war is just another mean to achieve it. von Clausewitz (1968) explains that “war therefore is an act of violence intended to compel our opponent to fulfil our will” (p. 101) and of course, war is never an isolated act, one act leads to another. Furthermore, he argued that “war is only a part of political intercourse, therefore by no means an independent thing in itself”, so that “war is nothing but a continuation of political intercourse, with a mixture of other means” (von Clausewitz 1968, p. 402). The United States began its imperial invasions of other countries with the Mexican–American War from 1846 to 1848, followed by the Spanish–American War in 1898. Presently, the United States is incurring enormous public debts and finds it essential to cut back on public domestic investment as more funds are required for military expeditions into other countries. An arms race with China will be unsustainable and would reduce expenditures in education and the much-needed construction of infrastructure. The manufacturing base is fast disappearing from the United States, either because they have become uncompetitive or because they have outsourced to other countries; infrastructure is declining and poverty is rising while military expenditures are rising; however, such a situation is not sustainable. Under the traditional assumption of guns or butter trade-off, military spending is regarded as non-productive, especially as it is assumed that military expenditure will crowd out other expenditures, such as on infrastructure, and so has an adverse impact on economic growth. When increases of military expenditures are funded through an increase in taxation or borrowings, then it may also crowd out private investment (Dunne and Vougas 1999). It has of course been argued that high military expenditures have contributed towards economic growth; for example, Ruttan (2006) argues that military expenditures have profound spillover effects on other sectors of the economy. Ruttan (2006) analyses the impact of military expenditure on the aeronautics and aircraft industry, the nuclear energy industry, the computer industry, the Internet and the space industry. However, they are

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spillovers which are often not foreseen. Instead, it may be argued that a deliberate industrial policy would go a lot further than resulting in unexpected spillovers. Industrial policies have been effectively used in Japan and South Korea during times when their military expenditures were relatively low. Lichtenberg (1988) for example showed that military R&D has not produced high levels of private and public rates of return, and finds that non-competitive R&D procurement crowd out private R&D investment. However, Ruttan (2006) argues that such impacts of military expenditures on the private sector are indirect through defence-related products as it gives private companies incentives to engage in their own research. Furthermore, Ruttan (2006) argues that as military expenditure has declined with the end of the Cold War, the United States has lost its capacity to create technologies which are able to be transferred to other general-purpose technologies. However, there has been a sharp increase in military expenditures in recent times. Kennedy (1987) argues that if a state’s resources are too much diverted away from the creation of prosperity towards military purposes, then it will inadvertently lead to a decline of a nation’s power in the long run. He makes the same argument about nations who are engaged in constant wars on a global scale. An increase in military expenditures may channel resources away from productive sectors towards unproductive sectors, so that Kaldor (1977) argued that there is an inverse relationship between military expenditures as a percentage of GNP and capital investment as a percentage of GNP. He also argues that countries that have less military R&D expenditures have higher R&D expenditures overall. Szymanski (1973) finds that countries with high military expenditures show a considerable lower economic performance than countries which have lower military expenditures. The following table provides the military expenditure for China, USA, Russia, Japan, South Korea and India as a percentage of GDP for alternative years from 2003 to 2018 (Table 8.1). According to Wagner’s law, government expenditure is income elastic so that the ratio of government expenditure to income is likely to increase along with economic growth. Wagner’s law has been confirmed by Akitoby et al. (2006) by investigating 51 developing countries by using a Cointegration method. Research by Narayan et al. (2008) also find supporting evidence for Wagner’s law in the case of the central and western provinces of China by using panel data; but no evidence for Wagner’s law was found when the complete panel for all Chinese provinces was use. Research by

2.1 3.6 3.7 1.0 2.3 2.7

China USA Russia Japan South Korea India

2.0 3.9 3.3 0.9 2.5 2.8

2005 (%) 1.9 3.9 3.1 0.9 2.5 2.3

2007 (%) 2.1 4.6 3.9 1.0 2.7 2.9

2009 (%) 1.8 4.6 3.4 1.0 2.6 2.7

2011 (%) 1.9 3.8 3.8 1.0 2.6 2.5

2013 (%) 1.9 3.3 4.9 1.0 2.6 2.4

2015 (%)

Source Stockholm International Peace Research Institute (2019). Military Expenditure Database. Solna, Sweden: SIPRI

2003 (%)

1.9 3.1 4.2 0.9 2.6 2.5

2017 (%)

Military expenditure by country as a percentage of the gross domestic product (2003–2018)

Countries

Table 8.1

1.9 3.2 3.9 0.9 2.6 2.4

2018 (%)

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Shah et al. (2016) shows that military spending has a negative impact on economic growth whereas in the case of India, it has a positive impact on economic growth; however, they find no significant effect of military expenditure on economic growth in China. On the other hand, their findings for Brazil and South Africa show that military expenditure reduced economic growth. It may also be argued that the possibility of war is inversely related to trade; although trade may increase with allies and neutral states during times of war. Regardless of who holds the military power it is the economic power that will dominate in the long run. The Soviet Union collapsed in 1991 because its economy had declined drastically; other military powers will follow the plight of the Soviet Union when their economies have declined sufficiently. Military might cannot prevent the shift in the financial institutions, the advancements of other countries in technology, lack of competitiveness and the high indebtedness of some advanced economies and the general decline of their economies; however it may be used to postpone such changes for a short time.

8.6

Conclusion

This chapter discussed the causes of the rise and falls of nations and has highlighted the importance of the development of the BRI in this process. The West only became economically dominant after the Industrial Revolution, just over 200 years ago. The Roman Empire lasted a thousand years, whereas the United States began to decline after merely fifty. The global financial crisis of 2008 originated within the financial system of the United States and spread from there to other countries. The necessity of economic and financial cooperation between the BRICS countries has become more imperative since the financial crisis of 2008. International organizations which have been created at the end of the Second World War are archaic and have to be reformed so that they may be more representative of the global community. Military expenditures divert resources from the more productive sectors. Kennedy (1987) argues that the United States suffers from “imperial overreach” and so diverts resources from more productive economic activities and other much-needed investment as it is likely to crowd out other expenditures; even though there are some spillover effects on other economic sectors. Szymanski (1973) and numerous other authors find that as military expenditures increase there is a decline in economic performance.

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In the long-term, it is economic power rather than military power that determines the well-being of a nation. The Rise and Fall of Nations intertwines history, politics and economics, so that the BRI is seen in these two volumes as a central part of this process. The long-term divergence in economic growth between the East and the West is underway with consequences in political power and standard of living. The great Divergence has been explained thoroughly by Pomeranz (2000), Shiue and Keller (2007), and Frank (1998).

Bibliography Akitoby, B., Clements, B., Gupta, S., & Inchauste, G. (2006). Public Spending, Voracity, and Wagner’s Law in Developing Countries. European Journal of Political Economy, 22(4), 908–924. Der Derian, J. (1987). On Diplomacy: A Genealogy of the Mediation of Estrangement. Oxford: Basil Blackwell. Dunne, P., & Vougas, D. (1999). Military Spending and Economic Growth in South Africa, a Causal Analysis. Journal of Conflict Resolution, 43(4), 521–537. Ferguson, N. (2014). The Great Degeneration: How Institutions Decay and Economies Die. New York: Penguin Books. Frank, A. G. (1998). Reorient: Global Economy in the Asian Age. Berkeley: University of California Press. Fulbright, J. W. (1970). The Arrogance of Power. Harmondsworth, UK: Penguin Books. Fukuyama, F. (1992). The End of History and the Last Man. London: Hamish Hamilton. Gills, B. K., & Frank, A. C. (1991). The Cumulation of Accumulation: Theses and Research Agenda for 5000 Years of World System History. In C. Chase-Dunn & T. Hall (Eds.), Core/Periphery Relations in Pre-capitalist Worlds (pp. 67–111). Boulder: Westview Press. Gramsci, A. (1971). Selections from the Prison Notebooks of Antonio Gramsci (Q. Hoare & G. N. Smith, Ed. and Trans.). New York: International Publishers. Hobson, J. (2004). The Eastern Origins of Western Civilization. Cambridge, UK: Cambridge University Press. Ikenberry, G. J., & Kupchan, C. A. (1990). Socialization and Hegemonic Power. International Organization, 44(3), 283–315. Jung, C. G. (1953). The Psychology of the Unconscious; pp. 1–117 in Jung, C. G. (1953). Collected Works, Volume 7: Two Essays on Analytical Psychology. New York: Pantheon.

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Kaldor, N. (1977). The Roles of Armes in Capitalist Economies: The Process of Overdevelopment and Underdevelopment. In D. Carleton & C. Schaerf (Eds.), Arms Control and Technological Innovation. London: Croom Helm. Keohane, R. O. (1980). The Theory of Hegemonic Stability and Changes in International Economic Regimes, 1967–1977; in Holsti, O., et al. (1980). Change in the International System (pp. 131–162). Boulder: Westview Press. Keohane, T. O. (1984). After Hegemony: Cooperation and Discord in the World Political Economy. Princeton: Princeton University Press. Kennedy, P. (1987). The Rise and Fall of the Great Power: Economic Change and Military Conflict from 1500 to 2000. New York: Random House. Kindleberger, C. P. (1973). The World in Depression, 1929–1939. Berkeley: University of California Press. Kindleberger, C. P. (1989). Manias, Panics, and Crashes: A History of Financial Crises. New York: Basic Books. Krasner, S. (1976). State Power and the Structure of International Trade. World Politics, 28(3), 317–347. Lichtenberg, F. R. (1988). The Private R&D Investment Response to Federal Design and Technical Competitions. American Economic Review, 78(3), 550–559. Mackinder, H. J. (1904). The Geographical Pivot of History. The Geographical Journal, 23, 421–437. Maddison, A. (2007). Contours of the World Economy, 1-2030 AD: Essays in MacroEconomic History. Oxford: Oxford University Press. Morgenthau, H. J. (1967). Politics Among Nations: The Struggle for Power and Peace (4th ed.). New York: Alfred A. Knopf. Narayan, P. K., Nielsen, I., & Smyth, R. (2008). Panel Data, Co-Integration, Causality and Wagner’s Law: Empirical Evidence from Chinese Provinces. China Economic Review, 19(2), 297–307. Pomeranz, K. (2000). The Great Divergence: China, Europe, and the Making of the Modern World Economy. Princton, NJ: Princeton University Press. Rodman, K. A. (1995). Sanctions at Bay? Hegemonic Decline, Multinational Corporations, and U.S. Economic Sanctions Since the Pipeline Case. International Organization, 49(1), 105–137. Ruttan, V. (2006). Is War Necessary for Economic Growth: Military Procurement and Technology Development. New York: Oxford University Press. Shah, S. A., He, C., Yu, M., & Xiaoqin, W. (2016). Government Expenditure, Defence Expenditure and Economic Growth: A Causality Analysis for BRICS. European Journal of Economic Studies, 18(4), 447–458. Seiglie, C. (2016). Openness of the Economy, Terms of Trade and Arms. Southern Economic Journal, 82(3), 748–759.

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Postscript: The Shift in Global Power and its Ramifications

These two volumes on the belt and road initiative and the global economy attempt to connect different disciplines to explain the importance of the BRI as it is not purely an economic project but involves international relations, the shift in the global financial and economic power. An analysis of the interconnectivity of all the countries which are part of the BRI requires an integrated interdisciplinary eclectic approach, including an analysis of the different stages of economic development in which the countries find themselves so that countries within different stages have different needs; for example in terms of human capital requirements and technological progress and innovation. China has become the biggest economic power in 2014 when measured by the purchasing power parity (PPP), which takes account of the differences in the exchange rates. China is nominally the second-largest economy when based on the market exchange rate. China has become increasingly important in world politics and its power and influence are expected to be increasing for at least several decades. The “Chinese Dream” attempts to provide a collective identity and attempts to incorporate and accommodate aspirations, ideals and hopes. Most people are expected to follow the “Chinese Dream” while only a selected few take part in the formation of the dream; much the same as in most countries. The success of the BRI will depend on the cooperation between all those countries involved and even beyond so that the “Chinese Dream” may have to become the dream of the participating countries as well if it is to succeed. © The Editor(s) (if applicable) and The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28068-0

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China’s aim is to move forward in the establishing of countries with one destiny which implies the creation of one economic, if not political bloc as part of the BRI which encompasses over 100 countries and international organizations. The aim is to create a developed economy by 2020 and a basically modernized nation by 2025. By 2035, China expects to be a society of medium prosperity and also expects to have completely reformed the army by 2035; China also expects to be a rich and powerful socialist nation by 2050. The aim is to establish by 2050 an integrated market of about 4.5 billion people using local currencies for international trade, certainly for bilateral trade; or a basket of currencies, such as the RMB, rouble and other currencies. The BRI is seen as a way to achieve such goals through the creation of interconnectivity between nations to create a common destiny. The BRI, at least across Eurasia should be able to promote the RMB as an international currency. The successful implementations of the BRI will lead towards changes also in the international financial system and it will affect China’s foreign policy, international trade, international relations as well as China’s domestic economy. There are various obstacles which may impede China’s economic growth; there is considerable unbalanced economic development between different regions and there is a need for prosperity to be spread more equally amongst its citizens which also entails greater access to education, better health care and mitigating the detrimental effects of pollution on the environment. The elimination of poverty in rural areas has to be especially targeted. However, such difficulties in China’s economy can be partly alleviated with projects as contemplated under the BRI which as an inclusive project may provide the much-needed growth engine for China as well as for the participating countries. The financing of infrastructure is a major growth-lifting strategy as it may lead to structural transformation to promote economic development on a global scale (Lin and Wang 2016). It may be anticipated that the BRI will benefit the global economy as a whole, but most of the gains are expected to be channelled towards the domestic economy of China and of the participating countries. Lin and Wang (2016) advocate “bottleneck-releasing investments in developed and developing countries” (p. 103) to increase long-term growth and development. Rather than just focusing on directing increasing economic growth within the domestic economy, BRI intends to increase globally coordinated investment to further economic growth and development. If implemented and managed well, the BRI is able to create demand and jobs as there is a reciprocal relationship between the two: increases in

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jobs increases income which increases demand and thereby creates more jobs. The risks involved are the political instabilities in various locations of the BRI; some of such instabilities have been created by those who are opposed to or are suspicious of the purpose of the BRI. The successful implementation of the BRI requires cooperation and a joint effort by the participating countries. However, some countries prefer to adhere to the status quo situation and resent any possible change in power relationships, so that not all countries will be prepared to play along; instead may present various obstacles to prevent any possible success of the BRI; especially when such countries may perceive that their global power may decline as a consequence of the BRI. Nevertheless, the BRI is likely to transform the geopolitical and geostrategic and international relationship with implications for global governance. The BRI will enhance the opportunities for mutual trade between the participating countries. The BRI allows reciprocal mutually beneficial trade relationships to be formed. Chinese exports can move for example to Europe and European exports can greatly increase and move to China, and of course, to any country in between. Rather than blaming China for the decline of Western economies, it may be argued that Western economies may instead focus on structural changes to their economies; without such changes, Western economies are likely to deteriorate further. It may be argued that a paradigm shift has to occur in theories of economic growth if it is to lead towards sustainable economic development. China’s main objective until the early 2000s was economic growth, but it has now shifted more towards economic development. Prospects of development are essentially multi-dimensional as it affects not only economic growth but it also has social implications, such as well-being, the elimination of poverty and the distribution of income. A new paradigm is likely to evolve to replace the neoliberal ideology guided by market fundamentalism; especially as austerity policies have become part and parcel of the race to the bottom through neoliberal globalization. Corporations who advocate neoliberal ideologies are likely to be the first to jump a sinking ship and take their investments to emerging economies when the neoliberal ideologies will be confirmed to be inappropriate. China already has attracted numerous foreign corporations because their investments bring higher returns in China than in Western economies.

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Globalization has become more than just finding new markets for exports or to control the world economy, so that China’s domestic transformation will have a considerable impact; hence the impact of government intervention in the economy will have to be rethought as many of the projects of the BRI could not have been visualized and implemented without government activity; the decaying infrastructure in various countries which are guided by neoliberal economics may illustrate this. Laissezfaire economies presuppose government intervention so that laissez-faire economies can function properly; anti-monopoly laws in various capitalist economies illustrate this. Furthermore, projects such as the BRI require huge injections of finance; without such finance the BRI and the economies of countries along the road of One Belt and One Road are less likely to take off. Countries such as Japan and England used state intervention when such countries were engaged in rapid industrialization. The need for government intervention to protect the environment also illustrates the necessity of government intervention in the economy. Flexible planning may enhance economic development and promote sustainable economic growth through Five-Year Plans. Perspective plans may be used for the prospects of longer term development which may then be adapted and modified to current situations, such as in yearly plans. Emerging powers will increase their abilities to exercise their rights to be accepted on more equal term. Hence, Russia promotes a Eurasian Economic Union (EAEU). Brazil is promoting various projects to facilitate integration in South America. The Shanghai Cooperation Organization (SCO) promotes economic development and political stability in Central Asia. China has increasingly closer interaction with east and Southeast Asian countries through ASEAN+1 (the Association of Southeast Asian Nations plus China) as well as through ASEAN+3 (ASEAN plus China, Japan and South Korea). Regionalism is developing into an alternative to multilateral global governance structures (Krickovic 2015). The ASEAN+3 established the Chiang Mai Initiative (CMI) to make bailout funds available to members and so may be able to counteract possible future financial crisis (Krickovic 2015, p. 565). Regional integration allows Brazil to expand its markets, especially through Mercosur to increase free trade within Latin America. China is pursuing a free trade policy in Asia, especially through the ASEAN-China Free Trade Area (ACFTA). China has more than 25% of ASEAN’s total foreign trade and is the largest external trading partner of ASEAN (Krickovic 2015, p. 565).

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The splitting up of global dominance will lead towards a polycentric model of governance which may empower regional powers, so that regional powers may increasingly solve problems according to their own design rather than imposed by western powers; hence the “Washington Consensus“ may be undermined. More and more free trade agreements are signed by China while free trade at the global level diminishes. Russia, Belarus and Kazakhstan have joined a Customs Union and have adopted common tariff policies. This Customs Union has now expanded into the Eurasian Economic Union (EAEU). Countries which are unable to cope with the speed of the construction of the BRI show their resentment and consequently try to obstruct the progress of the BRI. The West generally still has to come to terms with China’s development and progress; instead it may be better to promote cooperation amongst nations to promote various positive agendas. Improvements in efficiency should not be confused with economic growth, and there is no “best practice” that is applicable to all countries. Countries have different economies, are at different stages of development and have different resources at their disposal so that economic policies which are to promote sustainable economic development have to be tailormade according to the specific needs of specific countries. Policies which are “associated with structural adjustments are better at restoring macroeconomic stability to crisis-ridden states than at stimulating long-term growth” (Harman and Williams 2014, p. 927). Furthermore, “better-performing developing states often used ‘unorthodox’ economic policies” (Harman and Williams 2014, p. 927). During the 1960s there was a greater emphasis on market failures in economic development and hence appropriate policies were deemed to be more interventionist in approach; whereas during the 1980s more emphasis was placed on the need to rely on market mechanism. Rodrik (2006) argues that “seeking efficiency gains does not amount to a growth strategy” (p. 975). Under a beggar-thy-neighbour policy which was used during the Great Depression during the 1930s, countries insisted of exporting their own products but tried to prevent imports from other countries entering their own; hence trade declined as well as investment so that unemployment increased. Trade barriers were reduced when industrialized countries had a comparative advantage, but as emerging economies become more competitive in manufacturing, trade barriers are increased again, tariffs are increased and sanctions are imposed nominally for political reason; but it has been argued here that such policies have an economic reason. The United States

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has declared its opposition to China’s “Made in China 2025’ policy and wants China to abandon such policy which is intended to make China into a high-tech world leader. Tariffs should not be used to hold back another country’s technological development. In this case, imposed tariffs will only compel countries on which such tariffs have been imposed to intensify their own independent research and thus may accelerate their technological advances, especially as China’s own technological research has already significantly advanced. Tariffs imposed purely as protective measures are counterproductive in the long term. Various writers such as Acemoglu and Johnson (2005) argue that the quality of institutions is paramount to economic growth. On the other hand, Bradhan (2002) argues that “good institutions” such as the protection of property rights or the rule-of-law may only be applicable to a wellfunctioned mature market economy. There are formal institutions which govern through well-structured organization and there are informal institutions which govern through a network of communal relations. Chan, Xu et al. (2015) find that “the formal and the informal institutions are close complements” (p. 64). Like guanxi as exercised through personal connections, informal institutions may undermine formal institutions. Informal institutions take usually a longer time to change, but informal institutions can also be used to enhance the effectiveness of the formal institutions; after all, according to the Chinese ancient proverb, mountains are high and the emperor is far away (shan gao huangdi yuan山高皇帝远). The reforms which began in 1978 began with formal institutions. Chan et al. (2015) argue “that it is the strength of the informal institution, which has augmented the effectiveness of the “formal” institution and offers a plausible explanation for China’s miracle!” They also argue “that the “formal” and the “informal” institution would not “crowd-out” each other” (Chan et al. 2015, p. 82). Most business leaders have few ideas about how to solve the economic difficulties at present; neither do they have the right qualifications. The major problem in the near future concerns the supply of energy. Policies of protectionism, deregulation and tax cuts are unlikely to improve economic growth which is accelerated or at least promoted through investment and industrialization which requires professionals in the sciences and engineering rather than business studies. Pyle (2007) explains the main reason for the American and Japanese alliance by stating that the underlying “purpose of the alliance was not to

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defend but also to restrain Japan” (p. 349). Japan had no way to escape from the US domination; but the United States will be unable to subordinate China in economic or political affairs. Furthermore, the growing importance of the Beijing Consensus will have economic and political ramifications. The United States will eventually be unable to finance its international financial obligations, especially when more nations will disinvest in United States treasury bonds which at the moment still support the huge American budget deficit. This will also undermine the Washington Consensus as a viable policy. The old North–South axis has been effectively replaced with the newer South–South axis. Chinese interaction within financial, economic and international relations can be encapsulated with the Chinese sayings of “sleeping in the same bed but with different dreams” and “riding the tiger” (Li and Shaw 2014). The Chinese proverb “sleeping in the same bed while having different dreams” refers to a marriage of convenience concluded through pragmatic circumstance; whereas “riding a tiger” implies that riding a tiger might entail some danger, but it may even be more dangerous to get off the tiger. Both expressions reflect China’s position within the present international relations of economics and finance; that is, “China is riding the tiger of market economy and “the capital liberal order”; that is, its economic development is increasingly dependent on a functioning global market” (Li and Shaw 2014, p. 2). China is a large importer of goods, so that a decline in Chinese economic growth implies a decline in Chinese imports and so may decline the exports of China’s trading partners. A changing world order will provide challenges for some and opportunities for others. A society that does not experience any challenges will stagnate while excessive challenges may destroy a civilization; with other words, a civilization without a challenge will decay. Toynbee (1960) argues that history is again on the move, and one may add, again and again.

Bibliography Acemoglu, D., & Johnson, S. (2005). Unbundling Institutions. Journal of Political Economy, 113(5), 949–995. Bradhan, P. (2002). Decentralisation of Governance and Development. Journal of Economic Perspectives, 16(4), 185–205. Chan, K. S., Xu, X., & Gao, Y. (2015). The China Growth Miracle: The Role of the Formal and the Informal Institutions. The World Economy, 38(1), 63–90.

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Harman, S., & Williams, D. (2014). International Development in Transition. International Affairs, 90(4), 925–941. Krickovic, A. (2015). “All Politics Is Regional”: Emerging Powers and the Regionalization of Global Governance. Global Governance, 21(4), 557–577. 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. Lin, J. Y., & Wang, Y. (2016). New Structural Economics and Resource Financed Infrastructure. Pacific Economic Review, 21(1), 102–117. Pyle, K. B. (2007). Japan Rising: The Resurgence of Japanese Power and Purpose. New York: Public Affairs. 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.

Index

A Akamatsu, K., 118, 148, 150 American debts, 24 American dollar in decline, 32, 41, 42 Angola mode, 102, 110, 116 Antidumping policies, 66, 179 Appreciation, 19, 25, 29, 30, 40, 84, 128, 133, 155 ASEAN Economic Community (AEC), 122 ASEAN free trade area (AFTA), 123, 125 Asia–Africa Growth Corridor (AAGC), 103, 128 Asian financial crisis 1997–98, 12, 25, 28, 42 Association of Southeast Asian Nations (ASEAN), 4, 122–124, 126–128, 178, 208

B Balassa, B., 89, 133 Bankor, 35

Basket, 4, 11, 13, 14, 16–20, 24, 141, 171, 206 peg regimen, 11, 17 Belt and Road Initiative (BRI), 1–4, 6–9, 13, 20, 21, 28, 29, 31, 33, 34, 41–43, 48, 49, 53, 58, 61, 62, 69, 70, 75–78, 80, 83–93, 97–101, 103–107, 115, 118, 121, 122, 127, 128, 131–133, 139–141, 144–146, 149–155, 157, 158, 163–165, 167–181, 183–185, 189, 190, 192, 196, 201, 202, 205–209 as a globalizing force, 8, 163 Bilateral currency swap, 28, 30, 42 Bilateral swap agreements, 11, 14, 30 Bretton Woods system, 13 BRI and well-being of participating countries, 2, 7, 55, 97, 129, 132, 133, 145, 157, 167, 168, 171, 178, 180 BRICS (Brazil, Russia, India, China, South Africa), 37, 59, 107, 115, 128, 143, 147, 157, 169, 201

© The Editor(s) (if applicable) and The Author(s) 2019 J. Joshua, The Belt and Road Initiative and the Global Economy, https://doi.org/10.1007/978-3-030-28068-0

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INDEX

Brzezinski, Z., 9 Business cycle synchronisation (BCS), 107 C Capital account liberation, 19, 43 Capital controls, 29, 43 Carbon dioxide emission, 66 Carbon emission, 49, 52, 55, 59, 62, 64 trade policies, 63 Casino capitalism, 25 Changing international financial system, 1, 11, 41 Chiang Mai Initiative (CMI), 30, 208 China, 2–9, 11–21, 23–26, 28, 30–33, 35–43, 48–58, 60–63, 65–67, 69, 70, 75–93, 97–109, 111–114, 116, 118–120, 122, 123, 125–131, 133, 134, 139–142, 144–155, 157, 163–171, 173–185, 189–191, 193, 196, 199, 205–211 diversifying international reserves, 41 domestic economy, 1, 2, 6, 69, 75, 77–79, 85, 92, 99, 164, 206 Global South relations, 97 integration into the global production networks, 177 North Korea trade, 121, 122 Venezuela cooperation, 167, 168 China International Payment System (CIPS), 13, 15, 28 China–Pakistan Economic Corridor, 30 China’s challenges and opportunities, 6, 77 China’s effect on Southeast Asia, 123 China’s labour market, 6, 78, 81, 92 China’s open-door policy, 77 China’s trade, 2, 92, 106, 167 Africa, 7, 164, 166

ASEAN free-trade, 124 Latin America, 166 Southeast Asia, 7, 128 China’s trade surplus, 15, 36 China’s uneven development, 92 Chinese exchange rate policies, 5, 11 Coase, R., 69 Coasian theorem, 69 Commodities-for-infrastructure, 101 Community of common destiny, 76, 101 Community of common fate, 76 Comparative advantage, 6, 38, 62, 92, 111, 113, 114, 117, 124, 126, 150–152, 164, 167, 176, 178, 180, 185, 196, 209 diversification versus specialisation, 7 shift in, 109, 114 Complementarities between regions, 97 Complementary and competitive factors, 112 Convergence, 77, 104, 106, 141, 145, 164–166 absolute, 104 conditional, 4, 104 Counter push to the BRI, 164, 165 D Decoupling economic growth from environmental impact. See Economic growth and resource use decoupling Decoupling policies. See Economic growth and resource use decoupling resource use from economic growth, 55 Dependence, 28, 81, 84, 107, 120, 166, 167 political, 8, 163, 167 trade, 8, 163, 164

INDEX

Depreciation, 16, 19, 20, 22, 39, 42 floating exchange rates, 22 Devaluation, 5, 22, 36, 39, 41, 182 fixed exchange rates, 22 Distribution of income, 6, 82, 84, 92, 93, 131, 207 Diversification. See Comparative advantage shift in comparative advantage, 150 Diversification versus specialisation. See Comparative advantage E East Asia, 5, 7, 17, 43, 79, 98, 116, 120, 139, 140, 148, 149, 152, 155, 157, 168, 177, 192 prospects, 43 Economic growth and resource use decoupling, 55, 57 Emerging economies, 7, 8, 12, 20, 23, 26, 27, 33, 38, 40, 90, 91, 93, 101, 107, 139, 142, 143, 148, 152, 163–167, 176, 184, 185, 190, 207, 209 Energy security, 6, 48, 57, 65 Environmental degradation, 4–6, 47, 49, 53–56, 58, 59, 62, 64, 65, 70, 77 Environmental Kuznets curve (EKC), 49–51 Environmental laws, 62 regulations, 63 Eurasian Economic Union (EAEU), 133, 164, 170, 171, 179, 208, 209 Exchange of infrastructure for raw materials, 98, 110, 116, 121 Exchange rate fluctuation, 17 Exchange rates, 4, 11, 13–19, 21, 22, 26, 27, 29–31, 34–37, 41, 43, 110, 111, 116, 124, 128, 141, 147, 174, 184, 205

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Exchange rate stabilization, 17 EX-IM Bank, 103, 110 Export diversification, 109, 113, 115, 117

F Financial crisis 1997–98, 2008–09, 12, 25, 28, 42 market-driven, 25 Financial crisis 2008–09, 5, 12, 15, 23–28, 32, 38, 41, 42, 101, 106, 139, 157, 167, 172, 177, 189, 191 precursor of reforms, 23, 41 Financial regulations, 12, 24 Flexible exchange-rate regimes, 21 Floating exchange rate, 5, 12, 20–22, 24, 41 Flying geese model, 118, 149 economic development, 118 Foreign direct investment (FDI), 3, 27, 60, 63, 77, 87, 88, 100, 108, 113, 114, 118–120, 124, 127, 129, 132, 145, 153 multiplier effect, 112 Forum on China–African Cooperation (FOCAC), 100 Fulbright, J.W., 34, 165, 172–174, 177, 191

G Galbraith, James K., 68 Galbraith, John K., 68 Gas-oil-yuan-gold mechanism, 5, 33 GATT agreements, 36 Gazprom, 57 Gini coefficient, 82–84, 145 Global shift of economic power, 5, 9, 12, 41 Globalisation and income, 55, 105

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INDEX

Globalisation/Globalization, 4, 6, 31, 51, 55, 61, 68, 77, 81, 87, 91, 92, 105, 126, 141, 146, 149, 156, 164, 165, 169, 176, 180, 185, 207, 208 economic, 4, 61, 77, 87, 91, 180 political, 61 product fragmentation, 156 Going out strategy, 2 Gramsci, A., 193, 194 Granger causality, 60 Gravity model, 7, 139, 140, 146–148, 157, 176 Greenhouse effect, 47, 48, 50, 51, 54, 68 H Heckscher–Ohlin model, 111, 114 Hegemonies, 9, 35, 42, 163, 181, 185, 193–197 construction, 9, 193 demise, 9, 193 heartland theory, 9 ideological, 193 new hegemony new paradigm shift, 195, 196 structural, 193 Hirschman, A., 99, 166 Hobson, J., 190 I IMF staffing policy, 12, 23 Infrastructure, 2, 3, 6, 7, 23, 29, 34, 41, 48, 55, 60–62, 70, 85–90, 97, 99, 102–107, 109, 114, 117–124, 130, 133, 147, 148, 154, 157, 167, 168, 170, 171, 175–177, 180, 190, 195, 198, 206, 208 economic growth, 2, 7 interconnectivity, 2, 90, 104, 130 Southeast Asia, 7

Infrastructure bottlenecks, 116 Infrastructure gap, 103 Innovation frontier, 6, 75, 90 International currency, 5, 14, 16–21, 27–31, 35, 41, 42, 164, 206 International monetary system, 4, 12, 13, 20, 25, 26, 35, 42, 164 International Regime Change. See International relations International relations, 1, 2, 4, 8, 17, 139, 140, 143, 144, 157, 163–166, 168, 172, 174, 189, 205–207, 211 counter push to the BRI, 8, 163, 165 international regime change, 172 military expenditure, 198, 199 Wagner’s law, 199 military powers imperial, 35, 197 overreach, 173 paradox of sanctions, 175 power soft, hard, smart, 164, 173 rise and fall of nations, 1, 189, 190 sanctions, 8, 163 shift from unipolar to multipolar world order, 4, 8 Thucydidean trap, 165, 174 Thucydides, 174 International reserve currencies, 4, 5, 11–14, 19, 20, 29–31, 34, 35, 37, 41, 42, 89, 92 Intra-regional exchange rate, 12, 16 J Jung, C.G., 192 K Kaldor, N., 89, 199 Kennedy, P., 9, 190, 197–199, 201

INDEX

Keohane, R., 172, 195 Keynes, J.M., 25, 35, 91 Kindleberger, C.P., 23, 195, 196 Kojima, K., 150, 175

L Learning-by-doing, 110, 116 Learning-by-exporting, 79, 114, 116 Lewis Turning Point, 81 Linkages, 7, 84, 99, 102, 109, 110, 113, 124, 133 weak, strong, 3, 99 Linkages between resource sectors and other sectors, 3, 99, 133 Loan arrangements, 102 Loan conditionalities, 101

M Mackinder, H.J., 9, 189 Made in China 2025, 75, 90, 91, 93, 165, 173, 177, 178, 183, 185, 210 Managed floating exchange rate, 14 Marketization, 86, 87 Market reforms, 76 Marshall–Lerner conditions elasticities of demand of exports and imports, 22 Marx, K., 24 Mercado Común del Sur (MERCOSUR), 129, 208 Military expenditure. See International relations Military powers. See International relations imperial, 198 overreach, 173 Monetary policy, 21, 30, 33 Triffin dilemma, 13, 20

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N New global production networks (GPN), 7, 139, 140, 150, 151, 153, 157 New hegemony. See Hegemonies new paradigm shift, 195 Nordhaus, W.D., 50 North and South Korea prospects, 122 North–North trade, 9 North–South structure of commercial relations, 105 North–South trade, 9, 115 Nye, J.S., 164, 172, 173 O One Belt, One Road (yi tai – yi lu). See Belt and Road Initiative (BRI) P Paradox of sanctions. See International relations Petrocurrency, 20, 41 Petrodollar, 5, 13, 37, 38, 179 Petroyuan, 20, 33, 39, 40, 42 Pollution causes and consequences, 48, 50 economic growth, 4, 5, 48–52, 55, 65, 68–70 taxation, 198 terms of trade, 62, 64, 69 Power. See International relations soft, hard, smart, 173 Production cycle, 150 Production ladder, 150, 151 Protectionism, 8, 15, 144, 163, 165, 172, 176–180, 210 Protectionism, trade disputes opposed by the WTO, 36, 176 Protectionist policies use as trade barriers, 66

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INDEX

R Regional Comprehensive Economic Partnership (RCEP), 31, 123, 178, 179, 185 Regional currency basket mechanism, 12, 16 Renewable energy, 6, 48, 49, 60, 62, 66 Resource curse, 3, 7, 99, 111, 113, 119, 125, 132, 133 Rise and fall of nations. See International relations RMB, 5, 12–22, 28–33, 36, 38, 40, 41, 84, 87, 89, 92, 102, 110, 155, 157, 171, 179, 182, 206 convertibility, 16, 31 currency bloc, 5, 13, 29, 42 dollar exchange rate, 16, 30 funding currency, 11, 16, 18 international currency, 5, 14, 16, 18, 19, 21, 28, 29, 31, 41, 42, 164 internationalization, 28–32, 42 investing currency, 5, 11, 16, 18, 21, 42 medium of exchange, 5, 18, 19, 30, 37, 42 reserve currency, 5, 13, 19, 28, 30–32, 37, 38, 42, 171 store of value, 5, 18, 29, 30, 32, 37, 42 unit of account, 5, 11, 18, 29, 30, 37, 42 RMB (Renminbi, yuan), 11 Robinson, J., 26, 142 Rodrik, D., 18, 77, 89, 209 Russia’s Far East and Japan, 122 Russian sources of energy, 120 S Sanctions. See International relations Schmitt, C., 181 Schumpeter, J., 26, 27

Shanghai Cooperation Organization (SCO), 37, 128, 165, 169, 171, 179, 190, 208 Shanghai Gold Exchange, 20 Shift from unipolar to multipolar world order. See International relations Society of Worldwide Financial Telecommunication (SWIFT), 15, 28, 35 South–South trade, 9, 76, 88, 105, 115, 142, 164, 184 Special Drawing Rights (SDRs), 16, 17, 24 State interventions, 150, 175, 208 State-owned enterprises (SOEs), 78, 87, 91, 154 Stiglitz, J.E., 170, 171 Sub-Saharan Africa (SSA), 98, 100, 101, 106–109, 114, 115, 118, 147, 154 Sun Yat-sen, 83 T Tariffs, 24, 28, 114, 119, 124, 126, 147, 148, 165, 172, 175, 176, 178, 179, 181–185, 190, 194, 196, 209, 210 Taxes, 36, 62, 63, 65–67, 87, 210 negative externalities, 67 Thucydidean trap. See International relations Thucydides. See International relations Trade barriers, 21, 63, 64, 79, 147, 165, 169, 175, 176, 209 China and Africa, 7, 103, 105, 110, 119 China and Brazil, 130, 142 China and India, 34, 128, 148, 184 China and Latin America, 7, 8, 130, 142, 208 China and Pakistan, 128

INDEX

China and South Asia, 128, 170 China and Southeast Asia, 7 China and the Caribbean, 129 competitive effect, 120 competitiveness, 113, 157, 183, 185, 197 complementary effect, 115, 120 India and Pakistan, 170 liberalization, 6, 62, 91, 133, 143, 169 North–South, 9 sanctions, 34, 37, 40, 165, 173, 176, 179–181, 183, 184 South–South, 9, 76, 88, 105, 115, 142, 157, 183 Triffin dilemma. See Monetary policy U US dollar in decline, 5, 12, 16, 34, 38, 41 US dollar weaponization, 34 US treasury bonds, 12, 14, 20, 32, 36, 39, 40, 42, 102

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V Veblen, T., 192 Vertical integration, 177

W Wagner’s law. See International relation military expenditure, 201 Washington Consensus, 26, 78, 86, 91, 170, 185, 209, 211 World Bank staffing policy, 24 World Trade Organisation (WTO), 36, 61, 63, 66, 123, 141, 155, 165, 169, 177, 182, 191, 194, 196 accession rules, 77 opposes tariffs, 169, 182 WTO-plus regulations, 66

Y Yuan. See RMB