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China’s “debt trap” on developing countries

China’s dollar diplomacy has a darker side. Although China is pursuing what it calls “principle of peaceful rise” rather than military expansionism, its economic engagement with many developing countries is turning a one sided winning gamble. In the first instance developing countries which are deficient of capital are allured by China’s forthcoming policy of providing credit and technical support to develop infrastructure, but in due course of time China not only renegotiates the terms of agreement of loans, but also tries to take control over the project if the borrowing countries find it hard to pay. Last year, with more than $1 billion in debt to China, Sri Lanka handed over a port to companies owned by the Chinese government. Now Djibouti, home to the US military’s main base in Africa, looks about to cede control of another key port to a Beijing-linked company. Many western countries including US are unhappy about China’s dollar diplomacy which often turns into ‘debt trap diplomacy.’

Recently US Secretary of State Rex Tillerson  said (March 6)) “Beijing encourages dependency using opaque contracts, predatory loan practices, and corrupt deals that mire nations in debt and undercut their sovereignty, denying them their long-term, self-sustaining growth.” He also added that Chinese investment does have the potential to address Africa’s infrastructure gap, but its approach has led to mounting debt and few, if any, jobs in most countries. This kind of funding of infrastructure project presumes that if the borrowing countries fail to generate enough cash to pay back they fall in a debt trap, which allows China to take control over the infrastructure aided by it and also to bargain land and resources from these countries at unilateral conditionality. This is what some analyst call “debt-trap diplomacy“: Offer the honey of cheap infrastructure loans, with the sting of default coming if smaller economies can’t generate enough free cash to pay their interest down. In Sri Lanka, acrimony remains around Hambatota and projects like “the world’s emptiest airport.”

China has characterized its “Belt and Road” initiative as a win-win for its aspirations to become a global trade leader and developing economies’ desire to fund transportation infrastructure. It has certainly filled the vacuum created by a shrinking American presence in global institutions. But as with Western internationalist projects, China is also facing accusations of imperialist behavior when its debt plans go wrong.

Eight most vulnerable nations

The Center for Global Development, a non-profit research organization, analyzed debt to China that will be incurred by nations participating in the current Belt and Road investment plan. Eight nations will find themselves vulnerable to above-average debt: Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan, and Tajikistan. The researchers note that they did not estimate how this debt would effect growth, and that they needed to assemble much of their data from media reports. But they still say their evidence should raise concerns about economic distress stemming from debt that would undermine development efforts altogether. In the past, China has responded to the debtors inconsistently and hasn’t followed best practices adopted by international lenders working with poor countries. Sometimes, the debt has been forgiven; other times, disputed territory or control of infrastructure has been demanded as recompense.

China’s debt is a new kind of imperialism through finance capital which the Marxist thinker blamed about the western economies and particularly the US during hey days of dominance of global economy 3 decades ago by them. China should have a more transparent and responsible debt policy as it has today become a net outbound investor.  Analysts suggest China to distribute its loan portfolio among more countries rather than a few selected ones for strategic advantages so as to to spread debt more equally. There is protest against China in Pakistan, Myanmar and some African countries for poor governance and corruption in its project finance and implementation which is bereft of rehabilitation and compensation to the people rendered destitute and homeless due to China funded projects. China also puts conditions to procure inputs from Chinese suppliers and use its workers in its funded projects. It also keeps its stake higher in the joint projects.  Now countries like Bangladesh, Nepal and Pakistan have started thinking about other sources of funding. China needs to adopt better corporate governance, adopt stricter standards and more transparency about economic feasibility of the projects.

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