Dr. Ajay Chhibber on China’s One Belt One Road Initiative

Dr Ajay Chhibber is Distinguished Visiting Professor , National Institute of Public Finance and Policy , India and Visiting Scholar , Institute of International Economic Policy, Elliott School of International Affairs, George Washington University, USA. He was the first Director General of the Independent Evaluation Organization of the Government of India. He was previously Assistant Secretary General at the United Nations and Assistant Administrator ,UNDP. Dr Chhibber worked at the World Bank where he held senior positions and was director of the World Development Report 1997 on the role of the state.

Dr Chhibber has a PHD from Stanford University and a Masters from the Delhi School of Economics, and advanced management certificates from Harvard and INSEAD, and is currently Distinguished Visiting Professor at NIPFP and Visiting Scholar, George Washington University.

 

He spoke with Seoyoon Choi CMC ‘19.

Biography courtesy of Dr Chhibber

Could you briefly explain the significance of the One Belt, One Road (OBOR) initiative? What are the objectives that China hopes to achieve through the OBOR?

Initially the OBOR was meant to be a framework for greater cooperation between Central Asia and China's western provinces in order to ensure a more balanced development within China. As China’s western provinces were lagging behind the eastern coastal provinces, the new Silk Road strategy was a way to increase trade and cooperation from China to its western borders and its southern borders. But since then, it has evolved into a broader strategy for China's engagement with the world. The new Silk Road proposes to link China to Europe with trade and transport corridors across Central Asia and Russia. The Maritime Silk Road includes maritime links through the Straits of Malacca to the Indian Ocean, Middle East, and Africa. In scale and scope, it is much larger than the traditional Silk Road concept. It also signals that China now wants to look outward and export its capabilities in infrastructure, investment, trade, and industrial development. China has for the last few decades tried to attract foreign direct investment and technology to learn from the West. It now wants to start looking outward and use the new Silk Road strategy to look for markets and to export its expertise, especially in areas like infrastructure, finance, and trade. Therefore, it also signals for the first time a shift in how China wants to project itself. Thus far it has always emphasized that it is a developing country with some remaining challenges of poverty eradication. With the announcement of the new Silk Road strategy comes a more confident projection of China's economic and technical achievements and its ability to create new initiatives and new institutions.

 

In tandem with the proposal of the OBOR, China has also established the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDP) that may serve as alternatives to existing international financial institutions (IFIs) like the World Bank and the International Monetary Fund (IMF). What motivated China to launch the new financial institutions? How would you assess the performance of these new institutions so far?

China is supporting and creating new organizations to fund its new policy, namely the New Development Bank (NDB), or the BRICS Bank, with capital of about $50 billion (which will eventually increase to $100 billion); the Contingent Reserve Arrangement (CRA) with $100 billion; the Asia Infrastructure and Investment Bank (AIIB) with $100 billion (which may later increase); and the New Silk Road Fund (NSRF) with a capital of $40 billion. China’s total contribution in these new institutions amounts to about $125 billion. These new institutions and funding mechanisms are partly responses to the slow reform at the IFIs and partly channels for China to utilize its vast reserves. After some initial reluctance, many countries have joined. Japan still does not have a positive stance toward these institutions, particularly to AIIB, which Japan has not joined. But many others have joined, including the UK, France, Germany, Italy, Spain, Switzerland, Australia, Korea, and Russia. Brazil has also decided to join the AIIB as a founding member, and this will encourage other Latin American countries to join as well.

In addition to these new institutions, China has recapitalized some of its existing banks and financial institutions. For example, it has recapitalized the China Development Bank (CDB), China Exim Bank (CEB), and the Agricultural Development Bank of China (ADBC) with an additional $62 billion.

Thus China’s stated position is that its One Belt One Road strategy is not in opposition to existing regional and multilateral organizations. OBOR is intended to enhance the role of multilateral cooperation and make full use of existing mechanisms, such as the Shanghai Cooperation Organization (SCO), ASEAN Plus China (10+1), Asia-Pacific Economic Cooperation (APEC), Asia-Europe Meeting (ASEM), Asia Cooperation Dialogue (ACD), Conference on Interaction and Confidence-Building Measures in Asia (CICA), China-Arab States Cooperation Forum (CASCF), China-Gulf Cooperation Council Strategic Dialogue, Greater Mekong Sub-region Economic Cooperation, and Central Asia Regional Economic Cooperation (CAREC) to strengthen communication with relevant countries and to attract more countries and regions to participate in the Belt and Road Initiative. China characterizes these initiatives as complements to existing programs, and not opponents to them.

Nonetheless, the new financial institutions have an opportunity to improve upon the practices of the existing IFIs, but whether they will do so remains to be seen. For example, obvious improvements they can make include reducing the time and costs of project preparation, having more flexible financing instruments, and not pushing dubious so-called “best practices” but instead finding “right practices.”  More South-South exchange is built into their structures as well. But there are challenges too, since solving these issues will require a lot of innovation. The most difficult issue will be to ensure good, workable environmental and social standards that foster sustainable and inclusive development and not simply standards that promote rapid growth with weak environmental and social outcomes. There is a possibility that Chinese institutions may improve upon the existing ones, but it is too early to tell.

 

India has joined the AIIB, but has significant concerns about the Chinese initiative. Can you explain India’s delicate policy on this issue?

There is quite a big debate now in India on whether China’s One Belt and One Road (OBOR) strategy -- now also called the Belt and Road Initiative (BRI) -- represents a threat or an opportunity for India. Some view it as a big threat, as a strategy that China will use to encircle India. The concept is sometimes called the “string of pearls,” which refers to ports on the Indian Ocean that will be used to disrupt India’s trade. Some consider it as a great opportunity to attract financing for India’s infrastructure development. BRI would not only improve infrastructure, but also boost growth and employment. There is also a third group of people who regard it as a fait accompli and India must seek to derive as much benefit from it as possible. What is emerging is a competitive yet cooperative approach from both China and India, in the Indian Ocean, South China Sea, and parts of East Asia.

India clearly has not joined the BRI. It has concerns particularly with the Maritime Silk Route (MSR) and this idea that there will be Chinese ports that could strangle India like a “string of pearls.” India was upset by the Chinese President’s recent commitment to invest $47 billion in rail and road infrastructure and a virtual trade corridor connecting West China to the strategic Gwadar Port in Pakistan. This will enable China to carry oil and gas from Iran and Arab countries via Gwadar Port, which was also built by China. There are also concerns because of the China-Pakistan Economic Corridor (CPEC), which runs through Kashmir, a disputed territory to which India has claims. China, on the other hand, has expressed opposition to Indian interference in the South China Sea.

India has agreed to join the NDB and AIIB, however. In fact, the president of the NDB is an Indian, and the second largest shareholder of the AIIB is India. India has also agreed to the Kolkata-Kunming road corridor connecting Bangladesh, China, India, and Myanmar (BCIM).

There is a lot of debate in India about the BRI, and it is a question of how individual projects will emerge out of it. There will be further probing of China and India by each other. China and India now have much larger economic interaction than in the past. The trade is in favor of China and amounts to almost $100 billion. India has a trade deficit of about $50 billion with China. But India is emerging as a big market for the Chinese, so China will have to take some of that into account in its negotiations with India.

 

Building large infrastructural projects is complex and politically difficult. There are allegations regarding environmental damage and human rights abuses under Chinese investment projects in Africa and Southeast Asia. How could the Chinese government manage such political risks in carrying out its OBOR initiative?

In Myanmar, the construction of the Myitsone Dam was cancelled for environmental reasons. The political climate in individual countries can also create roadblocks. In Sri Lanka, the previous government was very much in favor of Chinese projects, including the famous Hambantota project. But following the change in government, Sri Lanka became much more cautious because the new government feared that these projects were “big white elephants” that would leave the country in debt. If the country was unable to pay back the debt, it would have to convert this debt into equity, allowing the Chinese to own some of these major ports and pipeline projects. Particularly in Africa, there have been a lot of concerns about Chinese projects that do not use local labor. Many of these companies bring in Chinese labor and equipment. The Chinese workers live separately, finish the project, and leave the country. The question is whether these major investments can be sustainable in the long term. China has responded to these concerns by agreeing to build the Gwadar Port in Pakistan and also signing a forty-year contract for operating the port. In other words, instead of building and transferring the infrastructure, the Chinese will build and then operate them as well.

Also some of the areas that the BRI is located have significant political turmoil. The risks of executing projects in areas of growing turmoil should not be underestimated. Growing turbulence in the Middle East — vital to the New Silk Road strategy — could become a constraining factor. Central Asia also poses challenges. Cooperation from Kazakhstan — sometimes referred to as the Buckle in the Silk Road Belt —is vital, as this huge country with its enormous resources tries to balance Chinese demands with Russian interests.

The CPEC projects are also fraught with execution problems on the ground. Project execution risks are another factor, given the Chinese company’s labor practices and lower environmental standards, which raise opposition from local civil society. China’s new financial institutions, such as the AIIB, cite sustainable development as one of their main objectives, and they could show a path to infrastructure investment that balances environmental protection with development. China’s own development experience so far has been very mixed; it has developed fast but at a very high environmental cost. The ability of those same companies [that will execute OBOR projects] to handle environmental issues is not very strong based on past experience. While they are now shifting greater attention to environmental concerns, whether they will actually be effective at responding to such concerns, remains to be seen.

 

Another well-known risk in developing infrastructural projects is corruption. How could China do a better job preventing corruption and misjudgment in the deployment of its resources in the OBOR initiative?

Corruption is a huge issue especially in large capital-intensive infrastructure projects. The Chinese approach so far has been to avoid conditionality in their financing on the ground. They argue that conditionality does not work, and much Chinese aid is built around not interfering in local systems. The Chinese approach has been to ring-fence the project and, in most cases, to bring equipment and labor from China. But this approach has led to criticism, especially in Africa. It remains to be seen whether China will be able to continue with this approach on large-scale projects across so many countries. The main issue is that the financing terms for many of these projects are not very transparent. Therefore, there are huge opportunities for corruption and misjudgment on whether the financial returns to these projects are justified or not. Without transparency, and with such an opaque financing structure, it will be very difficult [to successfully implement these projects]. In the AIIB and NDB, the Chinese will have to be much more transparent, but the banks will still form a small part of the overall financing package. The bulk of the financing will come from China’s own institutions like the CDB, CEB, and ADBC. This lack of transparency is a big issue going forward.

 

Could the OBOR achieve China’s goals of addressing its excess capacity and of utilizing China’s comparative advantage in building large infrastructure projects? In strictly economic terms, what can make OBOR a sustainable and profitable long-term investment?

Some have suggested that the OBOR was necessary for the Xi Jing Ping administration to handle some of China’s internal structural problems and political dynamics. China’s growth is slowing down and its intention was to rebalance its investment-driven growth model – under which China developed huge surplus capacity in several basic industries such as steel, sheet glass, aluminum, cement, copper wiring, and transport and construction equipment, just to name a few. China’s OBOR strategy is seen as a way of utilizing some of this excess capacity, as it attempts to rebalance internally within China. But it is unlikely that the OBOR strategy alone can take care of all of the existing excess capacity.  

The OBOR is a broad strategy that is hard to assess. Each project under the broad strategy can be assessed for its economic, social, or environmental benefits and costs. Those will be very difficult issues to ensure good workable environmental and social standards that ensure sustainable and inclusive development, rather than just rapid growth with weak environmental and social outcomes. It’s hard also hard to define success. If more than 50 percent of the projects under this strategy work well, then you can give it a passing grade. If more than half of the projects end up as white elephants, the strategy would not have succeeded.

 

China’s long-term strategic objective of the OBOR initiative seems to be to establish itself as a global leader in regional, if not global, integration. As the U.S. retreats inward, Japan continues to stagnate, and Europe struggles with its own internal problems, is China well-poised to exploit the current strategic opportunity?

While many see China’s new Silk Road strategy as an opportunity for greater trade and investment and see the new financial institutions as a new source of badly needed finance, some view them as a grand strategy of China to dominate globally. Some see it as China’s challenge to the Western dominated financial architecture. Others are concerned that environmental and social standards will be weakened by the new institutions and the new approach. And some view it as a way for China to dominate its smaller and weaker neighbors. It is for sure a very strategic and significant shift in China’s approach in global trade and finance.

With a slowdown in the global economy and with difficulties in many low-income countries in gaining access to finance, the new Silk Road strategy represents a new opportunity. It is not a finite project. It is an approach under which there will be many projects spanning Southeast Asia, Central Asia, and Africa. While Latin America is not formally part of the OBOR, China also has extensive engagement in the Latin American region. It is a huge opportunity but also a huge risk for China. Balancing internally, managing all the problems that will emerge for sure in these projects along the Silk Road, and at the same time being able to ensure that there is enough benefit for all the countries involved, will be a great challenge for China.

 

What are some structural advantages that the new Chinese institutions have in comparison to the traditional IFIs?

The main criticisms of the World Bank and other multilateral banks are that first, they are too slow at implementing projects. By the time the project is executed, the situation on the ground often has changed. Second, the feedback mechanism comes too late to be able to course-correct these projects. In addition, while the up-front financial terms are quite favorable because the interest rates are so low, the project itself takes too long to be prepared and executed. As a result, the country does not get the benefits of the low interest rates for a long period of time. Another criticism is that the environmental social standards are too rigid. The “best practice” policies of the West are not necessarily applicable to many of the developing countries.

The new financial institutions claim that they will be able to fix some of these problems, for instance by preparing projects in a much shorter time. Many countries have been refused World Bank’s financing on the grounds that they have not met the appropriate environmental and social standards. The new Chinese institutions claim that they will be able to find a good balance between growth and environmental and social issues. Ultimately without growth, there will be no social benefits in any case. We do not have enough information from the few initial projects yet to judge how well they are doing, but these are the intentions of the new institutions.

Seoyoon Choi CMC 'Student Journalist
Featured Image By Umargondal (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons.
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