The Belt and Road Initiative

The Belt and Road Initiative (B&R)—commonly referred to as One Belt, One Road (OBOR)* is a China-led effort to revive—and broaden—the ancient ‘Silk Road’ trading route that stretched from China, through Central Asia and the Middle East to the Mediterranean in Europe. The goal of the initiative is to invest in necessary infrastructure with the aim of promoting closer economic integration among member economies and boosting cross-border trade, economic growth, and development. The B&R includes both a land ‘belt’ and a maritime ‘road’ that encompasses most of Asia, parts of East Africa, and Europe.

There are currently an estimated 68 member states in total which, according to an interview by McKinsey, accounts for 65% world population, one-third of world GDP and a quarter of global cross-border trade. Projects which have been proposed or are already underway are valued at just under US$ 900 Billion, with China promising to invest approximately US$ 4 Trillion in OBOR countries, in total, though no clear timetable has been set.

(Source: The Economist)

How the Belt and Road Initiative Will Impact Businesses

With proposals including outlays for power plants, new and improved ports, airports, and thousands of kilometers of new road and rail links, the B&R will have a major impact on regional and global commerce. Different member countries—and the firms and consumers within—will benefit in different ways, depending on their specific circumstances.

Pakistan, for example (an enthusiastic supporter of OBOR), boasts a young and reasonably well-educated workforce; however, it suffers from regular power outages and insufficient transport links, both major hindrances to the development of a competitive manufacturing sector. Investment in a transportation corridor between Pakistan and China, along with new coal mines and hydroelectric power via the B&R Initiative promise to address these problems. If successful, Pakistan will be more closely integrated into Factory Asia—in which China is a core component, create more local jobs, deliver lower costs to consumers, and make the country a more attractive place for private investors and foreign manufacturers.

This represents just one prominent example of China’s strategy via the OBOR, focusing on countries in Central and Southern Asia where governments are in greater need of such investment and therefore more likely to be receptive and energetic partners. If successful, the OBOR will result in increased productivity, lower costs faced by producers and consumers, shorter shipping times, and increased economic growth and cross-border trade—to the benefit of countries inside and outside of the OBOR network.

Challenges and Risks

The size and scope of the project are ambitious, posing many challenges—practical and political.

Funding

Funding is a major concern. The Chinese government has promised US$150 Billion annually, along with an additional US$240 Billion coming from the Silk Road Fund, a joint effort by the Chinese central bank, Asian Infrastructure Investment Bank (AIIB), and the New Development Bank. The numbers quoted by governments vary considerably, making a proper accounting difficult. Regardless, this falls far short of anticipated funding requirements for current and future OBOR projects.

Administration & Corruption

Further complications arise due to the intersection of politics, administration, employment, and corruption. Projects are being coordinated across languages, cultures, and institutions. Many local institutions in OBOR countries lack the expertise and experience necessary to oversee such large and complex projects and may also prefer to operate differently than their Chinese counterparts, likely leading to delays. Corruption, a global phenomenon is also endemic to many of the member countries, which may result in waste, contracts going to unsuitable firms, and poor quality of construction. Establishing mechanisms for proper oversight and review will be both critical and difficult.

Employment & Environment

Local workers and politicians alike are hopeful these projects will bring good paying jobs. However, many projects will be carried out by Chinese firms, rather than local ones, in part because many countries lack local firms with the necessary expertise and experience. Using the experience of Chinese firms in Africa, many favor sending in Chinese workers for reasons related to language, culture, skills, productivity, or all four. This will complicate the local politics—as well as costs and execution—related to the B&R Initiative.

Such large-scale projects will likely have an impact on the environment, raising concerns regarding potential environmental degradation and its short and long-term impact, something China itself currently faces.

Politics

Although there is much to like about the OBOR, many remain skeptical. Some have noted that Chinese firms are some of the greatest potential beneficiaries of these projects. With a glut of some materials—such as steel—and drop in domestic demand, Chinese SOEs and other national champions need new markets. Around 50% of Chinese FDI went to OBOR countries in 2016, an increase over 2015, with much of that being directed to Chinese firms with contracts for local projects. This, coupled with Chinese firms gaining majority stakes in key infrastructure abroad, has made some politicians wary and resulted in local protests.

Geopolitics plays a significant role as well. History, continuing tensions in the South China Sea, and China’s experience in Africa have made some partner countries cautious. The perception that China is seeking to increase its ‘soft power’ abroad also feeds into the trepidation of local leaders and, at times, local protests.

Economics

As well, some projects may be unprofitable, unnecessary, or unsuitable. According to The Economist, the Chinese government anticipates a loss of 80% in Pakistan, 50% in Myanmar, and 30% in Central Asia, generally.

Other projects may simply be unnecessary or follow the ‘if you build it, they will come’ strategy. For example, a large oil refinery built in Kyrgyzstan by a large Chinese SOE is still operating at only 6% capacity. Although useful, the need simply isn’t there yet. Many large-scale projects being undertaken in underdeveloped countries face a similar risk.

Some projects are planned for regions where the need for investment is clear but security risks are high—such as Balochistan in Pakistan. Attracting, retaining, and protecting workers is difficult, as are the logistics of delivering materials, and ensuring the overall security of the project and investment. All of this has caused some to question whether the case for the OBOR is hard-nosed economics or political.

The Long View

In the event these challenges and risks can be addressed, this new Silk Road should be viewed as an economic boon.

From the perspective of governments, business, and workers alike, there is much to like about the B&R Initiative. In the short-term, it should boost employment, investment, and economic growth in target economies. In the long-term, improved transport links will mean faster and less expensive shipping between business, clients, and end-consumers. More sources of reliable power will enable manufacturing sectors to take off, typically seen as a key step for a country’s economic development. There will also be a knock-on effect for local economies as ancillary firms develop to support growing manufacturers, logistics firms, and the like.

Major risks depend on how well projects are executed and political concern overcome. With proper execution and political accommodation, they can greatly benefit local economies and the world at large. If not, it risks becoming an expensive boondoggle.

 

*The OBOR is referred to using several different official names for reasons related to politics and language. These include the following: The Silk Road Economic Belt and the 21st Century Maritime Silk Road, Belt and Road Initiative, or simply The Belt and Road.


About the author: Michael Mersol-Barg is the managing director of Mersol & Luo. Prior to establishing Mersol & Luo, he worked in Beijing where he helped entrepreneurs and firms understand how to navigate the Chinese market. He has a Masters in Economics and speaks both English and Mandarin Chinese.

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