China’s One Belt, One Road may be a dead end for African countries
Debt financing is commonly tied to the use of labour from China, there is little transparency about loan conditions and money is flowing into countries with weak governance
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 address 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 have 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. Jinping 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 financial 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 show 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 it 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 their loan terms”. This makes it difficult to accurately assess their loans’ fiscal burden on borrowing countries. 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, however, 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 Chinese 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 investments by 2009. Nevertheless, 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 therefore limits employment and business opportunities for locals.
But the red flag over China’s development co-operation has probably been the accusation of its involvement in corruption in developing countries. For instance, Ann-Sofie Isakssona and Andreas Kotsadam recently provide strong empirical 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.
• Kodongo is associate professor in finance at Wits University.