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4.3 One Belt, One Road From a Theoretical Perspective
In this section of the chapter we apply Ruland’s six functions of interregionalism to OBOR in order to observe how the different schools of thought – realism, liberal institutionalism, and social constructivism – explain the various utilities of this megaregional project. The table below provides an outline of how OBOR’s functions fit into Ruland’s theory. An explanation of how each function applies to OBOR and the corresponding evidence follows there afterward.
Table 4.3 The Six Functions of OBOR
Source: Created by the Author
Realism: Balancing
As mentioned earlier, realists assert that interregional dialogues are engaged by regions to balance against other interregional dialogues and to maintain equilibrium militarily and/or economically. Interregional balancing is often viewed in a triadic context in which international relations is built upon three nodes of
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power, namely Europe, the Asian-‐Pacific, and North America. In a struggle for influence and power these triadic players are constantly working to tip the scales in their favor by participating in interregional agreements with one another. In the case of OBOR, the function of balancing is certainly at play.
Over the last 6 years, China has felt itself being gradually cornered between the interregional dialogues of the two other triadic powers by the “ABC” (Anything But China) trade blocs.103 On one side, the U.S. and Europe have been pursuing the TTIP. On the other side, China has witnessed a growing U.S. influence due to its
‘pivot to Asia,’ which has been exemplified by the TPP. While both of these interregional agreements concern China, it is the TPP and the Obama’s Asian pivot that has motivated Xi to make efforts to find a triadic balance.
Well before the pivot was formalized in 2011, the Obama administration had already begun to turn its focus on working closely with countries in the Asian-‐
Pacific region including South Korea, Japan, the Philippines, Australia, India, and Taiwan. The threat of China’s rise to American hegemony in the region had to be addressed. So as it reduced its capabilities in the Middle East, the U.S. was prepared to turn its attention to Asia. In 2011, the Obama administration formally announced the pivot and its key piece on the agenda – the TPP. The White House made it clear that it sought to contain China’s growing influence when Obama declared that, “we can’t let countries like China write the rules of the global economy. We should write those rules.”104 On the surface, the TPP is a free trade agreement aimed at reducing tariffs and further liberalizing the economies of 12 countries along the Pacific Rim.
Yet, there are hardly any doubts that the TPP is being used as a geopolitical mechanism to pull countries like Vietnam out from under China’s growing economic shadow. The hope for the United States is that the TPP will help acquire greater economic gains relative to China not only for itself, but for its allies in the Pacific as well. These relative economic gains can then be translated into national power and a more prevalent military presence in the region.
103 Aaron Rabena, “China's Counter-‐Pivot Response,” International Policy Digest, May 11, 2015.
104 The White House, Office of the Press Secretary. Statement by the President on the Trans-‐Pacific Partnership [Press release]. The White House, October 05, 2015.
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Faced with the TTIP, TPP, and the potential for expanded U.S. influence with Asia and Europe, China was forced to react as it has witnessed the scales begin to tip out of its favor. Therefore, China’s response to Obama’s pivot to Asia with OBOR is to boost its cooperation with Asia and Europe, the same regions that the U.S. is targeting with the TPP and the TTIP. The infrastructure investments offered by OBOR will help “to add to the gravitational pull of China on long wary neighbors and diminish the attractiveness of the United States”105 The United States and its major ally in the Asian-‐Pacific, Japan, are excluded from the current OBOR roadmap and have spoken out against the validity and feasibility of the initiative.
Liberal Institutionalism: Institution-‐Building, Rationalizing, Agenda-‐
Setting, and Promotion of Development
Of Ruland’s six functions of interregionalism, three of them are based in the school of liberal institutionalism. According to the view, institutions are essential for regions to promote cooperation by reducing transaction costs, fostering channels of information sharing, and offering a mechanism for resolving conflicts. Additionally, interregionalism helps drive global governance to respond to the challenges of an increasingly globalizing world.
Institution-‐Building
With regards to this function, Ruland asserts that interregionalism creates a demand for new institutions. As an interregional dialogue intensifies both the amount and level of communication between regions, the need for better coordination and systemization grows. The vision behind OBOR certainly creates a need for institutionalization. Thus, China established the Asian Infrastructure and Investment Bank to help manage and regulate the investments in infrastructure.
Except for the United States and Japan, the AIIB has become a welcomed institution for several reasons. These reasons include infrastructure funding needs, the demand
105 Douglas Paal, “Why Congress Must Pass the TPP,” Carnegie Endowment For National Peace, June 17, 2015.
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for sustainable development, and the displeasure with slow reform in the global financial architecture. The issue is that the current financial institutions are not fulfilling these needs adequately, especially when it comes to the financing of infrastructure. In breaking down the total annual financing for infrastructure investment, we find that of the “roughly $0.8-‐0.9 trillion, over 50% comes from national budgets, almost 20% comes from national development banks, 25% comes from the private sector and only 3-‐4% comes from the existing MDB’s and 1-‐2%
comes from south-‐south flows.” 106 Surprisingly, the current multilateral development banks have provided little in infrastructure investment, although they were primarily created to deliver infrastructure funding. For instance, although the International Bank for Reconstruction and Development (IBRD) was originally established in 1944 to finance infrastructure development in the devastation of World War II, it soon shifted its focus to poverty reduction and social development, at the expense of infrastructure.107 Another major criticism of the current multidevelopment bank landscape is that it implements an approach based on conditionality and a one-‐size-‐fits-‐all strategy; these institutions come far short of introducing policies that are specifically designed to meet the needs of developing countries. However, the AIIB is not to be looked at as a competitor of current multilateral banks, but as a complement. The OBOR bank has already signed major co-‐financing agreements with the ADB and the World Bank in Pakistan and Indonesia.108
As discussed earlier, the AIIB currently consists of 57 members divided into regional and non-‐regional contributors, ranging from developed Western countries to developing African and Asian nations. Voting rights in the bank are decided by a complex formula based on the member’s contribution and the size of their economy.
Based on this formula, China will have a supermajority in the bank as its contribution of nearly $30 billion far outweighs contributions from any other
106 Ajay Chhibber, “China’s One Belt One Road Strategy: The New Financial Institutions and India’s Options,” National Institute of Public Finance and Policy, Working Paper No. 15-‐155, (2015), 9.
107Ibid., 9.
108 Lean Santos, “What to expect at the AIIB Annual Meeting in Beijing,” Devex, June 23, 2016.
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member. However, to combat the criticism that the AIIB will merely be a tool for Chinese foreign policy, the bank plans to set high standards in transparency and efficiency. Based on the Zedillo report’s recommendations on World Bank reform, the AIIB’s governance structure should be leaner. For example the report found that the World Bank’s resident board cost $70 million a year, thus the AIIB decided to establish a non-‐resident board that will collaborate electronically instead.109 While each country has a seat on the board of governors, the board of directors will consist of only twelve members. Based on the threshold set for board seats (6% voting power for regional members and 15% for non-‐regional members), China, Germany, Russia, and India will have their own seat, while the remaining eight seats will be made up of multi-‐country constituencies.110 For instance, South Korea’s board vote is also a vote cast for Israel and Mongolia. As far as staffing goes, the AIIB will only maintain 500-‐600 staff, which is six times less than the ADB and 20 times less than the World Bank. The voting share of each member is calculated by the size of their investment, a basic share for all members, and a special share for being a founding member.111 In the Board of Governors, decisions are made by a majority and in some cases a super majority. In the Board of Directors, each director casts the number of votes to which the governors who voted for them are entitled.
Rationalizing
As Ruland points out, interregional dialogues have the capacity to break up multilateral debates into smaller, more manageable discussions. The rationalizing function allows interregionalism to alleviate the stalemates that are so common in multilateral negotiations. Recently, a major gripe in multilateral institutions has been the limited voice of emerging and developing nations. Pumping more money into infrastructure is not the only reason China formed the AIIB. The Asian
109 Anthea Mulakala, “New Asian Infrastructure and Investment Bank Breaks Ground: What You Need to Know,” The Asia Foundation, January 27, 2016.
110 Scott Morris, “Doing the Math on AIIB Governance,” Center For Global Development, July 02, 2015.
111 New Zealand House of Representatives, “International Treaty Examination of the AIIB, Articles of Agreement, and Final Text,” Report of the Foreign Affairs, Defense and Trade Committee, August 21, 2015.
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Infrastructure and Investment Bank is also catering to the fact that the developing world still lacks representation in many global financial institutions. Currently, the European economies still hold more than 40 percent of the voting shares of the existing financial institutions, while Europe’s share in the global economy has shrunk to around 25%.”112 Yet, while emerging countries have seen their share of the global GDP rise, their share of voting rights have largely remained the same.
Reforms have been proposed, but have been slow to be realized. The Asian Infrastructure Investment Bank is the first international financial institution of its kind in that it is was created to address the infrastructure investment needs of developing countries. Compare the Asia Development Bank and the AIIB. Developed countries outside of Asia make up 40% of the Asian Development Bank’s shares while countries in Asia own only 38%. This is in contrast with the AIIB’s equity breakdown, which splits 75% among Asian countries and only 25% for non-‐Asian countries.113 With more representation in multilateral institutions like the AIIB, emerging countries will have a greater voice in the global forum. As an unintended effect, the AIIB is already beginning to stimulate reform in other international institutions and thereby the global governance system. At the end of 2015, the U.S.
Congress finally approved changes to the governance of the International Monetary Fund, which will give a greater voice to emerging countries. The timing cannot merely be chalked up as coincidence; the reforms had been muddling in Congress since 2010 and had little chance of getting passed until the AIIB came into the limelight.
Agenda-‐Setting
Closely related to rationalizing, the agenda setting function of interregionalism is quite straightforward in that it asserts that interregional dialogues have the ability to set the direction of global forums and bring new issues
112 New Zealand House of Representatives, “International Treaty Examination of the AIIB, Articles of Agreement, and Final Text,” Report of the Foreign Affairs, Defense and Trade Committee, August 21, 2015, 13.
113Yan Wang, “China's 'One belt, one road' vision to strengthen co-‐operation,” Central Banking, June 09, 2015.
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to the forefront. For much of China’s ascendance, it maintained a peaceful rise with a low profile and remained a rule follower. However, China is no longer content with sitting on the sidelines and wants to shift from an agenda-‐follower to an agenda-‐
setter. The One Belt, One Road “embodies China's ambition in global agenda setting, especially in the international economic field.”114
With OBOR, China is directing the global agenda towards infrastructure connectivity, the global supply chain improvement, and investment in developing countries. The purpose of the AIIB is clearly aimed at bring these goals to the forefront of the global agenda. As Article 1 of AIIB’s Articles of Agreement states:
“The purpose of the Bank shall be to (i) foster sustainable economic development, create wealth and improve infrastructure connectivity in Asia by investing in infrastructure and
other productive sectors; and (ii) promote regional cooperation and partnership in addressing development challenges by working in close collaboration with other
multilateral and bilateral development institutions.”115
Research conducted by several different organizations heavily supports these agenda goals. Based on studies conducted by the IMF, infrastructure investment in developing countries has a significantly high multiplier effect on their economies.
So, for every dollar spent on infrastructure, the economy expands by 1.6 dollars.116 Additionally, the World Bank found that “if all countries reduce supply chain barriers halfway to global best practice, global GDP could increase by 4.7%
and world trade by 14.5%.”117 These benefits far outweigh the benefits from the complete removal of all import tariffs, which could only increase the global GDP by 0.7% and world trade by 10.1%.
OBOR and the AIIB’s focus is quite different from the goals of the existing international financial institutions, which mostly focus on small poverty-‐reduction projects. As the director of Columbia University’s Harriman Institute, Alexander Cooley, puts it, the AIIB “signifies the start of a new chapter in the evolution of
114 Feng Zhang, “China as a Global Force,” Asia and the Pacific Policy Studies 3, no. 1 (2016): 126.
115 “Articles of Agreement,” Asian Infrastructure Investment Bank, Signed on June 29, 2015.
116 Miriam Campanella, “The AIIB will help fill the infrastructure finance gap,” East Asia Forum, April 9, 2015.
117“Report: Reducing Supply Chain Barriers Could Increase Global GDP Up To 6 Times More Than Removing All Import Tariffs,” World Bank, January 22, 2013.
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international development — a multilateral institution, global in membership, whose agenda is not predominantly determined by the U.S. and its Western allies”.118 The AIIB’s push for infrastructure development is already putting pressure on other multilateral institutions and national governments to get behind its infrastructure agenda. At it’s annual meeting last year in Baku, Azerbaijan, ADB chairman Takehiko Nakao announced that the bank would be increasing its lending capacity by 50%. At the same meeting Japan’s Finance Minister, Taro Aso, announced that his country would also increase support for infrastructure development. Together, these announcements were seen as “an effort by the ADB to reassert its relevance on a region, at a time at which its influence appears to be waning.”119
Promotion of Development
The last of the liberal institutional functions, the promotion of development, revolves around an asymmetric setting in which the advanced side contributes aid to the less developed regions to spur economic development. Yet, the advanced side does not provide aid purely out of goodwill, but with the intention opening new stable economic markets and creating a favorable environment for trade and investment. In this regard, development promotion is motivated by mutual gains. As we’ve seen with interregional dialogues in the past, this phenomenon can support development policies and liberalize the markets of regional members. Of all of OBOR functions, development promotion is the most glaring. No matter where you read about the initiative, the major theme of OBOR continues to be providing aid, in the forms of capital and technical expertise, to developing nations across Asia, Africa, and the Middle East. Yet, by providing this aid, China is also serving its own interests.
118 Lean Santos, “AIIB nears completion but China's 'global leader' status remains in question,”
Devex, June 30, 2015.
119 Finbarr Bermingham, “ADB will reform lending to assist poorer members,” Global Trade Review, May 06, 2015.
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As mentioned earlier, China is motivated by a plethora of factors, including increasing labor costs, an oversupply in steel, an overcapacity in the manufacturing and construction industries, the internationalization of the RMB, energy security, a and a need for better environmental standards. When considering these factors, building infrastructure across the six corridors of OBOR makes sense for China, because if successful, these projects would help alleviate many of these issues. For the developing members of OBOR, many have an abundance of resources and are witnessing economic growth, yet they lack the funding to keep up with the demand for industrial development and construction. For this reason, most countries that have joined OBOR have done so due to a need for development financing, especially members in Southeast Asia. When it comes to reducing logistics costs caused by congestion and structural inefficiencies and increasing the competitiveness of the economies of countries like Indonesia, the Philippines, and Cambodia, improving port infrastructure and connectivity with remote areas is seen as a necessity.
According to a study done by Citibank, ASEAN alone requires US$100 billion every year for the next 10 to 15 years to keep up with demand.120 With infrastructure gaps as large as this one, it is simply not possible for national governments to cover all on their own. Private investments – such as pension funds, sovereign wealth funds, and insurance companies – will certainly be required to bridge the gap. However, currently the institutional and legal frameworks for private investment remain weak. For instance, only 0.2% of the 7.2% of GDP spending on infrastructure development in Asian countries comes from private sector.121
With an abundance of capital, excess construction capacity, the requisite technical expertise, the multilateral financing mechanism of the AIIB, and the OBOR platform, China has the ingredients to fill the infrastructure gap. In 2015, Chinese companies already accounted for 17% of infrastructure investment across Southeast Asia.122 That figure is only expected to increase with the continued
120 Turloch Mooney, “Southeast Asian infrastructure benefits heavily from One Belt One Road,”
Fairplay, June 07, 2016.
121 Justin Lin, “Infrastructure's class of its own,” Economia, April 30, 2014.
122 Mooney, “Southeast Asian infrastructure benefits heavily from One Belt One Road.”
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progress of OBOR. In fact, the China Development Bank has already pledged to finance over 900 projects in 60 countries.123 China’s experience with supply chain management and integration is also valuable for developing countries. Unlike Japan, which is often at the end of the supply chain, due to China’s participation at various stages of the regional supply chain, it has a better sense of vertical integration among ASEAN countries. OBOR provides a platform and a market through which
progress of OBOR. In fact, the China Development Bank has already pledged to finance over 900 projects in 60 countries.123 China’s experience with supply chain management and integration is also valuable for developing countries. Unlike Japan, which is often at the end of the supply chain, due to China’s participation at various stages of the regional supply chain, it has a better sense of vertical integration among ASEAN countries. OBOR provides a platform and a market through which