Belt and Road, Economics and finance, International relations | Asia, East Asia, South Asia, Southeast Asia

4 May 2018

The strategic benefits of China’s Belt and Road Initiative must be weighed against domestic efficiency costs, John Gibson writes.

The Belt and Road Initiative (BRI) has the potential to remake the economic geography of China, moving investment and economic activity to the country’s western regions. Academic commentary on the BRI mostly deals with the international aspects, but it is likely that impacts within China will occur sooner, and be bigger.

Many BRI partner countries have poor sovereign credit ratings, which may limit investment in these places. The infrastructure focus of the BRI is also a vulnerability, given political instability in the regions linking China to Europe and the Middle East.

In contrast, China can build BRI projects within its own jurisdiction at a faster pace. This is especially because one of its economic motivations for the initiative is to deal with the country’s industrial-sector overproduction. With spare capacity already in place, infrastructure in western China can be built quickly.

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This shift in the location of economic activity is required for the BRI to break from business as usual. If President Xi Jinping’s flagship economic initiative is to be truly transformative, some investment must go to regions that otherwise would not receive it, and some economic activity must disperse to places the market would not direct it. Of course, when governments ignore the direction in which markets are pulling resources, they potentially forego the efficiencies that come from locating in the most productive areas.

In a recent study, Chao Li and I focus on the northwest China to Kazakhstan component of the Belt and Road. This overland route proceeds from Xi’an (the terminus of the original Silk Road) through to Khorgos on the China-Kazakh border. Khorgos is China’s primary western gateway and is where containers have to undergo transhipment because of the wider gauge railways in Kazakhstan (and throughout the former Soviet Union) than in China and Europe.

There are 46 prefectural‐level units in a corridor from Khorgos to Xi’an; these units should see more investment and economic activity from the BRI. Diverting economic activity to the west follows the goal for more of China’s exports to go by land through Central Asia to markets in Europe and the Middle East.

Exports are currently highly concentrated – eight of China’s coastal provinces account for 82 per cent of exports, yet have just one-third of the country’s residents. In contrast, the nine western provinces contribute just four per cent of China’s exports, despite covering two-thirds of its land area and being home to 19 per cent of its residents.

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These 46 prefectural‐level units are smaller and more administratively diverse than other spatial units in China. They have higher rates of out-migration and are home to a more ethnically diverse population than elsewhere in the country. They are also considerably poorer, with GDP per capita just two-thirds of that prevailing elsewhere in China.

Just because an area is poor does not mean that investment should not go there. It could be a ‘poor but efficient’ area that is constrained in the availability of inputs. Investment in such poor areas could bring high rates of return.

However, the ‘poor but efficient’ characterisation does not seem to apply to the Xi’an to Khorgos corridor, at least in the recent past. According to our productivity estimates using Data Envelopment Analysis, these areas are less efficient at converting labour and capital into GDP than elsewhere in China.

This lower efficiency seems to be intrinsic to this corridor area, rather than due to its observable characteristics (such as being smaller or poorer), because there is no similar efficiency gap for a matched set of regions elsewhere in China that have similar observable characteristics.

Given that the Xi’an to Khorgos corridor is less productive, resources allocated there are likely to have a high opportunity cost, in the sense that they would yield more GDP elsewhere.

Whether the international strategic benefits for China of the Belt and Road Initiative outweigh these intra-national efficiency costs is a key question for evaluating the overall impact of this major regional development policy.

This article is based on the author’s paper ‘The “Belt and Road Initiative” and comparative regional productivity in China’, which was published in Asia & the Pacific Policy Studies in April 2018. All articles in the journal are free to read and download.

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