Features | Diplomacy | Economy | East Asia

China’s Developing World Edge

The IMF and World Bank should take a leaf from China’s focus on developing world infrastructure.

By Richard Ghiasy, Stephan Mothe, and Frances Pontemayor for

Since Deng Xiaoping’s administration launched its Reform and Opening Up policies in the late 1970s, China has integrated hundreds of millions of its citizens into the global economy, resulting in poverty alleviation on an unprecedented scale. This is in no small part due to sustained investment in both physical and social infrastructure. By focusing on upgrading its water, energy, transport and telecommunications systems, China has shown an intrinsic understanding of an indispensable developmental building block.

Expanding on its domestic successes, China has since been replicating this approach in the developing world, filling a public good vacuum that global development institutions, namely the International Monetary Fund (IMF) and the World Bank, have not tackled with the necessary intensity. In the process, China has been underwriting global poverty reduction in steel and cement; gaining not only access to the developing world’s resources and markets, but also stronger partnerships on many levels. Two regions – Central Asia and especially Sub-Saharan Africa (SSA) – stand out for the breadth and depth of Chinese involvement. Is China helping to pave their path to modernity?

Development via Infrastructure?

China’s modern leaders took note of the role that large infrastructure projects played in the development of the world’s two largest economic hubs, the United States and Europe. Investing as much as 9 percent of GDP in infrastructure in the 1990s and 2000s, China laid the foundations for its current success. At its peak, in the years between 2001 and 2006, more was spent on roads, tracks, airports and other fixed assets than had been spent in the previous fifty years put together. Nearly every corner of the country is being linked, regardless of soil, latitude or climate conditions; high-speed train lines already connect most of the major urban hubs and highways will connect more than 90 percent of cities with a population of more than 200,000 by the end of 2015. In that same year, China’s total highway length is expected to surpass that of the U.S. As of this year, China’s mobile phone users reached a staggering 1.11 billion; and it has achieved an Internet penetration rate of 42.1%, giving it the world’s largest online population. Allocation of public resources to infrastructure has allowed China to maximize and exploit its competitive advantages and has made it a magnet for foreign enterprises and investors. Infrastructure both embodies and catalyzes development.

China’s social infrastructure, its hospitals and schools, are not too far behind. Although significant deficiencies persist, both the health and education systems have made great strides despite the challenges of managing such a vast population. Life expectancies have risen steadily over the past thirty years, while maternal and infant mortality have plummeted. The country’s top universities are pumping out graduates with the knowledge and attitudes necessary to compete on the global stage, and are increasingly attracting top foreign talent as well. According to a McKinsey study, by 2030, China will account for 30% of the world’s new college‐educated workers. With the Chinese government spending over US$250 billion a year on education, it would not be surprising to see Tsinghua, Peking or Fudan universities begin to challenge the best of the West over the next few decades. Thanks to their lower fees as well as grants and scholarships from the Chinese government, many of these schools’ international students are from developing nations. Upon visiting six African nations on his first international trip as China’s president, Xi Jinping announced 18,000 new scholarships for African students to study in Chinese universities over the next three years. Many of the recipients will return home with honed skills and fresh ideas on how to jumpstart their countries’ economies. Increasingly, they will arrive to find their governments on honeymoon with Beijing – not Washington.

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Despite a historical legacy first built on financing construction and reconstruction, the IMF and World Bank have promoted different objectives in their engagements with the developing world since the 1960s – increasingly shaped by social aid. The success of the Marshall Plan in putting Western Europe back on its feet after World War II paved the way for that model to be applied in the newly decolonized nations of Africa. Thus, for much of the 1950s and 60s, the Bretton Woods institutions avidly promoted infrastructure and industrialization as the prime means of accelerating the region’s economic development. However, during Robert McNamara’s tenure as U.S. Secretary of Defense, Cold War considerations led to an overhaul of institutional strategies and a new focus on poverty alleviation, especially via social programs geared towards education and agriculture. In the 1980s, structural adjustment programs (SAPs) came to the fore, tying eligibility for aid to economic liberalization, i.e., austerity, privatization and deregulation. Following the end of the Cold War, poverty alleviation once more became a priority, now with a focus on the poorest of the poor. Today, the ambitious Millennium Development Goals, committed to by the UN’s 189 member states in 2000, are attempting to measurably address issues of extreme poverty, education, health, gender equality and environmental sustainability by 2015.

The achievements of each initiative are undeniable, but this inconsistency has seriously limited the efficiency and long-term effectiveness of their contributions and even led to unintended harm. Although “traditional donors” have injected more than US$1 trillion of aid into SSA since the 1950s; because of the lack of a clear, consistent long-term strategy the region continues to face widespread poverty, disease, corruption, and prevalent unemployment. If international institutions’ efforts have proven inadequate, is it not natural that China and others step in?

A Win‐Win Scenario

In addition to their lack of experience with large infrastructure construction projects, many Central Asian and SSA nations also lack the financial resources necessary for these sorts of projects. In many cases, this situation persists in spite of these countries possessing abundant natural resources. Meanwhile, China, recognizing that its rapid domestic growth demands resources far exceeding its own supply, has concluded that it must seek them elsewhere. Partly to this end, zou chuqu, known in English as the “Going Out” strategy, was launched in 1999. This strategy comprises outgoing foreign direct investment (FDI), engineering and construction projects abroad, and the export of Chinese goods and services. It couples resource acquisition and trade diversification with opportunities for Chinese companies to increase their international presence and competitiveness. Under this mandate, China has been willing to give these “disconnected countries” a much-needed hand with few strings attached. One of the main manifestations of this strategy is the Resource for Infrastructure (R4I) approach. The result has largely been a win-win scenario.

R4I creates a symbiotic partnership between states. Chinese policy banks, such as the China Development Bank or China Export‐Import Bank, offer concessionary loans or grants to resource‐rich countries such as Angola, Ghana, Nigeria and Kazakhstan, to be used for infrastructure projects, often carried out by Chinese state-owned enterprises (SOEs). Contracts differ on a case-by-case basis and loans may be repaid through a variety of methods, but usually include giving China the right to access certain mineral resources. In these cases, China does not necessarily get a discount on the resources extracted – it still pays the market price for the goods. But it does receive priority in purchasing the commodities it desires. The foreign currency earned is then channeled towards repaying the loans. A loan-for-oil model was highly popularized in Angola, but is now widely used in China’s engagements throughout the world, with the model expanded to include other resources. In Ethiopia, for example, sesame seeds have become an increasingly large bargaining chip.

This strategy for securing energy resources offers a stark contrast to that of Western countries, which often rely on private companies that are focused solely on extraction and operate more strictly under market mechanisms. Chinese package deals most often involve several SOEs, from financing institutions to prospecting, extracting, processing, and trading companies to engineering and construction firms, all of which count with the explicit backing of the state. The benefits of the contracts extend far beyond the value of the resources exchanged, leaving behind tangible infrastructure and developing deeper partnerships embedded in official policy instruments.

These kinds of deeper partnerships have helped boost China’s trade with Central Asia’s five nations. Trade volume increased 30‐fold between 2000 and 2010, to reach nearly US$30 billion. The two most notable Chinese‐financed infrastructure projects in the region are the 1,833 km natural gas pipeline that runs from Turkmenistan through Uzbekistan and Kazakhstan into China’s Xinjiang SAR; and a 2,228 km oil pipeline that runs from Kazakhstan’s Caspian Sea shores and enters China just north of the gas pipeline. China’s leading ICT provider Huawei provided the communications network for the latter. The historic Uzbek city of Bukhara has been linked to Beijing by highway. Smaller but notable projects include the extension of power lines to link the northern and southern electric grids of mountainous Kyrgyzstan, and construction of the Shar-Shar tunnel and power stations in impoverished Tajikistan. In Afghanistan, Chinese oil behemoth China National Petroleum Corporation (CNPC) has invested US$200 million in oil fields in the north; and SOEs Metallurgical Corporation of China (MCC) and Jiangxi Copper Corporation (JCC) have invested some US$3 billion in the Mes Aynak copper mine, although the project has been stalled by excavation works on an ancient Buddhist city unearthed at the site.

This drive to strengthen the Central Asian infrastructure base also forms part of a set of preemptive measures to curb insurgency spillovers into China’s western regions. Beijing sees insurgency as a product of poverty and weak governance, both of which thrive when infrastructure and FDI are lacking.

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Although relations between China and SSA have deepened considerably since the Middle Kingdom’s economic boom, at least one example of large‐scale cooperation dates back to the days of Mao. The 1,800km TAZARA Railway between Zambia and Tanzania was built with Chinese finance and manpower and was completed two years ahead of schedule in 1975 after being rejected as unfeasible by a World Bank mission. More recently, in 2012, Angola’s Benguela line, which had fallen into disuse following the 27-year civil war, was rehabilitated, funded by loans obtained by mortgaging future oil supplies to China. Beijing now plans to link the TAZARA and Benguela lines, effectively creating a Trans-African Railway. Farther north, the Chinese SOE Sinohydro has been involved in numerous projects in Côte d’Ivoire, a net energy exporter whose dams supply power to several West African nations. On a visit to Beijing in June, Sierra Leone’s president signed an US$8 billion infrastructure deal with China that includes a US$1.7 billion contract with China Kingho Energy Group for the construction of a port, a mine, power facilities and a 250-kilometer railway. Africa’s largest dam, Sudan’s US$1.8 billion Merowe Dam, was built with Chinese financing and South Sudan, Africa’s newest nation, is already scheduled to receive a US$8 billion loan, much of which is earmarked for infrastructure. Chinese companies have also put their hands into the construction of both air and seaports, with projects in Cape Verde, Mauritania, Kenya, Tanzania and Mauritius, among others. Huawei, who has allied with the UN Global Compact, is bridging the digital disconnect that prevails in most SSA nations.

These are the sorts of projects that have led African Union (AU) chairman Hailemariam Desalegn, who has stated that “the lack of adequate infrastructure is the nemesis of development,” to express his “deepest appreciation to China for investing billions in this sector to assist us in our development endeavors.” His praise should come as no surprise: China financed and completed construction on the AU’s US$200 million headquarters in 2012. Indeed, according to the Washington-based Center for Global Development (CDG), China has provided or committed US$75 billion in ODA to the continent, and China’s own Ministry of Foreign Affairs claims that FDI reached US$17 billion last year and puts China-Africa bilateral trade at nearly US$200 billion per year.

Not a Panacea

Foreign aid follows interests and, clearly, altruism is not the primary driver of China’s policy. The support given to infrastructure construction in these regions has its limitations.

First, because of their extractive nature, the benefits of infrastructure projects may not be equitably distributed, particularly geographically. While investments have been made in all of the SSA and Central Asian nations, resource-rich countries have received the lion’s share. In a number of projects, the physical infrastructure constructed simply takes the shortest route from the point of extraction out of the country, limiting its usefulness to society at large. Moreover, construction has rather frequently ignored social and environmental considerations on par with international standards, resulting in unintended consequences. The same goes for the extraction of the resources obtained in exchange. As recently as August 2013, CNPC’s operations in Chad were suspended due to serious contamination in oil exploration sites. China should lead by example in these nations and adhere to the strictest international benchmarks for environmental concern, contributing to trust‐building with both local populations and the international community.

Second, there is a long-standing reputation of Chinese companies to bring in imported Chinese labor to these regions, which already face severe unemployment. In fact, this reputation is often exaggerated; several governments have successfully negotiated quotas for local employment into investment contracts. Nonetheless, widespread rumors persist, resulting in anti-China protests as witnessed in Kazakhstan and Kyrgyzstan, and galvanized political opposition to closer relations with China in a handful of African countries. Also, as part of package deals with SSA and Central Asian nations, trade agreements have allowed cheap Chinese imports to flood domestic markets, overwhelming the often fledgling local industry. While affordable consumer goods such as refrigerators, cell phones and motorcycles have the capacity to raise living standards, the competition has not been welcomed by local producers. As China’s manufacturing industry moves up the ladder, passing on the best practices of low‐end industries to developing countries is a moral imperative.

Third, the Chinese brand association with poor quality, even in infrastructure, is highly detrimental both to recipient countries and to China’s image. A case in point is Luanda’s General Hospital, which was paid for with a US$8 million credit line from Beijing and built by the Chinese SOE COVEC. In 2010, only four years after its completion, it exhibited critical structural defects, leading to the evacuation of its patients and a new bid to rebuild the hospital. Although oil continues to flow and Chinese companies continue to build, China’s standing with the Angolan public has yet to fully recover. Similar experiences in other countries mean that discontent is not limited to Angola.

Fourth, China’s no strings attached, strictly business policies in its engagement with developing nations are a threat to its ascension as a global leader. China has made deals with infamous characters in Sudan, the Democratic Republic of Congo and Turkmenistan. Although this sullies its image in the West, it does resonate as a sign of respect for sovereignty in countries with memories of intervention by colonial powers and Cold War interests. While China’s approach surely is neither designed nor guaranteed to lead to political liberalization in these countries, infrastructure has the potential to empower the populations it serves. Better-informed and connected people are more inclined to actively participate in politics and keep their governments accountable, contributing to what Zbigniew Brzezinski refers to as “global political awakening.”

Undoubtedly infrastructure is not a panacea. And while the West has been dedicated to development aid for over half a century, China is a relative newcomer to the game and the long-term sustainability of its approach remains to be seen. What is clear, however, is that developing countries are receiving a much-needed hand in a long neglected sector, with more favorable conditions than ever before. Some countries, such as Kyrgyzstan, have bound themselves to depend heavily on Beijing for the near future; others, like Angola, have become adept at negotiating ever more advantageous deals, often by playing the countries competing for its resources against each other. Meanwhile, both Chinese and recipient governments are learning the importance of accountability.

A Rethink for the West

In tackling a nation’s development, the rationale behind early‐stage allocation of resources to infrastructure as an indispensable building block for growth is not hard to comprehend. Negligence of this building block by the IMF and World Bank, however, is. The IMF and World Bank are no longer equipped to deal with the changing global landscape, and should engage in deep introspection about their approach to global development aid if they are not to further lose relevance and trust from the developing world. Their inconsistency has allowed China to move in and charm – a situation only exacerbated by the growing likelihood of a BRICS Development Bank.

Despite China’s successes in nurturing its ties with the developing world, the West should not declare defeat: traditional and emerging donors can coordinate and complement the assistance each offers to developing nations. Large ventures such as the proposed New Silk Road provide excellent opportunities for cooperation. The West can also utilize its superior capabilities in institution building and social aid to ensure that new constructions are used to their full potential. Moreover, it can support Chinese-led efforts by working with local governments to assess potential environmental and social impacts, and pressuring contractors to follow international standards.

The global development finance institutions must once more prioritize infrastructure. What good are doctors with no hospitals, teachers with no schools, and judges without courts? And what good are these buildings without power lines, pipes, and roads to connect them?

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Stephan Mothe writes for the Shandong Academy of Social Sciences (SDASS). Frances Pontemayor is Liaison for Chinese SOE MCC – Guam strategic investments. Richard Ghiasy is a Research Fellow at the Afghan Institute for Strategic Studies (AISS) and a former analyst at the Embassy of the Islamic Republic of Afghanistan to the PRC.