Sun, Oct 15, 2017 - Page 6 News List

The need for ‘Belt and Road’ exists

By Shang-jin Wei 魏尚進

Since 2013, China has been pursuing its “Belt and Road” initiative, which aims to develop physical infrastructure and policy linkages connecting more than 60 countries across Asia, Europe and Africa.

Critics worry that China might be so focused on expanding its geopolitical influence to compete with the likes of the US and Japan that it could pursue projects that make little economic sense. However, if a few conditions are met, the economic case for the initiative is strong.

As a recent Asian Development Bank report confirms, many Belt and Road countries are in urgent need of large-scale infrastructure investment — precisely the type of investment that China has pledged.

Some, such as Bangladesh and Kyrgyzstan, lack reliable electricity supplies, which is impeding the development of their manufacturing sectors and stifling their ability to export. Others, like Indonesia, do not have enough ports for internal economic integration or international trade.

The initiative promises to help countries overcome these constraints, by providing external funding for ports, roads, schools, hospitals, and power plants and grids. In this sense, the initiative could function much like the US’ post-1945 Marshall Plan, which is universally lauded for its contribution to the reconstruction and economic recovery of war-ravaged Europe.

Of course, external funding alone is not sufficient for success. Recipient countries must also undertake key reforms that increase policy transparency and predictability, thereby reducing investment risk. Indeed, implementation of complementary reforms will be a key determinant of the economic returns on Belt and Road investments.

For China, the investments are economically appealing, particularly when private Chinese firms take the lead in carrying them out.

In 2013, when China first proposed the initiative, the country was sitting on US$4 trillion in foreign-exchange reserves, which were earning a very low dollar return of less than 1 percent per year. In terms of China’s own currency, the returns were negative, given the expected appreciation of the yuan against the US dollar at the time.

In this sense, the initiative’s investments are not particularly costly for China, particularly when their far-reaching potential benefits are taken into account. China’s trade-to-GDP ratio exceeds 40 percent — substantially higher than that of the US — owing partly to underdeveloped infrastructure and inadequate economic diversification among China’s trading partners.

By addressing these weaknesses, China’s investments can lead to a substantial increase in participant countries’ and China’s own trade volumes, benefiting firms and workers substantially.

This is not to suggest that such investments are risk-free for China. The economic returns will depend on the quality of firms’ business decisions. In particular, because efficiency is not the primary consideration, Chinese state-owned enterprises (SOEs) might pursue low-return projects. That is why China’s SOE-reform process must be watched carefully.

Nonetheless, while the initiative is clearly driven partly by strategic objectives, a cost-benefit analysis shows that the economic case is also very strong — so strong, in fact, that one might ask why China did not undertake it sooner.

Even the US and other countries could reap significant economic returns. A decade after the global financial crisis erupted, recovery remains weak and tentative in much of the world. Bold, large-scale infrastructure investments can provide much-needed short run stimulus to global aggregate demand.

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