The final communique of the G7 Leaders Summit in Cornwall, UK, captures the contradictions of our time. Politicking over the origin of the coronavirus and vaccine distribution while a large part of the world is still struggling to combat the pandemic; Acknowledging the urgency of the climate crisis while at the same time feet dragging on more ambitious action; Doubling down on a position of antagonism against China when pressing global challenges demand collaboration with the world’s second largest economy.
It is the last point that more or less defined this year’s G7 Summit, with antagonism expanded into new areas. Infrastructure financing in the developing world now joins the ranks of human rights and pandemic-fighting as a frontline issue for the competition of Western and Chinese approaches.
In Point 67 of the communique, the G7 group lays out a plan that is supposed to represent “a step change in our approach to infrastructure financing”. The “Build Back Better World” Initiative (“B3W”) contains six key principles: values-driven vision, intensive collaboration, market-led, strong standards, enhanced multilateral financing, and strategic partnerships. The plan does not explicitly refer to China, but each of the principles is unmistakably a critique of the Belt and Road Initiative (BRI), often seen in the West as a state-led approach to infrastructure development that applies low standards and mainly serves China’s own strategic interests. If the plan itself wasn’t direct in its targeting of China’s BRI, House Chairman of the Foreign Affairs Committee, Gregory Meeks, spelled out the US approach in a recent Foreign Policy op-ed titled “The Build Back Better World Partnership Could Finally Break the Belt and Road.”
So to what extent is the G7’s counter-offering “new”? Can it live up to the promise of being a “step change” in global infrastructure financing? And how will it work out in reality given the involvement of multiple countries and stakeholders, both public and private, in the G7’s market-led, multilateral approach? Perhaps more importantly, how will the economies of the Global South, the initiative’s purported target market, receive it? These are a few questions we posed to our network of experts. Below are the insights we have collected in response.
Stella Zhang, PhD candidate at the Schar School of Policy and Government, George Mason University
The B3W is not the first response from the G7 countries to China’s role in global infrastructure development. The US, Japan, and Australia already formed a Trilateral Infrastructure Partnership (TIP) in 2018 and have been actively reaching out to Indo-Pacific countries. The B3W supposedly will have a broader geographic coverage. Regarding how much of “a step change” it will be, it remains to be seen how the G7 countries will pool together their financial resources and expertise, and coordinate their economic engagement with developing countries.
One question that is not clear is how the G7 countries will coordinate economic interests among themselves, given that they champion the Public-Private-Partnership model and seek to mobilize private capital into infrastructure investment. Take the examples of the Development Finance Institutions (DFIs) involved in the TIP (the U.S. International Development Finance Corporation (DFC), Japan Bank for International Cooperation, and Australia’s Export Finance and Insurance Corporation), they are not the Official Development Assistance (ODA) agencies, required by the OECD Development Assistance Committee guidelines to separate development aid from economic interests; rather, all these institutions have a mandate to help their national businesses export or establish footholds overseas — in this sense, they are the real counterparts of China’s policy banks such as Export-Import Bank of China and China Development Bank. But while the G7 governments may be on the same page, private companies from these countries may be not. How to effectively coordinate among the G7 governments while fulfilling their mandates to promote their national businesses may turn out to be a challenge. Of course, coordination problems also exist for China, but the relationship between the Chinese government and companies is more concerned with accountability than coordination.
Another question is whether B3W will define the kind of projects they will finance. For sure, they will want to differentiate from China by emphasizing sustainability, equity, and inclusiveness. There will potentially be tension between these goals and the host governments’ priorities. Moreover, the U.S. DFC “is committed to generating returns for the American taxpayer.” That may mean that they will not be able to finance projects that cannot generate positive returns until after a long period of time.
I think ultimately, the key competition will be less about how the DFIs work, and more about how effectively companies from G7 countries and China can identify and execute projects in the host countries. Availability of financial support from the government is one factor in this competition, but not necessarily the determining factor. An interesting case in point is that Chinese contractors have received the largest shares of contracts awarded by the World Bank and African Development Bank in Africa. This suggests that they have certain advantages compared to other international competitors in certain kinds of projects, even when they don’t involve Chinese financing and have built in requirements for sustainability, equity, and so on. That said, even the Chinese companies themselves would agree that they have much less understanding and less established presence than companies from G7 countries in many host countries.
The competition between G7 and China may also mean greater bargaining power for the host countries. I think it will be their rational choice to try to make use of BOTH Chinese and G7 resources, rather than choosing between them. So the host countries will want to direct them into different sectors to fulfill their different needs.
David H. Shinn, former U.S. ambassador to Ethiopia (1996-99) and Burkina Faso (1987-1990) and adjunct professor of international affairs at George Washington University
The Build Back Better World (B3W) Partnership is a new concept based on old principles. It is new in that it brings together the G7 countries and has invited other democracies to join including India, Australia, South Korea, and South Africa. Its current membership also begs the question whether other countries such as Brazil might be invited to join in the future. There is a heavy emphasis on pursuing key democratic principles, most of them long-standing: transparency, good governance, sustainable development, high standards, and being climate friendly. While aimed at mobilizing private-sector capital to improve infrastructure in low-and middle-income countries, it has the potential to evolve and incorporate a broader agenda.
China’s Belt and Road Initiative (BRI) seems to have begun as an infrastructure enhancement project across Central Asia to Europe and along the Maritime Silk Road. Today, it looks more like the totality of China’s foreign policy that spans the globe. In any event, it has morphed well beyond infrastructure enhancement focused on a relatively narrow geographical zone. At this point, the far more limited purpose of the B3W makes it difficult to compare usefully with the much more expansive BRI. In fact, the BRI has taken on so many features and incorporates so much geography—now including the Arctic and Latin America—that one can question whether it continues to serve as a useful, discrete concept.
If one looks only at the infrastructure component of the BRI, there are important differences with the B3W. The B3W emphasizes the use of government financial institutions to leverage private sector capital as compared to a much larger reliance on BRI capital provided directly by state-owned enterprises. The focus sectors of the B3W are climate, health and health security, digital technology, and gender equity and equality. Of these sectors, the BRI has only given significant attention to digital technology. Most of its financing has been devoted to “hard” infrastructure such as dams, ports, railways, and roads. The BRI has a major advantage in the way it operates. One country—China—can largely decide what and how to finance a project. The B3W, on the other hand, requires careful collaboration among its members, which is tantamount to herding cats.
Rasheed Griffith, host of the China in the Caribbean podcast
B3W is a values-laden narrative that the G7 wants to publicly inculcate in an attempt to compete with China. But as it now stands B3W is neither a plan nor a strategy – it is not even an approach. At best B3W is merely a gesture. No specific funding commitments have been made. No multilateral project management coordinating mechanisms have been announced. There is no indication of which G7 companies will be able to do the international contracting work. In any other policy context B3W would not be taken seriously.
The infrastructure component of the BRI has generally been market-led. Chinese contracting firms were able to export the excess capacity from the massive economic boom of China’s infrastructure industry in the last 3 decades. G7 countries do not have such excess infrastructure capacity. In fact, some G7 countries themselves have an infrastructure deficit. It will be exceedingly difficult to justify to their electorates why they are spending billions of dollars in the Global South on infrastructure when it is also needed at home.
Moreover, Chinese firms are more flexible in terms of financing arrangements (for example the North-South Highway in Jamaica that was done via land collatorialization). Chinese firms are likely still more willing to invest in risky megaprojects (for example the Baha Mar resort in the Bahamas that was funded for nearly $4 Billion largely by China Exim Bank). Chinese firms are likely still more willing to coordinate paperwork and seller credits for projects. B3W will have to coordinate multilaterally making it slower and more bureaucratic by default. There is already a problem in the Caribbean where governments cannot complete US DFI paperwork to receive project funding.
All such initiatives that aim to build up the Caribbean are welcomed. But that is not to say that B3W will induce any excitement. The Caribbean has been concurrently engaged with many of the major players of the G7 for centuries: making the region accustomed to worn-out posturing. If these G7 countries had the capacity and willingness to “build back better” anywhere in the world you would see it in the Caribbean first. Keep looking.
Alvin Camba, Assistant Professor at the Korbel School, University of Denver
Bilateral and multilateral approaches of countries toward infrastructure financing are not new. What will be new with the B3W is the convergence, harmonization, and creation of new policies in order to create a viable global alternative to BRI. Members will need to negotiate common policies, approaches, and principles on infrastructure financing for the low- and middle-income countries. This process will be difficult because the B3W members have their own national institutions and social norms, which will compete against one another in the formation of the initiative.
Some things need to be negotiated, such as the degree of state intervention in the economy, which members of the B3W vary on. For instance, the Germans and the Japanese have a stronger preference for state institutions such as the German Import-Export Bank or the Japanese International Cooperation Agency. Other states, particularly the US and the UK, rely on less direct forms of intervention. So, the outcome would be either a “weak version” of the B3W where it will not be different from the current status quo, with the alternative initiative true only on paper. Or a “strong version” where compromises among B3W members would happen.
What the B3W overlooks, however, is that some leaders choose to work with the Chinese not because there are no alternative financiers, but because the Chinese were more amenable and less intrusive to their goals. Across the world, leaders work with the Chinese to fulfil parochial political objectives. Philippine President Rodrigo Duterte, for example, chose the Chinese because they were open to expediting BRI projects so that they would be completed in his term, allowing Duterte to directly and immediately reward his allies. In another project, China Telecommunications’ joint venture with a Philippine firm to create the Dito Telecommunity was forged to simultaneously reward Duterte-crony Dennis Uy and weaken the Philippine business elites’ monopoly of the telecommunications sector. Similarly, Indonesian President Jokowi Widodo opted to work with the Chinese in the Jakarta-Bandung high-speed rail because they were willing to invest in a project that might not be profitable. While in Malaysia, former Prime Minister Najib Razak sought Chinese loans to build the East Coast Railway in order to bail out the 1MDB state fund.
Put in another way, leaders have political objectives in addition to development or geopolitical ones, influencing their calculus to work with Chinese partners. Thus, what the B3W plan misunderstands is the local drivers of interest in Chinese assistance. Some leaders do not necessarily solicit aid to benefit the institutions of their country; they also seek to use such aid to enrich themselves and extend the scope of their political influence.