Is China’s aid an entrapment?
To drill down to the very basics, the admin’s economic platform is a slew of infrastructure projects to drive growth. Their tag line screams “Golden Age of Infrastructure” which of course gets lots of oligarchs’ adrenaline rushing. There is no doubt the Philippines need to improve on its infrastructure to take the country to a higher level. A huge dose of infra projects will also by themselves provide a kick to the economy from the resultant multiplier effect. Infra grand plans always look fantastic on paper and in public speeches but need to be treaded warily, especially when several mammoth projects are being undertaken almost concurrently. Egos, personal interests, and politics often get in the way of economic management.
According to NEDA, there are 12 mega projects worth a total of $4.4 billion (Php220 billion) such as the 653 km North-South Railway, New Centennial Water Source-Kaliwa dam, and the 2,000 km Mindanao railway project. Having cut the proverbial bridge to the US with Duterte’s pivot to the Chinese, the latter was primed to be the main source of funds provider for Philippines. The Japanese were already sold on investing in the Philippines after the pitch Pnoy made to the their National Diet in 2015 where parliamentarians gave the visiting president a standing ovation. In the Duterte admin, Japan is a Johnny-come-lately, but they too are willing to fund some of the projects. Depending on how one views it, the Japanese are jostling for influence in the country, or it is Duterte playing 2 sides.
Let’s get some perspective. It’s worth pointing out that the Pnoy admin had seen GDP grew from $200B in 2010 to $292B in 2015 whilst reversely bringing the debt to GDP ratio down from 52.4% in 2010 to 45% in 2015. Some of the infra and discretionary spending had been from substantial savings from lower interest payments on loans, no doubt by restructuring loans to take advantage of the era of low-interest rates. The Duterte admin proposed infras will thus nudge up the debt to GDP ratio by 3-4% which is maintainable. However this has to be seen against a backdrop of :
- A rising interest rate regime is going to hurt loan servicing costs. The days of bingeing on cheap money appears over as the Fed is bent on rate increases in light of perceived improvement in the US economy. The EU central bank appears set to increase rates as well after more than a decade.
- The weakening peso scenario makes foreign loans weigh more in peso terms.
- Budget Secretary Diokno’s intent is on deficit budgeting as a growth pathway.
- There is a weakening local economy due to the difficult political situation.
- Global uncertainties have been caused by an unpredictable Trump presidency.
External funding sources are from the private sector, bilateral arrangements, or multilateral organizations. What sorts of requirements do they normally entail?
Private sector — Consortium or syndicated loans are put together by financial institutions if the proposals meet their risk criteria and the projects are viable. These are purely commercial transactions at market rates.
Bilateral — these are put together after country to country agreements and normally take the form of exim bank credits or ODA (overseas development aid). The arrangement will work in some advantages to the lender country for the soft loans extended. Such give-aways include using creditor country’s banks, hardware, consultancy in relevant fields of expertise, developers, contractors,etc. Increasingly, advanced countries try to tie aid packages to benign conditions like human rights commitment, good governance, anti-corruption, or other social commitments like poverty reduction, health care improvements, etc.
Multilateral — these are from institutions like IMF, World Bank, and Asian Devt Bank. The good part is the borrower is tied to strict terms of accountability, transparency and legalities. The bad part is these institutions are controlled by western countries who demand third world borrowing countries implement economic policies in line with their neolibertarian ideological leanings such as privatization and globalization.
The bitter taste in the mouth comes during times of default. Private sector loans will work out through loan restructuring. Bilateral ones will see creditor country gain physical control of assets. Multilateral lenders will ram down the borrower’s throat bitter pills of some template economic recovery programs like heavy doses of austerity that have done more damage than good, and generally altered the economic landscape of these countries where capital resources are taken over by core group of mighty capitalists.
The lessons in Latin South America and Africa are markedly different coming out of the debt traps in the 70s/80s. The Latinos were primarily indebted to banks. There were many debt restructuring exercises and some big bank lenders themselves got rescued by their govts which reconstituted the loans into tax payer funded ODAs. Big financial institutions grouped together in what was known as the ‘London Club’ and it took them years to solve the mess. The African experience was different. They borrowed primarily from multilateral lenders who loaned recklessly. Many took on huge loans for infra projects and with economies basically relying on one or two key products, like oil, diamonds, or cocoa, they went into default easily when commodity prices collapsed. It was left to the ‘Paris Club’, a grouping of lender countries, to sort out the mess. Many rescue packages required borrowers to adopt macro economic policies that failed to solve underlying problems. Several of these countries remain heavily in debt with economic assets in the hands of foreigners.
Enter the dragon:
Duterte has said Chinese financial aid comes with no strings attached. This needs a big call-out because, at the very least, there are interest servicing and repayment requirements. China has already promised a $3.4B exim bank credit for Philippines, and this has been hailed by admin supporters as a great success. People say the mayor from Davao has done what previous presidents couldn’t do. He has brought the bacon home. But is this true, when terms remain unknown? It implies that, without China, the infra projects cannot proceed. The Pnoy admin had brought the country on a path of economic recovery and good governance that has earned it investment grade ratings for the first time in 40 years. With the improved credit rating, one of the highest GDP growth rates, and a world still flushed with liquidity and lesser investment opportunities, the Philippines would have had no problems going to the international capital markets. Sadly, within 8 months of the new admin, Philippines credit standing is now questionable. It seems we are indeed stuck with China after all.
The era of western-style colonialism, the likes of Magellan, Vasco da Gama, English East India Company etc, one of physical occupation, are long past. It had been replaced by treaties or covert subversion, in various forms, to retain countries under spheres of influence. The latest superpower, China, now straddles the world with neocolonial ambitions. It has no desire for physical military occupation of countries, (other than Tibet which it invaded in 1950) but nevertheless it’s objective is to create a hegemonic sphere of influence through trade, communication, security arrangements — a throw back to the ancient days of the Silk Road where weaker peripheral countries traded with and paid homage to the middle kingdom. The One Belt One Road strategy is a mammoth transportation network meant to cement this hegemonic sphere. As long as weaker countries maintain friendly relations with China, there is no fear of a Chinese confrontation. It is left to be seen to what extent China will recognize these countries’ sovereignty when contentious issues arise in the future. Needless to say, countries that become dependent on China will unilaterally take positions favorable to China.
In ancient days, trade flowed along the Silk Road with all sorts of goods getting into China in exchange for silk. Today, China wants all sorts of commodities in exchange for cheaper mass produced goods from Chinese factories. China takes whatever they require from various countries, but unlike the Conquistadors, they pay for it. China has also been very friendly by providing lots of financial aid for infra projects, with no strings attached.
This is a politically naive view expressed by many frustrated with western cynicism.
The Chinese debt trap:
It is becoming apparent that China’s financial aid destroys a country insidiously. Experiences include :
- Favored projects — They are not in it to help solve a country’s economic problems. Projects they finance are those that (1) enable access to natural resources that they seek; (2) help in the distribution of their manufactured goods (eg, those huge warehouse complex in Kazakhstan; (3) allow them to project further influence (eg ports in Sri Lanka).
- Local corruption is acceptable — Govt-to-govt deals with corruption at high levels is tolerated, often by pricing project cost high to provide a big margin for officials.
- Chinese corruption — Officials all the way up to the proletariat is a nest egg of corruption. Project pricing is also forced up to grease Chinese hands.
- Chinese monopoly — Projects lock-in Chinese companies, equipment, products and services, Chinese labour from engineers to unskilled laborers. Exim bank financing takes care of that. ‘Exim’ means export/import which means the financing is for projects that involve the exportation of Chinese products and services.
- Dubious companies — Some Chinese companies and products banned by UN agencies for substandard issues continue to be active in Chinese projects.
- Local jobs — marginalized.
- Labor relations — Chinese tend to have poor labor relations in host countries. When there are encampments of huge number of Chinese workers in a project, labor friction is common.
- Questionable hardware — It is not uncommon to see Chinese use of hardware or designs that are questionable. Eg the nuclear plants they built in Pakistan are of a design the Chinese themselves don’t use in China.
- Environmental impact — Pollution and environmental issues are very important in China. (They have a huge reforestation project involving replanting 66 million trees in China). In host countries, they pay scant attention to environmental issues. This is especially disconcerting in Africa where local legislation on environment is weak and the Chinese are active in energy, mining, logging, and extraction industries.
- Interest rates — Nobody said it was free money. It is termed soft loans in that the terms are often stretched compared to commercial loans, and credit risks may not be acceptable to financial institutions. But the interest rates are not necessarily subsidized.
Duterte is right. Chinese aid has no strings attached. The Chinese are not interested in host country issues so their loans carry no requirement as to good governance, human rights commitment, social responsibilities, etc. They don’t care if you eat dogs, legaleize same-sex marriage, sponsor extra-judicial killings, officials skim-off the top, etc. They don’t even care if the projects have no economic benefits for the population. Nor do they even care whether borrower has the capability to service and repay the loans.
Question : What sort of leaders make a beeline for this type of aid?
So what do the Chinese really want? – Commercial penetration and strategic leverage. A country is ensnared in a debt trap when it is caught in a cycle of interest capitalization or taking on new loans to pay off interest or principal repayments. When default occurs, the Chinese move in to gain control of the resources, corporations or installations. As in the case of the port in Sri Lanka, it turned out to be a white elephant, but the Chinese are not bothered because they now have a port where their naval vessels drop anchor to project maritime influence right under Indian noses. The financial hold of the Chinese on Cambodia, Laos, Myanmar, and Thailand ensures a disunited ASEAN when it comes to China’s aggression in the West Philippines Seas. Not that it really counts as Asean Chairman Pres Duterte isn’t interested in pursuing the matter. Recently, Cambodia has unilaterally suspended its ‘Angkor Sentinel’, an annual US-Cambodian joint defense exercise agreement. It has also banned the Taiwanese flag in Cambodia.
What then are the benefits to takers of Chinese aid? The payback for countries that are well-managed reap the economic rewards from their projects. Rogue countries or leaders that take from China and remain subservient gain protection. China suffers no moral turpitude in their extension of aid. They subscribe to the I-rub-your-back-you-rub-mine doctrine. Beijing has funded Pakistan heavily, and stationed Chinese troops in Pakistani space to observe Indian troops. In return, China has consistently blocked UN actions against people like Masood Azhar, Syed Salahuddin, Hafiz Saeed, and Zaki-urRehman Lakhvi – a motley group of terrorists and Pakistani intelligence agents who have committed dastardly acts including the bombing of a famous hotel in Mumbai, India where hundreds of tourists perished.
The Philippines and Chinese aid:
Where did the idea for the pivot to China come from? Because a snide comment by Obama
offended the personal feelings of Duterte? It’s ridiculously silly to think so but that’s precisely what many have been led to believe. A careless Facebook posting by Bong Go (personal assistant to Pres Duterte) told us the president visited China a few months prior to the election.
How far back did this China love go? What is currently not in the public consciousness is a little queer diplomatic development back in 2007. Bongbong Marcos, then a provincial Governor, petitioned for the establishment of a PRC consulate in Laoag, the capital of Illocos Norte. It boggles the mind as to the purpose and how it passed Congress. The reason offered was it facilitates the growth of Chinese business in Illocos Norte. Is that even believable, if not, what was the real intent? It’s not far-fetched to venture that the Marcoses drifted towards the Chinese long ago, if for no other reason than they are persona non-gratia in US.
It is clear the Marcoses had a close relationship with Chinese officials for a long time. Then along came Imee Marcos’ contributions to the presidential bid of Duterte. Was the China pivot a leveraged outcome of the sponsorship and if so, for what is the purpose? Bearing in mind Bongbong’s political ambition, the more sinister question actually is, were the Marcoses the channel the Chinese used to turn Duterte? John Le Carre would have asked, who are the Chinese handlers of the Marcoses? Considering the family had sold out the country once by acts of indigenous spoliation, selling out the country a second time is within the realm of plausibility.
The Pnoy admin had made a policy decision of using the PPP model for infra projects and the necessary legislation and process have been put in place. The financing would be partly from domestic savings and partly commercial loans arranged by contracting entities. Thus, it allows for the channeling of domestic savings to national projects. The groundwork had taken too long and Pnoy admin had been criticized for the failure to push PPP projects through. The Chinese funding are bilateral arrangements which mean the required bidding processes under PPP do not apply. The all too familiar problems of transparency will once again be revisited.
The admin has bandied various admirable projects, but there do not seem to be any concrete plans. Even the Chinese have said they do not, at the moment, understand how the financing is to proceed, and specifically for the Mindanao railway, they are looking for various studies and analytical reports. It is apparent the admin is long in ideas, but short in detailed plans. The officialdom from Mindanao must now realize that it’s one thing to criticize previous admin for being slow in taking action, it’s altogether different when sitting in executive chairs. Planning for such projects takes years and NEDA has recognized that some projects might extend into the next admin. Railway projects, for example, require ridership data, cost of alternative mode of transport, eminent domain resolution, station site determination, environmental impact studies, economic benefits, and probably a hundred other studies. In many other countries, such projects involve community participation. Will it be simply railroaded here, pardon the pun?
Previous Budget Secretary Abad had warned that “chronically weak linkage between planning, budgeting and execution in most agencies … led to weak absorptive capacity, poorly programmed projects, and implementation delays”. Absorptive capacity is a qualitative inference to project management staff in govt service. The govt staffers do not measure up and this has hampered project implementation. The underlying cause is simply civil service pay scale is not on par with the market resulting in a brain drain with more skilled workers avoiding public service. Since this problem is not addressed, we can expect the Golden Age of Infrastructure to suffer similar setbacks.
In line with what’s been said above on Chinese objectives in their financial aid, two developments in THE Philippines can be prophesied:
- There will be Chinese participation in some port development somewhere on the Mindanao southern coastline. As a matter of fact, the govt has scrapped a Pnoy PPP project, the Davao Sasa Port Modernization, and replaced it with a Php39B Davao mega port project contracted out to R-II Builders Inc, a company that is embroiled in a few legal suits and charges of professional incompetency. It’s a no-brainer that the Chinese will be roped in because the contractor has no financial muscle. Why the Chinese interest in a southern seaboard? To extend maritime influence southwards spanning Indonesia, resource rich Papua New Guinea, Australia and New Zealand.
- In the ongoing battle being waged by DENR against existing mining businesses, Duterte has repeatedly said he stands by Secretary Gina Lopez. He minced no words when he said he is willing to forego Php 60B revenue from the industry with the closure of all mines. With Chinese interest in raw materials, it looks like a Machiavellian maneuver is paving the way for oligarch change in the extraction industry, especially in Mindanao.
Reference : “China’s Debt Trap Diplomacy” by Brahma Chellaney, Professor of Strategic Studies at the New Delhi-based Center for Policy Research and Fellow