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Wanandi: "Belt and Road" Initiative (BRI) as catalyst for green growth

2018-12-20, by Jusuf Wanandi, from Centre for Strategic and International Studies, Indonesia (CSIS)

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(Jusuf Wanandi, Vice Chair of Board of Trustees of Centre for Strategic and International Studies Foundation)


The World’s Need for New Growth Momentum

Growth is fundamental to the functioning of our maturing world economy. It may be needed more pressingly in lower income countries than elsewhere but is universally needed, nevertheless. Centuries of experiences have taught us that growth can never be taken for granted. It needs nurturing or even game changers occasionally which coincided with major technology innovations, positively disruptive policy overhauls or both.

We have recently enjoyed a buoyant growth in the wake of technology innovations despite of policy mistakes that we committed almost in regular sequences as we did before the Asian financial crisis of 1997-1998, and the global financial crisis of 2007-2008. We count on them while we seek to grow faster. However, there are downsides to the current digitally-driven innovations. They tend to be extremely divisive, allowing winners to take almost all of the sweet fruits as demonstrated by flagship companies of the current globalization. What is more, automation eats up a large number of jobs, including jobs that were considered safe against automation. How far and how fast we can generate replacement for the lost jobs remains to be seen. This is not to say that the world can dispense with technology innovations. Ever since human invented technology it has developed its own trajectory which humans can only partially control. The important point to be made is that major policy initiatives are needed to balance the disruptive effects that come along with the digitally-driven innovations which according to some scientists may even soon arrive at a singularity, a situation when learning machines exceed human being in intelligence.

Depleting natural resources even farther is not a realistic choice. In fact, through the Paris Agreement governments have agreed to cut green-house gases emission. Given such commitment the world is challenged to squeeze a higher unit of growth from a given resource use. Answering the challenge is certainly difficult but the way the world economy grows in the period after World War II indicates that efficiency improvement in resource use is a feasible target. The Marshall Plan and European integration that followed a few years thereafter, the marathon of trade liberalization under the GATT and later the WTO, the revolutionary shift of the Republic of Korea, Chinese Taipei, Hong Kong SAR, and Singapore and, most miraculous of all, the New Economic Policy of Mainland China are examples of dramatic policy changes that triggered a strong and lasting economic growth.

The post-war growth is uneven spatially. As far as Asia and Europe is concerned it is concentrated along the North-West South-East axis. It basically leaves out the Western provinces of China, certain parts of South Asia, Central Asia, the Middle East and even East Europe. The same happens to Africa despite its preferential access to the European Union. Connecting these areas to the main trade and investment route is, therefore, a historical opportunity or even a historical call to Asia, Europe and the world at large. This is what the Belt and Road Initiative (BRI) is doing. With BRI and preexisting initiatives the entire world would be connected through land and maritime infrastructures.

BRI as a Living Design

The BRI covers an immense land and maritime areas in three continents where more than 50 percent of world population live at a rising living standards. It is home to people with very different living standards, stages of technological advancements, religions, folklores, political systems and other elements of cultural diversity. Many of the BRI countries are already confronted with divisive forces of their own which are very deeply-rooted. Ingenuity will be needed in the design of BRI to enable it to function as a glue rather than an additional force of division. Orchestrating BRI as a connected growth area is a herculean task to perform.

So far BRI is most popularly known for the huge networks of infrastructure that it plans to establish with the help of Chinese investment. An amount of investment in the order of USD 8 trillion is often time mentioned in connection with BRI. It is a huge investment, representing roughly 2.5 percent of the combined GDP of the participating economies. It would come as a major relief to the 45 developing countries of Asia which, according to the ADB, will need to invest around USD 26 trillion. While huge the expected BRI-related infrastructure investment falls far short of the USD 26 trillion in the period of 15 years from 2016 in order to maintain a growth momentum, eradicate poverty and respond to climate change. Hence, China, the rest of Asia, the Pacific, Europe, Africa and the world at large share an interest in making BRI a success.

Better physical connectivity among the BRI economies will speed up the movement of goods, services, capital and people. Many goods and services will enjoy an improving tradability. Trade and investment costs will fall. Division of labor or specialization among the BRI economies, particularly among neighboring economies will expand and deepen. With new infrastructure new technologies come along.  More efficient in resource use the new infrastructure will also be greener. What is more new businesses will be crowded in. Indeed, it is these crowding-in effects that we expect the most from infrastructure. They are the litmus test for the success of infrastructure.

Trade and Investment Program

BRI involves an extremely complex set of issues of which many will emerge in later stages. Some issues have already circulated widely in friendly or hostile manners. Let me focus on just a few issues, particularly investment trade issues, growth issues and governance issues. As indicated earlier it is the crowding-in or multiplier effects that will determine the extent to which BRI is going to deliver its intended results. Many of BRI economies have had a long experience with trade and investment liberalization through unilateral, regional, pluri-lateral and multilateral initiatives and have profited from those experiences handsomely. Many others in Central Asia, South Asia and Africa are yet to integrate properly with the rest of the world through trade and investment liberalization initiatives. Even for the “established traders” like China and ASEAN renewed efforts are needed to keep themselves open to trade and investment. Enthusiasm for opening is weakening as reflected in the protracted negotiation on RCEP. ASEAN has hardly introduced any meaningful initiatives on trade and investment in recent years. The inward-looking trend that erupted in the wake of the world financial crisis of 2007 and 2008 has not been reversed. What is more there is room for further trade and investment liberalization in the BRI economies despite the progress made in the past. Beyond non-discrimination China may consider a preferential access to Chinese market for goods and services originated in the least-developed economies in BRI, engaging thereby in “benefaction” similar to what developed economies did 50 years ago is response to the demand from the developing world. Linking China-financed infrastructure with an increasing capacity to export in the borrowing countries is imperative to avoid a debt problem from arising in the future where interest payments and debt repayments create balance of payment problem of a crisis proportion. Needless to say, open trade investment policy can only lead to a better trade preparedness, if complemented with capacity building and trade and investment facilitation. Hence, the design of BRI must also include trade and investment program aimed at enabling borrowers to earn enough foreign exchange when the time arrives for debt servicing. Whether or not such export capacity is generated by domestic or foreign investors, including Chinese investors, is of secondary importance, though politically there is also a limit to foreign presence that a country can receive in good faith.

If one looks back to past decades all major policy initiatives were centered round trade and investment policy reforms which include greater opening toward the rest of the word, greater freedom to do business and removal of distorting policy measures. At a time when many governments are turning inward internalizing trade and investment measures in BRI design is critical for its success. China can influence BRI’s trade and investment agenda by integrating them in lending’s terms and conditions but also indirectly through its participation in ASEAN, RCEP, Asia Europe forum and other forums.

BRI offers a great opportunity for greener economy. Within BRI China can catalyze a more conducive institutional setting for a green economy, that it has laid down in recent years while dealing with pollution problems of its own. Green industries and services have grown very fast in China in recent years. In clean conventional energy such as carbon capture and sequestration (CCS) China has more progress, realizing that it will continue to depend on conventional energy for a long time to come. China has topped the world in recent years in the research, development, adoption of renewable energy, particularly wind turbine, solar energy, and bio energy. It has also made a lot of progress in water resource conservation and recycling as well in desalination technologies.

China will remain at the top in terms of CO2 emission for a long time to come. The sheer size of its population and very rapid growth combine to result in such large-scale emission. At the same time China has demonstrated a very strong commitment and ability to study, develop and adopt greener practices of economic development at both the hard and soft side, with these recent experiences China can also guide BRI into a green economy platform for collective learning by doing.

Growth and Preemption of Debt Problems

The fact that in its early stages BRI is dominated by loan relationship between China as creditor and the rest of BRI as borrowers necessitates a built-in fiscal prudence. Whether one likes it or not government everywhere is exposed to a continuous scrutiny as regards its fiscal profile. Prudent government is expected to limit its annual borrowing to not more than 3 percent of GDP and to control debt at not more than 60 percent of GDP. Even under such a fiscal prudence a government will have to be able to generate an additional taxation capacity. The rate of economic growth in such an economy must rise to allow a higher tax revenue in due course of time. Otherwise debt crisis is already pre-programmed for both sides, the creditor and the debtor, at the time the loan is disbursed. The costs of such crisis are much heavier than the pecuniary costs. Generating an additional growth impetus is, therefore, essential for any borrower in BRI. This brings us back to similar issues that were discussed in relation to the building of export capacity.

Infrastructure is usually not a good sector as tax payer. Its services are usually subjected to a wide range of distortions, including price control. Infrastructure is judged not on its own returns but on the extent to which it gives birth to successful business enterprises. One can certainly attempt to minimize the likelihood of default by assuring that loan is directed to infrastructures with the highest expected returns, that users are charged with a price in excess of costs, that procurement is conducted in the most transparent and competitive way, that the project is managed and maintained in the best professional way in the interest of the highest possible productivity. Ways must be found to impose such requirements. While BRI should maintain its autonomy in setting its own standards of development financing there is a lot that it can learn from the practices of other infrastructure lending institutions such as the Asian Infrastructure Investment Bank (AIIB), the Asian Development Bank (ADB), the World Bank and the European Bank for Reconstruction and Development (EBRD). In times of economic convergence sound development lending practices also get increasingly similar across economies and regions. With BRI the world of development financing is changing. There is a non-zero probability that in the early stage of its development BRI will primarily be dealing with borrowers with poor rating whose access to the resources of the established development banks is very limited. Countries with better credit standing may engage in adverse selection, directing good projects to institutions with tougher requirements and less bankable projects to BRI. On the other hand, BRI’s lending would border at redundancy, if it sets exactly the same conditions as other institutions do.

Primus Inter-pares

At BRI’s early stage the centrality of China is a necessity. An initiative as grand as BRI requires a strong champion. In playing its championing role China will have to win friends in the participating countries. BRI diplomacy is crucial. Groups of friends similar to BRI Scholarship should be formed and nurtured. China will also have to demonstrate a commitment to transparency, accountability and fairness, or good governance in short. BRI will need to be more balanced and comprehensive in its issue coverage and more inclusive in its structure. This way allegation and premature worries about hidden intentions of China can be demystified gradually. 

The world is very lucky these days to be able to enjoy a relatively strong growth of output and trade despite the loss of enthusiasm and trust in multilateral and regional trade negotiation and cooperation, the ease at which the United States uncoupled from the core international institutions that it brought to life over 70 years ago and tendency of many governments to go the inward-looking ways while addressing trade and investment issues.  However, unchecked this retreat from open trade and investment is going to harm the world sooner or later and severely so. Through BRI and other organizations and forums in which China is member or participant China should urge other countries to re-engage in trade and investment issues. Given what China has accomplished through its New Economic Policy over the last 40 years translating the positive experiences into a global trade and investment agenda as continuation of what the world has painstakingly accumulated in the last 70 years or so is greatly opportune.