One Belt, One Road’s Governance Deficit Problem

China’s One Belt, One Road (OBOR) initiative represents by far the country’s most ambitious global project, connecting China, the world’s second-largest economy, with Africa, Central and Southeast Asia, Europe, and the Middle East through transportation and trade infrastructure. OBOR’s two main components, the Silk Road Economic Belt and the Maritime Silk Road, comprise a multi-trillion-dollar plan spanning 68 countries, which together account for 60 percent of the world’s population and up to 40 percent of global GDP.

Such a large-scale plan comes with tremendous risks, of course. The majority of the OBOR route nations have the potential to default or fall victim to other forms of political instability. But although China obviously has to pay attention to these risk factors, it also needs to solve a governance deficit problem plaguing the project both within China and along the OBOR route in order to fulfill the mission of advancing global development while increasing its own global influence. Consolidating institutions that strengthen accountability, transparency, and participation in OBOR policymaking and implementation may help China overcome the governance deficit challenge.

ECONONMIC DEVELOPMENT IS NOT ENOUGH

The Silk Road Economic Belt involves a series of overland infrastructure links across Eurasia, whereas the Maritime Silk Road is a plan to build and manage ports at strategically important locations in order to eventually connect China to Africa and the Middle East by sea. Along both the land and sea routes, Chinese corporations will build economic zones, industrial parks, and other facilities, such as power plants, to boost the regional economy and improve the livelihoods of local residents. Through massive state-sponsored lending, these corporations expect to benefit substantially from exporting equipment and products and undertaking lucrative construction projects tied to OBOR. China hopes its leadership role in the initiative will improve its image as a great power in its neighborhood and other corners of the world.

As an expensive cross-regional investment and development plan, OBOR is full of uncertainties. International media outlets and commentators have documented the major security, geopolitical, and regulatory risks facing the project. For example, the $62 billion China–Pakistan Economic Corridor runs through Pakistan’s Balochistan province, an area prone to terrorist attacks, and cuts across the Pakistan-occupied Kashmir, irritating India and partly causing the latter’s reluctance to join OBOR. While land acquisition for development purpose can be done in China, sometimes brutally, as land is a state property, many other democracies have land tenure laws protecting private ownership rights. Therefore, more than a year after the groundbreaking ceremony was held for the $5.5 billion railway linking Jakarta and Bandung, the line has yet to be constructed due to difficulties regarding acquiring land.

However, less widely discussed is a governance deficit, both in host countries and within China, which could impede OBOR’s implementation and dampen the prospect of a more active Chinese foreign policy. There is currently a lack of the necessary institutions to ensure transparency, accountability, and meaningful public participation in both China and host countries during the process of OBOR policymaking and project implementation. There is also insufficient institutional infrastructure to establish and enforce rules to ensure that relevant parties and groups are given equal opportunity in decision making and implementation.

China has long assumed that economic development smooths out political conflict and that infrastructure building leads to prosperity. But if OBOR is to succeed, China will need to take additional steps to improve many host countries’ governance. Political incumbents in many of these states could unfairly take advantage of the availability of Chinese investment opportunities by engaging in cronyism, leading opposition leaders to attack them for selling out state sovereignty. Without sound institutions to ensure the proper distribution and use of infrastructure funding, investment projects may function as a resource curse, further corrupting political bureaucracy and unintentionally directing government resources to the infrastructure sector from other more sustainable sectors such as manufacturing.

Chinese investors may believe that unchecked political authority in many of these states allows more work to be done unimpeded by bureaucracy. But without effective means to channel concerns through political institutions, local residents could express anger about employment conditions, land loss, and industrial pollution in ways far more destructive to Chinese investors, causing difficulties during project implementation and security threats to Chinese personnel. Indeed, this is already happening. In August 2016, club- and sword-wielding Kenyan youths attacked Chinese nationals working on a railway project linking Mombasa and Nairobi. In February 2017, hundreds of Sri Lankans violently protested the ceremony of a Chinese deal to build an industrial zone near the Hambantota port. There is no doubt that Chinese corporations must guarantee appropriate and legal compliance. But oftentimes they are targeted because host governments fail to install or enforce regulations and fail to effectively inform the public about investment projects.

Improved governance in host countries benefits China in the long term, but it remains to be seen whether Beijing will encourage it. Many parts of the developing world welcome China’s “no strings attached” style of aid and investment compared to lending by Western powers conditioned on human rights and other obligations. And as much as Beijing may want to work with host governments to tackle governance challenges, its hands are tied by its official foreign policy principle of non-interference in other countries’ domestic affairs. China does exert pressure on political elites and parties when its more immediate interests are under threat, as was the case when China encouraged Pakistan to stop its strategy of supporting jihadists in Afghanistan and Kashmir in order to facilitate the success of the China–Pakistan Economic Corridor. But improving governance is a long-term mission that demands sustained and systematic collaboration between various actors in China and in host countries.

China should uphold its non-interference principle while working with international institutions such the World Bank and the newly founded Asian Infrastructure Investment Bank to co-fund good governance projects for improving accountability and public participation in OBOR route nations. It should also strengthen the rules in investment agreements to ensure proper distribution and use of investment funds. Finally, China should continue to regulate the behavior of its own corporations, ensuring they follow local rules and regulations and encouraging them to devote efforts to strengthening community relations and civic participation.

GOOD GOVERNANCE AT HOME

Domestically, China also faces a serious governance deficit with respect to OBOR. Despite the fanfare conducted by the central government, the initiative has yet to translate into concrete policies. Many simply view OBOR as an umbrella term encompassing a series of bilateral and multilateral infrastructure and trade projects. The concept is ambiguous enough that some Chinese corporations deliberately misapply it to non-relevant projects to secure government approval and for getting their money out of the country.

The lack of a powerful, centralized institution to manage the OBOR-connected ministries, local governments, state-owned and private corporations, universities, and social organizations could make the project landscape chaotic. In February 2015, the State Council (China’s cabinet) established the Leading Small Group (LSG) for Advancing the Work of Building the Belt and Road Initiative. By involving various ministry-level bodies, LSG is in theory a significant means to push forward major policy issues in Chinese politics. Unfortunately, this particular LSG does not seem to wield power commensurate with the size of the OBOR mission. Although the LSG is headed by Zhang Gaoli, one of the Politburo Standing Committee members (who recently stepped down after the 19th Party Congress) and vice premier of the central government, the group’s day-to-day operation is based at the ministry-level National Development and Reform Commission (NDRC), and the real workload seems to be shouldered by the Department of Western Region Development under NDRC, which used to focus on developing China’s western hinterland. Relying on one department-level body to coordinate the many actors involved in OBOR is challenging. It is time for Beijing to consider upgrading the group to function as a separate and permanent entity under the direct leadership of the State Council so that it is powerful enough to coordinate the various OBOR actors in treasury, credit agencies, industrialization, commerce, foreign affairs, culture, education, etc. Such an entity would not only wield the needed authority, but also enough human resources to carry out the OBOR projects.

Beijing should also consolidate good governance institutions within China. Given the huge amount of money spent overseas by Chinese state-owned enterprises or through loans by policy banks such as the Export–Import Bank of China and China Development Bank, China owes its public a regular, clear, and accessible report detailing the status of OBOR implementation. After all, investments by Chinese enterprises abroad in recent decades have had a mixed record. Chadbourne & Parke estimated that some 30 percent of Chinese outbound direct investments failed because of a lack of preparation regarding risk factors and misuse of investment funds. Many others run at a deficit. A rare report recently disclosed by the National Audit Office identified a widespread practice by state-owned enterprises of covering losses by faking transactions and revenues in order to avoid scrutiny by state regulators. The recent efforts to tighten regulatory measures on overseas acquisitions have excluded OBOR projects because Beijing considers them too important for national interest. Yet this should be a rationale for even stricter scrutiny, not deliberate neglect. In short, Beijing should regularly audit all state-owned enterprises’ overseas operations, regardless of whether they are tied to OBOR.

China should not ignore the concerns of its population while making foreign policy and implementing expensive overseas projects consuming public funds. So far, the Chinese public seems to welcome Beijing’s more active Go Out policy, which encourages Chinese companies to seek business opportunities overseas. According to a 2016 Pew Research Center survey, 67 percent of the Chinese respondents said Chinese companies should increase investments in developing countries, and 66 percent said China should increase foreign aid in developing countries. Still, only 22 percent said China should help other countries deal with their problems, a smaller portion of citizens than in the EU, India, and the United States.

Although Beijing is trying to take the lead with respect to globalization, one should not underestimate the potential of home-grown forces of anti-globalization and populism, which are currently gaining strength in many other parts of the world such as the United States and Europe. As China struggles to restructure its own economy and secure OBOR’s future, Beijing needs to keep the public in the loop about how OBOR will realistically benefit individual lives both in route nations and in China. Meanwhile, the elite colleges should focus on expanding curricula on international affairs and area studies, and offer financial incentives for college students to study abroad in OBOR route nations.

Designed to be the “project of the century,” as hailed by Chinese President Xi Jinping, OBOR is a dauntingly complex initiative that demands careful engineering in the beginning. Without tackling the basic governance issues of institutionalization, transparency, and accountability both in China and in the route nations, Beijing may risk OBOR’s failure and threaten its own popular legitimacy in the long run. It would be a blow to China’s dream of rejuvenation and a loss to the prosperity of the world were the project to fail.