TOPIC
WHY CHINA’S ‘ONE BELT, ONE ROAD’ PLAN IS DOOMED TO FAIL
Eerie similarities with Japanese scheme
20 years ago suggests a future of white elephants, wasted money and corruption
on a scale never seen before
6 AUG 2016
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Japanese prime minister Keizo Obuchi had a
similar, ill-fated, idea to China’s One Belt, One Road in the 1990s. Photo: AFP
Facing a deep slowdown after years of
investment-fuelled growth that culminated in a huge property and stock market
bubble, the leaders of Asia’s largest economy come up with a cunning plan. By
launching an initiative to fund and construct infrastructure projects across
Asia, they will kill four birds with one stone.
Read more from This Week in Asia
They
will generate enough demand abroad to keep their excess steel mills, cement
plants and construction companies in business, so preserving jobs at home. They
will tie neighbouring countries more closely into their own economic orbit, so
enhancing both their hard and soft power around the region. They will further
their long term plan to promote their own currency as an international
alternative to the US dollar. And to finance it all, they will set up a new
multi-lateral infrastructure bank, which will undermine the influence of the
existing Washington-based institutions, with all their tedious insistence on
transparency and best practice, by making more “culturally sensitive” soft
loans. The result will be the regional hegemony they regard as their right as
Asia’s leading economic and political power.
Consistent political will is needed to ensure one belt, one road initiative succeeds
If
you think you’ve seen this movie before, you probably have. That could be an
outline of China’s “One Belt, One Road” initiative, launched last year to great
fanfare, and relentlessly promoted by loyal officials ever since. But it’s
actually a description of a strikingly similar plan rolled out by Japanese
prime minister Keizo Obuchi in the 1990s. That too promised to provide work for
Japan’s recession-hit construction sector by building Japanese-funded
infrastructure projects around Asia. And it even included a proposal – never
realised – to establish an Asian Monetary Fund to lend to regional governments
on easier terms than either the IMF or World Bank.
Unfortunately
for Beijing, the precedent is hardly encouraging. From the start the scheme was
plagued by bickering over conditions and allegations of corruption. A handful
of infrastructure projects did get built, but the reality fell woefully short
of Tokyo’s grandiose dreams. Far from cementing Japan’s economic ascendancy
across Asia, the project left a legacy of bad blood, and marked the beginning
of a financial retreat from around the region that Japan has only recently
begun to reverse.
All
the signs are that China’s One Belt, One Road plan will similarly fail in its
main objectives. First, the idea that infrastructure projects in Central and
South East Asia could absorb a sizeable portion of China’s excess industrial
capacity is simply unrealistic. Consider steel. Currently China’s steel mills
can turn out some 1.1 billion tonnes of the metal annually. Yet even with
economic stimulus efforts in full swing, no one expects domestic demand to
exceed 700 million tonnes this year. It is hard to imagine China building
enough roads, ports and pipelines across Asia to use up the extra 300 million
tonnes of capacity, especially when you consider that the World Steel
Association forecasts demand in the European Union, the world’s largest
economy, to be just 150 million tonnes this year.
China’s one belt, one road initiative set to transform economy by connecting with trading partners along ancient Silk Road
Beijing
could try. But if it did, it would run into another problem. Asia needs
infrastructure development, but the region’s capacity to absorb new projects is
limited. As China has learned at home, building a new high speed rail line or
state of the art airport is easy enough given plentiful funding. But building a
high speed rail line that is economically viable is altogether more difficult.
Inevitably, if Beijing attempts to pursue projects at a pace and in a number
sufficient to make a dent in its excess capacity, it will end up building white
elephants, wasting money, and encouraging corruption on a scale never before
seen.
China’s one belt, one road plan covers more than half of the population, 75 per cent of energy resources and 40 per cent of world’s GDP
These
constraints mean China’s ambition of using lending tied to the One Belt, One
Road initiative to help promote the yuan as Asia’s international currency of
choice is also destined to fail. What policy-makers had in mind was something
akin to the Marshall Plan, by which the United States pumped money into Western
Europe in the late 1940s to fund post-war reconstruction, so confirming the US
dollar’s position as the world’s dominant reserve currency. But 1940s Europe
was very different from Central Asia today. Europe’s physical infrastructure
may have been destroyed by war, but its know-how and institutional strength in
depth were largely intact. Rebuilding on such foundations was relatively
straightforward.
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Developing Asia’s foundations are still under construction. But
while physical capital like a new port or railway can be built in just a few
years, building the human and institutional capital that allow that port to
operate efficiently and to contribute effectively to economic and social
progress is a slower process. The two need to go hand in hand, which is why
multi-lateral lenders like the World Bank lay such heavy stress on best
practice. The senior officials charged with implementing China’s grand plan
appreciate these capacity constraints, and appear to be scaling down their
ambitions. That’s sensible, but it means the One Belt, One Road initiative will
fall far short of its original objectives, just as its Japanese forerunner did
almost 20 years ago.
http://www.scmp.com/week-asia/opinion/article/1999544/why-chinas-one-belt-one-road-plan-doomed-fail?utm_source=outbrain&utm_campaign=GME-I-beltandroad&utm_medium=ctwia_SEA&cx_source=outbrain&cx_medium=ctwia_SEA&cx_campaign=GME-I
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