The Belt and Road Initiative (BRI), launched by China in 2013, is a sweeping and ambitious development strategy aimed at enhancing global connectivity through the construction of extensive infrastructure networks across Asia, Europe, Africa, and beyond. While heralded as a potential catalyst for economic growth and cooperation, the BRI has also attracted a spectrum of criticisms. Concerns range from worries about the debt burdens placed on participating countries due to large-scale infrastructure investments to questions about transparency in project agreements and financing terms. Additionally, the initiative's geopolitical implications, potential environmental impacts, and uneven distribution of benefits have sparked debates about its long-term viability and impact on recipient nations.
CDDRL researchers Francis Fukuyama, the Olivier Nomellini Senior Fellow at the Freeman Spogli Institute for International Studies (FSI), and Michael Bennon, a research scholar and program manager for CDDRL’s Global Infrastructure Policy Research Initiative, have written widely about BRI’s challenges. Their latest essay, “China’s Road to Ruin: The Real Toll of Beijing’s Belt and Road,” published today in the September/October issue of Foreign Affairs, explores the current state of the BRI, the challenges it has created, and the reforms needed to protect the World Bank and International Monetary Fund (IMF) from the fallout of the BRI debt crisis.
Below, Fukuyama and Bennon share their insights on the potential implications of the BRI on global development finance, as well as suggestions for reforms that could bolster the ability of international financial institutions to manage any potential debt crises arising from these projects.
What are the key factors contributing to the risk of debt crises stemming from the Belt and Road Initiative? How significant is this risk in your assessment?
It is clear that fears from a few years ago about China using “debt trap diplomacy” to gain access to strategic assets were overblown. The real problem is that poorly conceived Chinese projects have created a new round of sovereign debt crises for developing countries and put the burden of resolving them on international institutions like the IMF. This diverts time and resources away from activities that would contribute to the long-term development of many poor countries.
Assessments of the current emerging markets debt crisis have tended to focus on the amount of BRI debt that exists in aggregate or for a particular country since it is such a large initiative. A much more important factor is transparency regarding the debts associated with BRI projects and the key terms of those debts. Without considerable transparency efforts, loans to large infrastructure projects are naturally opaque. They include many contingent liabilities for borrowing governments. These are liabilities that may be the responsibility of the borrowing government if they materialize. A lack of transparency over BRI debt also undermines the trust needed when a restructuring is necessary if other lenders become concerned that other “hidden” bilateral debts are not participating. So a key difference is not simply the debt crisis itself but the lack of trust among key bilateral lenders.
How have the dynamics of global development finance changed with the emergence of large-scale initiatives like the BRI? What challenges does this pose to established financial institutions such as the World Bank and the IMF?
The BRI has impacted the World Bank and the IMF in very different ways. For the World Bank, it simply represents a very viable alternative for countries in need of bilateral loans for large infrastructure projects. For decades, the World Bank has developed and improved its Environmental and Social safeguards for infrastructure projects. These are intended to improve project outcomes, but they also clearly impose costs in funding and project delays for borrowers. With the emergence of the BRI, borrowers had an alternative source of financing without the World Bank’s same safeguards.
For the IMF, the challenge is clearly on assisting countries in credit distress and managing the restructuring process, and this has been playing out over the last few years. The IMF has developed programs to lend into and then “referee” debt restructurings in the past, but the present situation is very unique both financially and geopolitically.
Are there lessons that can be drawn from historical cases of emerging market debt crises that could inform strategies to prevent or manage such crises in the context of the BRI?
Historically the best “solution” for an emerging market debt crisis is a fast, deep restructuring that gives the distressed borrower the headroom to resume economic growth. That is the opposite of what is happening for the initial restructurings in the current emerging market debt crisis. There is very little trust among lenders, and those restructurings that have been negotiated have been underwhelming. Geopolitically speaking, the emerging market debt crisis currently underway is a bit unique.