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Lee Jones

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July 21, 2022

Could Geopolitical Competition Over Development Financing Benefit the Global South?

Since the launch of China’s Belt and Road Initiative (BRI) in 2013, development financing has returned to the fore of global geopolitics. Despite its critics, the latest surge of great-power competition could be a good thing for developing countries.

During the Cold War, national development in the global south was hotly contested, as both the capitalist and communist powers offered competing pathways to “development”, alongside potentially generous assistance for post-colonial regimes willing to follow them. After the Cold War, this contest for power disappeared. Western hegemony implied neoliberal templates and conditionality for development assistance – at least until the launch of the China Belt and Road Initiative in 2013 . Now geopolitical competition over development and its financing is back with a vengeance, with all the major powers jockeying for position in the global south.

Despite what many anti-China hawks would have us believe, the BRI is not primarily a geopolitical initiative. Nor is it some kind of charitable enterprise, as China-boosters may suggest. In fact, the BRI is an attempt to address deep-seated problems within the Chinese political economy. These problems include the exhaustion of the fiscal stimulus after the 2008 global financial crisis, when many state-owned enterprises (SOEs) became dependent on infrastructure-building contracts; the vast over-capacity in many basic industries; and the over-accumulation of capital in the Chinese banking system, amid dwindling domestic profit margins. The BRI is fundamentally designed to create external demand for Chinese enterprises, supported by Chinese loans. That the BRI could also boost China’s political ties with foreign governments is a nice bonus, but those political ties are not the core imperative driving the scheme.

Nor is Chinese development financing geared to any geopolitical “grand strategy.” Chinese megaprojects are not strategically planned by Beijing. Chinese development financing is actually recipient-led and “bottom up”, with very limited coordination and oversight. Chinese leaders may say they want improved relations with Country X, but it is up to the recipient government to devise projects and apply for financing, which disperses the actual decision-making among mostly commercially-oriented agencies, including the Ministry of Commerce, the National Development and Reform Commission, and China’s policy banks. As a result, the Ministry of Foreign Affairs is largely marginal to the process. SOEs can therefore lobby would-be recipients to apply for Chinese funding for projects they themselves will undertake, meaning that the tail often wags the dog. The limited scrutiny of projects’ viability and affordability on either side, leads to “white elephant” projects like Sri Lanka’s Hambantota Port. Such hapless outcomes create diplomatic blowback for Beijing. Charges of land-grabbing, forced displacement, environmental degradation and labour abuses also reflect weak regulation and supervision of China’s overseas enterprises.

In short, the prevailing “bottom-up” approach means that project funding is not guided by the vague policy guidelines set in Beijing, but according to overlapping interests of the Chinese SOEs and recipient-country elites. These projects, taken together, do not converge into a coherent vision or “grand strategy,” as many supposed maps of “the BRI” misleadingly imply. Beijing has no official map of the BRI and, in 2017, went so far as to ban even unofficial BRI maps, reflecting the disaggregated reality of its development financing. 

Even if the origins of the BRI were not geopolitical, the BRI clearly has geopolitical consequences.  Starting with Indian think-tankers, then echoed in Washington and elsewhere, the idea of “debt trap diplomacy” took hold, falsely suggesting that China was deliberately offering developing countries debt-fuelled projects in order to seize strategic infrastructure for future military use or simply to exercise strategic leverage. 

And certainly, governments receiving large quantities of Chinese development financing – which often comes bundled with side-payments to elites, lucrative contracts for their business cronies, and aid for their militaries – can be emboldened to say “no” to the West. Cambodia is a good case in point. Hun Sen’s Cambodian People’s Party regime was heavily dependent on Western aid in the 1990s and 2000s, arguably constraining its authoritarian tendencies. Since 2013, with Chinese aid flowing in, the regime has felt able to ban opposition parties and violently repress labour unrest, secure in the knowledge that Beijing has its back. Across the global south, Western aid and development organisations suddenly find themselves in a much more competitive international context.

China’s competitors have clearly ramped up their development financing offer in response to the BRI. Major initiatives since 2013 include:

  • Japan’s Quality Infrastructure Initiative (2015);
  • The USA’s Development Finance Corporation (2018) and Build Back Better World (2021);
  • Australia’s Infrastructure Financing Facility for the Pacific (2019);
  • The G20’s principles for quality infrastructure investment (2019), followed by the launch of the US-Japan-Australia “Blue Dot Network”; 
  • The UK’s British International Investment agency (2021); and
  • The EU’s Global Gateway Initiative (2021).

The situation in Ukraine shows only too painfully what can happen if weaker countries and their domestic politics become wrapped up in geopolitical contestation. However, insofar as renewed great-power competition over development financing does not spill over into outright conflict, it could arguably be beneficial for developing countries, in two main ways.

First, it forces China to step up by getting more specific about its aims. The early years of the BRI were pretty much a free-for-all, such that the brand was slapped on everything from ports to football tournaments to dodgy casinos and money-laundering hubs. The unrestricted use of BRI reflects its non-strategic nature and ultimately incentivized Chinese actors to promote top leaders’ ill-thought-out initiatives to advance their own careers and make money. When the funding recipients also had rather questionable motives of their own, this lack of aim means possible disaster. The Chinese leadership has increasingly acknowledged the need to improve oversight over its development financing, and have undertaken reforms.**

Second, rising geopolitical competition for developing countries may increase their leverage. Having multiple potential development partners gives weaker countries greater bargaining power and choice. After years of focusing on fruitless pro-market and “good governance” programmes, Western aid agencies are being pushed back towards questions of substantive economic development, including physical infrastructure. Developing countries are consequently less inclined to follow unhelpful neoliberal policy templates in exchange for aid, thus Western and multilateral lenders are forced to be more flexible to compete with China. This increase in competition can clearly benefit Southern governments, especially those that have become habitual “rule takers” – either accepting neoliberal conditionality from the West, or just taking whatever Chinese firms and financiers can offer, sometimes without even trying to negotiate. Greater competition over development finance should encourage recipient governments to act more strategically – to assess different offers and bargain hard to maximise local benefit – while external partners will have to be more accommodating than before. If Southern governments are canny, they can stop serving narrow, sectional interests, and gain greater benefit for their own peoples.

What else is going on within geopolitical competition over development financing and what will happen next? China and Japan are likely to remain the world’s primary bilateral lenders, which will ultimately constrain global competition and its benefits to the global south. Western governments have yet to transcend neoliberal policy thinking, and their development financing frameworks reflect this: they all rely on “escorting” private capital towards Southern infrastructure development, rather than mobilising large amounts of public financing. But often Western investors decline to be “escorted.” They see megaprojects as too risky and Southern lenders as too unreliable. It is precisely this context that allowed China’s latecomer SOEs – backed by deep state pockets and forced into the riskier markets that weren’t already sewn up by more established players – to gain a foothold in the global south. Japan, too, takes a more statist approach to development financing, serving as the original model for China’s own approach. Until Western donors are willing to put their public money where their mouth is, they will never be able to compete fully with China’s BRI.

* In Malaysia, for example, Chinese companies were all-too-willing to help bail out the corrupt prime minister Najib Razak, signing inflated infrastructure contracts in exchange for propping up the 1MDB fund that Razak and his cronies had pillaged. This provoked a fierce anti-Chinese backlash in Malaysia’s 2018 general election, and the new government renegotiated major Chinese projects, haggling down the price and scope. Cautioned by China’s competitors, many other countries have also become leery of Chinese projects, worrying about the extent of local benefit and the risk of falling into a “debt trap”.

** In 2017, the People’s Bank of China clamped down on capital outflows, its governor recognising that the BRI had enabled projects that “do not meet our industrial policy requirements… are not of great benefit to China and have led to complaints abroad”. The Ministry of Commerce and China’s policy banks have also introduced more regulations and restrictions, and the Central Commission for Discipline Inspection has even deployed to some projects to investigate claims of corruption. At the 2019 Belt and Road Forum, Xi Jinping himself implicitly acknowledged the criticisms of Chinese financing, and mounting competition in the development financing space, by promising a “clean and green” BRI with better-quality projects. This round of regulatory tightening is similar to that which followed the first influx of Chinese investment into Africa in the mid-2000s, which prompted claims of Chinese “colonialism”. Such reforms will not fix all the problems, but show that Chinese elites are sensitive to criticism and are on a sharp learning curve. Hopefully, this heightened awareness will lead to better-quality projects – though the primary responsibility for ensuring that projects are viable, affordable and well-governed will always remain with host countries.

Lee Jones

Lee Jones is Professor of Political Economy and International Relations at Queen Mary University of London and author of (with Shahar Hameiri) Fractured China: How State Transformation is Shaping China’ Rise (Cambridge University Press, 2021).

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