In April this year Thomas Hale, Associate Professor of Global Public Policy at the Blavatnik School of Government, Oxford University, and co authors Liu Chuyu and Johannes Urpelainen published an in-depth look at the complex and dynamic network of actors who make and shape the Belt and Road Initiative.
With an underlying guiding question of “how and to what extent does sustainability matter?” to these actors, the three researchers dug into the roles and relations of key Chinese government ministries, banks, state owned companies and recipient country governments. Interviews with different levels of staff in these entities furnish the report with some unique insights available into what can be a bewildering canvas of players and their dynamic relations, contributing much to our understanding of the decision making process on the Belt and Road.
Earlier this month Panda Paw Dragon Claw spoke with Professor Thomas Hale about the findings, what they mean for the question of sustainability on the Belt and Road, and what civil society and advocacy groups for a “greener” BRI could learn from them.
Panda Paw Dragon Claw (PPDC): In contrast to common perceptions of the Belt and Road Initiative, your study proposes that the Initiative is primarily driven by a “bottom-up” dynamic, shaped by multiple competing players. You label this a “reverse two-level game”. Can you tell us a bit more about how this works and why it is of significance to those trying to understand the Belt and Road Initiative?
Thomas Hale (TH): The view of BRI as a monolithic masterplan, still common amongst media and policymakers, is as stubborn as it is pernicious. While the Chinese leadership obviously sees great strategic value in BRI and has mobilized vast resources to support it, Beijing could not centrally direct all aspects of Chinese overseas investment even if it wanted to. Instead, as in many policy areas, the leadership articulates the overall direction of travel and, except for a few particularly strategic projects, leaves each piece of the state apparatus to implement that vision as best they can.
This “campaign” approach means that the majority of BRI projects cannot help but reflect the interests of the individual ministries, financiers, companies, and local governments that design, approve, fund, and implement them. Understanding those different interests, and how they interact with their counterparts in BRI countries, is therefore necessary to understand why BRI projects look the way they do.
In international relations, “two-level games” refers to the idea that cooperation between countries is constrained by what is politically possible domestically. Two leaders can negotiate a trade deal, but if they can’t get that deal approved by their key domestic constituents, it’s not much of a deal. In other words, leaders make the deal, but domestic interests define the boundaries in which that deal must fall. We think it’s helpful to understand BRI through a similar but reverse logic. International bargaining defines the boundaries of what’s possible, but it is the deals made by individual companies, banks, and ministries, in China and in recipient countries, that decide the specifics.
PPDC: In addition, you suggest that an asymmetry of information within this network has a big impact on their interactions and how decisions get made. How does this work?
TH: Information asymmetry, a core challenge of Chinese policymaking generally, is particularly vexatious with respect to BRI. How can decisionmakers in Beijing track thousands of projects, implemented by an array of different actors, in dozens of countries?
The barriers are surprisingly mundane. For example, the bureaucratic structure of key BRI entities militates against coordination. Take the China Development Bank (CDB). Since it finances so many projects, one might assume it would have a good overview of BRI as a whole. In reality, the CBD’s decision-making is distributed across a number of regional offices with significant autonomy and divergent interests. The Chengdu branch handles Southeast Asia, the Xi’an branch Central Asia, etc. So even in one organization, information does not flow.
Personnel is another key barrier. The National Development and Reform Commission (NDRC), despite its central role and unquestionable authority, has just a small staff overseeing the approval process that reviews significant BRI projects. They do not have the time or resources to do due diligence on every detail of every project. Moreover, NDRC or CBD officials in Beijing often struggle to gain accurate knowledge about economic opportunities and challenges in recipient countries. These organizations do not have their own staff in country, so must instead rely on diplomats or commercial officers—or, frequently, state owned enterprises involved in projects—for information.
For all these reasons, the ability of regulators in Beijing to meaningfully shape the design of BRI projects is constrained. Instead, central authorities tend to become involved mostly in a firefighting capacity when things go wrong. It’s a classic principal-agent problem.
You might therefore wonder why Beijing does not impose order. After all, centralization has been the core theme of President Xi’s tenure. Here, the vastness of BRI limits what is possible. Because such a large swathe of China’s financial and economic interests are engaged, the leadership would need to expend significant political capital knocking heads together to get them to align. This is only worth it for the highest priorities. Unfortunately, as we show in the report, sustainability is almost never amongst them.
PPDC: What are the competing roles and interests of the three main Belt and Road supervisory ministries, the Ministry of Commerce (MOFCOM), the National Development and Reform Commission (NDRC), and the Ministry of Foreign Affairs (MoFA)?
TH: NDRC is unquestionably the most important ministry. If it decides to block a project, that project will not happen. But this de jure authority is undermined by de facto limitations on personnel and information, as noted above, and also by bureaucratic and intra-party politics. If a project is particularly important for a major SOE, or for CDB, or for a high-ranking provincial leader, the mid-ranking NDRC officials overseeing the approval process would need a very good reason to block it. In practice, their approval is almost always forthcoming by the time a project reaches their desk. MOFCOM also has a formal veto for most projects (it must grant an export license in many instances), but in practice this is rarely denied.
Though it often receives the most attention when it comes to China’s overseas policies, on Belt and Road projects, MoFA is mostly on clean-up duty. Should a project turn sour, it is the MoFA diplomats in-country who will be on the front line of setting it right. This was evident, for example, in the Chinese embassy to Kenya’s proactive engagement with civil society groups after they won a court case calling for the cancellation of the Chinese financed and constructed Lamu coal power plant.
PPDC: The two policy banks, the China Import-Export Banks (EXIM Bank) and China Development Bank (CDB), are the major sources of financing for Belt and Road projects. How does their financing decision making process work, what are their motivations and, to the best of our knowledge, how do they assess financial risk?
TH: The most under-appreciated aspect of China’s policy banks is their need to make a return on investment. While ultimately these institutions can rely on China’s sovereign guarantee, no director of CDB or China EXIM Bank wants to break the bank because doing so would end his career (there have not been any female leaders of either institution). So while these institutions can and do take a loss on projects of high political importance, their ability to do so depends on making a return on the vast majority of their lending. CDB, in particular, relies on bonds to finance its operations, and bondholders need to be paid.
However, while the policy banks are very focused on managing financial risk, neither institution plays a particularly proactive role in developing the projects they finance. Instead they rely on large Chinese firms, typically SOEs, to bring them business. Again, this creates an important information asymmetry.
PPDC: You cite one example, China EXIM Bank’s loan for the Myitsone hydropower dam in Myanmar, of policy banks’ loans ending up on the wrong side of risk – political in this case – but suggest that the bank seemed to enjoy “punishment immunity” at annual evaluations. Tell us more about the case and what you mean by this? What are the implications of this for advocacy groups who are trying to highlight the economic, political, environmental and social risks involved in many Belt and Road projects?
TH: This case is a great example of why information asymmetry in BRI is such a consequential constraint, even if it seems quotidian. The Myitsone dam, which China EXIM Bank financed, was fiercely opposed by local civil society groups, who attracted significant support from international NGOs. When the Myanmar government suspended the project, the bank took the hit. While these dynamics are common in large hydro projects, China EXIM Bank was able to convince regulators that it and the commercial partners had done as much as could be expected of them, and were simply the victims of “anti-China forces.” How could the authorities in Beijing, with little knowledge of the specifics, argue otherwise?
On the one hand, this case demonstrates how decisionmakers in Beijing are sensitive to local opposition, especially when it attracts widespread attention. On the other hand, it also shows that “naming and shaming” alone is unlikely to drive long-term structural change unless the incentives of key bureaucratic actors can be shifted.
PPDC: One issue that comes up in your analysis of all the above mentioned Chinese players is understaffing, particularly in the departments that are tasked with assessing and monitoring Belt and Road projects. For example, you note that though China EXIM Bank has more global assets than the World Bank, it has only 1,000 staff in their Beijing headquarters, compared to the World Bank’s 12,300 staff worldwide. MOFCOM affiliated staff in Chinese embassies who are tasked with finding and assessing commercial opportunities are similarly understaffed. How could this gap be addressed and is Beijing taking moves to do so?
TH: In BRI, the old adage that “personnel is policy” really rings true. In the report we recommend that the Central Organization Department (COD), the Chinese Communist Party’s powerful “HR department,” take a holistic and systematic approach to breaking down some of the silos and staffing limitations that undermine efforts to “green” BRI. For example, COD could bring together officials from policy banks, regulators, SOEs, and in-country embassies. Crucially, they could also make sure that officials across all these entities are building up deep contextual knowledge of BRI countries. We usually think of BRI more as a geopolitical issue, not a question of human resources. But when it comes to re-shaping bureaucratic incentives, the latter is perhaps more important. Combined with some bureaucratic reshuffling—for example, giving the Ministry of Environment and Ecology (MEE) a substantive role in decision-making—such reforms could substantially improve the quality of BRI projects.
Outside the Chinese policy apparatus, non-governmental actors in China and especially in BRI countries can play an important role. For example, given the information asymmetries, decision-makers in Beijing should see local NGOs as key partners helping them monitor implementation of BRI projects. Such relationships are not easy to establish, but the recently established Belt and Road Initiative International Green Development Coalition (BRIGDC), a loose network of Chinese and international NGOs and policymakers led by the MEE, could play a role in building them.
PPDC: So, where does sustainability come into this complex web of relationships and what suggestions do you have for those advocating for an increased focus on social, economic and environmental sustainability in the Belt and Road Initiative?
TH: The objective of our report was to look in detail at the actors who actually shape most BRI projects in order to to understand how significantly sustainability figures in their interests and decision-making. Depressingly, the answer is very, very little. In fact the only instances where sustainability attained salience was when civil society groups, courts or other actors in BRI countries (for example, anti-coal campaigners in Kenya) threatened to block or halt BRI projects over sustainability grounds. There are two implications. First, the importance of local sustainability activism in recipient countries cannot be overstated. When such activism threatens the viability of BRI projects, it has real influence. Second, we won’t see a lasting “greening” of BRI until Beijing expends the political capital needed to reshuffle bureaucratic interests in a way that elevates sustainability. This is likely a long-term challenge.
PPDC: And lastly, in what ways has this turbulent year changed the picture for the “greening” of the Belt and Road?
TH: BRI will be profoundly shaped by the fallout of the COVID-19 crisis. There will be even more demand in developing countries for growth-promoting infrastructure projects, but probably less supply of Chinese financing as the policy banks look to their bottom lines and domestic priorities. At the same time, China will be eager to strengthen diplomatic relationships as geopolitical contestation intensifies. In this context, sustainability could be increasingly side-lined by blanket interest in economic stimulus. However, if China sees diplomatic benefits in greening BRI—for example, if a future Biden administration makes this part of the path back to a more stable relationship with the United States, as recently indicated in his climate plan—then sustainability may take on a new importance. Should that happen, the key challenge will be to move from grand bargains to real shifts in the bureaucratic interests that shape BRI projects.
Dr. Thomas Hale is Associate Professor of Global Public Policy at the Blavatnik School of Government, University of Oxford. His research seeks to explain how political institutions evolve – or not – to face the challenges raised by globalisation and interdependence, with a particular emphasis on environmental and economic issues.
The co-authored report, Belt and Road Decision Making in China and Recipient Countries: How and to what extent does sustainability matter?, is available in full here.