4 Economic Opportunities in:

Clement Guitton

Unlikely Allies, page 81 - 106

How Group Leadership Shapes International Afffairs in the 21st Century

1. Edition 2018, ISBN print: 978-3-8288-4278-6, ISBN online: 978-3-8288-7189-2, https://doi.org/10.5771/9783828871892-81

Tectum, Baden-Baden
Bibliographic information
Economic Opportunities New Development Bank, BRICS, Belt Road Initiative, and the G20 China and India are today two strong shaping forces of the world economy; their cooperation is also fraught with border conflicts going back to decades earlier. On October 20, 1962, high up in the Himalayan mountains, next to the border with India, at 4,000 metres above sea-level, the Chinese People’s Liberation Army launched two simultaneous attacks against the Indian army: one at Aksai Chin, a mountainous desert now known as Arunachal Pradesh, and the other one 1,000km farther, at Ladakh. The attacks marked the beginning of a bloody, albeit short, war between the two countries. Over the course of three weeks, the two armies repeatedly faced each other off, leading to a high casualty count for the Indian army. Some put it at roughly 1,300, and a bit more than half this figure for the Chinese one, others at roughly 3,000 Indians killed and 4,000 further Indians captured. As for any conflict, several versions also exist as to who was to bear the blame for starting the war – and as to why it happened. One of the versions holds that China started it, as they were the ones who first crossed the border. But this is a bit too simplistic. Neville Maxwell, an Australian journalist who spent much time in India and in its archives, instead holds India responsible.25 In 1914, the British foreign secretary Henry McMahon sat with the Tibetan representatives and drew a line on a map, delimiting the border between the Tibetan region of China and India. According to Maxwell, McMahon’s map was, however, not presented to the Chinese; McMahon had exceeded his authority, so much so that the viceroy, the regional representative at the colony, cancelled the line. The Indians interpreted the matter differently. Jawaharlal Nehru, the first Pr ime Minister of India, 4 25 Neville Maxwell, 1999. ‘Sino-Indian Border Dispute Reconsidered’, Economic and Political Weekly, Vol. 34, No. 15, pp. 905–918. 81 regarded the border issue as settled and that the Chinese should be the one raising it if needs be. During a mail exchange with Zhou Enlai, the first Premier of the People’s Republic of China, Nehru expressed that he ‘had not been aware at any time previously that there was any frontier dispute between our two countries’. Maxwell explains that India interpreted China not raising the border issue as the country accepting the McMahon delineation line. But that was not the case, and several elements built up to China feeling threatened. That the CIA was training and arming rebel groups in Tibet was not helping, as much as India hosting the Dalai Lama. On October 9, 1962, Indian troops made a move. China had to reconsider their options: only a big enough blow would lead to their adversary changing their mind. And so came the war that they fought for three weeks. Regardless of who is to blame for starting the 1962 war, the animosity between the two countries has lived on and the border issue has not been settled, even if the last military clash between the two countries dates back to 1975. In 1982, China helped Pakistan build its nuclear bomb by providing it with enriched uranium; it did so to a large extent in support of their shared enmity towards India. And as recently as the summer of 2017, this erupted again. Bhutan, a landlocked country the size of Switzerland, with 800,000 inhabitants, and which shares borders with India and China, became the theatre of renewed hostility between India and China. The question of who started it would, again, be controversial. The Economist reported it straightforwardly as such: ‘On June 18, Indian army troops marched across an international border to block the progress of a group of Chinese border guards’. The Chinese were part of a road-building crew and were on their way to extend China’s position further into Bhutanese territory. To the Chinese’ defence: the maps of the region are often imprecise and consequently lead to frequent accidental incursions anyway. This time around, no one died; the range of words the British magazine chose to describe the incident is still rather noteworthy: a ‘brawl’, ‘garden-fence fisticuffs’,or even ‘current argy-bargy’. To explain this ‘brawl’ it is useful to look at the Bhutanese economy and its closeness to India. 80% of Bhutan’s trade is with India, which is also the only country benefiting from its main export, hydroelectric power. India, on the other hand, gives Bhutan 60% of its foreign aid, and its army builds and maintains 4 Economic Opportunities 82 roads over there. Both countries felt uneasy about the Chinese incursion, but this was short-lived and two months later, the conflict had faded away. Similarly to Bhutan, India had for a long time considered the tiny islands of the Maldives within its sphere of influence. A domestic political crisis on the islands in early 2018 brought up similar concerns as those of the summer of 2017. The Chinese had been investing heavily in the Maldives in infrastructure, as the president Abdulla Yameen was entertaining close relations with China. When Yameen started rounding up political opponents, calls – notably from the former 2008–2012 president of the Maldives, Mohamed Nasheed – mounted for India to intervene. This would have brought India into a face-off against Chinese interests, a dangerous mix. India stayed put, though, and hoped that the domestic political crisis playing in its backyard would resolve on its own. With all these rivalries and potential for explosive situations, we have to wonder, then: how did China and India manage to come together to create a $100 billion bank (with a yearly lending capacity of $34 billion), the New Development Bank? (It also created at the same time a fund for liquidity crisis, also worth $100 billion, called the Contingent Reserve Arrangement, but not all countries chipped in equally on this one, with China by far the largest contributor.) With all the discussions of competition between rising powers, such a financial institution does not fit the narrative of countries being confrontational to reach their ambitions. Could another theory account for this puzzling development? China and India created this new bank along with Brazil, Russia and South Africa – the so-called BRICS quintet of countries. The aim of the bank is to lend money to BRICS countries, mostly for infrastructure projects. In comparison, a $100 billion sized bank corresponds to roughly a third of the World Bank’s assets (at $324 billion) and half of what the World Bank lends (up to $205 billion). The New Development Bank could hence become a big deal. Also, to put that into perspective: JP Morgan, just one of a few large US banks, issued $80 billion of long-term debt in 2017, with tangible common equity of $188 billion (and, while less relevant to the comparison here, total assets of $2.5 trillion and a market capitalisation of $412 billion). 4 Economic Opportunities 83 The attractiveness of creating a new institutional bank is largely to pull funds together to have more firing power, but also to lend without any conditions, unlike the World Bank or the International Monetary Fund. These institutions often attach stringent reforms or fiscal policy to their loans, much to the dismay of elected officials, who find that they undermine democracy. (A reasonable explanation as why these organisations lend with (political) conditions is that it is a sort of insurance for the organisations themselves, which could otherwise go ‘bankrupt’ – meaning that member states would refuse further funding – and could trigger financial crises). The member states of the New Development Bank like to boast that the bank also benefits from exceptionally good ratings, that is to say ‘AAA’, as it is supported by sovereign states. This means that it can lend at favourably low rates. Yet, it is noteworthy that there may be a ‘slight’ conflict of interest in the ratings, as they come from one of the member states – China – where the line between state intervention for the national interest and business independence is much blurred.26 To understand how China and India were able to get together on such an expansive – if not expensive, too – project, we need to look at two factors: the reasoning behind the creation of the bank, and more broadly, the shaping of BRICS as an informal institution in the past decade. Some saw the inception of the bank as a result of the countries’ incapability to reform the voting system of the World Bank and the International Monetary Fund. The voting share of the BRICS countries within the World Bank does not align with the economic reality anymore, they argue. The Economist explained this discrepancy in 2006, although it is still valid today: It is absurd that Brazil, China and India have 20 percent less clout within the [International Monetary] fund than the Netherlands, Belgium and Italy, although the emerging economies are four times the size of the European ones, once you adjust for currency differences. Currently, following the latest 2010 reform on IMF voting quotas (which member states only finished ratifying in 2016), the US has the 26 For the details: the rating agencies are China Cheng Xin International Credit Rating Co. Ltd., abbreviated to ‘“CCXI’”, and Lianhe Credit Rating Co. Ltd. 4 Economic Opportunities 84 top spot, with roughly 17% of the voting share; China comes in with just under 5%, India and Russia have roughly 3%, Brazil less than 2% and South Africa roughly 0.5% (the exact percentage depends on which precise body within the IMF one looks at). But this compares badly with a ranking of the countries’ GDP, especially in terms of purchasing power parity. Just in terms of ranking, China is second behind the US, India follows right behind China, Russia is in 6th position, Brazil is in 7th, and South Africa trails a bit further behind in 28th place. The discrepancy between the voting power – linked to the potential to choose projects in which to invest – and the economic weight of the BRICS countries (topped with their economic ambition) may explain their will to go ahead and create a new financing mechanism. But this can’t be all. When looking at how the IMF’s sister organisation, the World Bank, lends its money, it is also clear that the BRICS countries still benefit to a certain extent from the World Bank’s support. In 2013 – the year the new bank was announced – the BRICS had accumulated 27.2% of the loan portfolio from the bank (China 9%, India 8.3%, Brazil 8%, Russia 1%, South Africa 0.9%).27 To explain the rationale behind the New Development Bank, others interpreted it as a result of the frustration of the G20 to not follow through on their ‘commitments to mobilize infrastructure investment for the developing world’.28 The bestseller author and scholar, Parag Khanna, elaborates on this idea, reasoning that the creation of the New Development Bank stems from the need to cover an ‘estimated annual $3 trillion required in infrastructure spending just to keep up present levels of GDP growth’.29 He also noted that ‘for the first time in history, infrastructure spending consistently exceeds military expenditure’. There are already a lot of different development banks. The New Development Bank fits the group leadership theory particularly neatly, however. Despite vast differences in economic sizes between its five 27 Alexandra Morozkina, 2015. ‘The New Development Bank in Global Finance and Economic Architecture’, International Organisations Research Journal, 10(2), 89– 105. 28 Gregory T. Chin, 2014. ‘The BRICS-led Development Bank: Purpose and Politics beyond the G20’. Global Policy, 5(3), 366–373. 29 Parag Khanna, 2014. ‘New BRICS Bank a Building Block of Alternative World Order’, New Perspectives Quarterly, 31(4), 46–48. 4 Economic Opportunities 85 member states, all of them hold the same share of the bank (20%) and all hence have the same voting power within its board. This is remarkable when compared with other key international financial institutions, where steering power is never otherwise equally distributed. And while the contributions to the bank are the same for everyone, their weight in relation to their different economies varies vastly: for China, $10–20 billion is peanuts (out of an $11tn GDP), while for South Africa, this amounts to 2.5–5% of its GDP – a consequential chunk in other words. The different member states also have roles that balance each other out. The headquarters location has led to much debate, until the group settled on Shanghai, with a regional office in South Africa. India was of the opinion that it was the one behind the inspiration for the project and that this should translate into something. The first president has therefore been Indian (for the first six years), the Chair of the Board of Directors Brazilian, and the Chair of the Board of Governors Russian. Other development banks – as hinted already – do not necessarily have this equal representation. This would be the case with the Asian Development Bank (with the US and Japan as the largest shareholders), or even the Asian Infrastructure Investment Bank, where China is this time by far the largest shareholder at 28.7%, with the second shareholder a long way behind: India at 8.3%. The BRICS communicated the project of establishing the bank in 2013, in South Africa, after India had initiated the discussion the prior year, during the Delhi Summit. (This was the year that Xi Jinping met Vladimir Putin for the first time, during which the Chinese head told his counterpart: ‘I feel like our personalities have a lot in common’.) The first project it financed was in December 2016, a Shanghai-based solar power plant costing $76 million (the second one was for India, for $100 million concerning water usage). The creation of the New Development Bank was, however, not entirely the beginning of the example of group leadership theory in action: the meetings of the BRICS in themselves probably are. Such meetings may also have contributed greatly to diffusing the conflict between India and China over Bhutan in the summer of 2017. A couple of days before the BRICS summit was due to start in China this summer, both countries agreed to have their military forces disengage from the conflict region, an early success for a meeting that was for a long 4 Economic Opportunities 86 time otherwise looked at as lacking teeth. The myriad of articles mentioning the ‘soft power’ of the BRICS could attest to it. The BRICS But why the BRICS? And why not other countries? This largely comes down to fate (a topic we’ll come back to later in two chapters) and a tad to an arbitrary choice. In 2001, Jim O’Neill, London-based chief economist at the bank Goldman Sachs, put together a report where he cobbled Brazil, Russia, India and China together, calling them out for their future potential growth (note the absence of South Africa). He foresaw so much growth potential that in a 2003 paper, candidly titled ‘Dreaming with the BRICs’ (no, the ‘s’ doesn’t stand for South Africa here), Goldman Sachs made the prediction that ‘if things go right, in less than 40 years, the BRICs economies together could be larger than the G6 in US dollar terms’. This was a bold claim at the time, and one which brought a lot of debate, although he actually even underestimated their growth potential when looked at from today’s standpoint. He predicted that the four economies would have a combined GDP of $8.7 trillion in 2013; by then, it amounted to over $15 trillion. O’Neil confided to the Financial Times a decade after his seminal publication that the BRIC term was just a mental prop. But its influence was enormous, especially following the 2003 paper, which got a lot more attention than the first one, so much more than many referred to it the first time the term BRICs was coined. The term entered the usual current lexicon; companies developed strategies to seize the BRICs’ market, and the very same countries set up an informal summit. (It may be slightly ironic that the BRICS’ bank, for development, as a counter weight to the Western-biased Bretton Woods institutions, has another US commercial bank to thank for its origin.) Before O’Neill’s report, the BRIC countries had not really aligned, nor come together as a bloc. The idea came to O’Neill after the planes had hit the Twin Towers on 9/11. ‘What 9/11 told me was that there was no way that globalisation was going to be Americanisation in the future – nor should it be’, he recalled in 2010 in an interview with the Financial Times. ‘In order The BRICS 87 for globalisation to advance, it had to be accepted by more people… but not by imposing the dominant American social and philosophical beliefs and structures’. O’Neill’s ideas found much opposition from critics, who perceived it as just a marketing trick from Goldman Sachs. Such critics argued that there were more differences to these countries than commonalities. Russia and Brazil are big commodity exporters; China is a commodity importer. When Russia, as an exporter, benefits from high-energy prices, India, as a heavy importer, suffers. To O’Neill’s critics, he did not heed the fact that the countries had very little political commonality either, as he focused predominantly on economics. Brazil, India (and later South Africa) are democracies; Russia and China are authoritarian – with Russia’s indicators of life expectancy and GDP per capita worsening in the few years prior to O’Neill’s neologism. China and Russia both have a seat at the United Nations Security Council and have helped maintain the status quo. The others have fought to have it overhauled. Brazil doesn’t have nuclear weapons; China, Russia, and India all do, with India the only one of the three not a signatory to the Non-Proliferation Treaty. Others were also offended that he hadn’t included Korea, or Mexico, to which his answer was, even if it was not entirely rational, that he excluded them because of their membership of the Organisation for Economic Co-operation and Development. Following the financial crisis, many similar ideas stemming from think-tanks or for-profit organisations had collapsed. But not the BRIC idea. The crisis rather gave it a raison d’être (much like the G20 summit, of which more in a bit) instead of wiping it out, with topics discussed including efforts to combat the ripple effects from the 2008 financial crisis. According to the scholar and author Olivier Stuenkel, in his book The BRICS and the future of global world order, ‘the BRICs grouping thus did not turn into a household name because of its conceptual novelty, but rather because it powerfully symbolized a narrative that seemed distant in the 1990s but appeared to make sense in the mid-2000s: a momentous shift of power was taking place away from the United States and Europe towards emerging powers such as China, India, and Brazil’. Russia, India, and China were already meeting regularly as part of the ‘RICs’ since at least 2001. In 2006, Russian Minister Sergey Lavrov 4 Economic Opportunities 88 pushed to include Brazil, de facto creating the BRICs, even if the two other members were initially sceptical. The four foreign ministers met first in September 2006 in New York, on the side of the United Nations General Assembly. Then, in June 2007, there ensued an awkward meeting with the Group of 8. As part of a process to try to include emerging countries (the Heiligendamm Dialogue Process) – a process already started in 2005 in the UK – Brazil, China, India, Mexico and South Africa were invited to the G8 meeting, but it was made clear that this would be only as observers; they would not take part in the decisionmaking process. They took this as insulting. The BRICs foreign ministers met again in September 2007 on the sidelines of the United Nations General Assembly. And in May 2008, in the Russian town of Yekaterinburg, 1,700km east of Moscow (what the Russian President Dmitry Medvedev described without sarcasm as ‘the epicentre of world politics’), the four foreign ministers met again for the first time in a stand-alone meeting. Apart from the Brazilian delegations, they were all already in town for the summit of the Shanghai Cooperation Organization. In September of that year, they met, again, and issued their first, very short (five sentences) press release, listing the issues discussed: Priority issues on the 63rd UNGA agenda were discussed. Special attention was paid to agreeing on common approaches for all four countries to topical world development problems, including the state of affairs in global finances, the food crisis, climate change and cooperation within the Heiligendamm Process of the Group of Eight and its partners. Possible joint steps on these issues were examined in the context of upcoming international forums. It noted further that ‘a keen exchange of views also took place on further steps to develop ‘the group and its meeting’. The second meeting of foreign ministers took place a mere ten days after the Lehman Brothers had filed for bankruptcy. Two months later, the BRICs finance ministers met this time and ‘called for the reform of multilateral institutions in order that they reflect the structural changes in the world economy and the increasingly central role that emerging markets now play’. The press release did not shy away from calling the World Bank and the International Monetary Fund by name. And they got organised to have their meetings right before the spring meetings of both the The BRICS 89 World Bank and the International Monetary Fund, showing how they ganged up together to try to increase their influential weight. In July 2009, again in the Russian town of Yekaterinburg, the four heads of state this time convened together. The club was exclusive, but informal. Size helped for this informality. ‘The informal club culture has allowed the BRICS members to work without any pressure of rigid institutional hurdles such as organizational problems, deadlines, influence from fragmented bureaucratic interest groups and turf fighting as witnessed within formal institutions’, noted two Canada-based scholars of international relations, Andrew F. Cooper and Asif B. Farooq. The lack of existing norms, formal structure and charter meant that only a shared (implicit or not) understanding of why the countries came together bounded them. This common understanding amongst the BRICS members has evaded many who criticised that they were not on the same economic path. A critique, by far not the fiercest, but still worth mentioning for its lack of prescience, ventured: Still, they [the BRICS] have a long way to go. When considering the three key issues that dominated global affairs in 2014 – Ukraine, ISIS and Ebola – it becomes clear how little the BRICS countries assumed a leading position.30 True, the leading position may not be the same in the security domain as the economic one, but no one pretended that they would ensure a ‘leading position’ in all matters of public life. To already make a breakthrough in economic development might not be too bad. The BRICS proved these critics wrong, as they managed to find a common fabric to justify their get-together, and this mutual interest (read as well: frustration against the Bretton Woods institutions) has been prevalent enough that it has lasted for the past twelve years. Hence, the group presented itself then as speaking on behalf of emerging countries. A big ‘but’ was becoming increasingly hard to overlook, though: no one represented the large African continent. There were two main candidates, Nigeria and South Africa. Jacob Zuma, South Africa’s president until 2018, visited each country, bringing a message sweet to their ears: that investments by foreign developed 30 Oliver Stuenkel, 2016. ‘Do the BRICS possess soft power?’ Journal of Political Power, 9(3), 353–367. 4 Economic Opportunities 90 countries ‘plagued’ emerging countries (as reported by the left-leaning British newspaper The Guardian).31 Another very convincing argument has probably been that the country has also three quarters of the world’s reserves of platinum, a chemical used in many industries, from the auto sector (as a catalyst to moderate exhausts) to medical devices (for catheters or other implants). China is its top export partner and India ranks fifth, but Nigeria has comparable advantages, as India is its top exporter and Brazil comes fourth. South Africa also had an advantage, though, in deploying its diplomatic charm offensive. As the previous chapter mentioned, it had been working closely as part of the BA- SIC countries – Brazil, South Africa, India, and China – on climate change and managed to create trust ties. It was similarly part of a dialogue forum since 2003 – IBSA, standing for India, Brazil, South Africa, meaning that it had close contacts to all BRICs members but Russia. In the end, the BRICS won over a potential BRICN. Conceptually, the meaning of the BRICS had shifted. It wasn’t a group of countries full of economic potential anymore. ‘For South Africa to be treated as part of BRIC doesn’t make any sense to me, but South Africa as a representative of the African continent is a different story’, commented O’Neill. And yet, joining the ‘BRIC label’ has probably been a good PR coup for South Africa, as much as for the other countries, which boosted their status of emerging power along with their global ambitions. Zuma therefore took part in the second, now renamed BRICS with a capital ‘S’, summit. The creation of the New Development Bank represents a continuation of the BRICS’ informal club culture, as it put an institutional framework around it. But the informality continued. The BRICS still did not have any secretariat, staff, or charter. Meanwhile, heads of states, foreign, finance, health and other ministers kept meeting up, setting objectives and working on these subjects together. The number of areas in which they worked together was quite wide-ranging: from tax to establishing standards for their statistics à la OECD, to national security (e.g., on terrorism, piracy, cyber security, conflicts in Syria, 31 Sébastien Hervieu, 2011. ‘South Africa gains entry to Bric club’, The Guardian, 19 April. The BRICS 91 Libya, and Mali), to food security, to exchange programmes for judges (although this was discontinued after one year), to academia, and to trade. One of the major successes has been, all in all, a public relations coup by providing a platform for its member states to showcase whatever they wanted. They have been notably successful in presenting themselves as representatives of the developing world in international forums – as the previous chapter also exemplified concerning the climate change debate. It is tempting to take the story of group leadership within the BRICS and the New Development Bank as representative of the emerging phenomenon. After all, the newly formed BRICS exhibited group leadership characteristics in fighting against older institutions, which clearly did not show these characteristics. This leads to a caveat: not all newly formed institutions have exhibited such characteristics, and the specific role of China as an economic power could appear to contravene the theory. Valid counter-examples would be with the New Development’s ‘sister organisation’, the Asian Infrastructure Investment Bank. Yet, again, these do not invalidate the whole theory. The Asian Infrastructure Investment Bank, like the New Development Bank, seeks to invest in long-term infrastructure projects. It has a much larger membership than the New Development Bank, with over 80 member countries, started financing its projects around the same time (in 2016), but has a much different shareholder structure, with China clearly in the lead. Because of all the other member countries backing the $100 billion bank, it receives a high credit rating that also allows it to raise capital cheaply. Strangely, the US has very much opposed the bank and has encouraged other countries not to join it, seeing it as a competitor to the Bretton Woods institutions that would give cheap credit with no conditions attached – but to no avail. Their attempts at blocking the bank may have in fact even boosted its support. The biggest blow to US diplomatic effort was memorably when its close ally, the United Kingdom, announced in March 2015 that it had chosen to join in. France, Germany and South Korea then followed suit. Even India subsequently accepted the invitation to join. The bank, as much as the Bretton Woods institutions, reeks of biases; it does not promote equally distributed weight. There is a voting 4 Economic Opportunities 92 split of 75% of the shares allocated to Asian members, and 25% to the others. And amongst this Asian part of the shares, China holds 77%, India 9%, Russia 7% and Korea 4%. So, how does this reconcile with the theory of group leadership? There are two possible answers: first, it doesn’t, but the theoretical chapter also emphasised that group leadership theory would not encompass everything, as much as realism or liberalism do not. Second, though, it is to look at how China intends to use the bank, mostly as a central pillar to finance projects for the region amongst what it has dubbed ‘One Belt One Road’ (officially now translated as the ‘Belt and Road Initiative’): a huge $1 trillion infrastructure overhaul for the pan- Asian region that would allow trade to flourish and would potentially involve 65 countries.32 Most of the lending for the initiative will come from the China Development Bank and the Export-Import Bank of China, which already lends more to Asia than the World Bank, but the New Development Bank will also play its part. The Belt Road Initiative $1 trillion in infrastructure is huge. Many have compared the project to the Marshall Plan from the US after the Second World War, but the Chinese initiative completely dwarfs it. The Economist calculated that: the Marshall Plan of the US amounted to $13 billion between 1948 and 1951, roughly $151 billion in today’s dollars. These were ‘handouts’ not loans. ... the China Development Bank already claimed to have lent $180 billion by the end of 2017, and the Export-Import Bank of China $110 billion by the end of 2016. And the ‘project’ is just getting started. 32 Afghanistan, Albania, Armenia, Azerbaijan, Bahrain, Bangladesh, Belarus, Bhutan, Bosnia and Herzegovina, Brunei, Bulgaria, Cambodia, Croatia, Czech Republic, Egypt, United Arab Emirates, Estonia, Georgia, Hungary, India, Indonesia, Iran, Iraq, Israel, Jordan, Kazakhstan, Kuwait, Kyrgyzstan, Laos, Latvia, Lebanon, Lithuania, Macedonia, Malaysia, Maldives, Moldova, Mongolia, Montenegro, Myanmar, Nepal, Oman, Pakistan, Palestine, Philippines, Poland, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, Sri Lanka, Syria, Tajikistan, Thailand, Timor-Leste, Turkey, Turkmenistan, Ukraine, Uzbekistan, Vietnam, and Yemen. The Belt Road Initiative 93 As much as the US benefitted from the Marshal Plan, China would as well benefit from it, and so would other countries receiving its funding. But concerns about such a megalomaniac project are not lighthearted and also need addressing. Let’s focus first on how the project has brought many different countries to one common goal. The origin of the project lies in a reversal of long-standing Chinese policy to try to keep a low profile in foreign affairs so that it could focus on its domestic affairs. With the project, Xi Jinping hopes to be able to transform China to a wealthy and strong country, both at home and abroad, by 2049. The initiative has in fact at least three huge elements: to improve connectivity on land, on water, and online (this last one has received the creative name of ‘digital silk road’). None of them has, however, a strict definition of what belongs to it, and what doesn’t. Many Chinese provinces have their own version of the ‘One Belt One Road’ initiative, making it hard to discern what would have happened had Xi not launched his grand vision on a September 2013 day at Nazarbayev University, in Astana, Kazakhstan. Anywhere that China may find willing partners to build tracks, bridges, and ports could fall under the initiative. A consequence of all this cash spending is that it has created a backlash against Chinese workers. Locals have perceived the arrival of many Chinese migrants as a threat more than as a boon, launching waves of attacks, in an evident racist manner, joking about the ‘yellow peril’ or about ‘Chinese labourers feasting on their donkeys’, as the former journalist and analyst Tom Miller describes it in his book, China’s Asian Dream. The backlash may come from a form of uneasy dependency that China has created with the likes of Laos, Cambodia, Sri Lanka, Tajikistan or Kyrgyzstan. They rely on Chinese firms for the construction of their national infrastructure and for their cheap loans, with no strings attached. In Central Asia, China has thrown an ‘economic lifeline’ to the countries now closer to China than to Russia when it comes to economic matters. Russia’s invasion of Crimea may have also helped push these countries closer to the Chinese sphere of influence, even if these countries remain much closer to Russia in the defence realm. In an ad in The Economist (last week of June 2018 edition), Hu Biliang, a professor at the ‘Belt and Road Institute’ took aim at the critics. He explained 4 Economic Opportunities 94 that the perception that it may benefit Chinese companies only probably comes from the initial stages of the investment: no one wanted to jump onto the project, and Chinese state-owned companies had to pick up the slack if they wanted the project to move forward. As the Belt and Road Initiative becomes more tangible, risks should go down, and with it, more non-Chinese companies should also feel more comfortable getting on-board. And yet, that China chose to set up two ‘international’ courts in China to handle any dispute arising with the project is not too comforting. One will be in Shenzhen to deal with maritime issues around the Belt and Road Initiative, while the other will be in the middle of the country, in Xi’an, to deal with land-based issues. We can only guess that China’s laws and interests will overrule any other considerations. With the initiative, China has, however, no military ambitions. It does not intend to ‘conquer foreign lands’, or as Miller eloquently, albeit bluntly, put it: ‘The goal is to create a web of informal alliances lubricated by Chinese cash’. Indians are wary that it may be otherwise and that China is building a ‘string of pearls’, a nickname that has stuck since a report by the US contractor Booz Allen Hamilton coined it for the US Department of Defense. The string would go across Bangladesh, Myanmar, Sri Lanka and Pakistan, right on India’s doorstep. Some of the further concerns are on the credit risk side. The Asian Infrastructure Investment Bank, amongst others, will lend huge sums of money to countries that would otherwise have struggled to attract financing. Put differently, if other banks had refused to lend to these countries, there must have been reasonable fears that the countries would not be able to repay their debts. Large defaults could negatively impact global financial markets. Or, they could create political backlash in the regions, as China would seize ownership of the infrastructure, as has happened in the past in Sri Lanka. Between 2007 and 2015, the Sri Lankan government took on $15 billion of debts, whereas in 2006, Sri Lanka’s overall external debt was ‘only’ $10.6 billion. China lent the money to build a power plant, an airport, an overhauled port, a new financial district, and an entirely new port at Hambantota. Unlike charging the ‘usual’ interest rate of under 2% for loans coming from multilateral development banks, Chi- The Belt Road Initiative 95 nese lenders were able to charge an average of 6%, with the highest even going to 8.8%. One of the very few explanations that makes sense of this huge difference is corruption. On top of that, mainly Chinese companies worked on the projects. The projects were not successful. As The Diplomat, an online outlet covering Asia reported, ‘the power plant suffered numerous outages’, ‘the airport became the world’s emptiest’, and the Hambantota port was a ‘commercial failure, getting hardly any ships’. The reporters added that ‘commercial failures, meanwhile, meant that insufficient revenue was generated to cover loan repayments, creating distressed assets’. To compensate China, the Sri Lankan government took a series of measures, including a debt-for-equity swap. In September 2014, China took on a 99-year lease on the port. In January 2015, following elections and the ousting of the former president, Sri Lanka took on new loans, this time at a 2% interest rate to be able to repay their 6% interest rates loans. And in December 2017, Sri Lanka ‘handed over’ the Hambantota port, not only the land ownership but the actual project too, against $1 billion, corresponding to selling 70% of the port’s equity. ‘With this agreement we have started to pay back the loans’, confirmed the Prime Minister of Sri Lanka, Ranil Wickremesinghe. He also confirmed that the port would not be used as a military base. Strategically, even without a military base, this could still further help China to project its economic power, especially when combining it with other holdings across Asia. Such a ‘tactic’ – if it really was one – attracted China the name of new colonialists, or ‘creditor imperialists’. It tends to show that it was rather naïve to believe that South-South cooperation – as opposed to North-South cooperation involving the World Bank or the International Monetary Fund – would be somewhat less exploitative. Unfortunately, there are fears that there could be more of these too-generous credit lines from China. A 2018 paper by the DC think tank Centre for Global Development mentions eight countries at ‘particular risk of debt distress’ because of the One-Belt-One-Road project: Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan, and Kyrgyzstan. Hu Biliang, the professor at the ‘Belt and Road Institute’ who published a rebuttal in The Economist about the project favouring Chinese 4 Economic Opportunities 96 firm, also attempted to defend this point about ‘creditor imperialism’ as such: China has followed the principles of broad consultation, joint contribution and shared benefits, neither enforcing political conditions nor coercing others into deal. Every arrangement is based on voluntary and equal cooperation. He went on by giving a concrete example with Laos, describing the decision process while emphasising similar values of group leadership theory: Prior to collaborating on projects, China and its partners conduct a joint assessment on the sustainability, and economic and social benefits of projects in an attempt to avoid risks and potentially negative outcomes for either party. For example, total investment in the China-Laos railway project is $7 billion, of which $2.1 billion is funded by the Laotian Government by borrowing a 30-year low-interest loan from the Export-Import Bank of China. According to the deal, the Laotian Government will pay back $0.1 billion every year. After a feasibility assessment, both countries agrreed that such a plan is workable, and even if the Laotian Government is unable to meet the financial repayments, it can instead opt to provide China with potassium carbonate, a common trade item between the two countries, as a substitute for cash. This is an example of how Belt and Road collaboration is premised on the basis of equality, mutual benefit and trust. Another worry though on the credit side is not related to the borrower’s inherent poor credit worthiness, but rather to the current economic environment of extremely low interest rates. Emerging markets benefited greatly from this era of ‘cheap money’, with many loans made in US dollars. The New Development Bank itself, although, as its document puts it, ‘endeavors to provide loans denominated in the national currencies of its member countries’, still provides US dollar and euro denominated loans. If the US federal reserve decides to increase the interest rates, then this will result in a strengthening of the US dollar (as the interest rate increases, it attracts more investors seeking returns on the dollar, appreciating the value of the currency). This, in turn, will create difficulties for investors to repay their debt, which will have a higher value. The concerns are important to be borne in mind, but also the change on a geopolitical level that the initiative has signalled. Official The Belt Road Initiative 97 documents of the ‘Belt and Road Initiative’ have been keen to speak of ‘common development’, ‘mutual prosperity’, and of a ‘community of common destiny’ based on the premise of ‘mutual benefits’. That’s a strong insistence on the word ‘common’. Despite the many concerns that the initiative brings, and despite the imbalance of power, in this case tilted towards cash-rich China, the insistence on being a group makes it a prime example for group leadership theory in international affairs. Quoting Miller one last time is also useful: ‘China’s new “empire” will be an informal and largely economic one, posited on cash and held together by hard infrastructure’, he writes. As a reminder, informality, as seen within the BRICS as well, has been a key tenet of the theory. It is still too early to know how the ‘Belt Road Initiative’ will actually pan out, but its development is certainly of interest to watch within the context of the theory. The G20 Other recent developments in the realm of economic opportunities point in the direction of group leadership theory. The same year as the BRICS emerged as an institution with its first summit, another summit took place, the G20. The G20 has emerged throughout the years as the platform to discuss global economic matters. Discussing groups of countries steering economic opportunities without mentioning the G20 would be very odd. In 2009, the G20 brought together for the first time the heads of states of its member countries, going one step further than ‘merely’ being a meeting for finance ministers and of central bank governors (it was also itself created as a result of the 1998 Asian financial crisis). The transformation of the G20 into a summitry received a much different reaction than the creation of the BRICS, but there are many links between the two groups. The creation of the G20 summit was crisis-induced: more precisely, as a consequence of the 2008 financial crisis against which a global answer was necessary, the crisis having potentially accelerated the creation of the BRICS. (The crisis was the result of too many countries having banks that indulged on collateralized-debtobligations, a financial product where mortgages were sliced up into 4 Economic Opportunities 98 tranches and sold as securities, and which caused the banks big losses when the true value of these products emerged as being close to worthless.) The BRICS demonstrated their value as a cohesive group more than once to the G20. In 2014, following Russia’s annexation of Crimea, Australia’s foreign minister, Julie Bishop, floated the idea of barring Russia from participating in the G20 summit planned to take place in her country. The BRICS’ answer illustrates perfectly the nature of the Group of 20: ‘The custodianship of the G20 belongs to all member-states equally and no one member-state can unilaterally determine its nature and character’. Russia, in the end, stayed in the meeting. Their reasons for standing up for Russia varied widely, and should not be interpreted as support for Russia though. Rather, Brazil is not a strong believer in sanctions after having experienced them itself in the ’80s; South Africa and India didn’t have any interest in getting involved, especially with China and Pakistan making their own territorial claims on India; and China didn’t want to give arguments to separatists in Tibet and Xinjiang by appearing to no longer support its nonintervention principle. (China did make an exception to this principle when it voted twice in the United Nations Security Council against Mummar Gaddafi in 2011, as it sought to protect its 35,000 nationals working in the country; the second resolution led to a regime change in Libya.) From the very start of the BRICS summit, in 2009, the group lent its weight to the G20 (all the while decrying the ‘legitimacy deficits’ of the IMF and the World Bank). Their first summit communiqué read: We welcome the fact that the G-20 was confirmed as the premier forum for international economic coordination and cooperation of all its member states. Compared to previous arrangements, the G-20 is broader, more inclusive, diverse, representative and effective. We call upon all its member states to undertake further efforts to implement jointly the decisions adopted at the three G-20 Summits. The BRICS kept having a meeting each time prior to the G20 to coordinate their agendas and kept pushing for a reform of the Bretton Woods institutions. The G20 got behind them and in 2010 a reform did come through. China took the number three position in share- The G20 99 holders’ ranking of the IMF, and the other four all had shares within the ten highest. John J. Kirton – the Toronto-based academic already mentioned in the previous chapter – has established himself as a reference on all G20 matters; he has also had the privilege of having much contact with official representatives sitting at the meetings. His characterisation of the G20 in his book G20 Governance for a Globalized World is therefore informative and reveals that he’s been an uncommon witness to the dynamics of the group, unlike hardly anyone else outside the closed circle of diplomats. For instance, in his own words: Internal equality among members produces the sense of responsibility and resources that enhance performance because it is more likely that G20 members will exert dominant influence and assume formal management responsibilities within the broader multilateral organizations in keeping with G20 goals. Many points in his book consider the G20 as part of the group leadership theory, but a few also speak against it. They will be considered in turn. While the US is part of the G20, it doesn’t ‘lead’ the group and there is evidence of many initiatives pushed by other countries. Turning the G20 meeting of finance ministers into a summit was at the request of the French President Nicholas Sarkozy. The Canadian Prime Minister Paul Martin had also campaigned for something similar earlier in 2004–2005 (and had called it an ‘L20’, with the L for ‘leaders’). The group dynamic within the G20 can be reminiscent of what we’ve seen in the previous chapter concerning the Conference of the Parties, with factions building on the side. During the years after the 2008 financial crisis, the US and Europeans did not see eye to eye on fiscal stimulus; Canadians, Europeans and the US on a global bank levy, and emerging countries against the others on imbalances in the benefits of globalisation. Also, similar to the Paris Agreement, the G20’s strength emerged on the back of the failure of other international institutions, most prominently the International Monetary Fund, the G8 and G20 (of finance ministers, not heads), and the United Nations. The G20 meeting of finance ministers was not enough anymore, as ‘officials [were] saying they needed a political mandate and leaders 4 Economic Opportunities 100 [were] saying they lacked the technical expertise to conclude the deal themselves’. The relatively small number of participants has meant that they could feel as part of an ‘exclusive club’, could have rather frank and personal discussions, and create a bond between each other. Or as Kirton puts it: G20’s controlled club participation as a network hub; enhance sense of belonging of the non-G8 members to the G20 summit group. They increasingly conceived of the G20 summit as a valued club that they too could soon lead. … [C]ontrolled participation leaves leaders alone to be leaders with their only peers and desired partners in a club they cherish as their own. The group takes decision by consensus, and ‘conceptions of interest and identities [are] constructed collectively’. Country leaders are alone with their peers, as a full seat at the table is only reserved for the 20 members. Exemplifying this trait is that ‘individuals were willing to compromise or to give others a bit of room to get an agreement through’ [at the Toronto summit in 2010], Kirton explains. Also representative of this personal atmosphere is Kirton’s description of leaders letting their emotions show: There were several spontaneous outbursts of applause for their beloved colleague Brazil’s Luiz Inacio Lula da Silva, who would soon be leaving. There were also personal condolences for their politically less loved colleague from Argentina, Cristina Fernandez de Kirchner, on the recent death of her husband. And yet, as mentioned, the G20 is not a perfect fit for the theory. Competition can be high (for instance to host the next summit, as the host has the advantage to set the agenda), and elbowing each other can be equally as hard. In 2010, Bush described the outcome of the summit in not so honourable terms: ‘I knew it wouldn’t be easy to forge an agreement among the twenty leaders. But with hard work and some gentle arm-twisting, we got it done’. It would seem that at times, ‘gentle’ bullying rather than personal bonding drove results. Furthermore, the question of membership has been a fraught one. The exclusive club feeling has meant that many countries could not be admitted. Switzerland is not a member, Indonesia was only admitted later, as were Mexico, Korea and Turkey. But few agreed that non- The G20 101 democratic Egypt should join, and Nigeria and Spain, despite their request, did not gain admission to the G20 summits. But more damning than rejections is that measures had to be applied to determine which countries have the largest ‘economic weight’ – in a way, this is not too far from the arrogance displayed in the quotes in the introduction, where boyish national leaders boast of who has the ‘biggest button’. According to Kirton, the expert, the G20 has performed best on fiscal stimulus, trade liberalization, and money laundering. It has, on the other hand, performed less well on managing the exchange rate regime, handling sovereign debt restructuring, world income polarization, and financial regulation, where it has delegated those issues to other international economic bodies. It’s a balanced mix. Other bodies? There are many more examples of group leadership within the sphere of economic opportunities, even if the topic may not be so popular at the moment. With many discussions stemming from the US, about trade barriers, protectionism, and trade wars, one could have the impression that the thesis of this book has overlooked many factors. And yet: recently the EU has concluded substantive trade deals with Canada, Japan, Singapore, and Vietnam; it has accelerated negotiations with Mexico and Mercosur; and in July 2018, in a big celebration of the ‘world’s biggest trade deal’, it signed a free trade agreement with Japan. Further, the 11 nation Trans-Pacific Partnership, despite the Trump administration leaving it, has moved forward fast, with Australian and Japan taking the lead. Mexico, put under pressure with the renegotiation of NAFTA (North American Free Trade Agreement) has also started pivoting towards other Latin America neighbouring countries. Since 2014, the Pacific Alliance has acted as a low-barrier trading alliance between Chile, Colombia, Mexico, and Peru, four ‘associate members’ and 48 observer countries. Between the four member states, 92% of all tariffs are now gone – a quite substantial amount, and ‘Chile, Colombia, and Peru have linked their stock markets so that a company listed in one of the exchanges can be traded in the other two’, as The Atlantic reported in an article provocatively titled ‘The Most Important 4 Economic Opportunities 102 Alliance You’ve Never Heard Of ’. There are further plans for a Trans- Isthmus Corridor starting from Mexico and championed by Andrés Manuel López Obrador (this may come to life in the coming years). Also, following the June 2018 G7 Summit, which exposed the discrepancy of the US stance on trade against one of the other six members, there has been much talk of ‘trade diversification’, basically turning away from the US. This has included South Korea looking at Russia, or the EU looking at trade deals with Australia and New Zealand. On yet a different continent, in 2018, 44 African countries created an important free trading bloc with the African Continental Free Trade Area. Until then, African countries mostly traded outside the continent (82% of exports are going outside Africa), as large tariff barriers hindered intra-continental trade. Non-state actor groups (e.g., the Group of 30), associations (e.g., the International Association of Insurance Supervisors or the International Financial Reporting Standards), or other regional development banks are further potent examples of the thesis that group leadership theory has its place in narrating the changes that the world order is going through. Within the G20, the Financial Stability Board also offers interesting lessons on group dynamics, with countries from the BRICS being included at their request. In the interest of space, it is not reasonable to delve into all initiatives, and I’m sure that many readers will also be able to come up with further examples of their own that embody the theory. A last mention concerning technological development is, however, warranted. As for the other sphere of international affairs, technology is likely to accentuate this trend – a point that the final chapter will further develop. Blockchain is offering a lot of hope to change how business is conducted. After the success of Bitcoin, which saw a rise from $3,000 to a height of under $20,000 within the span of six months in the secondhalf of 2017, many saw cryptocurrencies as a get-rich scheme. Their potential advantages could go well beyond that, though. Their inherent added value to the current system of transferring funds internationally is to be much quicker. The drawbacks of Bitcoin have so far been: high volatility, which defeats the purpose of either a payment system or a store-of-value, and its anonymity, circumventing efforts to fight money laundering, tax evasion, and other criminal activities. Now, Bitcoin and Other bodies? 103 many other similar currencies created during the frenzy of 2017–2018 may not ever be very useful, even if they don’t necessarily die out. But they have inspired a few interesting projects. Saga is one of them. Saga, launched in Switzerland by big names in the world of finance, including a former governor of the bank of Israel, a US Nobel-prize winning economist, and the co-creator of the Vix index, aims at reducing volatility by linking it to a basket of fiat currencies already existing and managed by the International Monetary Fund, the Special Drawing Rights. Saga also aims at tackling the anonymity issue by allowing authorities to verify owners whenever required. The usual critics apply to the Special Drawing Rights, and hence to Saga, as the Rights fall under the remit of the International Monetary Fund and are allocated respectively to voting shares within the fund. The Rights are heavily biased towards the US, to the dismay of emerging markets. But the overall point to stay aware of here is the cooperation that it has brought together, going beyond only the network effects of the technology. It is remarkable that despite the weight of the US in the world economy and in setting standards, this chapter could prominently highlight that a new constellation within international affairs is emerging. Speaking of a ‘G0’ world to express a world without leadership seems remote when considering the aforementioned initiative. Even within the realm of ‘hard power’, where many sceptics could have had doubts about the applicability of group leadership theory, several developments are noticeable. Countries seek to harness on an informal, and on an equal-footing basis, their willingness to move forward. These developments within the realm of ‘hard power’ reflect that group leadership theory goes beyond being only a theory. ‘Hard power’ was defined in the introduction around two components especially: economics, which we have just covered, and military forces. The next chapter delves, finally, into the last one. The sceptical will have a point. The US military spending is so large that collectively aggregating the second to the ninth largest military expenditures of countries still doesn’t reach the US level. (This corresponds to taking the expenditure of China, Russia, Saudi Arabia, India, France, the UK, Japan, and Germany). Consequently, the US plays a role in many security hotbeds, threatening global peace, and even recently, amidst much noise about the US pulling out of its international role. It has leant its 4 Economic Opportunities 104 weight to condemn Russia’s invasion of Crimea, has stepped up the rhetoric against North Korea, and has deployed limited resources against the Islamic States and in Syria. Regardless of US involvement, other countries have taken the lead in reining in global threats. And they have done so, probably unsurprisingly to the reader by now, as a group. Other bodies? 105

Chapter Preview

References

Abstract

The US withdrawing from the Paris Agreement, the Trans-Pacific Partnership, the ‘Iran deal’, UNESCO, as well as the UN Human Rights Councils: issues like these convey the impression that the world order has changed. Without US leadership, it may seem that we have entered into what Ian Bremmer, an oft-quoted political pundit, calls a G0 world, a world without any leadership. Clement Guitton argues against this world view, as it disregards evidence of global leadership around the world on matters ranging from climate change, to trade, to security. Going a step further, Guitton claims that there is even evidence of a new form of leadership in international affairs: group leadership.