Political-Economic Suboptimization of China's Belt and Road Initiative: The Case of Infrastructure Investments in Southeast Asia.

Date01 August 2021
AuthorVoon, Jan R.
  1. Introduction

    One of the major developments in international relations this century is China's "Belt and Road Initiative" (hereafter BRI). It is probably seen as the single-most grandiose global development strategy undertaken by China this century. Announced by President Xi Jinping in November 2013, BRI focuses on bringing together China, Asia, Russia, Middle East, Africa and Europe, linking China with the Persian Gulf and the Mediterranean Sea through Central Asia and West Asia, connecting China with Southeast Asia and the Indian Ocean, encompassing both the land route and the sea route (Du and Zhang 2017). BRI covers as many as 150 countries, a total population of over 4 billion and a lion's share of global production. It is a grand public diplomacy plan for China to integrate with many countries and regions around the world.

    Primarily, China has this ambitious plan to build infrastructure for its cooperating partners, including the constructions of roads, railways, ports, power plants, energy pipelines, production facilities, and so on, as well as to foster bilateral trade. Hence, BRI, from the viewpoint of the populace in most countries outside China, is largely perceived as a framework or institution set up by China to build connectivity through trade and investment expansion. Building infrastructure is of paramount importance as it enlarges international trade and enhances global GDP (gross domestic product) growth.

    This paper aims to examine, first, via econometric growth models, to what extent the different types of infrastructure investment, namely transport versus non-transport infrastructure, affect the long-run economic growth of the ten individual ASEAN countries. The economic literature so far has reported that ASEAN countries will benefit immensely from BRI-driven inflows of infrastructure investments (Chung and Voon 2017). Previous studies, however, did not explore the relative importance of the contributions of the different types of infrastructure to ASEAN's sustainable economic growth. This paper closes this gap. In this paper, we first examine and compare the disaggregate effects of the two major types of infrastructure on the Association's economic growth. After controlling for factors that may influence output growth, the econometric results show that transport infrastructure contributes positively and very significantly to the long-run GDP growth of most of the ASEAN economies. By contrast, the scale of the benefits from the investments in non-transport infrastructure is either insignificant or significantly smaller than that from the investments in transport infrastructure.

    We then collect data to explore the extent of BRI's various types of infrastructure investment in each of the Southeast Asian countries. Several data sources are used. Firstly, we hand-collected data on the number of the different infrastructure projects from BRI through at least 400 news articles via an online search engine. Surprisingly, the results reveal that most of the actual and planned infrastructure investments from BRI are concentrated in non-transport infrastructure, including fixed structures such as real estate and energy-related projects. According to the survey above, the number of types of infrastructure projects, however, does not reflect the actual expenditures on the transport and non-transport sectors. Hence, we collected additional data on China's infrastructure investment flows in the form of its direct foreign investment (DFI) to ASEAN countries. These figures were expressed in total US dollar amounts rather than project numbers. The data reveal that the flows of DFI from China to ASEAN countries have quadrupled since the start of BRI in late 2013 (hereafter post-BRI). The results show that the actual and committed amounts of non-transport infrastructure such as real estate, hydroelectric plants, energy pipelines, inter alia, invested in Southeast Asian countries are significantly larger than the amounts invested in transport infrastructure such as roads, railways and ports. This is the case in Brunei, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Thailand and Vietnam. The bilateral DFI data (on dollar amounts) support the hand-collected data (on project numbers), pointing to the robustness of our empirical finding that BRI's investments are skewed towards non-transport infrastructure. This is very much against the conventional perception that BRI is predominantly transport-oriented.

    Since ASEAN's economic growth is largely driven by transport infrastructure, the principal inflows of non-transport infrastructure to Southeast Asia post-BRI, therefore, result in suboptimization, meaning that ASEAN's needs for GDP growth may not be met efficiently by adequate inflows of the right type of production inputs. In contrast to previous literature pointing to the huge potential economic benefits accruable from BRI, this paper reveals that long-term economic growth benefits could be overestimated due to the economic suboptimization polemic arising from the mismatch of the types of infrastructure investment needed by ASEAN countries to enhance their long-run GDP growth. This potential suboptimization is evidenced by the results from our statistical analysis, which shows that ASEAN countries' growth is mainly driven by transport infrastructure. However, the infrastructure investment flowing from BRI since its inception in 2013 appears to be concentrated in the non-transport sector

    This study also identifies several political setbacks that may either aggravate the economic suboptimization problem or reduce the potential regional benefits derivable from the infrastructure investments. For instance, the debt-trap theory advanced recently by Western countries in the European Union and the United Slates might work to reduce the total investments in physical infrastructure, as some ASEAN countries such as Myanmar, Thailand and Malaysia have either cancelled the construction of several infrastructure projects or reduced the scale of these investments. Other possible political setbacks, such as domestic antagonism within an ASEAN country and regional disharmony across member states brought by diplomatic rivalries, sovereignty concerns and leadership changes, which may impede BRI's total investments in infrastructure in Southeast Asia, are also outlined in this paper The suboptimization emanates from at least two sources: first, the potential underinvestment in transport infrastructure coupled with the potential overinvestment in non-transport infrastructure; and second, the reduced inflows of the aggregate physical infrastructure and, as a result, the lower growth benefits accruable. Our analysis aims to examine how the economic and political suboptimizations could be mitigated so that ASEAN's long-term economic growth benefits could be enhanced.

  2. Theoretical and Empirical Background

  3. 1 Link between Infrastructure and Economic Growth

    This paper first uses a growth model to show the extent to which different types of infrastructure (or physical capital) contribute to GDP growth of the ten ASEAN economies. A simple Solow growth model is sufficient for this purpose. Solow's growth model argues that physical capital, labour (human capital) and technological progress (total factor productivity) contribute to long-run economic growth. Economic growth comes from adding more physical capital and labour inputs. Physical capital in the context of this paper is represented by the various types of infrastructure such as machinery, transport equipment and building structure. Infrastructure, as form or constituent of physical capital, gives rise to economic growth (Munnell 1992; Pradhan 2019; Zhang and Graham 2020).

    Frankei and Romer (1999) employed a new strain of Solow's model by including population and country size/area into their growth model. The rationale behind this is that population and country size control for the cross-country differences in growth should be accounted for. Larger countries experiencing relatively higher population growth would give rise to higher economic growth.

    The relative importance of the different types of infrastructure is measured in this paper by: (a) the statistical level of significance of the regression coefficients; and (b) the size of the coefficients. We demarcate the aggregate infrastructure into two types: transport and non-transport (using the available Penn World and BRI data). We then compare which one of these two types of infrastructure is more important in terms of their relative contribution to ASEAN's economic growth.

    2.2 The Suboptimization Proposition

    A suboptimal outcome simply means less than optimal level of outcome. In the context of this study and according to the BRI data we have collected from secondary sources, there are two broad types of infrastructure, transport versus non-transport. The regression results using the methodology outlined above show that the transport infrastructure contributes more to ASEAN's GDP growth than nontransport infrastructure given that both the significance level and the scale of coefficient of the transport infrastructure are larger. Moreover, the results are true across most of the ASEAN countries. Our empirical results computed from the growth model therefore point to an optimal (or the best possible) outcome if the transport infrastructure constitutes a higher proportion of the total BRI investment. However, the BRI investment data we have collected show that non-transport infrastructure (a smaller contributor to growth) constitutes a much higher proportion in total investment than the transport type (a larger contributor to growth). This inadvertently leads to a suboptimal outcome.

  4. Effects of Different Types of Infrastructure Investment on ASEAN's Economic Growth

    3.1 The Econometric Growth Model and Data

    To examine the differential effects of the different types of fixed capital inputs on output...

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