Debunking the myth of ‘debt-trap diplomacy’

This report from UK think tank Chatham House looks at how recipient countries shape China’s Belt and Road Initiative.

The Belt and Road Initiative (BRI) is seen by some as a geopolitical strategy to ensnare countries in unsustainable debt and allow China undue influence. However, the available evidence challenges this position: economic factors are the primary driver of current BRI projects; China’s development financing system is too fragmented and poorly coordinated to pursue detailed strategic objectives; and developing-country governments and their associated political and economic interests determine the nature of BRI projects on their territory. The BRI is being built piecemeal, through diverse bilateral interactions. Political-economy dynamics and governance problems on both sides have led to poorly conceived and managed projects. These have resulted in substantial negative economic, political, social and environmental consequences that are forcing China to adjust its BRI approach. In Sri Lanka and Malaysia, the two most widely cited ‘victims’ of China’s ‘debt-trap diplomacy’, the most controversial BRI projects were initiated by the recipient governments, which pursued their own domestic agendas. Their debt problems arose mainly from the misconduct of local elites and Western-dominated financial markets. China has faced negative reactions and pushback in both countries, though to a lesser extent than is commonly believed, given the high-level interests at stake in the recipient countries. To improve the quality of BRI projects, Chinese policymakers should develop a coherent, integrated decision-making system with sufficient risk assessment capacities and strict, clear and enforceable rules. This would involve tackling vested interests within China, particularly among commercially oriented agencies and in the state-owned enterprise (SOE) sector. Recipient governments must take greater responsibility for the evaluation of potential projects to ensure their viability and financial sustainability. They must also develop their ability to bargain with Chinese partners to make certain that local people benefit from the BRI. Since China continues to place great emphasis on host-country regulation, BRI partners must bolster their laws and regulatory environment. Policymakers in non-BRI states should: avoid treating the fragmented activities of the BRI as if they were being strategically directed from the top down; provide alternative development financing options to recipient states; engage recipients and China to improve BRI governance; and help improve the transparency of ‘megaprojects’. Civil society and political opposition groups in recipient countries should focus their efforts on demanding transparency and public participation around the design, feasibility, selection, pricing, tendering and management of megaprojects.

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