20 Jan 2017
China’s ‘Belt and Road’ Initiative – Challenges and Opportunities
By Dr Peter Wolff, German Development Institute / Deutsches Institut für Entwicklungspolitik
The Belt and Road initiative aspires to put Asia and countries in the Middle East, Europe and Africa on a new trajectory of higher growth and human development through infrastructure connectivity, increased trade and investment. This paper discusses some of the challenges of the Belt and Road initiative and draws lessons from existing regional cooperation programs in Asia. It argues for common approaches to infrastructure development and regional cooperation by supranational institutions, particularly the development banks, and suggests a higher degree of multilateralisation of the Belt and Road initiative. It also points to the challenges of developing new approaches for a new quality of growth, taking into account the agreed goals of the Agenda 2030 for Sustainable Development and the Paris agreement on combating climate change.
Introduction: Growth and sustainable development through connectivity and economic cooperation
The world is facing a seemingly permanent slowdown in economic growth after the global financial crisis. Trade and investment growth has been on the decline since several years and it appears that the reasons for this development are rather structural than cyclical. Monetary and fiscal policies in OECD countries as well as in emerging markets are facing severe limitations of effectiveness. Therefore, new ways for stimulating growth are high on the agenda. In order to foster investment in industry and services and increase employment opportunities, infrastructure investment on a large scale as well as trade and investment agreements have become central to the economic policy debate. The scaling up of infrastructure investment is seen as a strategic pathway to lift global growth and foster employment creation and sustainable development.
Estimates of infrastructure 'gaps' amount to trillions of US $. Particularly in Asia the need for infrastructure investments in energy, transport, water, communication is enormous. The Asian Development Bank estimates the need for USD 8 trillion in infrastructure spending in Asia between 2010-2020.
Against this background China's Belt and Road initiative has gained tremendous interest as a strategic vision for intensifying trade and investment flows and lend new dynamism to the development trajectories of countries from Asia to Europe and beyond. Potential benefits are expected by intensifying regional supply networks to sustain competitiveness, lower tariff and nontariff barriers (NTBs) to trade, thereby decreasing the cost of importing inputs and favoring participation in value chains. Since in emerging markets and developing countries alike new policies and institutions are needed to shift towards higher value-added activities, foster entrepreneurial development and promote innovation to sustain growth in productivity, China's Belt and Road initiative is regarded as a welcome shift of the economic policy debate from macroeconomic to structural policies (OECD, 2015).
How can countries seize the opportunity of integrating into regional and global value chains and thereby increase trade and investment? For Asia this question is of particular relevance, since in a medium term perspective China will transfer part of its labour intensive industries to other countries in the process of rebalancing its economy. This also entails that in the future Chinese foreign investment will be less oriented towards natural resources and more towards manufacturing. China is planning to shift part of its production base overseas, but this would require that the necessary infrastructure exists, and the right policies are in place, in order to absorb these investments.
The Belt and Road initiative is expected to stimulate Asian and global growth by increasing trade flows and infrastructure development. Trade integration is already fairly advanced in parts of Asia, with the Association of Southeast Asian Nations (ASEAN) already operating as a Free Trade Area with the establishment of the ASEAN Economic Community (AEC) at the end of 2015. South Asia is trailing behind, but attempts to seize the opportunities of a greater degree of connectivity for trade and investment are on the way. In Central Asia, where economies are mainly resource-based, trade integration has been taking a slower pace and is limited further by the slowdown of commodity prices.
While the high aspirations for a scaling-up of infrastructure and industrial investments provide a positive vision for economic growth across Asia and beyond, it should not be forgotten, however, that economic growth has to be of a new quality in the 21st century. The Agenda 2030 for Sustainable Development and the Paris Agreement on combating climate change, both being subscribed to by all countries along the Belt and Road, require a different growth model and different pathways for infrastructure and industrial investment. Investments require new technological solutions for decarbonising the economies to a zero level during the coming decades. This will have to be accompanied by lower energy intensity in trade, by a low-carbon urbanisation process and by efficient low-carbon energy technologies. The Belt and Road initiative has to take this new quality of growth into account from the beginning.
This paper attempts to give a brief overview of some of the opportunities and challenges of the initiative. It does rather neglect the complex foreign and security policy considerations which are an important feature of the Belt and Road initiative. The second chapter gives a brief description of the Belt and Road initiative, chapter 3 draws some lessons from the extensive experience with connectivity and regional cooperation programs in Asia for which the Asian Development Bank has been an important supporter. Chapter 4 deals with the challenges of scaling-up finance and chapter 5 concludes with a view on the institutional challenges of cross border connectivity and of the Belt and Road initiative as a whole.
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