Vice President Mike Pence’s visit to the Indo-Pacific this week casts a spotlight on a region increasingly vital to global security and prosperity. State-based and private investors are investing vast amounts to build infrastructure and advance economic growth. For the emerging economies of the Indo-Pacific to realize their full potential, they must avoid economic traps.
Seventy years ago the Marshall Plan helped rebuild countries devastated by World War II. It is celebrated as an economic marvel, not only because it provided badly needed support, but also because it helped develop stable societies that advance global peace and prosperity. What is often forgotten is that Russia countered with its own plan to rebuild Eastern Europe. The Soviet Molotov Plan was designed to leave Eastern Bloc countries dependent on Moscow.
Having spent much of the past year traveling across the Indo-Pacific, I’ve seen these contrasting approaches being played out today, from Indonesia to Sri Lanka. While China is lending vast amounts to infrastructure projects across the region, the United States is the largest source of investment into the Indo-Pacific, and the recent passage of the BUILD Act will more than double U.S. development finance resources.
The Indo-Pacific needs this investment in power plants, ports and other infrastructure to create modern connected economies. However, from predatory lending to corruption, China’s approach to development raises red flags. When host-country policymakers consider projects to support their country’s prosperity, they should weigh the following five factors:
•Is the project win-win or winner take all?
U.S. infrastructure development helps improve local business conditions, connect countries with global markets, and reduce dependence on foreign aid and capital. In contrast, China seeks to build spheres of influence, often through corrupting elites, rather than empowering citizens and creating free and open networks of nations. This mercantilist zero-sum approach doesn’t deliver long-term benefits.
•Could the project erode sovereignty?
John Adams said that a way to subjugate a country is through “either the sword or debt.” The Center for Global Development has identified several recipients of Chinese investment, including Pakistan, the Maldives and Djibouti, whose high debt-to-GDP ratios could cause economic distress.
Loan-to-own exchanges, or “debtbook diplomacy,” do not create sustainable sovereign states. I’ve visited a strategic port in Sri Lanka that China has claimed for 99 years. Angola now sends the majority of its oil to China for debt repayment. Deals like these threaten a country’s economy and autonomy.
•Does the project create local jobs?
Economic development should benefit countries by creating jobs for their workers. Often these jobs pay more and provide better training and benefits than the local standards. Yet too many Chinese-backed investments give most of the jobs to workers imported from China, depressing labor conditions for the people they purport to help.
•Does the project enhance environmental standards?
Responsible investors protect the environment. But much of China’s development is resource extraction focused on quantity and speed. The World Bank has argued that Chinese investment had concentrated in poor nations with weak environmental regulations, leading to the creation of “pollution havens.”
•Is the project built to last?
One Chinese-built bridge in Kenya collapsed two weeks after it was built, and many other Chinese-backed projects have been structurally unsound. To avoid such outcomes, projects must have world-class engineering and construction. In a world facing challenges that far exceed the resources of governments, the private sector must be a partner in infrastructure development.
State-based investing is insufficient, inefficient and unsustainable. Including true private-sector partners shows investors and employers that a country is a viable commercial destination.
The Western development finance model, combining private capital with limited government support, has been proven to be a superior model than state-directed investments, and takes into account the factors countries and projects need to thrive.
Some of the greatest triumphs of America’s foreign policy have moved fragile and developing countries to successful societies, which have become now economic partners, not vassal states. Infrastructure is crucial to development, but the most valuable resource a country can have is a cadre of human talent powered by the free and open societies America has been helping to build for more than 70 years.
• David Bohigian is executive vice president of the Overseas Private Investment Corporation (OPIC), the U.S. government’s development finance institution.