Economic Dimensions of OBOR: A Nepalese Perspective
A Paper Presented at a Conference organized by China Study Center (CSC)and Nepal Institute for Strategic Studies (NISS) held Friday on April 28, 2017 in Kathmandu
By
Prof. Dr. Madan Kumar Dahal, Member, Board of Directors,Institute for Strategic and Socio-Economic Research(ISSR);Member, Revenue Advisory Board, Ministry of Finance/GON;Immediate Past President, Nepal Economic Association; &Former, Founder Chairman, Mega Bank Nepal Ltd., Kathmandu.
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The Philosophy of OBOR
China’s bold, farsighted, historic as well as pragmaticinitiative known as “One Belt and One Road (OBOR)” offers a grand scale proposal for the future geo-political vista resulting in 'One Economic World'. This enterprise is claimed as the “Silk Road World Order” that contains three major components: (a) Upgrading and modernization and extension of existing Silk Road; (b) Inducting Maritime Silk Road; and (c) Developing Energy Silk Road. "It is well-known that centuries ago when China was at its most glorious periods, there was a trading route linking China’s ancient capital Xian westward all the way to Europe, through which commerce and cultural exchanges took place. In addition to the land route traveled with camels, China also had taken ocean voyages from its east coast to South China Sea, the Indian Ocean, and all the way to Africa, bringing Chinese artifacts and culture to those regions. These were known as the Silk Roads (Ni, Peimin; March 2016)".
After the emergence of new political leadership in China President Xi Jinping in his visit to Central Asia and Southeast Asia in September and October 2013 proposed to build the “Silk Road Economic Belt” and the “21st century Maritime Silk Road”. "The former calls for integration and cooperation of the countries on the original Silk Road through Central Asia, West Asia, the Middle East, and Europe, forming an interconnected belt through developing infrastructure, increasing cultural exchanges and expanding trade. The latter is a similar proposition to promote collaboration in Southeast Asia, Oceania and North Africa through adjacent bodies of water ( 2, 2015)".
China has, thereafter,launched noble steps to execute these initiatives, including the establishment of a US$40 billion "Silk Road Fund", revitalizing the plan for a Free Trade Area of Asia Pacific (FTAAP), and, more significantly, setting up of the Asian Infrastructure and Investment Bank (AIIB). With US$ 100 billion initial capital AIIB is in operation from 2016 as a flagship of OBOR and the bank is likely to be a prime contenderto the financial system governed by developed countries like the United States and Japan. The stretch of “One Belt One Road” strategy is vast that directly includes 26 countries, 4.4 billion people, and count for 63 percent of the world’s entire population, and roughly one-third of the world’s economy (Ni, 2016).
OBOR is, indeed, rapidly getting enormous momentum. The AIIB has obtainedcooperation from thirty-seven regional countries and twenty non-regional members, including some of the close partners of the US, such as Australia, France, Germany, Saudi Arabia, South Korea, and even the United Kingdom.With this recent trend a new world order is emerging. As Professor Yuri Tavrovsky puts it, the new order is “not vertical, but horizontal” and the new world order is multilateral ( May 22, 2014). This would enhance integration and cooperation to the benefit of all involved. For example, China has taken a prime role in the establishment of the AIIB and it holds an overwhelming 30% of voting share, but offered to forgo veto power at the AIIB to ensure that no single country can dictate decision-making at the new bank.
China’s “One Belt One Road” strategy is not philanthropic, nor is it the approach to receiving a favor from China. While China has developed a lots of expertise in building infrastructures such as high speed railwayswith huge foreign currency reserves, there is need to balance its underdeveloped western regions with its more advanced east coast. In addition, the countries in Central and West Asia, the Middle East, and East Europe can mobilize China’s cooperation to speed up their modernization process. It is important for China to shift its focus from the east coast toward the west. China’s approach todeal with the return of Hong Kong through the “one country, two systems” policy, and China’s aid to other developing economies with no threads attached also justify the government’s willingness to accept plurality. Currently,there is widespread talk about the rise of China as economic power with global influence. The miraculous economic development of China is attributed to its rapid growth of economy with admixture of communist ideology and capitalist economy, a hybrid that attracted almost 60 percent of FDI with uninterrupted double digit growth for a long time until recently.
At this backdrop, a clarion call of Chinese leadership to international community for working together to forge a new partnership of win-win cooperation and create a community of shared future for the prosperity of mankind is, indeed, a historic breakthrough to establish a new global economic order. Thus, the vision of “One Belt One Road” strategy is the most original, brilliant and innovative contribution to the history of economic developmentin the world.
Attributing Factors to One Belt One Road (OBOR) Initiative:A New Paradigm of Development
A variety of reasons could be illustrated to justify that One Belt One Road (OBOR) is a pathfinder to a New World Economic Order (NWEO) - an innovative paradigm of development.The New Silk Road or One Belt One Road (OBOR) project largely incorporates the nations located at the original Silk Road throughCentral Asia, West Asia, the Middle East, and Europe. The Silk Road Economic Belt would be an overland network of road, rail and pipelines connecting China’s east coast with Europe via a new Eurasian land bridge. Five regional corridors would separate the land bridge, with Mongolia and Russia to the North, South East Asia, India, Pakistan and Bangladesh to the South, and Central Asia, West Asia and Europe to the West. Theproposal for developing Maritime Silk Road is unique aimed at investing and fostering collaboration in Southeast Asia, Oceania, and North Africa through several adjoining bodies of water – the South China Sea, the South Pacific Ocean, and the wider Indian Ocean area. In addition, the concept of "Energy Silk Road" is another economic dimension to spur growth in the region ( Sep. 30, 2016).
Chinese President Xi Jinping stressed that “the economic belt along the Silk Road is dwelling to 4.4 billion populations representing the biggest market in the world with unparalleled potential.Integration of these regions into an economic region through building infrastructure, increasing cultural exchanges, and broadening trade would create win-win effects to all connecting countries with One Belt One Road (OBOR).Xi said: "Enhancing policy coordination is necessary for the implementation of the OBOR Initiative throughpromoting intergovernmental cooperation, building a multi-level intergovernmental macro policy exchange and communication mechanism, expandingshared interests, enhancing mutual political trust, and reaching new cooperation consensus".It is also important tofacilitate connectivity - a priority for OBOR initiative by respecting each other’s sovereignty and security concerns. Investment and trade cooperation is a prime concern in building the OBOR by improving investment and trade facilitation and removing investment and trade barriers within the region and in all related countries. Financial integration and cooperation needs to underpin the OBOR initiative via the implementation of currency stability, investment and a financing system.It requires establishing bilateral joint working mechanisms to draw up implementation plans and roadmaps for advancing the OBOR initiative. It is assured that China would"fully leverage its various regions, adopting a proactive strategy of interaction and cooperation among the eastern, western and central regions, and their integration into theChinese economy(thesiriusreport.com; Sep 30, 2016)."
President Xi has madeextensive visits to over 20 countries for initiatingconsultation with countries along the OBOR to maximize the opportunities provided by the Initiative. China also designed to boost global trade and help countries to coordinate their economic policies. OBOR is likely to incorporate 60 countries comprising 4.4 billion populations. There is a proposal for investing 1.5 trillion renminbi over a distance of 11,000 km.; More than 1,500 contracts worth over $40 billion have been signed by Chinese companies in the first half of 2015 and it is estimated that "belt and Road Initiatives" require US$ 6 trillion ( June 26, 2017). Already 900 projects have been planned to operate at an estimated cost of $890 billion. President Xi has also encouraged state-owned enterprises and financial institutions to invest in infrastructure and construction abroad.
Funding for Silk Road projects would be mobilized from China's state-owned banks and a series of government and multilateral funds, including a Silk Road Fund, the AIIB, and the New Development Bank. In this context, the role of The Asian Infrastructure Investment Bank (AIIB) is crucial to lending infrastructure projects with an authorized capital of $100 billion. Silk Road Fund is financed primarily with Chinese capital with special attention to transport and other infrastructure, resources and connectivity projects across the B&R, with a focus on Asia.
The initial US$40 billon seed money is funded by the CDB, China Exim-bank, the China Investment Corporation and China’s State Administration of Foreign Exchange (SAFE). The Karot Hydropower Station in Pakistan was the first investment project by the Silk Road Fund. The New Development Bank (NDB), formerly referred to as the BRICS Development Bank is a multilateral development bank established by the BRICS nations, which isconsidering supporting public or private projects through loans, guarantees and equity participation. The China Pakistan Economic Corridor (CPEC) initiatives would be funded through loans from Chinese state-owned banks such as the China Development Bank, The Industrial and Commercial Bank of China (ICBC) and the Export-Import Bank of China to enable Chinese companies to invest in projects as commercial ventures.
Similarly, New Eurasian Land Bridge would be constructed connecting from China's Jiangsu province to Rotterdam, Netherlands comprising Central and Eastern Europe. Likewise, China – Mongolia – Russian Corridor would be builtby utilizing existing international freight lines and constructing a northern passageway to connect Beijing, Dalian and Tianjin with Western Europe.China – Central Asia – West Asia Corridor would be created.In addition, China – Indochina Peninsula Corridor would be built adjoiningBangladesh, Bhutan, Maldives, India, Nepal, Pakistan, and Sri Lanka.The US$1.95 billion 660MW Thar Coal project became the first integrated mining and power project in the corridor. Bangladesh – China – India – Myanmar Corridor would be built;2,800km Kolkata to Kunming road is at the heart of the corridor.In addition, OBOR includes several ports with Chinese engagement inAfrica, Asia and Europe (Existing, under construction and planned) andothers (existing, under construction and planned) such as: 1. Male; 2. Colombo; 3. Hambantota; 4. Gwadar; 5. Chittagong, and Others (Existing) - Karachi; and 2. Dhaka.
‘One Belt, One Road’: Understanding Chinese Views
The major challenge to the ‘One Belt, One Road’ strategy (OBOR)is to implement an action plan aimed at encouraging: "The orderly and free flow of economic factors, highly efficient allocation of resources and deep integration of markets; encouraging the countries along the Belt and Road to achieve economic policy coordination and carry out broader and more in-depth regional cooperation of higher standards; and jointly creating an open, inclusive and balanced regional economic cooperation architecture that benefits all (Kerry, Brown and He Jingjing; Posted by China Briefing,April 21, 2016)".In the words of Chinese foreign minister Wang Yi, “the initiative is China’s idea, but the opportunities it has created belong to the world.” In this context, it is the attempt by the world’s second largest economy to have a stronger voice in the global economic order.
TheOBOR’s strategic objective of OBOR is not only to establish “hard” connectivity – infrastructure development, especially transport construction – but also to build “soft” connectivity including promotion of trade, financial integration, exchange of policy and culture as well as people-to-people links – to forge, as it were, a stronger regional consciousness ( hard and soft connectivity aims to boost economic recovery and stability in the OBOR area and those around it. OBOR at the very least brings the possibility of an alternative model of partnership, and new means of cooperating for a common goal (Kerry, Brown and He Jingjing; April 21, 2016)".
The Significance of the 21st Century Maritime Silk Road Initiative
The 21st Century Maritime Silk Road would greatly link the entire world through people to people connectivity, culture, information and civilization, and significantly help promote trade, investment, technology, industry, tourism, agriculture, biodiversity and 'blue economy' on the basis of comparative advantages and competitive edges with improving efficiency and governance. The 21st Century Maritime Silk Road will be a powerful gateway to modernize and industrialize the economy especially of coastal countries and prove to be a glaring example to maximize the benefits from liberalization and globalization to make a breakthrough in the economic front of member countries associated with MSR of three continents respectively Asia, Europe and Africa.
It is extremely pertinent and rational that China, a pioneer of the 21st Century Maritime Silk Road (MSR) should play a proactive and lead role to design a pragmatic strategy and offer benefits to smaller, least developed and landlocked economies like Nepal, Bhutan, Afghanistan in South Asia region and similar other disadvantageously placed nations in other continents that lack direct access to sea. It requires for promoting navigation through sea connecting rivers of respective countries, which would help reduce transportation costs and time with faster mobility and availability of goods at cheaper prices in respective countries.
Conceptually a brilliant ideology to enhance global connectivity and economically an outstanding proposal to spur growth with massive development of maritime infrastructure, the emergence of the 21st Maritime Silk Road could be considered an entirely innovative economic revolution that would be instrumental to drive the future of many developing countries to a climax of progress and prosperity in future. The most significant and unparallel initiative led by China under the dynamic leadership of President Xi Jinping to build the 21st Century Maritime Silk Road is historically an unique phenomenon in the contemporary economic history of the world, which would certainly pave the way to help countries struggling for survival to build a strong economic nation-state (Dahal, 2015) .
The Economy of China: An Overview
In recent years Chineseeconomyhas surpassed the US economy in terms of PurchasingPowerParity (PPP) but that is not the only area where China has surpassed the UnitedStates. China now accounts for more total global trade than the United States does when the size of total imports and exports combined together. China is now the leading manufacturer of goods with largest new car market in the world. China has more foreign currency reserves than any country and also the number one gold producer in the world. China produces more than twice as much cotton as the United States does and China now produces 11 times as much steel as the United States does. Nobel economist Robert W. Fogel of the University ofChicagohas projected that the Chinese economy will be three times bigger than the U.S. economy by the end of 2040.
China is, therefore, a great opportunity for all developing as well as emerging market economies in South, South-east and Central Asia, Middle-east, Africa and Europe and with the discovery of the 21st Century Maritime Silk Road the impact of China's economy would be remarkable on global economy through extensive penetration in the area of trade and investment, agriculture, industry, tourism and technology with growing connectivity of people, culture and civilization. It is in this perspective there is need to analyze the significance of the 21st century Maritime Silk Road (MSR) and examine its impact on the burgeoning economy of developing countries.
After two decades of powerful reforms in China, momentum has slowed down in the past ten years. Yet without reform and opening up, the Chinese miracle simply wouldn’t have occurred. A similar push is vital if China is to move to the next phase of its incredible journey of accelerated development (Roache, 2012). Today, China is the world’s biggest exporter and its second-biggest importer, and its value-added service industry is worth close to $4 trillion. The lack of progress in opening up the services industry has impeded China’s plan to raise domestic demand. The unprecedented economic rise of China in the 21st Century and especially the induction of new growth model would be a boon to developing nations. China’s galloping economy provides enormous opportunity to Asia and the rest of the world with tremendous potential to maximize growth coupled with the emergence of the 21st Century Maritime Silk Road (Dahal, 2015).The following table provides an overview of the economy of modern China comprising a selective macroeconomic indicators.