Jan 09, 2018 03:19 PM

Opinion: Why and How China Should Lead ‘Belt and Road’ Initiaive

In today’s world, many parts of the economy are operating like a network. Productivity is highest when the network is the largest and most expansive. This is the common notion of network effects described of internet platforms, such as Facebook, Amazon, Alibaba and Didi. But the same network effect applies to supply chains and production linkages, and it could also be described of infrastructure. The critical thinking behind this concept of infrastructure is that it is most productive only when connectivity (across countries and regions) is relatively complete — that its positive externality is only greatest when infrastructure networks cover all of the important linkages around the world.

Imagine a situation in which we in China want to build railways that cheaply and quickly send goods from our inner lands to Europe. If the critical nodes of the Central Asian countries — the “Stans” — cannot be connected, then the infrastructure linking China and Europe is of no substantive value. Take another example, in Africa. Kenyan ports are modern and efficient, and there has been substantial investment in them, but a railway link that fails to connect Angola to its coastal areas implies that all of the precious resources beneath the earth will sit there and stay there, never to be shipped out. Only when the global network of infrastructure is constructed with relative completeness is its externality the greatest, the productivity gains the largest, and the effect of each segment of infrastructure linkages reaching its greatest value. Linking A to B has some externality, but the externality and productivity is greatest when A is linked to B, which is linked to C, and so on and so forth.

This comes back to how we should think about our “Belt and Road” initiative, and how we should market it to the world. Indeed, there has been much criticism and political backlash against our endeavor to do good for the world, precisely because there is a thin understanding of what lies behind our goal. Is it political and military control and influence? Is it to export our excess capacity? Whatever the real motivation behind the Belt and Road is, what is most important is to give a solid economic reasoning for why the Belt and Road initiative is a necessary economic initiative that will give shared economic benefits for all.

An infrastructure’s network effect provides that reasoning, and gives theoretical and structural clarity for what the Belt and Road initiative is trying to do. It tells us that someone has to help link the critical nodes in this network if these nodes sit strategically at some small and often poor countries that cannot build the infrastructure, or connect them with surrounding neighbors. If these countries have poor relationships with their neighbors, then another country or entity might have to step in to do the job for them. There are many reasons why an external actor is necessary, whether it is because of these countries’ lack of finances, lack of coordination, lack of regulatory or political connectivity with neighboring countries, or simple lack of will.

The natural question is then: Why China? Why should China be that external actor? The reason is that China supplies some critical, missing input. That input is deep pockets — someone has to pay a large initial cost to jump-start the building of the infrastructure network, and the actor needs to be able to absorb a huge amount of risk (liquidity risk, operational risk, construction risk, etc.), and it needs to have a long-term investment and strategic horizon. If we look at America, its own infrastructure is 30 years behind, partly because of the ferocious bipartisan debates on how to spend taxes. America will not have the ability to coordinate across many countries and regions and allocate spending efficiently if it cannot even do so in its own country.

If the answer to the first question is China, then the second question that naturally follows is: How much should China spend on the Belt and Road program? I like to compare it with the analogy of NATO. China is essentially playing a role in the infrastructure network as the U.S. has played a role in the security network. The U.S. contributed a far greater share to this public good than its size and wealth demanded, and one of the key reasons is that only by supplying the majority are the other countries in a position to cover the rest. In the absence of a large commitment from the U.S., the alliance might not have existed. And so in one sense, the U.S. paid a large sum only to avoid paying the full sum.

China’s case could be similar. Because global infrastructure facilitates trade, and lowers trade costs, one of the biggest beneficiaries will inevitably be China. So naturally, paying a large sum is compatible with incentives. By paying this large sum to jump-start the platform for international cooperation, China can avoid paying for all of the infrastructure projects — something that it cannot do, and should not aim to do in the first place.

While it is clear that the main role that China play is as coordinator and as enabler, one of the biggest challenges we face today is precisely the lack of coordination in these projects. From governments to banks and financial entities to companies ready to partake in these projects, there is no seamless process and procedure — an entity to organize and coordinate. We probably have already outlaid sizeable amounts of funding to Belt and Road projects, from large state-owned banks, to its many subsidiaries, from Silk Road funds to infrastructure funds, but we don’t have a consistent tabulation of data that document and collect all of the information on various projects. This then means that we have little sense of the risks that various entities are undertaking and that we are bearing as a country as a whole. What we need are entities acting like investment banks in the 19th century and post-war era, coordinating the infrastructure projects that Great Britain and the U.S. undertook overseas. In other words, we are lacking the very coordination we are endeavoring to provide.

How we should market the Belt and Road initiative to make our efforts in various countries smoother is of critical importance. If we can come up with a convincing argument that China is leading efforts to provide a global public good, a public good that would be left unattended if China were not to take the lead, then suspicions around the world would be mitigated; our efforts will thus be less costly and more productive. To make it successful, we need a perfect logic guiding the micro as well as the macro. In other words, we need to look at the most ambitious global project of this century both with a microscope and a telescope.

Keyu Jin is an associate professor at the London School of Economics and Political Science.

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Keyu Jin

Keyu Jin is a professor of economics at the London School of Economics, a member of the World Economic Forum’s Forum of Young Global Leaders, and a member of the Richemont Group Advisory Board