Development is Key to Advancing the Belt and Road Initiative

Abstract

The fundamental problems that the Belt and Road Initiative (BRI) aims to solve and the goals it is expected to achieve boil down to development. As the world’s second largest economy, China is highly complementary to most other developing countries in terms of factor endowments and macroeconomic characteristics. Historical experience suggests that large economies can generate spillover effects in areas such as investment, trade, technology, and finance. The BRI is neither an initiative to create a new set of international economic and trade rules nor an attempt to solve various difficulties in economic development with a single development model. Instead, it is an open international platform that China and other countries build together to promote economic development.

We attribute the macroeconomic logic behind the BRI partly to the interaction between the positive externalities of China’s development and the rebalancing of the global economy. Reform and opening up have greatly improved China’s macroeconomic efficiency, and the country’s high savings have successfully translated into strong domestic investment and large trade surplus. Developed countries’ pursuit of trade balance has prompted China to pay more attention to trade with other developing countries, and China’s outward investment has also become more balanced between developed and developing countries. Given that the economies of China and most BRI countries are complementary to each other, there is sizable room for cooperation between these parties.

Thanks to its large economic scale, China’s development brings positive externalities that are reflected in four aspects: (1) Strong infrastructure construction capacity and proactive action promote cross-border infrastructure construction and provision of public goods. (2) Large market demand makes global terms of trade favorable to developing countries. (3) Fledgling innovation system helps drive technological progress in related countries. (4) Industrial adjustment boosts outward investment.

The BRI has gradually materialized from an idea and a vision into policies and action, and has progressed from “sketching the outline” to “filling in the details”. Under the influence of investment and trade, the BRI has initially realized infrastructure connectivity (i.e., a general connectivity framework consisting of six corridors, six connectivity routes) and joint rule-making; boosted trade, investment, and employment in related countries; and played a notable positive role in the economic growth of related countries. However, there are also risks in the provision of cross-border public goods and outward investment. We believe that effectively promoting high-level opening up, including renminbi (RMB) internationalization, could help advance the BRI to a new level.

Author: ZHAO Yang, WU Ting.

1.1 Belt and Road Initiative from a Development Perspective

1.1.1 Echoes of History

In 2013, President Xi Jinping proposed building a Silk Road Economic Belt and a 21^st Century Maritime Silk Road during visits to Kazakhstan and Indonesia.¹ The two initiatives are together known as the Belt and Road Initiative (BRI). As of May 2023, China has signed BRI agreements with 151 countries and 32 international organizations.² Countries that have signed BRI agreements (BRI countries) are located in Asia, Africa, Europe, North America, South America, and Oceania, with a total population of 3.7 bn, or nearly half of the global population.³

The Silk Road and the Maritime Silk Road were among the most important trade routes in the ancient world. As a leading economy in that era (Fig. 1.1), China played an important role in both trade networks. In the modern era, it has re-emerged as a leading economy and trading nation, allowing the country to again spread its economic reach along the ancient Silk Road and Maritime Silk Road. Echoing the spirit of cultural inclusiveness embodied in the Silk Road, the BRI aims to build a development-oriented, inclusive, and mutually beneficial platform.

Fig. 1.1

Source Stephen Broadberry, Hanhui Guan, David Li, ‘China, Europe and the great divergence’, July 2014; TED data base, September 2015; Maddison data base, 2013; Macquarie Research, January 2017, World Bank, CICC Global Institute

China’s percentage in world GDP. Note The figures above are calculated by GDP in international US dollars.

Development remains the top priority of most countries. The 151 BRI countries had a combined GDP of only US $21 trn in 2021, or less than a quarter of global GDP.⁴ By level of economic development, there are currently 135 developing countries in the BRI, and nearly 50% of BRI countries are low-income or lower-middle-income countries.⁵ President Xi stated at the Belt and Road Forum for International Cooperation in 2017 that “Development holds the master key to solving all problems. In pursuing the Belt and Road Initiative, we should focus on the fundamental issue of development, unleash the growth potential of various countries, achieve economic integration and interconnected development, and deliver benefits to all.⁶”

1.1.2 How Does History Begin?

The mechanism of economic development has been examined by a number of scholars and researchers. Since Joseph Schumpeter espoused the idea of development as innovation, economics has defined and understood development at the macro level. Walt Whitman Rostow believes that the main reason why China’s traditional society during the Ming and Qing dynasties did not develop successfully was the lack of an effective national innovation system. But how can a country successfully develop a national innovation system? In his book Economic Growth of Nations (1971), Simon Kuznets examined nearly a century of historical data on developed countries and found that growth in developed countries was accompanied by the evolution of economic structure: There were always new industries expanding their share of the economy. However, Kuznets acknowledged that developed countries do not have a common pattern of long-term trends, and they provide no support for Rostow’s take-off theory.

Although the World Bank, established after the Second World War, has done a lot of work and achieved some results in promoting global economic growth, the achievements in development of the world’s developing countries are actually quite limited if specific countries such as China are excluded. The GDP per capita of low-income and lower-middle-income BRI countries is equal to only 3% that of the US, and this proportion has hovered at this low level since 1960 without trending upward (Fig. 1.2). Admittedly, the post-war international economic system has not brought fundamental development to most developing countries.

Fig. 1.2

Source World Bank, CICC Global Institute

GDP per capita of low-income and lower-middle-income BRI countries as a % of GDP per capita of the US. Note The GDP per capita of low-income and lower-middle income BRI countries is calculated by averaging the GDP per capita of each country.

It becomes even more embarrassing if we examine these facts in light of Schumpeter’s understanding of development as innovation in a broad sense. Most developing countries are developing slowly, with an undiversified and rigid economic structure, little innovation activity, and no innovation system to continuously invest in innovation. On the contrary, developed countries are growing well, with innovations continuously emerging and economic structure changing dynamically. The history of developed countries is not over, and the question facing more developing countries is: How does history begin?

1.1.3 China’s Role

As one of the most successful countries in global development in the past few decades, China offers development experience that is worth summarizing and learning. According to the United Nations, the number of people living in extreme poverty worldwide fell from 1.9 bn to 836 mn between 1990 and 2015.⁷ The main achievements in global development are concentrated in China. Through reform and opening up, China has lifted 850 mn people out of poverty, contributing more than 70% of global poverty reduction. Robert Zoellick, former president of the World Bank, praised China’s poverty reduction results: “This is certainly the greatest leap to overcome poverty in history”.⁸

China’s successful development experience lies in its adoption of the universal principles of a market economy which match existing international economic and trade rules, as well as its characteristics in the state-owned economy and government participation which complement existing development practices of other countries. This dual role is also reflected in the practices of the BRI. The BRI is not intended to come up with a new development model, but rather to build a platform for international cooperation to help related countries create a new development paradigm.

1.2 Positive Externalities of China’s Development and Economic Rebalancing

China’s reform and opening up has integrated the country into the global economy. The country has gradually emerged as an important economic force as its economy grows. Its economic development has started to generate positive externalities to the global economy.

1.2.1 China and BRI Countries Are Complementary in Factor Endowments

From the perspective of factor endowments for development, China and BRI countries complement each other in three ways. First, they have complementary population age structures. The overall population of BRI countries is large and young, and their labor force potential has not been fully realized. We see room for improvement in the quality of the labor force of BRI countries. The population of BRI countries reached 3.7 bn in 2021, of which people aged 0–14 and 15–24 accounted for 31% and 17%, much higher than the 18% and 11% in China (Fig. 1.3).

Fig. 1.3

Population age structure of BRI countries. Note Data from the year 2021. Source UN, CICC Global Institute

Second, most BRI countries rely on natural resources exports, complementing China’s status as a global manufacturing hub. According to the United Nations, countries whose resource exports account for more than 60% of the value of their goods exports are resource-dependent countries. By this standard, 90 of the 151 BRI countries are resource-dependent. These countries are generally lackluster in industrial development and need to import manufactured goods to meet their production and consumption needs. Although most countries can earn foreign exchange by exporting resources, they collectively run a trade deficit.

Third, some BRI countries face capital constraints, while China has available capital to invest in these countries. The less developed BRI countries have low production efficiency that constrains economic development due to their weak capital formation capacity and insufficient technology and R&D investment. The capital stock per capita of low-income and lower-middle-income BRI countries were US $3000 and US $11,000 in 2019,⁹ about 2% that of the US and less than 8% that of Japan. China had capital stock per capita of US $46,000, lower than developed countries but much higher than most BRI countries.

1.2.2 China’s High Savings Rate and Macro Rebalancing Have Implications for the World Economy

In addition, China’s high savings rate has implications for the world economy. China’s savings rate has long stayed above 40%, much higher than the US, which has higher GDP and GDP per capita. With China’s economy now the world’s second largest, China’s high savings rate means massive savings. China’s share of global savings rose rapidly after its WTO accession, leaving Japan, the US, and the EU behind (Fig. 1.4), and the country accounts for nearly a third of global savings by 2020s.

Fig. 1.4

Source World Bank, CICC Global Institute

Major economies’ share of global savings.

A country with high savings usually runs a trade surplus, which means outward investment. For example, the US ran a large trade surplus after the Second World War, which laid the foundation for its European Recovery Program (commonly known as the Marshall Plan). With the Marshall Plan, the US established the US dollar as the world currency while assisting Europe with the post-war recovery. Japan experienced similar expansion of outward investment during the course of its development. Japan began to systematically increase its outward investment in the 1970s, especially in Southeast Asia, and yielded favorable results.

When China’s savings exceed domestic investment demand, it needs to convert savings into trade surplus and net outward investment to achieve macro balance. For some time, China’s main trading partners were developed countries, with the US being the largest source of China’s trade surplus, and the US Treasuries being the largest single investment in China’s foreign exchange reserves. However, after the global financial crisis in 2008, developed countries became determined to balance their economies. As the US pursued trade rebalancing in the past decade, trade frictions between the US and China increased. Developed countries are also seeking to adjust global supply chains amid the impact from the COVID-19 pandemic and the Russia–Ukraine conflict. Such adjustments in global supply chains are moves by developed countries to adjust their economic and trade relations with China, in our view.

As China faces a new global economic landscape, we believe that the country also needs to rebalance its economy. China strives to balance the gap between its savings and domestic investment by expanding both consumption and domestic investment. Meanwhile, we think it also necessary for China to rebalance both its trade surplus and outward investment between developed and developing countries. In a sense, the BRI reflects China’s adjustment to its overseas investment focus—i.e., a shift in net outward investment from government bonds in developed countries to physical assets in BRI countries. We believe this is necessary for China to achieve equilibrium in balance of payments in the current international macroeconomic environment.

1.2.3 Spillover from China’s Economies of Scale

The large size of China’s economy is another of its distinguishing features. Past experience suggests that large economies can generate spillover effects in areas such as investment, trade, technology, and finance. Thanks to its enormous economic size, China’s development has positive externalities that are reflected in four aspects.

First, China’s strong production capacity advantages backed by economies of scale have enabled it to build world-class infrastructure in a relatively short period of time and become highly competitive in the international infrastructure market.

Second, China’s large market demand makes global terms of trade favorable to developing countries. The country not only exports a large amount of manufactured goods, but also imports commodities such as energy and raw materials on an unprecedented scale. As a result, developing countries’ terms of trade have improved.

Third, based on its domestic consumer market and export capacity, China has developed a technological innovation system consisting of the government, the market, companies, and universities. The country can leverage the system to drive technological progress in low- and middle-income BRI countries through investment and trade. Many of its technologies can be combined with the labor force and resources of low- and middle-income countries to achieve technology spillover and diffusion to such countries.

Fourth, the structural changes in China’s factor endowments and technological upgrading achieved by its development have enabled Chinese companies to go global. In this process, China’s financial capabilities have also expanded to countries in the supply chains.

1.3 The BRI in the Past Decade: Refining the Blueprint

In the past decade, the BRI has turned from a concept and vision into action and reality. The development of the BRI can be divided into several stages. In 2013–2018, the overarching plan was established. In 2018, China called for joint efforts to promote the high-quality development of the BRI and advanced results-oriented implementation of projects, similar to how an architect refines a blueprint.¹⁰ In 2021, with the global economy undergoing major changes, China attached more importance to risk management and sustainable development in advancing the BRI, and emphasized high-standard, sustainable, and people-centered progress.¹¹

1.3.1 China is Rebalancing Foreign Trade and Outward Investment Towards BRI Countries, and Facilitating RMB Internationalization

After the 2008 global financial crisis, developed countries have shifted to policies such as supply chain reshoring and trade barriers amid the relocation of manufacturing industries and the widening trade deficits with China. As US economic growth slowed, developing economies, notably emerging market countries in Asia, have grown rapidly and become new forces in the global economy. Against this backdrop, the BRI proposed in 2013 has created a new pattern of China’s all-round opening up. An important development has been the rebalancing of China’s foreign trade and outward investment from developed countries to BRI countries.

The rebalancing of China’s foreign trade was first evidenced by the rapid increase in its trade with BRI countries. China’s trade with BRI countries grew at an average annual rate of 6% from 2013 to 2021, about 1ppt higher than the growth rate of China’s overall trade. China has gradually developed into an important trading partner of BRI countries. According to UN Comtrade, China was already the largest trading partner of 35 BRI countries in 2021.¹²

Second, China has expanded its trade advantage over BRI countries and turned from a trade deficit to a trade surplus with BRI countries (Fig. 1.5). BRI countries accounted for 20% of China’s trade surplus in 2021, while the shares of the US and the EU in China’s trade surplus have declined in the past two decades. From the perspective of trade structure, BRI countries remain an important source of raw materials for China, and trade in supply chains and manufactured goods has started to contribute to China’s trade surplus with BRI countries.

Fig. 1.5

Source Chinese Ministry of Commerce, Wind, CICC Global Institute

Trade balance between China and BRI countries. Note Other Asia only includes South Korea.

Overall, China has formed a stable trade structure with BRI countries—it is a net importer of fuel and primary industrial supplies from BRI countries, and a net exporter of capital goods and consumer goods to BRI countries. Meanwhile, China’s trade structure with different BRI countries varies. In 2019, China recorded trade surpluses with BRI countries in Southeast Asia, South Asia, Central Asia, Africa, and Europe, and trade deficits with BRI countries in West Asia, the Americas, and Oceania. China’s trade surplus with Southeast Asia and Europe is mainly attributed to capital goods (excluding transportation equipment). China cooperates closely with Southeast Asia on production capacity, and machinery is a main capital goods category for China’s exports to Southeast Asia. Electrical appliances and electronic equipment make up a larger proportion of China’s capital goods trade surplus with Europe. West Asian countries and South Korea were the main sources of China’s trade deficit.

China needs to convert its trade surplus into outward investment to maintain equilibrium in balance of payments. BRI countries are mostly developing economies whose financial markets are less developed and whose real economies urgently need to develop. China’s outward investment has accordingly shifted from financial investment in developed countries to physical investment in BRI countries.

As China’s outward investment shifts from financial investment in developed countries to physical investment in BRI countries, China’s foreign exchange reserve assets held in US Treasuries as a percentage of its total outward investment assets have declined from 63 to 35% in the past decade, while the shares of foreign direct investment assets and other investment assets, mainly loans and trade credit, have continued to grow (Fig. 1.6). Foreign direct investment and bank lending have become the main forms of physical investment in BRI countries. As of end-2021, China’s cumulative investment and financing in BRI countries amounted to nearly US $1.3 trn. Most of the investment and financing took place after the BRI was proposed, with more than 70% being bank loans.¹³ China’s annual new investment in BRI countries is equal to just over 1% of its GDP, still smaller than the ratio of its trade surplus to GDP.

Fig. 1.6

Source State Administration of Foreign Exchange of China, CICC Global Institute

Changes in China’s outward investment assets. Note Since the dollar amount of financial derivatives is small, it is not shown in this figure.

China’s physical investment in BRI countries is based on its comparative advantages, focusing on infrastructure and industries. At least 58% of China’s direct investment in BRI countries in 2013–2021 going to infrastructure construction (mainly transportation and energy infrastructure), and more than half of China’s non-aid loans to BRI countries going to infrastructure construction-related industries. One of China’s approaches to developing industries in BRI countries is building industrial parks, where countries can improve their business environment and reduce transaction costs to promote technological innovation and industrial upgrading. As of end-2021, Chinese companies had invested a total of US $43.08 bn in the construction of industrial parks in BRI countries.¹⁴

The rebalancing of China’s foreign trade and outward investment towards BRI countries also creates favorable conditions for RMB internationalization. As China’s trade with and investment in BRI countries increase, infrastructure construction for facilitating cross-border RMB usage continues to advance. As of end-July 2022, China had made bilateral currency swap arrangements with more than 20 BRI countries and RMB clearing arrangements with more than 10 BRI countries.¹⁵ The RMB has become more commonly used under the BRI. Cross-border RMB settlement between China and countries along the Belt and Road reached Rmb5.42 trn in 2021, accounting for 14.8% of total cross-border RMB settlement in the same period.¹⁶ The strengthened economic cooperation and trade between China and Saudi Arabia as well as other countries since 2022 may increase RMB settlement and present further opportunities for development of RMB internationalization.

1.3.2 Provision of International Public Goods: “Hard Connectivity” of Infrastructure and “Soft Connectivity” of Rules

BRI countries’ economic development faces constraints of “hard” infrastructure and “soft” conditions. For the constraints of “hard” infrastructure, some BRI countries’ poor infrastructure leads to high trade costs and hampers industrial agglomeration and economies of scale. The constraints of “soft” conditions mainly come from the international environment. The existing international economic system does not fully take into account the interests of BRI countries. As a result, BRI countries could suffer a loss of efficiency under the existing international rules. The BRI, as a public good that China provides to the world, aims to enhance the connectivity of not only infrastructure, but also rules and standards, so as to reduce obstacles to the development of BRI countries.

Infrastructure construction under the BRI focuses on “removing weaknesses” and “promoting connectivity”. In terms of removing weaknesses, China provides infrastructure leveraging its capacity and advantages in infrastructure construction. Transportation infrastructure and energy projects together accounted for more than 75% of the value of construction projects that China implemented in BRI countries over 2013–2021 (Fig. 1.7). In terms of promoting connectivity, the BRI focuses on building international corridors and strives to improve cross-regional and cross-border access so as to break through spatial constraints of factor endowments, facilitate cross-regional factor flows, and boost economic vitality along the Belt and Road. It has formed a main framework consisting of six corridors, six connectivity routes, and multiple countries and ports.

Fig. 1.7

Source AEI, CICC Global Institute

Industry distribution of construction projects that China implemented in BRI countries. Note Calculated by dollar amount of construction projects. Time range from 2013 to 2021.

For “soft connectivity”, the BRI serves as a supplement to the current international economic and trade rules and governance system, and provides incremental global public goods in terms of rules and standards. It has brought together a wealth of cooperation platforms and mechanisms, and has been advancing under existing bilateral and multilateral international cooperation frameworks. The BRI adopts open and inclusive guidance through “soft laws” to accommodate differences among different countries and reach open cooperation intentions. The specialized cooperation initiatives formed under the BRI fully recognize the realities of development of each country, and help BRI countries build a system of rules according to their own interests in the international arena.

1.3.3 BRI Promotes Economic Growth of Participating Countries

Overall, we believe that the BRI has had significant positive effects on the economic growth of participating countries. The World Bank estimates that BRI transportation projects could increase trade in economies along the routes by 2.8–9.7%,¹⁷ increase foreign direct investment (FDI) inflows to low-income economies along the routes by 7.6%, and increase real income by 1.2–3.4%.¹⁸ To be specific, the BRI promotes the economic growth of participating countries through investment, trade, and innovation.

Investment: On the supply side, the construction of infrastructure and industrial parks under the BRI directly stimulate economic growth. Infrastructure construction has a multiplier effect, and can drive growth of other industries. For example, the construction and opening of the Mombasa-Nairobi Standard Gauge Railway can boost Kenya’s GDP growth by at least 2%.¹⁹ On the demand side, jobs created by the construction of infrastructure and industrial parks increase worker income, boost consumption, and drive economic expansion. As of end-2021, the industrial parks that China built in BRI countries created a total of 346,000 local jobs.²⁰

Trade: Infrastructure construction and the implementation of trade facilitation measures such as customs clearance under the BRI can effectively reduce transportation and labor costs and increase regional trade activity. According to WTO calculations, improved trade facilitation conditions could reduce the cost of trade among BRI countries by 12–23%. Analysis by Joanna Konings, senior economist at ING, suggests that if the cost of trade among BRI countries is halved, world trade could increase by 12%.²¹

Innovation: Innovation is the ultimate driving force for economic growth. BRI countries’ disadvantages in R&D and innovation may further widen their “development gap” and “technology gap” with leading countries. China has accumulated experience in “catch-up” innovation over the course of its development, and it can provide useful experience for BRI countries so that they can leverage innovation to boost their economic vitality. As of end-2021, China had established scientific and technological cooperation relationships with 84 BRI countries, and invested a total of Rmb2.99 bn to build 53 joint laboratories in agriculture, new energy, healthcare, etc.²²

1.4 Reflections and Insights

Reaching its 10th anniversary in 2023, the BRI faces a more challenging external environment (e.g., deglobalization). How could China combine its advantages in capital and experience with BRI countries’ population and resource endowments, leverage its positive externalities in terms of infrastructure construction and market size, and move the BRI to the next stage? We believe high-level opening up is necessary for advancing the BRI.

First, infrastructure is the basis for China’s opening up to BRI countries and the development of related trade and investment. Regarding the sustainability of infrastructure projects, we believe China can focus on higher-quality projects, leaning towards projects with higher returns and strengthening public–private partnerships in the construction of industrial parks. Given the high risk premium of BRI countries, China can diversify financing risks and resolve debt problems through multilateral cooperation.

Second, China proposes to steadily expand institutional opening up with regard to rules, regulations, management, and standards. We believe this requires China to: (1) Further enhance its scientific and technological innovation capabilities and strengthen its technology spillover to BRI countries; (2) play a role in the formulation of international rules and standards and help BRI countries better cope with constraints on new development; and (3) attract high-end talent to China through institutional opening up, bring together innovative factors of production of BRI countries, and expand the scale and scope of innovation activities.

Third, China aims to be a highly active participant in the global industrial division of labor and cooperation. This requires the country to further deepen cooperation with the global economy through trade, investment, and supply chain integration on the basis of its comparative advantages. For example, China could cooperate with BRI countries in Southeast Asia with low labor costs and low tariffs in renewable energy industries such as photovoltaic and wind power. On the demand side, China could open up its large domestic market further and explore the potential of BRI countries’ diversified markets.

Fourth, China proposes to maintain a diversified and stable international economic landscape and economic and trade relations. This requires China to maintain and improve multilateral mechanisms such as the WTO; actively develop regional plurilateral economic and trade rules; better integrate the BRI with existing international economic, trade and investment rules; and mobilize a wider range of international forces to participate in the BRI. China playing a greater role in the formulation and maintenance of relevant international rules could help strengthen its diversified economic and trade ties with BRI countries.

Finally, China aims to promote the internationalization of the RMB in an orderly manner. In the closed investment and trade loop between China and BRI countries (China investment—import of Chinese goods—export of primary goods to China), the circulation of currencies between them serves the circulation of goods, helping to reduce financing costs. This circulation is enhanced by the fact that China and BRI countries are complementary to each other in trade. When trade between a BRI country and China is large enough, the use of RMB in bilateral trade and investment reduces exchange rate risks compared with use of the US dollar. China can launch more RMB-denominated products, develop the function of the RMB as a store of value, and build a closed loop of investment and financing based on RMB settlement and denomination in cross-border trade, so as to advance the BRI in a steady and sustainable manner in the long term.