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Is China Winning the Scramble for Eurasia?

August 21, 2017 Topic: Security Region: Eurasia Tags: One BeltOBORNational SecurityASEANPutinChinaEconomy

Is China Winning the Scramble for Eurasia?

Roads, railways and other new connections are reshaping the Eurasian supercontinent and creating new forms of competition as well as cooperation.

Where is this flurry of activity heading? Collectively, these ambitions could foreshadow a more integrated and dynamic supercontinent, in which commerce, people and ideas move faster than ever before. But there are darker potential paths as well. New connections can also create dependencies between states, exacerbate inequalities within them and produce unintended consequences. After all, Eurasia’s ancient routes carried not only silk and horses, but also Mongol invaders and the bubonic plague.

EURASIA’S INFRASTRUCTURE rivalries consist of a mix of economic, political and strategic forces. The exact balance of these drivers varies greatly, from state to state and even from project to project. Occasionally, they are aligned. But more often, there is friction between competing goals: economic viability, political expediency and strategic clarity.

The strongest driver is Asia’s economic growth. Over the next two years, developing Asia is expected to deliver three-fifths of global growth. Emerging economies like China and India have more capacity to spend and, as the towering estimates of Asia’s infrastructure needs underscore, more reasons to spend. In theory, much of that spending is welcome and well intentioned, but the picture can become more complicated in practice.

Narrower commercial interests are also driving the infrastructure push. Behind China’s OBOR, for example, is an industrial sector whose size far exceeds China’s domestic needs. Having used more cement between 2011 and 2013 than the United States used during the entire twentieth century, China is using OBOR to move its excess capacity into neighboring countries. But China’s problem is too big for others to absorb, and the risk is that OBOR will prolong China’s chronic capacity issues rather than helping address it.

Domestic politics also play a part. From mayors to prime ministers, leaders love ribbon-cutting ceremonies, especially when projects set world records or use new engineering techniques. In 2012, for example, Russia unveiled the world’s longest cable-stayed bridge in advance of hosting the Asia Pacific Economic Cooperation summit on Russky Island in the Far East. Attendees enjoyed easier access to the island, but after they departed, only roughly five thousand year-round residents remained. Large construction projects also offer political leaders the opportunity to direct resources and reward supporters.

Infrastructure can also advance strategic ends. Roads, railways and ports are all dual use and critical for moving military troops and supplies. Controlling these assets also allows countries to restrict access and exert pressure. When a project’s commercial logic is weak, strategic motives are occasionally more apparent. Some observers suspect that Pakistan’s Gwadar Port, for example, will primarily benefit the Chinese navy. History is filled with examples of empires using infrastructure to claim, control and defend territory. The same road network that Darius the Great used to control the Persian Empire was used by Alexander the Great to conquer it.

A more recent development is the use of infrastructure finance to accomplish diplomatic goals. China has used the promise of infrastructure spending to win friends in its near abroad. Take Southeast Asia, where some countries have been offered generous infrastructure packages to support China’s stance on territorial disputes in the South China Sea. Of course, smaller countries know the rules of the game, too. They often play larger powers off against each other, extracting financial and military support and diversifying their diplomatic options. In their first meetings with counterparts from China and Japan, all four of last year’s new Southeast Asian leaders had infrastructure at the top of their wish lists.

FOR ALL the ambitions behind Eurasia’s infrastructure push, many of today’s plans will fail. Infrastructure investment is a notoriously difficult business all over the world, where projects typically run far over cost and over time—if they ever get started at all. The challenges in Eurasia are especially formidable, ranging from hostile geography to weak rule of law.

Having put a man on the moon over four decades ago, many observe, surely modern engineering can conquer our terrestrial environment. But infrastructure projects often traverse challenging terrain. Asia is home to the world’s highest mountains, the largest swamps and flood plains, and permafrost that extends to latitudes lower than anywhere else in the world. Its infrastructure must withstand extreme temperatures, seismic activity and other natural challenges.

 

The challenges are also man-made. In Pakistan’s volatile Baluchistan Province, for example, separatist groups have killed more than fifty people working on CPEC projects. Islamabad recently deployed fifteen thousand troops to protect workers along the route. States lacking the capacity to secure projects must consider whether to host foreign forces or pay for private-security services. Navigating each of these challenges comes with a financial cost.

In many areas, Eurasia’s legal and governance landscape is not ready for changes to its physical landscape. Corruption looms large, warping everything from contracting and procurement decisions to the operation of infrastructure projects. By some estimates, construction is the world’s most corrupt sector. In Central Asia, fraudsters have been caught setting up fake tollbooths to prey on unsuspecting drivers. Large projects provide ample opportunities to conceal bribes, and many implementing agencies struggle to effectively monitor all the contracting parties involved. Far from being buzzwords, greater transparency and accountability would help these projects succeed.

 

From project conception to operation, additional legal challenges abound. In South Asia, for example, 75 percent of countries rely on paper records for land rights, leading to confusion and competing ownership claims. Investment protections are often weak, which is why many infrastructure investors avoid developing Asia entirely. Procedures at the border are onerous, sometimes requiring cargo to be transferred to local trucks, for example. Many countries have signed onto transportation agreements but lack the capacity to implement them. International assistance can help, but some poor decisions also reflect the preferences of strong patronage networks. On the Cambodia-Thailand border, for example, a casino was built in the space initially designated for an inspections building.

Increasingly, sustainability is a necessity rather than a luxury. Multilateral institutions condition infrastructure lending on social and environmental impact assessments. But self-interest is a key motivator as well. Through experience, some states have learned that higher-quality infrastructure, the type that meets higher social and environmental standards, is a wise investment. Lower-quality infrastructure is cheaper and might be less expensive in the short term, but it wears down faster and costs more in the long term.

These challenges add up to the biggest hurdle of all: a shortage of bankable projects that offer returns commensurate with their risks. In theory, there are trillions of dollars of investable funds around the world—notably those held by long-term investors, like sovereign wealth funds and pension funds—ready to go into sound infrastructure projects that generate a reliable, long-term return. But all the risks and uncertainties described above can deter even the most intrepid investor. Multilateral institutions are experimenting with novel ways to share risks and attract private capital, but creating enough bankable projects will require wide-ranging political and economic reforms.

Bankability will be even more difficult for Asia’s overland routes than their maritime counterparts. Sea freight is slower than railway and air cargo, but it is considerably cheaper, which is why 90 percent of international trade travels by sea. With the global shipping industry overcapacity, and Arctic routes becoming more accessible, shipping seems primed to continue its dominance. Trade imbalances make it even more difficult to sustain overland routes between Europe and China. A significant portion of rail containers return to China empty. Despite the hype about new railway routes, the maritime realm is likely to be where most of Asia’s economic action remains.

Contrary to popular belief, not all infrastructure projects are economically beneficial or even benign. Economists have demonstrated that infrastructure can decrease trade costs, boost productivity and increase economic growth. But local conditions, institutions and policies matter greatly. If mishandled or pursued for the wrong reasons, infrastructure projects can destroy more value than they create. Even in the best business environments, projects are usually over time, over cost, under benefit—a troubling reality that Bent Flyvbjerg of Oxford University’s Saïd Business School has dubbed the “Iron Law of Megaprojects.” Our own data suggests there is reason to worry. Of projects in our database that were scheduled for completion last year, more than half failed to meet their deadlines.

Rather than approach megaprojects with caution, some countries are pushing forward and amassing alarming levels of debt. Laos is pursuing a railway project with Chinese loans that amount to nearly half of the country’s GDP. Likewise, the International Monetary Fund, Moody’s and others have expressed concerns about Pakistan’s growing obligations from CPEC. According to Tom Miller of Gavekal Dragonomics, a consultancy, Chinese officials privately expect to lose up to 80 percent of their investment in Pakistan. With China’s own sovereign debt recently downgraded for the first time in nearly thirty years, failed projects could exact a toll on borrower and lender alike. Nor is the broader global economy immune to these risks.

BUT NEW roads, railways and ports are being built, and they could reshape the Eurasian supercontinent. The United States cannot afford to stay aloof from these developments. Sitting an ocean away in either direction, and with plenty of storms swirling at home, it will be tempting for Washington to look the other way. Strategically and economically, that would be a colossal mistake.