China’s Belt and Road

Dr. Palitha Kohona | Published: 2:00 AM Oct 24 2020
FT China’s Belt and Road

Dr. Palitha Kohona

President Xi Jinping’s Belt and Road Initiative (BRI), unveiled in 2013, provides Sri Lanka with an unparalleled opportunity to fast track its economy along the path to development. The country desperately needs rapid economic advancement to fulfil the aspirations of its people for a better life and to realise the promises made by the Sri Lanka Podujana Peramuna (SLPP), that was elected to power with such a resounding majority.

The investment bonanza that is being made available under the BRI, especially the Maritime Silk Road, could revive the glory days of the ancient Silk Route for Sri Lanka when this tear drop of an island functioned as the trading hub of the Indian Ocean. Trade needs to be the catalyst of that which would rev the engine of prosperity. 

Today, the Sri Lankan economy is ailing badly. It is sluggish and appears to be losing its lustre, (having been downgraded by Moody to Caa1 from B1) except in certain limited sectors. There are many reasons for this. Chief among them is the inadequacy of inward investment flows and the erratic performance of exports.

China’s BRI grand plan, if prudently managed, provides the countries of the region, especially Sri Lanka, which is fortunately sitting strategically in the middle of the Indian Ocean and the Maritime Silk Road, the capital to propel their economies forward.

China’s BRI investment ambitions, focused mainly on cooperative infrastructure and connectivity enhancement, have been compared with the post-World War US Marshall Plan. But the funds available under the BRI make the Marshall Plan pale in to insignificance.

The Marshall plan provided over USD140 billion, at 2017 dollar values, and was designed to assist Western European economies recover from the devastation inflicted by the Second World War.

The BRI expects to make available a stunning USD 4 - 8 trillion for the countries of the Asian/African region. While the Marshall Plan achieved much, the BRI funds can be expected to realise substantially much more by creating a vast region of shared prosperity, the clear beneficiaries being a large number of developing countries.

The Marshall Plan allowed the United States to export its currency. The US dollar was used to provide the subsidies, while European countries purchased US goods with their own currencies. Over time, the US dollar became a tool for stability; funds provided by the plan created the basis for future frequent easing of trade restrictions.

Recognised by the IMF

Additionally, the Chinese Yuan is now a recognised reserve currency by the IMF and China appears to be increasingly moving towards international payments in Yuan. The IMF elevated the Yuan, also known as the renminbi, or ‘people’s money’, on the same day that the Communist Party celebrated the founding of the People’s Republic of China in 1949.

The Yuan joined the US Dollar, the Euro, the Yen and British Pound in the IMF’s special drawing rights (SDR) basket, which determines currencies that countries can receive as part of IMF loans. This would be the first time that a new currency has been added since the Euro was launched in 1999. It is an impressive achievement as the Yuan had very little credibility as recently as thirty years ago.

Today, the IMF recognises China as the world’s largest economy by purchasing power parity, not the US. Its per capita GDP exceeds USD 15,500. This is a massive leap from less than USD 200 in 1970. Sri Lanka’s per capita GDP is around USD 3,900. (It was USD 270 in 1980). 

The outward looking BRI initiative, seeking common prosperity, will have a massively transformative impact on the economies of the vast Asian and African regions encompassing 138 countries with over 65% of the world’s population. It will be a closely related factor as Sri Lanka seeks to realise its own Vision of Prosperity (Saubagye Dekma). The Vision of Prosperity provides the development blueprint for the country for the next few years as promised in the election manifesto of President Gotabaya Rajapaksa. 

The BRI, backed by China’s substantial economic clout, including through the Asian Infrastructure Investment Bank (AIIB), which has 103-member States at present, will create significant opportunities for the entire region on which Sri Lanka should capitalise. Sri Lanka is a member of the AIIB. The high level delegation which visited Sri Lanka recently, led by former Foreign Minister and senior Politbureau member Yang Jiechi, promised AIIB support for Sri Lanka’s development aspirations. Juggling with foreign policy options and pressing economic difficulties, the carrot of AIIB assistance is very tempting for Sri Lanka. 

Sri Lanka’s abundant potential as an investment destination, especially its location in the middle of the Indian Ocean adjacent to one of the busiest sea lanes in the world and in the middle of the BRI region, must be leveraged carefully by policy makers for national economic advancement. Sri Lanka also sits in the middle of a rapidly prospering region with Africa and the Middle East to the West, India to the North and ASEAN and Australia to the East. The economic power houses, China, Japan and Korea are further to the East. Sri Lanka has free trade agreements with India, Pakistan and Singapore and is negotiating one with China. It is important that Sri Lanka actively leverage its geographical advantages and its FTA benefits to attract global companies to set up shop here. Hambantota Port, built with Chinese funding, was leased to China Merchants Port Holdings Co. for 99 years  in return for $1.1 billion by the previous administration. 

The newly created Colombo Port City, with its visions of modern tropical comforts beckons international finance houses, educational establishments and health  facilities while the Hambantota Port and its export processing zone appear to be obvious destinations for manufacturing concerns seeking to access the commercial opportunities offered by the region. Chinese businesses would obviously find the prospects attractive.

The trading potential that China offers has not been fully exploited by Sri Lanka. Sri Lanka imports around USD 4 billion worth of goods from China while exporting less than USD 300 million of its own products. A more methodical and calculated approach to this lucrative and demanding market is required. Sri Lanka has the potential to increase exports to China of its highly valued tea, natural rubber products, precious stones, minerals, fish, organic vegetables, coconut products, indegenous medicinal products and even its garments and IT products. 

‘Unfairly’ Endowed by Nature

Sri Lanka itself, despite its relatively small size, is unfairly endowed by nature. From its miles of unpolluted golden beaches, lush green countryside, misty tea covered mountains, awe inspiring archaeological sites that bear witness to a rich and glorious past, the variety of wildlife, that includes the biggest animal on land, the elephant (in large concentrations), and the biggest in the ocean, the blue whale, a rich and potentially vast continental shelf, the valuable trove of minerals, including the rarest of gems, ilmenite, silica and graphite, its spiritual background to its well educated, easily trained and smiling people to whom hospitality is second nature, this country is a visitor’s dream. An investor’s ideal.

The country enjoys a comprehensive State funded free education system that has resulted in a first world standard of literacy (and high levels of IT competency, which can be refined further) and a birth to death State-funded free health care system, which has given the population an existence largely free of communicable diseases and a first world life expectancy. So far, covid-19 has resulted only in 14 deaths, largely the result of an efficient and caring health care system and an efficient security apparatus. Sri Lanka’s success in managing Covid-19 has not been marketed adequately to present the country as an attractive destination for investors and tourists (once global travel resumes). 

The cellular phone penetration in Sri Lanka is the envy of more developed countries and could be leveraged as an educational tool to assist the country further in its efforts to develop faster. The use of messaging through  cellular phones worked well in containing Covid-19. 

These are assets that should not be squandered or feebly surrendered for other countries to exploit. The large number of Sri Lankan professionals working overseas, trained under the country’s free education system, bears testimony to the absence of opportunities for them to find work locally. 

The clumsy foreign policy misjudgments of early 2015 must be carefully rectified and left behind. 

It is important to remember that Sri Lanka is not alone in the business of seeking to attract foreign investments or tourists. The competition in the region is fierce. The vast majority of developing countries have relied on foreign direct investments to spur their development effort. Some have been much more successful than others. Vietnam, Bangladesh, Cambodia and even Myanmar, yesterday’s global outcast, are surging ahead. The critical difference may lie in their ability to create the necessary policy environment and confidence for foreign investments to be attracted to them.

Against this background, it is important to create a professional business oriented approach to highlight and promote what Sri Lanka has to offer as an investment destination, encourage foreign investors to think positively of Sri Lanka when making investment decisions, create a better understanding of Sri Lanka’s investment climate and opportunities, including its enormous natural and human potential, and foster closer relations between the Sri Lankan business community and its counterparts overseas. It is no longer a task for amateurs or a matter to be left to chance. Secret deals could enrich individuals but not a nation.

A former Foreign Minister has, to his credit, spoken of the need to make business, the business of diplomats. A refrain adopted by President Gotabaya Rajapaksa. A reliable and transparent policy framework must be put in place and a professional facility to enable the transmission of investment-related information, both inward and outward, must be instituted.

The BoI should be revamped. Petty political point scoring should be avoided for the sake of the future of the country. There are other successful models that we could emulate. Some countries from our own region have effectively attracted foreign investments to speed up their development process and even left the developing country status behind.

China’s Impact In the Region

Already the Chinese largesse is impacting positively on a swath of countries and regions.

Pakistan, described as an all weather friend by the Chinese President, has been promised USD 54 billion in investments for infrastructure projects. The China-Pakistan Economic Corridor is the flagship project under this initiative. The Bangladesh-India-China-Myanmar corridor links China with the Bay of Bengal. Bangladesh has been promised USD 26 billion. 

Africa is reaping the benefits of China’s investments and many African economies are prospering for the first time in years. World Bank analysts ascribe this development largely to Chinese investments. The value of Chinese business in Africa since 2005 amounts to more than $2 trillion, with $300 billion in investment currently on the table according to the China Africa Research Initiative at Johns Hopkins School of Advanced International Studies in Washington. The key element to note is that Chinese investments come without overt political strings and disingenuous hectoring. 

It is likely that this trend will accelerate as China also learns from experience and responds more to the aspirations of the people of the continent. Since 2000, Ethiopia where the African Union is headquartered, has been a major recipient of Chinese loans to Africa, with financing for dams, roads, railways and manufacturing plants worth more than USD12.3 billion, more than twice the amount loaned to oil-rich Sudan and mineral-rich Congo.

The BRI concept while raising some concerns, especially among the former colonial powers who ruthlessly ravaged Africa and Asia when they had the opportunity, can be used by countries of the Indian Ocean region and beyond to enhance their mutual prosperity without being constrained by the fears and suspicions inculcated by the colonial past. More importantly, without territorial occupation, racial discrimination and forced alteration of cultures.

Even Australia received AUD 15.4 billion in Chinese investments involving 103 deals. Australia has been a major destination for Chinese investments after the US and Europe and investors have grabbed hotel assets, real estate, agri businesses, vineyards, health care, infrastructure, etc., giving rise to a latent xenophobic anti-Asian and anti-Chinese sentiment. The port of Melbourne is now controlled by a Hong Kong-Chinese concern. So is Darwin. 

However, China has also tightened overseas investments, especially in real estate, hotels, film and entertainment and sports clubs, to reduce excessive capital outflows and foreign exchange risks. Those countries seeking to benefit from the Chinese gravy train should be conscious of this development.

The expansion of China’s economic and political reach has caused more than a few adverse reactions in certain international circles, especially among powers which had been used to dominating the world stage. 

U.S. hostility towards China

Recently, it has been said that America’s focus on terrorism as the main threat has now shifted to Russia and China. According to a new Pentagon strategy, the United States must build up its military to prepare for the possibility of a conflict with Russia and China.

The US persists in viewing the world in terms of hostile competitors. Given that China and the US are closely intertwined in a complex economic embrace, the use of such terminology is curious.

The US is China’s major trading partner. Goods exports totalled $120.3 billion in 2019; goods imports totalled $539.5 billion. The trade deficit was USD 419 billion. The US has begun a bitter campaign to restrict Chinese exports and fencing in Chinese technology reminiscent of the dark days of the Cold War. It is also described as decoupling. 

China is the main lender to the US and holds over USD 1.2 trillion in US securities. Literally China has lent funds to the US to purchase relatively inexpensive Chinese manufactured products to keep US purchasing costs low and living standards at a high level.

China is the biggest market for many US agricultural products, sustaining large sectors of US agriculture and millions of Chinese tourists and students visit the US annually. The US has now been forced to subsidise its farmers to cushion them against Chinese counter sanctions on US farm products. 

Any conflict between the two countries, including the ongoing trade war, will do irreparable damage to both, not to mention the rest of the world. The two countries have a unique opportunity in history to get away from historical power based competition to cooperating for the common good.

India’s Sensitivities

Similarly a major concern is India’s sensitivities regarding China’s outreach. The fact that the two countries fought a border war in 1962 and have skirmished along a disputed colonial border, have not been forgotten by policy makers. But India’s sensitivities have impacted on the thinking of the smaller countries of the Indian Ocean region. India’s growing relationship with the US has clear military implications and India does not camouflage this realignment nor does the US The Quad, consisting of the US, India, Japan and Australia have adopted a clearly confrontational approach to China. The US has recently agreed to sell Guardion drones to India for maritime surveillance.

Unfortunately, the need to convey public messages of this nature to each other appears to encourage the hawks further. India, while strengthening its naval capabilities in the Andaman and Nicobar Islands, has also quietly developed strategic relations with Australia and Japan, participating in regular joint naval exercises. India maintains a naval base in the Seyschelles and has concluded an agreement to facilitate the use of Sigapore’s naval facilities by its Navy.

It seems unlikely that China, even if it wished, would be able to challenge nuclear-armed India in the Indian Ocean for decades to come. India enjoys overwhelming military superiority in the Indian Ocean. Furthermore, the US maintains a mammoth base on Diego Garcia to the South of Sri Lanka. It is highly improbable that Chinese policy makers would consider challenging the existing power arrangements in the Indian Ocean any time soon, if ever. They have not done so since Admiral Zheng He’s flotilla entered the Indian Ocean in 1405 and returned many times till 1433.

To prepare to meet a challenge from China would result in expending scarce resources for a confrontation that is unlikely to happen. To be obsessed with the thinking of a bygone era and continue to rattle ones weapons to demonstrate superiority may not necessarily serve the needs of today when millions simply desire a better life, schools for their children, housing with at least essential amenities and appropriate employment.

Europe learned this lesson after the Second World War and focused its attention on improving the lives of their people through cooperation. They have succeeded to an impressive extent. We in the Third World should follow this wonderful example.

Sri Lanka, as a small neighbour eager to ascend the development ladder in the shortest possible time is caught between the sensitivities of our closest neighbour and the need to develop stronger economic relations with another. There is little doubt that as a long time friend and a country that has provided much of Sri Lanka’s religious and cultural inspiration, Sri Lanka must create and maintain an environment that makes India comfortable.

The big neighbour must feel the reassurance that the small island to the South will not pose a strategic threat, even in collusion with any other country. It should not become someone else’s large aircraft carrier! Sri Lanka’s own interests will be served well with a reliable relationship with India.

This does not mean subservience or servility or a one-way approach dominated by hectoring and gratuitous advice. The relationship, if it is to be comfortable and sustainable, must be one between two proud sovereign nations. India has a positive role to play as the bigger neighbour to the North. India’s burgeoning economy could provide an outlet for Sri Lankan businesses to expand but over-zealous and rash opening up of our economic doors with no comparable reciprocity could result in Indian industry swamping our businesses.

We must seek our own development path and that might mean seeking to collaborate with whoever we like, including China. China, coincidentally, is India’s major trading partner. Both the Chinese and Indian leaders have made explicit overtures to each other, both recognising the opportunities presented by cooperation than by confrontation.

A prosperous and stable Sri Lanka will be an asset to India not an unhappy and resentful neighbour to the south. Sri Lanka’s prosperity through the OBOR will be to India’s advantage as well. India could also benefit extensively from a proactive engagement with the OBOR initiative

The writer is the Ambassador designate to China, the former Ambassador and Permanent Representative of Sri Lanka to the United Nations. 

Dr. Palitha Kohona | Published: 2:00 AM Oct 24 2020

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