Chinese Belt and Road Investment Isn’t All Bad—or Good

BY NILANTHI SAMARANAYAKE 

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In the last few years, the question of whether China’s Belt and Road Initiative (BRI) is predatory has been ripe for debate, with some arguing the loans Beijing offers constitute a debt trap and others pointing out that the BRI is ultimately beneficial for developing countries. The truth lies somewhere in the middle, and Sri Lanka shows how.

The example often used to paint China’s BRI as nefarious is Colombo’s controversial deal to lease Hambantota port to a Chinese-majority joint venture in 2017. The mainstream view is Sri Lanka was forced to “cough up” the port of Hambantota to China after it could not repay its earlier loans. These critics see the port as a white-elephant project of a former president, Mahinda Rajapaksa, with little economic benefit to the country. Some U.S. officials have even gone so far as to describe Sri Lanka as having “effectively ceded sovereignty over a key asset” when it made the deal.

At the other extreme, some observers are increasingly defending China as an undeserving target of criticism. They point out that Sri Lanka’s debt to China is no higher than its debt to some other countries and multilateral development banks. Moreover, they view the Hambantota port deal as little evidence of Beijing having any grand strategy and see Chinese lenders and negotiators as quite fair and amenable to restructuring loan terms for recipients.

Overlooked in this debate are a few factors that shed light on Sri Lanka’s—and perhaps other small states’—calculus when it comes to great powers.

First, there are domestic drivers to consider. Observers have rightly noted that Rajapaksa is from the Hambantota district, and his advocacy of the port has a clear element of self-interest. The project was locally popular as was the expected infusion of income it would bring.

Beyond local politics, however, there are deeper domestic structural and economic drivers. Hambantota is close to major sea lanes, and building a port there could help the country take advantage of its proximity to international trade routes. Hambantota is also in a part of the country that has been the site of insurgency and natural disaster. Developing it has been seen by multiple administrations as a way to pacify the region while advancing national economic goals. Indeed, despite Rajapaksa’s early pursuit of the Hambantota project with China in the mid-2000s, it was actually the administration that defeated him that eventually leased the port for 99 years.

Sri Lanka’s debt problem predates its relationship with China.

Second, Sri Lanka’s debt problem predates its relationship with China as a development partner. Many of its economic difficulties are related more to the “middle-income trap” than a Chinese debt trap. Since graduating to middle-income status, Sri Lanka has not successfully or responsibly updated its debt management strategies to reflect the loss of development aid that it had become accustomed to for decades. The Hambantota deal was a highly sought infusion of roughly $1 billion in foreign direct investment to replenish the country’s foreign-exchange reserves at a critical time of concern. But this balance-of-payments crisis had been years in the making.

Third, China and its state-owned enterprises do bear some responsibility in creating an unfavorable situation for Sri Lanka and other BRI countries. China represents itself as an alternate model of development to the world, yet Chinese negotiators pursued an excessive 99-year lease to the operation of Hambantota port with a country in desperate economic straits. Although Chinese port operators were highly sought after for their successful record in operating ports, this lengthy period of time is an outlier for port deals in the region.

In other words, in Sri Lanka, China isn’t solely to blame, but it also isn’t blameless. And that is rightly concerning for many other countries around the world.

For U.S. policymakers, the bottom-line concern is not really about the fairness of China’s loans anyway but rather about the extent to which friendly states may fall into China’s orbit. If the United States wants to prevent that from happening, it should pay closer attention to the domestic structural and economic factors that drive these states to seek Chinese deals. The start of the Biden administration offers a good opportunity to do that.

First, Washington can address the structural obstacles facing small states in the larger international economic system. In particular, it can use its influence in multilateral development banks to assist middle-income countries that have not sufficiently updated their economic practices. Next, the United States should acknowledge the agency of small states and not diminish them as relinquishing sovereignty when they conduct their own commercial infrastructure deals. In the case of Hambantota port, Sri Lanka’s leadership also sought U.S. financing, which was not forthcoming; U.S. investors were uninterested in the project.

As part of its renewed focus on climate change, the Biden administration might consider opportunities to provide development finance to turn Hambantota into a hub for fuel that complies with a January 2020 requirement from the International Maritime Organization (IMO) to curb sulfur content. In the past year, Sri Lanka has relaunched fuel service operations to capitalize on the need for ships to have IMO-compliant fuel.

U.S. policymakers are right to be concerned about the outcomes of Chinese agreements with small states, which make up a majority of the international community. But to address this issue, Washington needs to focus more on understanding the drivers within small states and the structural dynamics that push them in the direction of great-power competitors. After all, small states have agency, but great powers also have responsibilities.