by Dr. Richard L. Benkin
Keynote address to dangers of Chinese debt trap diplomacy, April 12, 2019, Dhaka, Bangladesh
http://www.interfaithstrength.com/BD%20Keynote.pdf
Good morning.
It’s an open secret that your government has been flirting with the idea of taking
Chinese Belt & Road money, I assume, for the purpose of improving infrastructure
in your country. Having spent a great deal of time on your roads and ferries both
inside and outside of the cities, I understand the goal and appreciate it. My back
is particularly appreciative of the goal. But it’s the means I question; or even the
need for Bangladesh to take on that kind of debt to get the job done, which is
after all the goal. Let me be blunt. Taking the Chinese money would be a
mistake—a big one! And I don’t say this in terms of American interests. It would
be a major error for the interests of the Bangladeshi people, and there are several
reasons why. Let’s start with the economic.
Even without the help of a dada, the Bangladeshi economy has outperformed its
fastest growing neighbors and others around the world. It’s a remarkable story
that, if told, would be a refreshing reality check against the false image that so
many people have of Bangladesh as a perennially depressed country and
permanently distressed people. Personally, I’m extremely impressed. Just last
month, your Finance Minister, AHM Mustafa Kamal, announced that Bangladesh’s
GDP will grow at a record-setting 8.13 percent this fiscal year; and that’s after last
year’s jaw-dropping 7.86 percent. In fact, things are so good that Bangladesh
soon will graduate from Least Developed Country (LDC) status and the free trade
protection the South Asian Free Trade Agreement provides LDCs. It was thereby
easy enough to predict when not more than six months ago, Bangladesh signed a
new bi-lateral free trade agreement (FTA) with India, its third largest trading
partner—and lets’ be clear, it is an agreement initiated by India. Now other
countries are jumping all over one another to do the same. Like my President,
Donald Trump, I prefer bi-lateral agreements to multi-lateral ones that do not
consider critical variations among the signatories or the special assets that each
party brings.
That’s great news, but the quickest way to undo all of it and kill an economy’s
growth is to inject it with massive amounts of debt, which is what Belt & Road
would do. No economy is immune to that, not even the largest. The US economy
was booming in the late 1990s and early 2000’s, but there were storm clouds on
the horizon. Consumer debt was way out of balance, capital requirements for
home purchases were ignored, and you could make more on the process of
opening and closing a business than in actually producing something. Even so, we
enjoyed the ride as long as we could until things got too much to stand. By 2007,
it was time to pay the piper, and we saw what happened. While a phenomenon
of that magnitude has multiple causes, too much debt was a major factor in killing
growth.
And yes, there are numerous economic theories about credit, monetary supply,
and their impact on an economy; however, they all do seem to agree that too
much debt is not a good thing. Their disagreements tend to fall more on degree
and what it means for policy-making. I’m not sure if those who support taking on
the massive Belt & Road debt are Keynesian economists, but that seems to be the
only model that supports it—sort of. Put simply, Keynesian theory holds that
government should be the driver of increased consumer demand, which will then
stimulate the economy. US President Franklin Delano Roosevelt’s administration
used this model in an attempt to dig the US out of the Great Depression;
particularly through the Works Progress Administration (WPA) that put almost 9
million Americans to work on—wait for it: infrastructure projects. Sounding
more like an argument for Belt & Road? The idea, of course, is that with the
money they earned in the WPA, workers and their families would start buying a
bunch of consumer goods—from basics like milk and butter to luxury items like
radios. (They weren’t buying PC’s or IPhones back then.) Of course, we now
know that while the WPA helped a lot of people—gave a lot of people jobs and
hope and helped the people who owned the grocery and appliance stores where
they shopped—it took the Second World War to get the US out of the Depression.
Keynesian economics was not the answer.
Let’s also recall that Keynesian economics was built to get economies out of
trouble, and the US economy was never in greater trouble than when the
Roosevelt Administration adopted it. A more germane comparison to the idea of
Bangladesh using that Chinese Belt & Road money would be what President
George W. Bush’s administration did in 2006 and 2007. The economy slowed
after the 9/11 attacks but had come back to a large extent. A lot of people were
making money, and people had jobs. But by 2006, it was getting sluggish again,
and Bush wanted to stimulate it. So in true Keynesian fashion, his administration
embarked on a program of increased government spending; and it worked—in
the short term. There was indeed a financial boom, but that boom (or bubble,
which is what we called it for its hollow center) was another factor contributing to
the 2007 financial crisis. Because you know what happens to bubbles? Eventually
they burst, which will be the likely outcome if you take on the Chinese debt.
Nor are the WPA’s positive accomplishments applicable here. When the WPA and
the rest of Roosevelt’s package of Keynesian goodies were instituted, US
unemployment had risen from about three percent to around 25 percent in only
six years. It actually hit that high mark (or low point if you will) after only four
years. That does not fit Bangladesh, which if not at full employment, is awfully
close. Unemployment has risen slightly from 3.6 to 4.2 percent today, but so has
the labor force participation number.
And with all this Keynesian talk, keep in mind that the current debate in my
country over who is responsible for “fixing” our economy, Presidents Trump or
Obama, is a false one and a purely political one. Government doesn’t fix
economies; it only breaks them. And for most of the people, it doesn’t matter
anyway. What matters is jobs, prosperity, and security; and those are things that
taking the Chinese bait will destroy.
Recently, some countries have started seeing that their governments, hand and
hand with the Chinese, are doing just that to their people. Last year, the
Washington-based, multi-national and multi-cultural think tank, Center for Global
Development, undertook the first comprehensive study of Belt & Road’s impact
on the indebtedness of participating sovereign nations. Utilizing World Bank and
other credentialed data, it reviewed the 68 countries participating in Belt & Road,
from those with nominal participation to some, like Montenegro whose public
indebtedness due to Belt & Road has exceeded 80 percent of its GDP. (The 68
total is a bit misleading, as it includes countries like Brunei that never has to worry
about cash flow, Israel whose participation is nominal, Syria and Yemen that are
in the midst of active armed conflicts, and China itself among others whose
participation is not comparable to those nations who have taken on significant
Chinese debt.) The analysis, however, did find 23 countries at risk of significant
debt distress due to Belt & Road: Cambodia, Mongolia, and Laos in East and
Southeast Asia; Afghanistan, Bhutan, Maldives, Pakistan, Sri Lanka in this
neighborhood, Kyrgyzstan and Tajikistan in Central Asia; Iraq, Jordan, and
Lebanon in the Middle East; Djibouti, Egypt, Ethiopia, and Kenya in Africa; Albania,
Armenia, Belarus, Bosnia and Herzegovina, Montenegro, and Ukraine in
Europe/Eurasia. Imagine: 23 sovereign countries defaulting on their debt! And
of them, they identified eight as “most vulnerable.” They are Djibouti, Kyrgyzstan,
Laos, the Maldives, Mongolia, Montenegro, Pakistan, and Tajikistan. Let’s take
them one at a time.
Djibouti: The most recent International Monetary Fund (IMF) assessment stresses
the “extremely risky” nature of Djibouti’s borrowing program. In only two years,
public external debt has increased from 50 to 90 percent of GDP, much of it
government-guaranteed and owed to China Exim Bank. And there’s more
borrowing in the pipeline for new airports (that’s plural), a new port, an oil
terminal, a toll road. Have you seen Djibouti’s size? I know there are people in
this room who could write a check for its entire national debt. Why it needs all of
that is beyond me, and most importantly, they tend to be income eaters not
income producers, which Djibouti must develop in order to repay the loans.
China already has one military base there. No doubt, it has more in mind each
time the tiny country can’t pay its bills.
Kyrgyz Republic (“Kyrgyzstan”): One lender, China’s Exim Bank, is Kyrgyzstan’s
single largest creditor, owning about 40 percent of the country's total external
debt. Yet, despite the fact that the country is poor with a small GDP, Kyrgyz and
Chinese authorities are reportedly discussing more construction and more loans,
including hydropower plants, an international railway, highways, and completing
a gas pipeline. What does China want?
Lao People’s Democratic Republic (“Laos”): The IMF has been raising doubts
about the ability of Laos to service its debts if it moves ahead with plans to build
the China-Laos railway and other projects. Although the Laotian government
insists that it will not guarantee the China Exim Bank financing, you can bet it will
be under irresistible pressure to cover any losses—one way or another. And I say
one way or another because there is no transparency here.
The Maldives: The Maldives’ projects hope to promote tourism, and although
that would produce income for what I hear is some beautiful real estate, the
Maldives’ location likely will keep that income modest. It also plans to use the
money to upgrade urban infrastructure and adapt to climate change. Most of its
debt has been accrued for non-income producing projects like an $830 million
international airport that I wager will be something of a ghost town eventually.
Maldives’ indebtedness is thought to have exceeded its GDP last year. Both the
World Bank and IMF consider the Maldives a very bad risk, but China keeps
loaning it money. Hmm.
Mongolia: According to the Center for Global Development study, “Mongolia is in
a particularly difficult position because its future economic prosperity depends…
on large infrastructure investments” to increase productivity and facilitate
exports. Locals, however, say that the projects have stalled, making the prospect
of default “extremely high.” Debt to GDP has gone from 62 to 89 percent in only
three years.
Montenegro: I’m glad to include Montenegro here because the Chinese debt trap
horror stories tend to focus on Asia and Africa. Europe is far from immune and
according to French President Emmanuel Macron, it better start acting in unison
or face even more troubles from China. [Added at the time of the address: I want
to digress from my prepared remarks because there has been a recent
development. Italy has signed onto Belt & Road. Italy is the first G7 nation to do
so, and the press is making a huge deal out of it. But I’m sure we can agree that
Italy’s position in the G7 is pretty much a legacy position at this point. Its
economy is in the toilet—doing really bad, which is why it took on the Belt & Road
debt. Didn’t it almost need to be bailed out few years ago? Anyway, it does
underscore Macron’s warning about Chinese expansion into Europe if Europe
does not act in unison.]
Back to the address.] As I reported in the Daily Asian Age this week, Montenegro
is already in serious trouble. Indebtedness to GDP hit somewhere around 83
percent in 2018, due in large part to a Belt & Road boondoggle that people call “a
highway to nowhere.” It was supposed to connect the seacoast with neighboring
Serbia and make transport and commerce easy; but it was structured in three
phases, and debt became unsustainable after the first. Government’s attempted
fix was to raise taxes, partially freeze public sector wages, and end other benefits.
Though they did not work, officials are determined to push on with phases two
and three—and more borrowing—even though major misuse of funds was finally
uncovered (after—by most accounts—being suppressed by journalists and
officials friendly to China). Oh, that’s right, corruption is also a problem with
these large loans; but I’m sure that won’t be a problem here.
Tajikistan: The IMF and World Bank rate Tajikistan as having a “high risk” of debt
distress. Debt to GDP has gone from a modest 33 percent to 57 percent in only
three years. The country already has had to issue $500 million in Eurobonds to
pay for a new hydropower generating facility, but I’ve not seen projections that
show how it can produce sufficient power that will provide the income needed to
repay the loans. Tajikistan’s single largest creditor is China, which has caused 80
percent of that debt; and Tajikistan’s critical geographic location in Central Asia
could provide a veritable smorgas board of targets for Chinese acquisition.
Pakistan: Through the China-Pakistan Economic Corridor or CPEC, Pakistan is the
Belt & Road centerpiece, with a total value estimated at $62 billion. And while
China has lent money to other countries at 2-2.5 percent, Pakistan is paying as
much as 5 percent. Pakistan’s massive borrowing from China raises concerns that
it will return again to other creditors for relief. It is significant, however, to note
that after Sri Lanka was forced to cede the critical port of Hambantota, Pakistan
cancelled three Belt & Road projects; however, that likely is too little too late.
Chinese military vessels already have been spotted at Pakistan’s (or more
accurately, Balochistan’s) Gwadar port.
Let’s look a bit further at Pakistan since CPEC is such a critical element to Belt &
Road, the nation is so close to Bangladesh; and Pakistan’s CPEC involvement goes
beyond its leaders’ desires for infrastructure improvement. My sources in
Pakistan tell me that the army and ISI (Inter-Services Intelligence) have planned
for some time to move away from the US orbit; certainly ever since the jig was up
on Pakistan’s safe haven for Osama bin Laden. CEPC was established two years
after US troops took him out, and if you look at negotiation time, initial overtures,
and so forth, the timing works. That is, CPEC was more of an undisguised geopolitical decision than one for infrastructure improvement. In that regard, CPEC
also was supposed to help Pakistan control its various nationalities and extinguish
national identity among Pashtun, Baloch, Sindhi, and others. But it has not turned
out that way. Pakistan’s problems with its restive peoples are growing, and CPEC
has become a rallying point for them. Leaders of all three peoples mentioned
have told me that far from easing tensions, CPEC highlights Pakistan’s policy of
stealing their natural resources and flooding their territories with Punjabis to
“make us minorities in our own land.” Last year in two separate incidents,
Pashtuns attacked Pakistan’s Taliban allies and tore down a Pakistani flag marking
the division of their territory.
That geopolitical failure, coupled with CPEC’s economic failure, made it easier for
Pakistan to cancel some Belt & Road contracts; although those cancellations did
little to ease Pakistani dependence on China. And, in fact, given US President
Donald Trump’s clear preference for India and its Prime Minister Narendra Modi,
and the likelihood of both leaders being returned to office; we might ask if
Pakistan has burned its bridges with its former patron through CPEC.
A statement last month by Pakistan’s Ambassador to the United States, Asad
Majeed Khan, was most revealing. In answer to a question about whether or not
Pakistan has “joined the China camp,” he said that “China came to Pakistan,
frankly, when no one else was willing to do so.” I find that fascinating. Not only
was Pakistan stigmatized as an international terror patron, report after report
also assessed its economy to be a bad risk for foreign companies. Why would
China jump into such an economically failed environment if not for geopolitical
advantage?
I was educated at one of the world’s premier business schools—the same one
Donald Trump attended, the Wharton School, and I was in the United States
corporate world for decades. I know that there is easily obtainable software that
companies use to determine the credit worthiness of both businesses and
individuals. You plug in the numbers and run the data to determine how large a
loan they can repay. Businesses also must provide pro formas that project the
timing and rate of income generation. These documents are scrutinized, and in
the end loans are approved or not for amounts expected to be repaid according to
schedule. I cannot fathom the Chinese not having access to this or comparable
software. (They’ve stolen so much valuable software from us!) And if they do, it
begs the question of why they make loans to countries they know will not be able
to repay them on time—unless that is their real intention.
Sri Lanka is a great example that there are things more valuable than loan
repayment. When it was unable to repay the $8 billion it owed, China offered
debt relief but at a price: relief in exchange for the strategic Hambantota port,
which gave China control of an important waterway adjacent to rival India. Then
when the Sri Lankans looked at what they got in return, they found that the relief
was only $1 billion, leaving them with $7 billion that they’re still unsure how to
repay. Their biggest question now is what China’s next demand will be.
Perhaps Malaysia had it right when it canceled the East Coast Rail Link and Sabah
gas pipeline before it was crushed under Chinese debt.
For those of you who have not been involved in international lending, things can
get rather tricky—different jurisdictional issues, which jurisdiction has standing,
international bribery laws and local “expectations” that would violate them, and
enforceable dispute resolution. And I’m currently working with a group here,
Bangladesh International Mediation Society that would be an excellent asset for
that. There’s also real potential for predatory behavior; which is why 22 creditor
nations, including the US, UK, Russia, Germany, France, and Israel have signed
onto something called the Paris Club. These nations have agreed to work
together when debtor nations, especially poorer ones, run into trouble repaying
loans. They look for alternate ways to reduce the principle that all agree to follow
(for example, by hitting certain carbon emission goals) and to provide some
predictability to how a nation can handle things when debt gets too high to
service. It should not be lost on any of us that China is not a member of the Paris
Group. Rather, China has said it will handle matters of repayment difficulties “on
a case by case basis,” on in other words, in whatever way it wants with each
country. And we saw that in Sri Lanka.
But even if the numbers worked in Bangladesh’s favor, there still would be a
countervailing argument for not giving China dominance here. As we read in
Brahma Chellaney’s brilliant editorial in yesterday’s Daily Asian Age, for the past
two years, “China has waged a campaign of unparalleled repression against its
Islamic minorities.” Let me repeat, unparalleled, from force feeding Muslims pork
to mass incarceration in high tech concentration camps. This is not a player that a
country whose constitution begins with “Bismillah,” or any decent people, wants
to climb into bed with! It is beyond me how Bangladesh, despite the facts of the
matter, can remain one of only eight Muslim majority countries who refuse any
relations with Israel, hurting only the people of Bangladesh not Israel. Yet is
considering tying its people’s future to a country that has made anti-Muslim
suppression a matter of top priority; whose anti-Muslim suppression program is
now under the all-powerful Politburo. And just so there is no doubt, that country
is China, not Israel.
Let’s add one more reason to be cautious. Bangladesh is a democracy; so are 21
of the 22 members of the Paris Club. China is not. Press freedom is a basic value
in democracies, but not in China. In fact, strict media control has been a core
element for the Chinese government since its inception; such that China ranks
176 out of 180 nations on Reporters without Borders’ World Press Freedom
Index. Its problem is that it does not control information almost everywhere else;
information that is often unflattering in what it reveals about China. Reporters
without Borders just issued a scathing report entitled, “China’s Pursuit of a New
World Media Order,” which alleges that China is trying to control international
media through the influence it gets from these projects. And we saw that result
in Montenegro. Cedric Alviani, the report’s author, recently said that China wants
to “reshape the very concept of journalism.”
Doing business with that kind of predator is a bad idea. Bangladesh should look
for other funding sources to accomplish its infrastructure goals; and there are
other sources that are more in line with Bangladesh’s core values. (I actually
would be happy to get into a more granular discussion about that in the
appropriate setting.) But there are always people who believe they can, as we say
in the US, “out con a con man.”
I have observed over a long time that you have a very bright and clever Prime
Minister, someone who is smart enough and accomplished enough to perhaps
believe she can outfox the Chinese. Don’t count on it. Donald Trump believes he
can out negotiate anyone and always get the best deal possible. Barack Obama
believed he could just walk into a room and everyone would love whatever he
said. George Bush believed his winning and disarming personality could
overcome any dislike or obstacle. Bill Clinton, well when he spoke, everyone in
the room felt as if he was talking to them personally; and he believed he could get
anything done with that special gift. All of them were right. All of them have
tremendous skills and attributes that enabled them to achieve things others could
not. And all of them made mistakes, too; all of them failed now and again. None
of them were successful at everything they did. It doesn’t mean they weren’t
successful people and presidents; but it does mean that even the best of us are
not perfect and can make serious miscalculations. The Chinese have been at this
for at least seven years, and it would be a mistake to think that anyone could beat
them at their own game. As the people of Sri Lanka, Montenegro, and other
places learned, the stakes for making that particular mistake are too high to risk.
Bangladesh might want to take away one thing Pakistani Ambassador Khan said
last month, that we’re no longer dealing with “either/or relationships.” That is,
China and the United States are important to the Bangladeshi economy. The US is
your largest customer for exports, buying about a fifth of your products. China is
your largest trading partner, accounting for about a fifth of all import and export
dollars. Approach the US and China as an equal—not a vassal, debtor, or beggar!
Set that fluidity in relationships as the context for future talks, and don’t let Belt &
Road undermine it. I think it’s time for the rest of the world to know what we
know: That Bangladesh has arrived.
Thank you.