Excerpt from the Book
In an average year during the BRI era, China spends about $85 billion on overseas development projects. The US spends less than half of that amount—about $37 billion each year.
But Beijing behaves more like a banker than a benefactor: for every dollar of aid that it provides to low-income and middle-income countries, it provides 9 dollars of debt. The US, by contrast, finances nearly its entire overseas development program with aid.
China uses aid and debt for very different purposes. Beijing uses aid to reward countries that diplomatically recognize it instead of Taiwan, as well as countries that support its foreign policy positions in the UN General Assembly. This is why Chinese aid projects cater to these interests of governing elites—by supporting the construction and rehabilitation of presidential palaces, parliamentary complexes, museums, theaters, and convention centers in major urban centers and by allowing presidents and prime ministers to steer funds to their domestic political supporters.
However, when Beijing issues loans or export credits that are priced at or near market rates, it does not give much weight to foreign policy considerations; Chinese state-owned lenders favor “bankable,” revenue-generating projects—like oil refineries, steel mills, and toll roads—that can turn a profit and facilitate debt repayment.
The BRI is often characterized as a grand strategy for building alliances, projecting influence abroad, and reshaping the international balance of power. But the authors find that the BRI is, first and foremost, a strategy for managing structural economic problems inside China. The rapid expansion of Beijing’s dollar-denominated international lending program addresses three domestic challenges—an oversupply of foreign currency, high levels of industrial input overproduction, and the need to secure natural resources that the country lacks in sufficient quantities at home. Consequently, when overseas borrowers agree to buy construction inputs (like steel and cement) that are oversupplied in China and absorb the country’s surplus dollars, they are helping Beijing manage its own economic problems. By accepting loans that are collateralized against future natural resource export receipts, they are also helping fuel China’s continued economic growth.
The authors find that Chinese government-financed development projects have major impacts on economic growth in the countries and subnational localities where they take place. Their statistical analysis reveals that the average Chinese development project increases a host country’s economic growth rate by 0.95 percentage points two years after the funding for the project is approved. These results imply that, if a recipient country with a baseline economic growth rate of 2% chooses to accept three additional Chinese development projects, it can reasonably expect to increase its rate of economic growth to 4.85% (within two years of China agreeing to fund the projects). The authors find that these economic impacts materialize quickly (within 2-5 years) and they are especially strong in Africa.
Another important discovery is that BRI-like projects—involving roads, railways, bridges, and tunnels—substantially reduce economic inequalities within the districts and provinces where they take place. The authors find that the implementation of one additional Chinese government-financed transportation infrastructure project generates a 10 percentage point reduction in the concentration of economic activity within the average district in a low-income or middle-income country.
While Chinese development finance is effective, the authors of Banking on Beijing find that it is not particularly safe: Chinese development projects fuel corruption and political capture, instigate conflict, degrade the natural environment, and create debt sustainability challenges.
According to the authors, there is rot in the system that China created to fast-track the approval and implementation of development projects: Beijing asks for project proposals and loan applications from politicians rather than technocrats (usually in the Office of the President or the Prime Minister), which often leads to projects being green-lit that disproportionately benefit the core political supporters of the President or Prime Minister. The average political leader’s home province sees an increase of 52% in funding from Beijing during the years when he/she is in power, but this political capture effect vanishes when the leader leaves power. The authors also document that, in the run up to elections, politically consequential jurisdictions see sharp increases in Chinese government funding.
Another finding from the book is that Chinese debt-financed development projects are especially vulnerable to corruption. No-bid commercial contracts are being issued to Chinese state-owned enterprises (SOEs) that already have a presence on the ground and thus the ability to quickly mobilize as soon as a loan application is approved. Chinese SOEs and the host country politicians who are responsible for submitting loan applications have institutionalized a simple but effective deception: they first inflate the cost of the underlying commercial contract that the loan will finance, and then develop a side agreement to split the “extra profits” (illicit proceeds) from the commercial contract.
Banking on Beijing also explains why the BRI has become a lightning rod for controversy. China’s allies and clients lavish praise on Beijing for its willingness to bankroll the “hardware” of economic development—highways, power plants, electricity grids, and telecommunication systems—and address local needs that traditional donors and creditors have neglected. However, China’s critics and rivals claim that its projects have an array of negative side effects. The authors argue that neither side is entirely right—or wrong. Global public opinion about the BRI is divided because of a fundamental tension between safety and efficacy—or risk and reward—that lies at the heart of China’s overseas development program.
Given that China will remain a major source of international development finance for the foreseeable future, the authors stress that developing world leaders need to step up their efforts to mitigate the risks of relying upon Beijing as a financier of first resort.
Beijing has taken far-reaching measures to shield its foreign lending and grant-giving activities from public scrutiny. However, the authors of Banking on Beijing overcame this impediment by collaborating with AidData—a research lab at William & Mary—to assemble the world’s most detailed and comprehensive dataset of Chinese government-financed development projects in low-income and middle-income countrie
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