Why China’s ‘Debtbook Diplomacy’ is a Hoax
“And why beholdest thou the mote that is in thy brother's eye, but considerest not the beam that is in thine own eye? Or how wilt thou say to thy brother, "Let me pull out the mote out of thine eye"; and, behold, a beam is in thine own eye? Thou hypocrite, first cast out the beam out of thine own eye; and then shalt thou see clearly to cast out the mote out of thy brother's eye.” (Matthew 7:3-5, KJV).
Panic is spreading in the trans-Atlantic area dominated by the City of London and Wall Street financial interests, over two factors: 1. That its bankrupt monetary and financial system, including the Euro system, is clearly in the final phase of its disintegration process; 2. That an alternative, which the Chairwoman of the International Schiller Institute, Mrs Helga Zepp-LaRouche has described as “a new paradigm” in international economic and political relations, has spread over large swathes of the planet thanks to China’s Belt and Road Initiative (BRI), the BRICS nations’ new development policies, the Shanghai Cooperation Organization’s expansion, the alliance between the China-spearheaded BRI and the Russia-led Eurasian Economic Union, and the China-Africa economic cooperation process. President Trump's repeated insistence that he has excellent relations with Presidents Putin and Xi Jinping, and that it would be a "good thing, not a bad thing" for the U.S. to have China and Russia as a friend, simply adds to the panic of the geopoliticians of the British Empire, and is the root of the frantic and fraudulent "Russiagate" campaign to remove him from office.
The corrupt Western mainstream mass media, hired academic institutions and think tanks are inventing new lies, packaged as academic studies, and coining new terminology that is then used by powerful political institutions in a fruitless attempt to stop the new paradigm. While the new paradigm is unstoppable, these circles intend to keep the U.S., and the EU countries, at least, away from it, thus preventing mutually beneficial cooperation between East and West. Russia has been a permanent target of defamation and economic sanctions, but China is gradually beginning to receive the same treatment. The latest such lie that is being peddled through academic and quasi-academic institutions to target China’s BRI is that China’s sinister plan behind the BRI is to set debt traps to poor and developing nations. “Debt trap” and “debtbook diplomacy” are the new catch-phrases that are now frequently used to portray China’s policies.
The term “debtbook diplomacy”—with the meaning that China builds influence over other nations by deliberately causing them to take on more debt than they can handle—was coined in a report commissioned by (and custom designed for) the U.S. State Department and written in May 2018
The two writers are the authors of the 260-page Special Report “Extending the New Silk Road to West Asia and Africa”, published by the International Schiller Institute in November 2017. (https://schillerinstitute.com/extending-new-silk-road-west-asia-africa/)
by Sam Parker of the Harvard Kennedy School’s Belfer Center for Science and International Affairs. This report was then used by the U.S. State Department to ring alarm bells all over the world about the potential impact of China’s Belt and Road Initiative. But the report’s author, Sam Parker, is not known to have any expertise in economics or to have written anything about the economies of China or other developing countries.
From the outset, Parker clearly exposes his Mackinder-inspired British geopolitical worldview, writing: “Debtbook diplomacy is by itself neither an economic tool nor a strategic end. Rather, it is an increasingly valuable technique deployed by China to leverage accumulated debt to advance its existing strategic goals. Three strategic targets for China’s debtbook diplomacy would be: filling out a ‘String of Pearls’ to project power across vital South Asian trading routes; undermining U.S.-led regional opposition to Beijing’s contested South China Sea claims; and supporting the PLAN’s [People’s Liberation Army Navy] efforts to break out of the First Island Chain into the blue-water Pacific.
Are the conclusions he reaches required by a sober analysis of China’s actions, or are they put forward for reasons that are themselves geopolitical?
Hambantota: the Only, and Deceitful Example
China’s relationship to the Sri Lankan port of Hambantota is always held up as a “template”, as Parker suggests, of how China intends to treat other nations. But, Hambantota is the only example that the critics of China can come up with. The three stages of the development of the project, including the building of a container terminal, cost a total of US$ 1.1 billion. It was not a Chinese idea, but a Sri Lankan government plan to ease the congestion at the only major port of the country, the Colombo Harbor Port, and building an industrial zone in its vicinity. This plan dates back to 2002, long before the BRI was conceived. Building power plants and industrial zones to foster economic activity was part of the “Regaining Sri Lanka” economic program. Another case of glaring “lying by omission” is considering Hambantota Port out of its national and global contexts. The critics assume, first, that Sri Lanka will always continue to be a poor country with no industries, agriculture or other modern economic activities that necessitate the existence of modern infrastructure, such as this port. Second, given the fact that most of the commercial shipping lines between East Asia and Europe are passing a mere 6 to 9 nautical miles south of the southern coast of Sri Lanka, a fact that is rarely mentioned, but which makes clear the potential benefit from this huge volume of global trade passing through these waters but without affecting the economy of Sri Lanka. This port holds a great potential for future development of shipping services, transshipment, and building industrial zones benefitting from the available transport means to world markets.
Construction of the harbor began in 2008 by the China Harbour Engineering Company and Sinohydro Corporation. 85% of the project was financed by a loan provided by the China Export-Import Bank. The port was formally opened for commercial use in 2010, but usage was below expectations. In 2016, faced with poor revenues and significant financing costs from the port’s construction, the Sri Lanka Ports Authority (SLPA) signed an agreement whereby China Merchants Port Holdings Company (CMPort), a Chinese state-run enterprise, took a 99-year lease of 70% of the port, and 85% ownership of the port and industrial area, with the obligation to continue investing in upgrading the facilities there. The Chinese company would invest $700-800 million more in developing the port area. The purpose of this deal was to relief Sri Lanka from the burden of this debt.
The agreement, however, does not stipulate that the debt of $US 1.4 billion to the China Ex-Im Bank would automatically be cancelled, rather the CMPort would deposit $US 973.658 million (85% of the total US$1.12 billion) in the bank account of the SLPA. Whether the Sri Lankan government uses this sum to repay the original debt to China is up to the Sri Lankan government. Details of the agreement can be found here: http://www.cmport.com.hk/EN/news/Detail.aspx?id=10007328
Was Sri Lanka deliberately given loans for a project doomed to commercial failure, with the intent of then seizing the port as payments came due? Absolutely not. But Parker would have you think so.
But is this the only reasonable conclusion? To the extent this specific example exposes a general trend, it exposes the indifference of international financial institutions and their allies to the aspiration of developing countries to eliminate poverty and economic backwardness. Parker himself reports that after a devastating, decades-long civil war, “Sri Lanka reached out to Japan, India, the IMF, the World Bank, and the Asia Development Bank to fund the construction of a major port in the undeveloped backwater of Hambantota, but was denied funding amidst concerns about human rights and commercial viability.” China did not turn down Sri Lanka, and helped that nation achieve a goal it had already sought. Another Sri Lanka infrastructure project receiving Chinese financing, Mattala International Airport, has also failed to reach commercial success, and has been cynically dubbed “the world’s emptiest airport.”
One important aspect about economics that modern day economists and journalists don’t understand, is that the value of infrastructure is not primarily its ability to derive a monetary return; rather, it is infrastructure’s role as a key factor in the development process of any modern economy, helping raise the productivity of the whole economy of a nation. The “return on investment” lies not in the fees forced upon users of the infrastructure utilities, but from the revenues of a productive industry and agriculture that uses these utilities.
Were the low port utilization and poor airport usage simple miscalculations on the part of the Chinese, poor investments that did not work out as planned? If China has paid billions of dollars for a failed airport and a failed port project, which it now owns, should we expect China’s adversaries to be laughing their heads off at that nation’s clumsiness, rather than be alarmed and panicked by such failures? But it is the future that will show whether these investments were failures, not security analysts such as Parker.
Treating Developing Nations as Minors
It is quite remarkable to see when European and American politicians, researchers and writers talk about developing nations, that they subconsciously speak on behalf of those nations as if these nations were minors who are incapable of speaking for themselves. This is a very revealing aspect of the still deeply ingrained colonial mentality, or the “white man’s burden” prevalent in the West.
Recently interviewed on the China-Africa Podcast podcast, W. Gyude Moore, Liberia’s former Minister of Public Works and a Deputy Chief of Staff to that country’s president, spoke to the African view of Chinese financing from his vantage point as the official who negotiated many infrastructure projects with the Chinese side, offering his response to the way China is frequently portrayed: “When China is presented as if it is this big, bad actor, who is acting in bad faith and loading countries with debt, it almost takes away the agency of the countries. It’s almost as if African countries are naive or they don’t understand what is happening to them and China is basically pulling wool over their eyes. This almost infantilizes Africans and African leaders… Because of the limited amount of money that’s coming from international financial institutions, countries like Liberia have to look elsewhere… One of the few countries that is actually available to talk to countries like Liberia that may not have the best credit record, having just had almost $5 billion of their debt waived, is China… For a country like Liberia, you couldn’t possibly depend only on the World Bank or the African Development Bank to be able to finance your infrastructure -- that would not have happened.”
Expanding on the relationship between debt distress and investments in the future, he added: “To be able to repay their debt, their economies have to be in a place where they’re actually generating revenue, and without infrastructure [this is not possible]. It’s almost like the chicken and the egg.”
Moore responded to the use of the example of the Sri Lankan port of Hambantota: “Everybody brings up the port in Sri Lanka, but China has given out billions of dollars in debt. And in my view, that the port in Sri Lanka is the only example that people can give, shows that this Sri Lanka example, this one instance, cannot be seen as the be-all and end-all of how China engages its partners.”
Instead of raising concerns about potential downsides to collaboration with Africa, the discourse of development would be better served by instead asking what other source of needed development aid is to be found.
The Real Debt Trap
Historically, the British Empire was, and still is, the master of debt traps. Its methods have been copied in the post-1971, post-Bretton Woods era by such United States- and British-controlled institutions as the International Monetary Fund and World Bank to shackle nations with unpayable debt, in order to loot them, destroy their physical economic productive capabilities and finally force them to give up their national sovereignty. Under the 19th century, British-dominated
1- The China-Africa Podcast, Aug 4, 2018, “An Insider’s View of the China-Africa ‘Debt-Trap’ Debate” chinaafrica-podcast.com
2- President Franklin D Roosevelt, one of the greatest American presidents and clearly an anti-colonialist statesman, had the intention that the post-WWII Bretton Woods system, which he organized, would usher an era of stable economic reconstruction and cooperation among independent and sovereign nation-states, not colonial powers. The fixed currency exchange was meant to create a stable currency market where sovereign nations, not private interests, can control their currencies and their convertibility to other currencies to ensure stable and smooth international trade and cooperation. This was the opposite of the previously, British Imperial system. When President Richard Nixon abolished the fixed exchange system, the U.S. dollar, and thus almost all other currencies became commodities controlled by private interests, exactly as the situation was before the war. Thus, the U.S. came under the rule of the British system, not the true American anti-colonialist system which the U.S. Revolution and consequent many wars and conflicts were fought to establish. The reader is encouraged to understand the conflict between the American System of political economics and the British imperialist system. The Schiller Institute and the LaRouche Political Action Committee in the U.S. have abundant information on this key conflict in the modern history of the world.
imperialist world order, as in the case of the post Bretton Woods system, money is treated as a “global” commodity controlled by private interests, rather than a political tool controlled by sovereign governments which issuance is intended to promote the productivity of society and the general welfare of its citizens.
One pedagogical example from the 19th century is the way the British and their French allies shackled Egypt with massive debt, forcing it gradually to abandon its natural and labor resources to be taken over by the British, losing its sovereignty over economic and financial policies, and finally being subject to military occupation by the British army for decades.
In the early 1860s Egypt was a relatively large producer of cotton to the world markets. When the U.S. Civil war broke out in 1861, and production of cotton in the Southern States was drastically cut down, the price of cotton in the international markets shot up. Egypt was suddenly awash with revenues, and started borrowing from British and French banks to develop this cash-generating activity. When the Civil War ended in 1865, and American production of cotton was resumed, the prices collapsed, and Egypt was suddenly in a financial crisis. But the British and French banks continued to loan money to Egypt at ever higher interest rates to service its old debt.
In the meantime, The Suez Canal was being built (1859-1869), and since the Egyptian government could not finance the project, a French company, the Compagnie Universelle du Canal Maritime de Suez, controlled the concession offered by ruler of Egypt Khedive Said Pasha to Ferdinand de Lesseps. According to the 99-year lease agreement, the French side controlled the majority of the shares in the company and the Khedive was offered 44% of the shares.
When Said Pasha’s successor, Khedive Ismail Pasha, was unable to pay his debt to the British banks in 1865, he handed over all his shares in the Suez Canal Company to them as a payment for part of the debt. But the problem did not stop there. In previous years, the Khedive had expropriated large swathes of agricultural land, especially in the Nile delta, from Egyptian farmers, forcing the latter to work as serfs in his new cotton and sugar plantations to produce more cash crops to pay the debt. When Egypt defaulted again in 1876, he was forced to hand over plantations to the British banks. In addition, the British and French bankers moved into the government’s offices (in IMF-style today) to run the financial and economic policies directly. One such British debt collector and banking “adviser,” officially called the “Controller-General in Egypt,” was Evelyn Baring of the famous British Baring banking family. As best described by Rosa Luxemburg, “European capital has largely swallowed up the Egyptian peasant economy,” where the lands, the serfs, the government and the Khedive all became the property of the Empire.
When some Egyptian military officers in Alexandria staged a mutiny in 1882, Britain used that as an excuse to occupy the country. In 1883, Baring, also known as the Earl of Cromer, became Consul General of Egypt, i.e., the de facto ruler of the country, with his term extending until 1907.
A fascinating and detailed account of this debt trap is provided in Rosa Luxemburg’s 1913 The Accumulation of Capital, in section three, Chapter 30, “International Loans.”
Britain’s occupation and control over the economy of Egypt continued, practically, until 1952, when the republican forces under General Gamal Abdel-Nasser overthrew the backward Khedive system, but did not nationalize the Suez Canal Company (then entirely controlled by the British) until June 1956.
This is the true debt trap “template.”
The British bankers and their allies in France, Belgium, Holland and Germany, indeed extended loans to the colonized countries in Asia and Africa for building infrastructure such as railways, irrigation systems and so forth paid for by the governments of these nations, but the purpose of these projects was to enhance the looting of the natural and labor resources of these nations, as the ownership of the mines and plantations moved gradually to the colonialist forces.
There are abundant similar examples in the post-Bretton Woods era (since the early 1970s) where the financial interests of the trans-Atlantic system used the political and military clout of the U.S., Britain and Europe to set similar traps for developing nations. The cases of Brazil, Mexico in the 1980s have been thoroughly analyzed by EIR. After a London or Wall Street-based initial attack on the currency or financial markets of a nation, the IMF enters the scene, prepared to “bail out” the nation by offering new loans. Accompanying these loans are a set of conditions, such as the forced devaluation of the currency, increasing the nation’s exports, often of primary raw materials and agricultural products, cutting government financing of infrastructure and scientific projects along with health and education, and all types of austerity measures to cut costs and “balance the budget.” At the end of each such round of “structural adjustment” by the IMF and the World Bank, the debt levels of the victim country tend to increase rather than decrease, forcing more borrowing with more draconian austerity measures, such as the state being forced to sell its assets, whether they are productive entreprises or natural resources, to foreign companies. Furthermore, governments that resist either the initial attack on their economy or the later intervention by the IMF/World Bank, become subject to defamation campaigns in the media, followed by political destabilization through color revolution, and, in the worst cases, by political or military coups, and even assassination. In his book Confessions of an Economic Hitman (2004), John Perkins provides a chilling, first-hand account of all such operations by western intelligence agencies, especially the U.S. His insider narrative, is based on his experience as as Chief Economist at Chas. T. Main, where he and other staff worked as advisers for the World Bank and the IMF with the approval of the U.S. National Security Agency (NSA).
See, for example, “Bankers’ math vs. human math: Do you know how to count?”, Dennis Small’s article on the Brazil debt crisis 1980-90, EIR, March 19, 1999 (https://larouchepub.com/other/1999/bankers_math_2612/bankers_math_2612.html) and “How the IMF's Policies Destroy the Physical Economy of Nations”, covering the Mexican crisis, EIR, March 19, 1995. (https://larouchepub.com/eiw/public/1995/eirv22n19-19950505/eirv22n19-19950505_016-how_the_imfs_policies_destroy_th.pdf ).
Returning to the China ‘Debt-Trap’ Narrative
One amazing aspect of the narrative of China’s “debt-trap diplomacy” is the utter lack of any evidence supporting the claims of the authors in these media and academic reports, none of which stand up to serious scrutiny.
What the facts show, is quite contrary to the “impression” intended by much of the anti-Chinese reporting. For example, well-documented research made by the China Africa Research Initiative at the School of Advanced International Studies (SAIS-CARI) at Johns Hopkins University, reveals that the majority of African debt is not held by China, but by by Western countries and such Western-backed institutions as the IMF and World Bank.
In its white paper on the upcoming September FOCAC meeting in Beijing, SAIS-CARI reports, as its first finding, that “We find that Chinese loans are not currently a major contributor to debt distress in Africa. Yet many countries have borrowed heavily from China and others. Any new FOCAC loan pledges will likely take Africa’s growing debt burden into account.” The white paper reports $133 billion in Chinese loan commitments to Africa over the period 2000-2016, with a very large $30 billion in 2016 following the 2015 FOCAC meeting in Johannesburg. While many African nations have Chinese debt, there are only three nations -- Djibouti, Republic of Congo, and Zambia -- for which Chinese loans are the most significant contributor to debt risk. In the African nation ranked fourth in Chinese debt as a portion of total debt, Cameroon, China holds less than one-third of the total debt.
As verified by the authors of this article in the referenced Schiller Institute Special Report “Extending the New Silk Road to West Asia and Africa,” China’s loans and total foreign direct investments (FDI) in Africa are smaller than those of these western institutions, but they are more directed towards construction of infrastructure, manufacturing and agriculture, while Western investments are directed towards mining and financial services.
“The Path Ahead: The 7th Forum on China-Africa Cooperation” SAIS-CARI Briefing Paper, Aug 1, 2018, Janet Eom, Deborah Brautigam, and Lina Benabdallah. Available at: http://www.sais-cari.org/s/Briefing-Paper-1-August-2018-Final.pdf
More information about the report may be obtained here: https://schillerinstitute.com/extending-new-silk-road-west-asia-africa/
China has also emerged as of the leading sources of aid to African nations, and the leading research partner in the fields of agriculture and healthcare. In addition, China has financed many development projects in Africa and southeast Asia through grants, rather than loans. In one very recent case, in July this year, the ceremony of the groundbreaking two new bridges in the Philippines, the Binondo-Intramuros and Estrella-Pantaleon bridges, which are financed and being built by China, was used by the mass media to arouse alarm and panic about China entrapping the Philippines in a debt trap. During the ceremony, which was attended by President Rodrigo Duterte himself, Chinese Ambassador to the Philippines Zhao Jianhua refuted this notion: "Let me make it quite clear: These projects, these two bridges, are going to be financed by Chinese grants. That is, we're going to build it for free." He added that “actually, there has never been a debt trap. It's all based on mutual agreement," stressing that China never asked for "even one square of real estate in this country." He added that the Philippine government "will own all those projects.. So there will be no question of putting yourself in debt. I think your economic team is smart enough."
Malaysia recently became another source of “debt trap” propaganda by the international media when the newly-elected Prime Minister Dr. Mahathir Mohamad's postponed two mega infrastructure projects being built by Chinese companies. The two projects were a $20 billion east-west rail project aimed at enhancing development of Malaysia's less developed east coast, and two gas pipelines in Sabah, one of the Malay provinces on the island of Borneo. The media portrayed this development as a big blow to the Belt and Road Initiative, and that it shows once again that China is using a "debt trap" to gain control over countries. Dr. Mahathir himself took dramatic steps to demonstrate that this was a lie, with his five day visit to China from Aug 17-21. Dr. Mahathir said that this issue is not about the Chinese. "We're here to assure the Chinese government and its people that there will be no change of policy.... We see China as a model for development," he said at a press conference with Premier Li Keqiang. The issue is the corruption of the previous PM Najib Razak government which Mahathir replaced after his party's surprise victory in the national election in May. Najib's development fund, One Malaysia Development Berhad (1MDB), set up soon after he took office in 2009, went missing as much as $4.5 billion, while nearly $700 million showed up in Najib's personal account. The huge deals with China, may have been connected to Najib's suspected criminal use of state funds. Until that is adjudicated, Mahathir had no choice but to put the projects on hold, and to renegotiate the projects if they are to be reinstated. The joint communiqué signed by Malaysia and China at the end of Mahathir's visit states that the two sides will speed up the implementation of the Memorandum of Understanding on Promoting Mutual Economic Development through the BRI. This is not a country turning against China for a supposedly devious debt trap.
The Case of Pakistan!
One very pressing and clear example where a country can today be destroyed by Western debt, and be saved from this trap by China, is Pakistan. In Chapter 4 of the “Debtbook Diplomacy” study, Parker states under the title “U.S. Interests at Stake,” the clear imperialist tendency he subconsciously harbors, completely missing the beam in his own eyes. Parker’s “point 1” states that “China’s expanding regional influence and access to South Asian and Pacific Island ports has the long-term potential to alter the regional balance of power away from effective U.S. naval dominance” (emphasis added). Worse is to come in point 2: “China’s loans undermine the U.S.’ ability to use its own economic assistance to promote U.S. security objectives. This assistance has provided the U.S. a powerful means to advance its nuclear security and counterterrorism interests in Pakistan.” [Emphasis added].
Pakistan, for reasons too complex to be sufficiently explained in this article, became a conduit for the Anglo-American geopolitical practice of pitting so-called Islamic forces against the Soviet Union and Russia in the Afghan War that extended from 1979 to 1989, and the consequent emergence of so-called Islamic jihadist terrorism as consequence of that, with Pakistan itself becoming a direct victim.
In that process, Pakistan’s economic development plans were halted, and the country became more and more dependent on U.S., British and Saudi financial assistance, later combined with IMF and World Bank loans.
Today, the Paris Club of lenders (composed almost entirely of Western countries), and multilateral lenders, spearheaded by the IMF and international commercial banks, are Pakistan’s largest creditors, not China, according to official statistics provided by the State Bank of Pakistan. Pakistan’s foreign debt is expected to surpass US $95 billion this year, and debt servicing is projected to reach $31 billion by 2022-2023. In the current fiscal year, Pakistan will pay $4.2 billion to these foreign creditors. Debt servicing of China-Pakistan Economic Corridor (CPEC) loans will start this year, but amounts to less than $80 million in repayments, according to Pakistani daily Dawn. In light of this, it is quite ironical that U.S. Secretary of State Mark Pompeo, the head of the U.S. institution that commissioned Parker’s report, warned in July of this year that the U.S. will put pressure on the IMF when it considers a $12 billion bailout package requested earlier this year by the government of Pakistan. “Make no mistake. We will be watching what the IMF does,” Pompeo said in an interview with CNBC television on July 30. “There’s no rationale for IMF tax dollars, and associated with that American dollars that are part of the IMF funding, for those to go to bail out Chinese bondholders or China itself,” Pompeo said.
The IMF, and consequently the Paris Club members, have been actively meddling in Pakistan’s fiscal policies and its sovereignty through debt rescheduling programs and the conditionalities attached to IMF loans through the Extended Fund Facility, for example. The last such Facility included a loan of $6.4 billion in 2016. The conditionalities attached to this kind of loan is, for instance, a government fiscal deficit limit of 4.2%, meaning that any substantial state-backed investments in infrastructure would be impossible. In addition, these conditionalities included the slashing of 200 billion Pakistani rupees (approximately $1.6 billion) from Pakistan’s own development plans. It is evident, like in every other case of IMF/World Bank “bailout packages,” that the debt grows bigger, and the economy declines further after these measures are taken.
However, the international mass media continue to accuse China of being the problem, and in some cases outright falsehoods are thrown into the media barrage as if they were scientific facts. For example, one big headline in the Pakistani daily The News International published on September, 29, 2017, was “Pakistan to pay back $100 bn to China by 2024.” Without trying to explain how this bizarre number was calculated, the writer states, “Pakistan has to payback $100 billion to China by 2024 of total investment of $18.5 billion, which China has invested on account of banks’ loan in 19 early harvest projects mostly relating to energy sector under China Pakistan Economic Corridor (CPEC).” The article never returns to this outrageous claim and provides no explanation for its figures. The Swedish leading business daily Dagens Industri published an article on August 20, 2018 in which it claimed, without bothering to cite the source of its information, that “Pakistan has incurred debt from China amounting to US$270 billion in the past few years.” The reader is supposed to swallow this information from these leading media sources without questioning.
Pakistan’s growing foreign debt is a direct result of its giant trade deficit, due to the IMF model. Pakistan has been running a yearly deficit of over $23 billion for the past few years, and it is increasing dramatically. Pakistan's main export items are raw materials and staple foodstuffs, and its main manufactured export is textiles. Staple food and raw materials suffer from price oscillations, whereas the textile sector is not competitive because of the collapsing energy supply. And it is exactly the energy sector, together with transportation, that is the main focus of Chinese investments in the CPEC.
In the fiscal year 2017-2018, imports stood at $60.86 billion, which was 2.6 times of exports of $23.22 billion, resulting in a historically high trade deficit of $37.64 billion. Once again, imports were heavily dominated by energy (oil and gas) amounting to $14.43 billion.
It is obvious that Pakistan’s power sector is the most critical element in resolving the country’s financial and economic crisis. A look at this sector’s capacity and power generation sources can help illustrate the situation and its resolution.
The total installed capacity for the electricity sector in the country is 25,000 MW (2017) with the average demand being 19,000 MW. The fuel sources are: 1. Oil and gas: 14,635 MW – or 64.2% of total power generation. 2. Hydropower: 6,611 MW or 29% of total generation capacity. 3. Nuclear power: 1,322 MW or 5.8% of the total generation capacity.
We have to bear in mind that the cost of importing oil and gas is at US$13 to 14 billion annually.
The CPEC’s energy aspect which is the main focus of the China-Pakistan cooperation can ensure the generations of enough electricity to eliminate the deficit in electricity supplies and preparing the economy for a further surge in industrial activity. The breakdown of the investments that are completed, under construction or negotiation is as follows: Coal plants: 8,580 MW; Hydropower: 2,700 MW; other thermal plants (natural gas): 825 MW; Solar power plants: 900 MW; wind farms: 350 MW. The expected total new electricity generating capacity is 13,355 MW.
The total cost of all these power generation projects (including mining of coal and electricity transmission lines) is estimated to be $23-30 billion, which is approximately the cost of two years’ imports of oil and gas, and less than half the annual trade deficit.
Since 1995, Iran has been negotiating with Pakistan to build a gas pipeline from the Iranian gas fields in the Persian Gulf to Pakistan and further to India (dubbed the Peace Pipeline) through which Iran would export natural gas at lower price levels than international markets to the two countries. Pakistan would not only have a cheaper source of electricity generation, but also a basis for petrochemical industries adding value to the raw material it imports. However, pressure from the U.S. and Saudi Arabia has prevented this project. In 2013, Iran had built the pipeline from its fields all the way to Zahedan, a border city with Pakistan. But the Pakistani side was forced once again to back down from the agreement. In 2016, with encouragement from the Obama Administration, Pakistan agreed to a 15-year agreement to import liquified natural gas (LNG) from U.S. ally Qatar, at market prices and with an added large cost of container transportation. Pakistan, which is suffering a chronic trade balance deficit, cannot pay for the Qatari LNG, and thus is forced to borrow from British and other Gulf and western banks, adding more to the debt servicing burden. Needless to say, the U.S. and Britain never allowed Pakistan to develop its nuclear power and technology base, focusing rather on the danger of nuclear weapons proliferation as a major U.S. national security concern.
Which Path will Pakistan Take?
In his election victory speech on July 26, 2018, Pakistani Prime Minister-elect Imran Khan focused on the economic crisis engulfing the country and pledged to continue the cooperation with China on the CPEC. "Our economic crisis is such that we want to have good relations with all our neighbours … China gives us a huge opportunity through CPEC, to use it to drive investment into Pakistan. We want to learn from China how they brought 700 million people out of poverty.” Addressing the U.S. policy, Khan said: "With the US, we want to have a mutually beneficial relationship … Up until now, that has been one way. The US thinks it gives us aid to fight their war.” As for the chronic, British orchestrated conflict between India and Pakistan, especially the dispute over Kashmir, Khan said: “I think it will be very good for all of us if we have good relations with India. We need to have trade ties, and the more we will trade, both countries will benefit… Pakistan and India's leadership should sit at a table and try to fix this problem. It's not going anywhere.”
Interestingly, both Pakistan and India became full members in the Shanghai Cooperation Organization during the June 2018 summit held in Qingdao, China, raising hopes that within this new context of the new paradigm, the tensions between Pakistan and India, stoked for decades by British influence, can at last be resolved. This will be a necessary condition for finally solving the permanent war situation in Afghanistan.
For Pakistan to overcome its debt crisis, it first needs to resolve its trade deficit. To do that, it needs to raise the productivity of its economy. Without ample supply of electricity, transport and efficient logistics, this task would be impossible. The Western loans to Pakistan are merely filling holes in the budget without freeing any resources for resolving the core problems.
Political and social unrest, as a consequence of this situation, will make it impossible for any government to keep the country together and achieve stability and growth. The very security of society and the government itself will be at risk, if this situation is not resolved quickly. The CPEC is right now the only concrete, constructive, and available remedy for this apparently insurmountable dilemma. Without increasing the productivity of the Pakistani economy as a whole, there will be no way out of the crisis.
Pakistan, which does have an industrial base, a relatively well-educated and young labor force, and international business connections through the Pakistan diaspora all around the world, can easily overcome its trade deficit and foreign debt burden in the foreseeable future.
Productive Credit vs Debt
According to American economist Lyndon H. LaRouche true economic value lies not in money or in natural resources, but rather in the creative, productive power of labor, and in increasing this power through scientific and technological advancements. All policies in society, including the issuance of money and credit should be geared towards improving the productive powers of labor, which includes financing and building a platform of basic economic infrastructure (transport, power generation, water management, healthcare, and education, including science-driver programs such as nuclear technology and space exploration programs). President Xi Jinping has expressed a clear understanding of this concept, and he frequently reminds his Communist Party comrades of the importance of this principle in defining China’s development strategy.
In a speech he delivered at a 2014 seminar commemorating Deng Xiaoping, Xi said: “The chief criterion he [Deng Xiaoping] put forward for judging any action is ‘whether it promotes the growth of the productive forces in a socialist society, increases the overall strength of the socialist state, and raises living standards.’ ”
In a speech he delivered the following year, President Xi stressed the importance of innovation in the field of science and technology as a measurement of economic growth. “We must consider innovation as the primary driving force of growth and the core in this whole undertaking, and human resources as the primary resource to support development,” he stated, adding that “We should promote innovation in theory, systems, science and technology, and culture.” In the same speech, he emphasized that “The US took the opportunity of the second Industrial Revolution in the mid 19th century and surpassed the UK, becoming the number one world power… The US has maintained global hegemony because it has always been the leader and the largest beneficiary of scientific and technological progress.”
The correlation between the development of advanced infrastructure and the increase in the productivity of the economy is thoroughly proven from studies conducted on the U.S. economy itself.
When discussing any issuance of money/loans, the real question that has to be asked is not the terms of the loan (interest rates, grace periods, or repayment duration) but rather, what the purpose it is issued for. It is, therefore, most important to distinguish between “money” and “credit.” To understand the difference, it is crucial to consider the ends to which new supplies of financing or debt are applied. This can be brought into view by reviewing the current, disastrous monetary and financial policy of the trans-Atlantic.
The “big three” central banks of the United States (Federal Reserve), Europe (European Central Bank) and Japan (Bank of Japan) have created, by rough estimates, $13-14 trillion equivalent in money since late 2008 (by “quantitative easing” programs), and have issued temporary liquidity loans to banks in the many trillions of dollars equivalent in addition. But none of that money—new currency and electronic entries—has been created for an economic purpose, nor for a trade purpose. It has all been created for a strictly financial purpose: providing the largest banks in these countries enough capital and liquid reserves to survive massive losses and bad debts.
On the other hand, credit issued by governments is a debt those governments assume, which will be “paid back” with “interest” by the greater overall productivity of a future generation. Essentially, growing future productivity is the security for the issuance of credit.
The “big four” public commercial banks of China (Export-Import Bank, China Construction Bank, China Development Bank, and China National Agricultural Bank), in contrast to the “big three” Trilateral central banks, are world-leading examples of the issuance of credit. These Chinese banks have nearly as much new currency—“money”—in the form of loans, as have the “big three” (US, EU, Japanese) central banks over the past decade.
Their lending has fostered extraordinary new platforms of transportation, navigation, water management, power production, agricultural production, and scientific research in the Chinese economy. They have now extended roughly $300 billion since 2014 in additional credit for infrastructure projects outside China through the Belt and Road Initiative. The result has been an extraordinary 8-10% of GDP invested in economic infrastructure for 20 years and multi-factor productivity growth averaging 3.11% annually from 2001-2014 according to the Bureau of Economic Analysis in the United States (which compared this to U.S. multi-factor productivity growth just one-seventh as great).
Total factor productivity
There is a strong relationship between credit issued for projects of new infrastructure and multi-factor (or, total factor) productivity. This latter parameter attempts to measure that rate of growth of an economy due to technological advance. The highest annual rate of growth of American productivity, thus measured, occurred in the periods in which the greatest investments were made in new infrastructure that required new technologies—road, canal, rail, and later space transportation technologies, electric power technologies, water management and flood control technologies, and communications. The most rapid growth of multi-factor productivity was the 3.30% annual rate of the 1930s, under President Franklin Roosevelt’s New Deal re-employment and massive “Four Corners” infrastructure programs, According to a 2005 report by the U.S. National Bureau of Economic Research.
Productive Credit vs Debt
The same close connection exists in much more recent history in the last 20 years of China’s economic growth. Extraordinary rates of investment in transportation, water management, nuclear power and other advanced infrastructure—the sudden appearance in one decade of more high-speed and mag-lev rail mileage than the rest of the world combined, is one celebrated example—has produced very high rates of multi-factor productivity growth and general economic growth and progress.
China’s policy-making with respect to its internal development, carries over into its relationships with other nations.
China Fulfilling FDR’s Dream?
Just as policies towards finance and domestic development differ greatly in contemporary China and in the trans-Atlantic, so too does China’s attitude towards Africa differ completely from the prevailing attitude expressed by most Americans and Europeans. Where the trans-Atlantic world sees only problems, China sees potentials and opportunities.
Historically, however, such positive thinking regarding Africa was by no means limited to China! U.S. President Franklin Delano Roosevelt held a similar view. Roosevelt—who rescued the U.S. economy after the Great Depression hit, and helped rid the world of Fascism and Nazism during World War II through using U.S. industrial and logistical capabilities during his New Deal economic revival years in the 1930s—held very strong anti-colonial sentiments and views. His heated encounters with British Prime Minister Winston Churchill, documented by his son Elliott Roosevelt, a U.S. Air Force officer who at times accompanied his father to international conferences during the war, attest to his vision of what should have happened after the war. Unfortunately, he died before the war ended, and his successors did not follow upon his progressive views and policies.
It took almost 70 years for that dream to be revived—but this time, by China. That nation’s commitment and farsightedness in helping develop the economies of the African nations was eloquently expressed in President Xi Jinping’s Dec 4, 2015 speech at the Summit of the Forum on China–Africa Cooperation (FOCAC) held in Johannesburg, South Africa.
Referencing China’s own experience in development and poverty alleviation, he said: “Industrialization is an inevitable path to a country’s economic success. Within a short span of several decades, China has accomplished what took developed countries hundreds of years to accomplish and put in place a complete industrial system with an enormous production capacity.”
Encouraging African leaders to pursue a path of industrialization, a call never heard from leaders of industrial nations in the West, President Xi stated: “It is entirely possible for Africa, as the world’s most promising region in terms of development potential, to bring into play its advantages and achieve great success…. The achievement of inclusive and sustainable development in Africa hinges on industrialization, which holds the key to creating jobs, eradicating poverty and improving people’s living standards.”
Breaking with the idea of technological apartheid, President Xi declared that “China is ready to share, without any reservation, advanced applicable technology with Africa and to combine Chinese competitive industries with African needs for development to deepen industrial cooperation.” He also promised to open vocational centers in Africa for training African personnel.
The outcome of the Johannesburg Summit was in harmony with President Xi’s call. The final declaration of the summit emphasized that the two sides—China and Africa—will promote the process of industrialization and agricultural modernization in Africa and focus on strengthening cooperation in infrastructure projects including, but not limited to, railways, highways, regional aviation, power, water supply, information and communication, airport and ports, as well as human resource development. The declaration also underscored the importance of integrating Africa into the BRI.
Thus, the stage was set for opening a new chapter in the history of Africa and the world. Adding to the previous achievements in trade and economic cooperation, within three years, China-Africa cooperation started transforming the continent, with poverty being reduced for the first time in recent decades. Spectacular results were achieved such as the building of the Djibouti-Addis Ababa and the Mombasa-Nairobi railways, power plants, industrial zones and water management projects all over the continent are under construction.
Back in Johannesburg to attend the 10th BRICS Summit on 26 July 2018, and to which African leaders were invited, President Xi reiterated more strongly his belief that Africa holds the greatest potential for development in the world, and that science and technology would be the key factor of productivity and increasing prosperity of nations. “We are witnessing major changes unfolding in our world, something unseen in a century,” President Xi declared, adding that “this is a world of both opportunities and challenges for us emerging markets and developing countries.” He noted that “the next decade will be a crucial one in which new global growth drivers will take the place of old ones. A new round of revolution and transformation in science, technology and industries.” Reiterating his previous views on where economic value is found, he said: “Science and technology, as the primary production forces, have provided inexhaustible power driving progress of human civilization. Humanity had made giant leaps forward as it progressed from an agricultural civilization to an industrial civilization, a process which created both huge gains in social productivity and growing pains.”
China Africa Forum in Beijing
The next FOCAC Summit will be held on September 3-4, and is promising to bring China-Africa economic cooperation to higher levels. On august 21, the Chinese Foreign Minister Wang Yi outlined the format and the program for the summit, which he characterized as a "reunion of the China-Africa family," reporting to the press that it will have four major foci: 1) it will renew the call for a shared future for China and Africa bound by their common interests; 2) it will initiate a new phase of China-Africa development, enhancing the African countries' participation in the Belt and Road Initiative, and focusing on upgrading cooperation on trade and infrastructure and people-to-people relations; 3) it will introduce pathways to a higher level of cooperation over the coming three years, and there will be the signing of a number of cooperation agreements with some of the countries, focusing on areas critical for Africa; 4) it will enhance the story of China-African cooperation historically with new measures to be introduced, which are people-centered. Wang Yi also said that there would be a great focus on young people in order to carry the relationship further down the road. There will be a thorough dialog between the Chinese President and the leaders of the 54 African nations, focusing on issues of practical cooperation, increasing synergy and improving trade ties. This will be followed by more formal discussions, focusing on industrial cooperation, the development of trade, health issues, and peace and security issues. The discussion will be tailored to the needs of the African countries. The co-chairs of this meeting will be President Xi, and Cyril Ramaphosa, South African President and the chairman of the African National Congress.On September 4 there will a round-table discussion, with the morning session chaired by President Ramaphosa and the afternoon by President Xi. They will discuss the three-year plan moving toward the year 2021.
The FOCAC should serve as a model for the European countries and the U.S. for dealing with the African continent as well as other parts of the developing world. The basis for this is mutual respect for each others’ sovereignty and independence, equality, and seeking mutual benefits of cooperation for all parties.
The Industrialization Staircase: Wither the U.S. and Europe?
The tension arising in response to the Belt and Road Initiative and the new paradigm in international relations is not justified. It is entirely due to misconceptions about economics and power relations among nations, that is forcing the U.S. and many nations in the EU into this negative attitude towards the BRI. The situation can be likened to a narrow staircase, representing industrialization, with China and the developing sector nations walking upwards. The U.S. and the EU are on the way down in the direction of deindustrialization. The two reach a point where they meet face to face in the middle of the staircase, blocking the way for each other. This is where the tension rises. It is here that one side has to decide to join the other by moving in the same direction, making it easier for both sides to move freely. It would furthermore be beneficial for both sides to make the staircase wider to accommodate everyone, or as President Xi says in describing China’s development policy, “making the cake (of economic growth) bigger” so everyone can have a fair share, rather than fighting over a small cake.
For the those with an imperialist leaning and education, their narrative of “China’s debt trap” is based on prejudice against the Chinese on the one hand, and most dangerously on the phenomenon of projection, as in “psychological projection,” where the accuser projects his own ill intentions or acts upon someone else. Those who project these attributes upon China believe, blindly, in one and only one system of international relations and governance, which is that of the hegemonic empire. According to their belief, any emerging power will necessarily behave as the Roman or the British empires did. Accordingly, any other arrangement, such as win-win cooperation or mutual benefit among nations, is either mere utopian idealism or a trick.
Therefore, the only rational path the U.S. and Europe should take is the one outlined most clearly and for a long time by Lyndon and Helga-Zepp LaRouche, Chairman of the Schiller Institute, that is to join the new paradigm of economic, industrial development, best exemplified by the BRI. In light of this, the Schiller Institute has launched an urgent international petition drive, seeking a conference of the United States, Russia, China, and India, to establish a new fixed exchange rate system for world trade and development, modeled on Franklin Roosevelt’s concept of the Bretton Woods system. This “new Bretton Woods system” would be the right context for these forces joining hands in the BRI to solve the many economic, social and political problems that have engulfed large parts of the world in the past years, including saving the very economies of the U.S. and the EU countries themselves.
It is only by changing its own axioms that the West will be enabled to see China’s policies for what they truly are, and to recognize that its own best interests lie in a world of shared prosperity.