Just over a year ago I was asked to brief a top honcho of economics from a very large country who was visiting the OECD in Paris. I told him that I would like to run through our work on the Belt and Road Initiative (BRI). He looked at me and said: “What’s that?” He wasn’t pulling my leg.
This weekend I watched from afar as the world leaders milled around at the G20. I was grateful to be out of that process. The leaders all smiles, shaking hands, and all aware of the presence of the elephant in the room: China’s long-term strategy based on the role of the state.
The G20 works when there is a common crisis to solve. There is no basis for a common strategy today. Two different visions of growth and development are present: the market-based OECD/Washington Consensus, versus the state control of banking and industrial policies. There is nothing one can do when disputes arise between the two, and once state-controlled groups assert sovereign immunity and ignore international rules and conventions.
China’s approach is working. Millions of people have been pulled out of poverty. China thinks very long term. It has understood well the lessons of industrialisation in the West: the ingredients of technology and infrastructure. China, the Middle Kingdom, was a unified, powerful empire for 2000 years, until the Industrial Revolution (and its related military power) saw them off. Now it’s catch-up time. The BRI is the infrastructure part of the plan, while absorbing and improving technology from the West is critical for the technology side.
It’s hard to say how the two alternative visions of the future will play out in the longer run. There has not been a case – after Russia failed – of a large Communist country based around state-owned enterprises (SOEs) saving, investing, expanding credit, exporting and growing at such speed. Perhaps, like Japan, they will hit the banking-debt wall and face lost decades in the future. Market economics is best, after all. But until now it hasn’t looked that way. China accounts for 40 per cent of world saving and investment and, after being accepted into the WTO in 2001, has moved from virtually nothing to 18 per cent of world manufacturing exports – the largest share of any country.
Middle class jobs fall
Import penetration on this scale costs jobs in the West: the so-called “China shock”. But nor do Western companies under competitive pressure stand still. Technical change and rationalisations help them to stay ahead of the game. But these dual forces hit the less-than-college educated middle class from both sides. In all countries, the share of middle class jobs has fallen while that for low-paying jobs has risen. Political ramifications follow.
Australia has yet to feel the full force of these pressures. China has needed Australian resources. We have enjoyed a strong pricing position in supplying them. But part of the logic of the BRI is to change this balance of power.
China is following its own brand of the “industrial revolution formula”. For infrastructure, the chart shows the “belt” (the old silk road with new railways, highways and electric grids) and the “road” (the sea lanes linking the economic corridors across central Asia, south and south-east Asia, Mongolia, Russia, the Middle East, sub-Saharan Africa, Europe and the Pacific). Since 2005 China has spent around $US800 billion ($1.1 trillion) on construction projects globally, 84 per cent of which is concentrated on the Asian-BRI and sub-Saharan Africa.
The goal of the BRI is to ensure long-term resources, food and energy security for China; as opposed to accepting the natural outcome of free-market trade and investment. The tech side of the strategy, naturally enough, is to absorb and improve that which is available in leading global companies. Since 2005 China has spent $US1.1 trillion on buying them, mostly from Western countries.
“Made in China 2025” and the “Digital Belt and Road” are central pillars of the strategy. These investments are a major source of tension: JVs with Chinese companies often require forced technology transfers; and the buying of global companies involves sensitive technology (with joint commercial and military applications). Major Western countries are now in the process of toughening up their foreign investment review processes, with national security in mind.
But what is the real nub of the concerns?
Leaving aside military developments in the South China Sea, the hollowing out of the middle class is a raw issue. We of course carry some of the blame here. More needs to be done to address labour market dislocation and shocking income and wealth distribution outcomes (yes, it’s good if you own shares in those digitalising successful global companies).
The real issue is that the size of the problem is larger than it should be, because business is not conducted on a level playing field: SOEs not operating along commercial lines, the subsidised cost of capital from state banks, export tax rebates, IP theft, dumping, use of standards and certification as commercial barriers, and government procurement and tendering practices are, inter alia, the subject of global disputes.
Any country that signs a free trade agreement with China without a chapter on SOEs (and Australia is one of them) just isn’t thinking about it.
Another key concern is debt diplomacy. The temptation of poor countries to take large loans from China is resulting in the handing over of key strategic assets to a powerful foreign state – equity ownership in return for debt forgiveness. This is politically destabilising in the countries concerned.
Finally, from Australia’s point of view, there is the resources issue. There are large energy and resource reserves across the BRI, particularly in Russia and central and south Asia – not to mention sub-Saharan Africa. The development of these resources has been constrained by the lack of infrastructure. The BRI will address this. Countries like Australia and Brazil, with high ratios of production to reserves, may lose their pricing monopolies and outsized production shares.
I know my top economics honcho has since come up to speed on BRI issues. We all need to do so. This weekend the G20 did nothing that matters to level the global playing field. Australia could make its own start by considering the need for an SOE chapter in our free trade agreement.
Adrian Blundell-Wignall a former director of the OECD, an adjunct professor at Sydney University and author of Globalisation and Finance at the Crossroads.