Richard Kozul-Wright and Daniel Poon say China's Belt and Road Initiative is different from the US post-war recovery programme for Europe, which came with policy conditions and an end date. But Beijing can still learn valuable lessons.

Once an exemplary student of globalization encouraged to be a “responsible stakeholder” in international affairs, China is increasingly portrayed in the West as a “strategic competitor” or worse, a dangerous threat to the survival of the rules-based international order.

China’s Belt and Road Initiative is one of the reasons for this shift in sentiment, with a crescendo of accusations about its geopolitical intentions and the dangers of debt peonage.

China has reacted swiftly to such accusations, rejecting, in particular, comparisons between its belt and road programme and the Marshall Plan; insisting, correctly, that it does not assert the economic hegemony the United States did at the end of the second world war; and eschewing the confrontational ideology that underpinned the plan.

But with the global economy entering troubled waters and pragmatic multilateral leadership in short supply, Chinese (and Western) policymakers might do well to draw lessons from the Marshall Plan to contextualize the belt and road strategy and inform the wider debate about the future of international economic governance.

Formulate and coordinate

From 1948 to 1951, the US transferred $13 billion (about $115 billion at current prices) to Europe for reconstruction; roughly 1% annually of US GDP and of the combined GDP of recipient countries.

By comparison, between 2014 and 2018, China financed an estimated $448 billion (in FDI and completed construction contracts) in 64 belt and road partner countries; roughly 0.8% annually of China’s GDP and 0.7% of the combined GDP of those countries.

Assistance under the Marshall Plan came in the form of loans – up to a predetermined ceiling – and, more importantly, grants, with priority given to imports of consumption goods to boost living standards, capital equipment and raw materials for infrastructure programmes that enabled dollar-earning or dollar-saving activities.

To gain funds, European governments submitted requests to the US-led European Cooperation Administration (ECA), which reviewed these according to established criteria and their impact on the US economy.

The ECA was instructed to limit the procurement of US goods in short supply and to encourage the reduction of surplus stocks. Moreover, on approval, Marshall funds were extended only once the recipient deposited a matching amount of local currency in an ECA-controlled account.

In addition, European countries were required to create an institution – the Organisation for European Economic Cooperation – to jointly formulate and coordinate the use of Marshall funds. Recipient countries had to submit a plan setting out how allocation of funds would allow for aid to be terminated by 1952–1953.

Most belt and road partner countries, while not war-torn, generally suffer from limited economic prospects, sizeable resource deficits and weak state capacities.

Practical plan

Like the Marshall Plan, the Belt and Road Initiative seeks to mobilize public and private investment in partner countries, albeit with a singular focus on large infrastructure projects, and it is linked to China’s own economic upgrading by creating footholds in external markets for its capital goods and hi-tech products.

But the differences are equally important. First, the belt and road plan is more development-oriented, more geographically dispersed and has no specified end date.

Second, financing consists largely of loans (provided by national development banks and dedicated funds), foreign direct investment and a smattering of grants. Third, given the limited institutional capacities in most belt and road partner countries, China has operated bilaterally and has not created tailored coordinating institutions.

On this score, a direct comparison with the Marshall Plan is indeed misguided. Even so, the success of the US plan was not just in the scale and composition of its financing, but in its governance approach.

The main institutional elements of what is considered “history’s most successful structural adjustment programme” were decentralized administration and regional coordination, time-limited programmes, and local ownership combined with institutional capacity building.

While pushing recipient countries to balance budgets, stabilize exchange rates, and reduce barriers to trade, policy conditionality under the Marshall Plan – unlike under later programmes – was pursued in practical rather than doctrinaire ways and tempered by Europe’s own aims of establishing full employment and mixed-ownership economies with closer regional ties.

Despite accusations that it is weaponizing debt, China has also avoided policy conditionality in favour of project conditionality.

This limits the development impact of projects in the borrowing countries, but is of a different order than imposing a one-size-fits-all policy straitjacket. Project conditionalities can be relaxed over time, or renegotiated, preferably while fostering local institutional capacities.

Development ladder

This is consistent with Beijing’s own experience both as a pragmatic policy experimenter and as a recipient of multilateral development assistance and advice unhindered by policy conditionality.

The first World Bank mission to China in 1980 sensibly accepted that market reforms would be gradual and argued that substantial gains could be achieved through improved long-term planning practices and information flows.

China has learned much in the subsequent 40 years and is now seeking to share its development experiences, recently establishing two multilateral development banks and its own dedicated aid agency with associated think tanks.

In doing so, drawing the right lessons from the Marshall Plan can actually buttress China’s budding leadership ambitions. And a rethink of multilateral rules and practices is very much needed, in light of China’s own remarkable success in catching up with those higher up the development ladder.

Read the original article in the South China Morning Post
Follow them: @SCMPNews on Twitter | South China Morning Post on Facebook

The views expressed in this article are those of the author and do not necessarily reflect the views of UNCTAD.