China’s Belt and Road Initiative vs Washington Consensus

Originally published by Inter Press Service

With the Washington Consensus from the 1980s being challenged, President Donald Trump withdrawing the United States from the Trans-Pacific Partnership (TPP), and China pursuing its Belt and Road Initiative (BRI), most notably with its own initiatives such as the multilateral Asian Infrastructure Investment Bank (AIIB), the political and economic landscape in East Asia continues to evolve. Jomo Kwame Sundaram was interviewed about likely implications for developing countries in the region and beyond.

Belt and Road Initiative

What do you think of world growth prospects and China’s Belt and Road Initiative?

Although there are some hopeful signs here and there, there are few grounds for much optimism around the North Atlantic (US and Europe) for various reasons. Unconventional monetary policies, especially quantitative easing (QE), have helped achieve a modest recovery in the US, but appears less likely to succeed elsewhere. Such measures have also accelerated massive wealth concentration, which is why a few of the world’s richest men own more than the bottom half of the world’s population.

The situation is more promising in East Asia due to China’s diminished but sustained growth, and its almost unique rising labour share of national income. Most importantly for others, China has been willing to finance massive infrastructure projects, although this has given rise to a host of problems. For example, Chinese contractors are known for using Chinese material and human resources as far as possible, minimizing multiplier benefits for host economies. A few years ago, China’s ambassador to Tanzania publicly apologized for the conduct of Chinese firms in Africa, but most others tend to see all Chinese in monolithic terms. Meanwhile, US, European, Japanese, Indian and other competition for influence has helped increased options for other developing countries. However, it is not yet clear that China’s BRI and ‘alternative globalization’ will be enough to sustain rapid progress in the region.

Trade Liberalization?

You once said that “If President…Trump lives up to his campaign rhetoric, all plurilateral and multilateral free trade agreements will be affected.” Now, with the US having withdrawn from the TPP, why are the Japanese, Australians and Singaporeans still pushing for the CPTPP (Comprehensive and Progressive TPP) with all the others without the US?

It must be emphasized that the US, the EU and Japan have done little to advance trade multilateralism and keep the promise of the Doha Round of World Trade Organization negotiations, flawed as they are against developing country interests. Meanwhile, the Japanese, Australians and Singaporeans are trying to hype up the CPTPP as a political counterweight to China. But as a trade agreement, it will not do much except to strengthen foreign corporate power and further weaken governments, e.g., through its investor state dispute settlement (ISDS) provisions.

Why will the CPTPP have little impact on growth, but will strengthen the power of foreign enterprises?

Let us be clear that even with the original TPP, all projections, including the most optimistic ones by the Peterson Institute, projected very modest economic growth attributable to trade liberalization. US government projections were much more modest. About 85 percent of the Peterson Institute’s projected ‘growth gains’ were attributed to ‘non-trade measures’, mainly broadening and strengthening intellectual property rights (IPRs) and foreign corporate legal rights against host governments with its ISDS provisions, which they are promoting as features for so-called 21st century free trade agreements. So, for example, if stronger IPRs raise the prices of medicines, the value of trade will also rise! With ISDS, if a government decides to ban the use of a toxic agrochemical to protect farm workers and consumers for instance, it will have to compensate the supplier for loss of profits!

International Financial Institutions

Do you think the Washington Consensus is threatened by South-led financial institutions like the Asian Infrastructure Investment Bank and New Development Bank?

Although still very influential, the Washington Consensus is acknowledged to have been superseded by new policy prescriptions. Despite recent ethno-nationalist Western reactions, all too many developing country governments still believe that further trade liberalization will boost growth. Meanwhile, financial globalization continues despite its adverse effects for growth, stability and equity.

Now, digital globalization is supposed to have wonderful progressive effects when it has clearly accelerated concentration of power and wealth, albeit with the rapid ascendance of innovative new players able to quickly consolidate lucrative monopolies.

I wish the new multilateral development banks would be bolder, but thus far, they have largely chosen to work within the dominant framework shaped by the Washington Consensus, probably to secure market confidence.

Credit from China’s banks, usually benefiting China’s corporations, is far more important than what the AIIB and NDB offer. Of course, lending by China’s banks has undermined the BWIs’ monopolies, and this has already been reflected by new policy initiatives by the West and Japan, e.g., to more generously provide infrastructure finance.

Meanwhile, the World Bank has aligned itself more closely with the UN’s Sustainable Development Goals in order to provide its new initiatives to promote market-based private finance such as securities and derivatives besides public private partnerships.

Capital Controls

You have pointed out that both portfolio investment inflows to developing countries have in recent years. Do you think it appropriate to resume capital controls, as Malaysia did during the 1997-1998 Asian financial crisis, to counter capital outflows?

With even China reintroducing capital controls, it is important to consider such options. I have long advocated counter-cyclical ‘capital account management’ to smoothen financial cycles, rather than to only impose controls after a crisis, as effective capital account management must be pro-active, agile, and flexible.

Almost by definition, capital account management is context specific. There are few ‘one size fits all’ rules. What I specifically called for in the early and mid-1990s is probably no longer relevant or appropriate. The challenge is not to expect the last crisis to recur, but to protect national economic progress from likely future threats.

Capital inflows to sustainably enhance the real economy should be prioritized, not portfolio flows which tend to be speculative, easily reversible, and do not enhance the real economy.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.

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  1. The Rev Kev

    I suppose that you could reduce the whole situation down to a simple fast food question: “Will you have fries with your Hegemony or rice?”

    1. MyLessThanPrimeBeef

      Will those who speak up against the new hegemon be ruthlessly put down?

      Will doing so, when the belief is against hegemony itself, be deemed as defending the old hegemon?

      And will those with the new hegemon be serious and mean business, if not seriously mean, in seeking revenge, to redress anything from a simple slight to being a tragic victim? If so, it is only human nature, and thus a good reminder for us all to reform one’s own house when one can, and not let others do it for you.

    2. RBHoughton

      An unevidenced assertion in respect of China Your Grace. You are conflating western imperialism with Chinese geopolitical aims.

  2. a different chris

    About 85 percent of the Peterson Institute’s projected ‘growth gains’ were attributed to ‘non-trade measures’, mainly broadening and strengthening intellectual property rights (IPRs) and foreign corporate legal rights against host governments

    Because that’s exactly how the American economy in the 19th century and the Chinese economy in the late 20th grew so fast! /sarcasm

  3. Susan the other`

    One thing capital controls will do is prevent Minsky-like inflows of capital blowing up some regional economy. Isn’t this the LTC story? It seems like that example showed clearly that outflows create bubbles where they are aggressively “invested” while at the same time creating stagflation in the exit country. Unregulated capital flows have no way of balancing themselves out. It’s a game for suckers – over time the exit country spirals into austerity or allows inflation, or a combination of both (stagflation) while the entry country blows up ponzi-style and crashes. I don’t understand why this obvious double crime has not been looked at very closely – if one country is running out of good investments and another has good investment potential that should not be an opportunity to blow both countries out of the water. That’s just completely irrational.

    1. MyLessThanPrimeBeef

      Can a country run of good investments?

      Investing in people or pristine nature is always available as a good option, no?

      1. Susan the other`

        Yes, but not in a capitalist structure. But there’s nothing better than people and nature. We say it over and over again, and it falls on deaf ears.

        1. MyLessThanPrimeBeef

          Not in China (even back in its socialist years in the 50’s and 60’s) either.

          1. RBHoughton

            Its worthwhile reviewing the course of history and Michael Hudson has done us all a favour with his new book “…. and forgive us our debts.”

            What transpires from a review of the economies of the Bronze Age, classical antiquity and Byzantium is that Athens, Rome and Constantinople all collapsed because they adopted the same economic system favoring creditors over debtors. This caused the accumulation of wealth in a few, a deep schism in society, with the excluded majority getting no advantage from society and unwilling to oppose invaders.

            This should sound familiar to those of us who promote the AngloAmerican economic model because we did not know any better than to copy the Greeks and the Romans.

  4. noonespecial

    For more on China’s OBOR, a recent article by Hervé Juvin in American Affairs Journal includes the following passage:

    “The heart of the issue lies here: from NATO to OBOR and the European Union itself, Europe has come back into history. Mercantilists or nationalists, federalists or populists, all of them seem to agree on one point: the European Union is engulfed in the end of “the end of history” and the fear of the end of the Union itself. They share a growing concern about the decay of existing international institutions, from the WTO to the UN, from NATO to the World Bank, each growing increasingly irrelevant though not definitively out of the picture. The lip service paid by China to traditional institutions is not an answer: China both enforces its presence in all these institutions, and at the same time carefully builds institutions on its own initiative with close allies, which eventually could become strong pillars of a new world order—a Chinese one.”

    1. MyLessThanPrimeBeef

      A new world order – a Chinese one…

      We read about the coming together of the Euro-Asian heartland, presumably with Russia and China at the top, plus maybe others, unless it’s a round table and everyone one is an equal hegemon.

      Here, is the author looking ahead, to a new world beyond that Euro-Asian one, with only China in charge, after removing Russia?

      If so, it’s a possible one, given Sino-Russia history, and human nature.

      1. noonespecial

        Re: “…is the author looking ahead to a new world beyond that Euro-Asian one, with only China in charge, after removing Russia?”

        From Juvin’s article, one possible scenario may be that:

        “We will witness both covert and open actions to prevent countries or companies from dealing with China and participating in the OBOR project, as well as covert and open operations to disrupt, delegitimize, and condemn any involvement in it. Land routes are very easy to close or at least to threaten. Every oil or gas company is well aware of the political risks facing any land pipeline. The same is true for railways, highways, even airports. “Accidents” may occur, and the threat of conflict, for instance in the Balkans or central Asia, cannot be dismissed.”

        If I may be so bold, prior geo-political “accidents” have occurred and humans being humans respond in kind.

  5. Larry

    I remain unconvinced that China can remake the world in it’s vision with the way it’s managing this large infrastructure outlay. Compare what China is doing to the rebuilding of western Europe after WWII, and it’s no comparison. The US was creating a world safe for global capitalism, full stop. What China is trying to accomplish seems unclear. And it is not benefiting from being the world’s supplier in this process. It’s domestic program has far more clarity in terms of creating fully domestic enterprises that climb up the value chain. But the BRI just doesn’t make sense to me in terms of the ultimate strategic goals.

  6. John

    All of which is based on assumptions that climate change and extinction event will not influence anything. I think there is a different hegemony at work.

  7. Norb

    Making the world safe for capitalism doesn’t seem like a survivable strategy. Endless consumption for its own sake instead of providing for human needs cannot go on indefinitely and won’t. Are the Chinese truly socialist or hidden capitalists? Their long term strategy looks like one of rapidly modernizing their society so they would not be destroyed and then securing their place on the planet.

    Chinese culture also contains elements of being superior beings- the chosen ones. But what society doesn’t. It is the bane of humanity to think of ourselves and superior beings in the Universe. This trait would be acceptable if it manifested itself in a benevolent manner, however, killing and warfare seem to be the preferred method.

    America has chosen the path of conquest for our civilization. It is not a defensive posture but an aggressive one.

    It is not reassuring when one considers it is easier to destroy that to create. Any moron can blow something up.

    The question will be do we love our neighbors or try to conquer them by any means necessary. You are- Free to Choose.

  8. Steven Greenberg

    The situation is more promising in East Asia due to China’s diminished but sustained growth, and its almost unique rising labour share of national income.

    If Chinese labor is really getting a rising share of national income, then there is a chance that Chinese hegemony will be quite different from USA hegemony.

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