China’s Belt and Road Initiative is becoming a massive debt trap

First Published: 2018-03-29

Beijing is creating debt traps to turn countries into vassal states

by Deepak Lal

First Published at Business Standard: Wed, March 28 2018

For many participants in China’s (BRI), major initiative of Dream”, is becoming a debt trap. This is resonant of one of China’s major methods of dealing with weaker “barbarians” as outlined in an earlier column (“China’s geopolitical resurgence”, December 20, 2013). tool was “induced economic dependence”. This was used to convert self-sufficient nomad warriors, Xiongnu, after 140 years of protracted war, into vassals, once they were made dependent on initially free Han-produced goods, which were later converted into “exchange for services rendered”, making Xiongnu de facto vassals. This was made de jure by a vassalage treaty in 51 BC. (Edward Luttwak, Rise of vs. Logic of Strategy, 2012).

modern instrument for converting barbarians into vassals was invented by Chen Yuan, who had converted bankrupt Development Bank (CDB) into main instrument for channeling China’s burgeoning infrastructure spending. During global financial crisis it became a major instrument of China’s foreign economic policy, as discussed in an earlier column (“China’s statist turn — II: ‘development’ bank”, July 19, 2013).

gave collateralised loans for infrastructure and deliveries of natural resources by state-owned companies in Africa and infrastructure was built by Chinese workers and Chinese state enterprises. natural resources were delivered to Chinese state-owned companies. By 2010, lending was greater than loans from World Bank, and Export-Import Bank of United States combined. This recipient debt financed model has become basis for Chinese

It is a programme to create debt traps for countries which Chinese want to turn into their vassals for geostrategic reasons. A recent paper by Center for Global Development (CGD) (“Examining Debt Implications of from a Policy Perspective”, Policy Paper 121, www.cgdev.org) has provided an assessment of these debt traps for 23 of most vulnerable among 68 countries that are potential borrowers. They have integrated lending pipeline into borrowing country’s debt at end of 2016. countries likely to suffer a debt trap are identified by a debt threshold at which rising public indebtedness is associated with falling economic growth, leading to debt distress and defaults. Based on recent research, they find “a statistically significant threshold effect in case of countries with rising debt-GDP ratios between 50-60 per cent. Using this threshold they find that there are 10-15 countries which could suffer debt distress due to related financing, of which 8 countries are at high risk of facing a debt trap”. (See graphic)

graph

Of these, should be concerned about at least three: Sri Lanka, and Pakistan, as infrastructure being debt financed under in these countries are part of Chinese “String of Pearls” port developments that aim to encircle In Sri Lanka, $8-billion loan at 6 per cent interest to finance construction of Hambantota port had already created a debt crisis with unwilling to service debt. In July 2017, agreed to a debt-for-equity swap, along with a 99-year lease for managing port. But Sri Lankan citizens have clashed with police over a new industrial zone surrounding port, as it is seen as impinging on country’s territorial integrity.Pakistan has borrowed 80 per cent of $62-billion of (CPEC) projects at interest rates as high as 5 per cent and is a prime candidate for distressed debt. There is growing opposition to projects particularly in location of

But are real geostrategic flashpoint for Chinese neo-colonialism, using its cash to create dependent client states. largest of Chinese projects under include an $830-million upgrade of airport, with a bridge to link it to capital costing $400 million, and relocation of major port. It has been claimed by Opposition that these Chinese projects account for some 70 per cent of Maldavian debt and $92 million per year paid to China, which is 10 per cent of Maldivian Budget.

and Bharath Gopalaswamy (“Is Abdullah Yameen handing over to China”, Foreign Policy, March 21, 2018) argue that “is on verge of conceding its sovereignty to Maldivian president has been accused of “allowing a Chinese land grab of 16 islands and inflating costs for personal game”. He has also rammed a free-trade agreement signed with Chinese through Parliament in one day, without discussion. In addition, Mr Yameen has been accused by Japanese of secretly transferring goods to North Korean flagged ships from Maldivian tankers, which Opposition claims are controlled by Mr Yameen’s family. This violation of UN sanctions has caught attention of US.

India, despite its military intervention in 1988 to preempt a coup against then President Abdul Gayoom, has so far not intervened to prevent this neo-colonial takeover by in its own sphere of influence. Perhaps with Mr Yameen’s breaking of North Korean sanctions, time has come for together with US and to militarily challenge this Chinese takeover of Maldives, restoring Mr Yameen’s exiled predecessor, who could cancel Chinese debt on grounds of it being “odious”.

This doctrine of “odious debt”, as Michael Kremer and Seema Jayachandran (“Odious Debt”, Finance and Development, June 1, 2002) have argued, goes back to peace negotiations after Spanish-American war. It is analogous to law in many countries that individuals do not have to repay if others borrow fraudulently in their name. Similarly, it has been argued that “sovereign debt should not be transferable to a successor government if it was incurred without consent of, and without benefiting people.” South Africa’s post-apartheid government was advised by Archbishop Desmond Tutu and to declare debt incurred by apartheid regime as “odious”. But it demurred, fearing that a default would hurt its ability to attract foreign investment. This danger would not apply to a successor regime in if India, US and jointly deposed Mr Yameen and allowed his successor to default on “odious” Chinese debt. This would also set an example and a precedent for other small, poor but geostrategically important countries being converted into Chinese vassals by debt traps it is creating though its program, to repudiate their Chinese “odious debt” and avoid fate of ancient Xiongnu.


Deepak Lal is the James S. Coleman Professor Emeritus of International Development Studies at the University of California at Los Angeles, professor emeritus of political economy at University College London, and a senior fellow at the Cato Institute. He was a member of the Indian Foreign Service (1963-66) and has served as a consultant to the Indian Planning Commission, the World Bank, the Organization for Economic Cooperation and Development, various UN agencies, South Korea, and Sri Lanka. From 1984 to 1987 he was research administrator at the World Bank. Lal is the author of a number of books, including The Poverty of Development Economics; The Hindu Equilibrium; Against Dirigisme; The Political Economy of Poverty, Equity and Growth; Unintended Consequences: The Impact of Factor Endowments, Culture, and Politics on Long-Run Economic Performance; and Reviving the Invisible Hand: The Case for Classical Liberalism in the 21st Century.

Visit Dr. Lal’s Archive Here…

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