There is strong economic case for B&R initiative

By Shang-Jin Wei Source:Global Times Published: 2017/11/6 21:23:39

Illustration: Luo Xuan/GT


Since 2013, China has been pursuing its Belt and Road (B&R) initiative, which aims to develop connectivity among more than 60 countries and regions across Asia, Europe and Africa. Critics worry that China may be so focused on expanding its geopolitical influence to compete with the likes of the US and Japan that it may pursue projects that make little economic sense. But, if a few conditions are met, the economic case for the initiative is strong.

As a recent Asian Development Bank report confirms, many countries and regions along the route urgently need 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 B&R initiative promises to help countries overcome these constraints by providing external funding for ports, roads, schools, hospitals, and power plants and grids.

External funding alone is not sufficient for success. The recipients must undertake key reforms that increase policy transparency and predictability, thereby reducing investment risk. Implementation of complementary reforms will be a key determinant of the economic returns on B&R investments.

For China, the B&R investments are economically appealing, particularly when private Chinese companies take the lead. In 2013, when China first proposed the initiative, the country had $4 trillion in foreign-exchange reserves, which were earning a very low US dollar return (less than 1 percent a year). In terms of China's currency, the returns were negative, given the expected appreciation of the yuan against the US dollar at the time.

Thus B&R 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 B&R investments can lead to a substantial increase in the trade volumes of participant countries and China itself, benefiting companies 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 companies' business decisions. In particular, because efficiency is not the primary consideration, Chinese State-owned enterprises (SOEs) might pursue low-return projects. That is one reason why China's SOE reform process must be watched carefully. Nonetheless, while the B&R initiative is clearly driven partly by strategic objectives, a cost-benefit analysis shows that the economic case is also very strong - so strong that one might ask why China didn't undertake it sooner.

Even the US and other countries may 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. The US, for one, is likely to see a surge in demand for its exports, including cars, locomotives, planes and high-end construction equipment, and financial, accounting, educational and legal services.

In the longer term, the new infrastructure will ease logistical bottlenecks, reducing the costs of production inputs. The result will be higher productivity and faster global growth.

If B&R projects are held to high environmental and social standards, significant progress can also be made on global challenges such as climate change and inequality. The more countries choose to participate in these projects, the better the chance of achieving these standards, and the greater the global social returns will be.

In an era when some of the world's most influential countries are turning inward, talking about erecting trade barriers and constructing border walls, the world needs initiatives focused on building bridges and roads, both literal and figurative - initiatives like the B&R initiative.

The author is a former chief economist of the Asian Development Bank, and is professor of Finance and Economics at Columbia University. Copyright: Project Syndicate, 2017.

Posted in: INSIDER'S EYE

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