China’s One Belt, One Road may be a dead end for African coun­tries

The su­per­power’s aid to de­vel­op­ing coun­tries comes with con­di­tions that must be care­fully in­ter­ro­gated

Business Day - - Opinion - Odongo Kodongo ● Kodongo is as­so­ciate pro­fes­sor in fi­nance at Wits Univer­sity.

Five years ago the Silk Road Eco­nomic Belt ini­tia­tive was launched by Chi­nese Pres­i­dent Xi Jin­ping. This was later ex­panded to some­thing much big­ger: One Belt, One Road — an am­bi­tious in­fra­struc­ture and eco­nomic devel­op­ment ini­tia­tive in­tended to stim­u­late eco­nomic in­te­gra­tion in Europe and Asia. Un­der the lat­ter ini­tia­tive, phys­i­cal road and sea routes will course their way through South­east Asia, Africa and the Mid­dle East, and end in Venice, Italy. One Belt, One Road cov­ers about 65% of the world’s pop­u­la­tion, one-third of the world’s GDP and a quar­ter of the world’s goods and ser­vices trade.

Crit­ics of the ini­tia­tive ar­gue that the project is driven by China’s need to ex­port ex­cess do­mes­tic ca­pac­ity and find ex­ter­nal op­por­tu­ni­ties for sur­plus do­mes­tic sav­ings. There­fore, it may fail to deal with press­ing in­fra­struc­ture needs or de­liver ex­pected re­turns to part­ner coun­tries.

In­deed, some an­a­lysts have even ar­gued that the in­fra­struc­ture needs of China’s part­ners are sec­ondary to its own in­ter­ests. Oth­ers ac­cused China of us­ing the ini­tia­tive to lock in pre­cious min­eral re­sources and to drive small de­vel­op­ing coun­tries into un­sus­tain­able in­debt­ed­ness.

The ini­tia­tive isn’t the only strat­egy China has de­ployed to re­alise its glob­al­i­sa­tion agenda. Xi re­cently an­nounced a $60bn fa­cil­ity for Africa. This will be rolled out over three years to fi­nance sev­eral devel­op­ment pro­jects, in­clud­ing emer­gency food aid, agri­cul­tural devel­op­ment, schol­ar­ships and vo­ca­tional train­ing pro­grammes.

Given China’s tra­di­tional prac­tice of con­di­tional devel­op­ment as­sis­tance, it’s rea­son­able to as­sume re­cip­i­ent coun­tries will be com­pelled to ac­cept China’s pri­vate sec­tor in­volve­ment as one of the con­di­tions of this out­lay. To be fair to China, aid “ty­ing” is com­mon among bi­lat­eral lenders: de­vel­oped coun­tries have been in­creas­ingly un­der pres­sure to stop the prac­tice. How­ever, re­cent Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and Devel­op­ment data shows that over­seas devel­op­ment as­sis­tance is still largely tied.

The key ques­tion, there­fore, is whether China’s in­vest­ment is a force for good for African coun­tries. I be­lieve it is not. How­ever, it be­hoves African gov­ern­ments to en­sure loan con­tracts are struc­tured on terms that pro­tect their coun­tries’ in­ter­ests. Ad­di­tion­ally, African coun­tries must in­sist on com­pet­i­tive sourc­ing of con­trac­tors and lo­cal sourc­ing of ma­te­ri­als and labour for all ex­ter­nally funded cap­i­tal pro­jects.

To un­der­stand a coun­try’s abil­ity to meet its loan obli­ga­tions, it is nec­es­sary to ex­am­ine lend­ing terms. How­ever, un­like most mul­ti­lat­eral and bi­lat­eral lenders, the state-af­fil­i­ated China Devel­op­ment Bank and China Exim Bank “do not dis­close loan terms”. This makes it dif­fi­cult to as­sess their loans’ fis­cal bur­den on bor­row­ers. This lack of trans­parency makes China’s true lend­ing in­ten­tions sub­ject to spec­u­la­tion.

Sec­ond, China has been ac­cused of us­ing devel­op­ment fi­nance to ac­cess un­tapped nat­u­ral re­sources in de­vel­op­ing coun­tries. In sub-Sa­ha­ran Africa, for ex­am­ple, some schol­ars sub­mit that “most Chi­nese gov­ern­ment funded pro­jects are aimed at se­cur­ing a flow of nat­u­ral re­sources for ex­port to China”.

Bei­jing rou­tinely dis­misses such ac­cu­sa­tions. In China’s de­fence are sci­en­tific re­search, CIA in­tel­li­gence re­ports and the World Food Pro­gramme, which have failed to find ro­bust ev­i­dence to sup­port the view that Chi­nese aid is strongly linked to nat­u­ral re­source en­dow­ments.

These ac­cu­sa­tions have been fu­elled by China’s strat­egy of ac­quir­ing strate­gic as­sets of debtor coun­tries that de­fault on their loan obli­ga­tions. For in­stance, Sri Lanka was re­cently forced to con­cede its strate­gic Ham­ban­tota port to China on a 99-year lease after it failed to ser­vice its debt.

Sri Lanka owes China nearly $13bn; its do­mes­tic tax rev­enue fore­cast for 2018 is just $14bn. Sim­i­larly, there has been per­sis­tent talk about Zam­bia’s sup­posed deal with China to take over Zam­bia’s in­ter­na­tional air­port, its na­tional broad­caster and power util­ity. Zam­bia has de­nied these al­le­ga­tions.

Al­though com­mon in real es­tate fi­nance prac­tice, where prop­er­ties of delin­quent mort­gagors are fore­closed to meet obli­ga­tions to lenders, an­nex­a­tion of strate­gic as­sets of sov­er­eigns is un­prece­dented. This raises the im­por­tant ques­tion: is China pur­su­ing a rogue strat­egy in its deal­ings with de­vel­op­ing coun­tries? The Cen­tre for Global Devel­op­ment, upon analysing move­ment in coun­tries’ over­all pub­lic debt-to-GDP ra­tio and con­cen­tra­tion of that debt with China as cred­i­tor, has con­cluded that the One Belt, One Road ini­tia­tive could make at least eight coun­tries in Africa and Asia vul­ner­a­ble to debt sus­tain­abil­ity prob­lems.

An­other area of con­cern is China’s “look the other way” pol­icy. This is un­like most “donors”, par­tic­u­larly the US, which has in­sisted on good gover­nance as a pre­con­di­tion for its devel­op­ment as­sis­tance. Data shows that China has made large re­source-re­lated in­vest­ments in coun­tries with weak gover­nance in­fra­struc­ture, such as the Demo­cratic Re­pub­lic of Congo (DRC) and Su­dan.

In the DRC, China is ri­valled by Cana­dian firms, which on ag­gre­gate held $4.5bn in min­ing-re­lated in­vest­ment by 2009. Re­search ap­pears to con­firm that Chi­nese out­ward di­rect in­vest­ment in de­vel­op­ing coun­tries is in­deed in­dif­fer­ent to the gover­nance en­vi­ron­ment in re­cip­i­ent coun­tries.

Sus­pi­cions about China’s in­ten­tions have also been height­ened by its in­ter­na­tional agri­cul­tural sec­tor in­ter­ven­tions. In its 2006 Africa pol­icy white pa­per, China pledged to strengthen agri­cul­tural co-op­er­a­tion and im­prove African coun­tries’ ca­pac­ity for food se­cu­rity.

Crit­ics, how­ever, aver that “agri­cul­tural aid and knowl­edge trans­fer cen­tres in de­vel­op­ing coun­tries are China’s en­try points for large-scale ef­forts to se­cure enough land some­where to feed a fully in­dus­tri­alised China in the longer term”. The Chi­nese gov­ern­ment de­nies this ac­cu­sa­tion.

That’s not all. China’s debt fi­nanc­ing is com­monly tied to the use of labour from China. In Africa alone, es­ti­mates put the num­ber of Chi­nese mi­grants at above 1-mil­lion by 2013.

Al­though data on the ex­act num­ber of Chi­nese mi­grants to Africa is un­re­li­able, re­cent stud­ies in Ethiopia and Ghana show that Chi­nese mi­grants are in­volved in run­ning restau­rants, re­tail food out­lets and small farms. This in­creases com­pe­ti­tion in the small busi­ness sec­tor and lim­its em­ploy­ment and busi­ness op­por­tu­ni­ties for lo­cals.

But the red flag over China’s devel­op­ment co­op­er­a­tion has prob­a­bly been the ac­cu­sa­tion of its in­volve­ment in cor­rup­tion in de­vel­op­ing coun­tries. Ann-Sofie Isakssona and An­dreas Kot­sadam re­cently pro­vided strong ev­i­dence sug­gest­ing that Chi­nese aid fu­els lo­cal cor­rup­tion but does not stim­u­late lo­cal eco­nomic ac­tiv­ity. On the con­trary, the study finds that “World Bank aid pro­jects stim­u­late lo­cal eco­nomic ac­tiv­ity with­out any con­sis­tent ev­i­dence of it fu­elling lo­cal cor­rup­tion”.

Con­sis­tently, an ear­lier study finds that Chi­nese devel­op­ment funds may have “cap­tured” lead­ers of re­cip­i­ent coun­tries. How­ever, the study doc­u­ments con­trary find­ings on cor­rup­tion. Other com­men­ta­tors ar­gue that the nega­tive fo­cus on China is driven by the West’s colo­nial-era anx­i­ety.

With such a con­flict­ing dis­course, China’s con­tri­bu­tion — or lack thereof — to the devel­op­ment of poorer coun­tries will need more re­search and might take much longer to ap­pre­ci­ate. My per­sonal view is that de­vel­op­ing coun­tries must care­fully scru­ti­nise ev­ery word in any cap­i­tal project funded by China.

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