Economics Essay Sample Paper on One Belt One Road

One Belt One Road

            Many developed economies are gearing towards modernization via cooperation and collaboration in the backdrop of global economic stagnation, financial crises and climate change. However, many developing and underdeveloped countries continue to grapple with economic uncertainties, food security and political instability. The question often lies with how best poor economies can pick and grow without retrogressing. How best the economies of developing nations can ultimately reach the desired levels for them to have fully acquired the ‘developed state’ title or ranked among the first world countries. One Belt One Road development initiative is one of the many ways that can be used as stepping stone to great economic development. This paper will analyze how One Belt One Road will be beneficial to the economy of the participating countries.  

Background of One belt One Road Initiative

One Belt One Road (OBOR) initiative, also referred to as the Belt and Road initiative, is a project founded by the Republic of China as a development strategy that is intended to establish connectivity and cooperation mainly in Eurasia and East Africa. OBOR has two main elements: the Silk Road Economic Belt (SREB) and the Maritime Silk Road (MSR) (Cheng, Li and Zhou 1). This project was unveiled by China’s President Xi Jinping in September 2013 for the SREB and October 2013 for the MSR. The belt project includes countries along the Silk Road via Central Asia, Middle East as well as Europe. According to Cheng, Li and Zhou, the One Road One Belt initiative also unites the entire region to form a united economic region through the building of infrastructure, rising cultural interactions and widening trade (1). It also includes countries in South East Asia and South Asia. It is important to note that the majority of the nations participating in this project are associates of the China-led Asian Infrastructure Investment Bank (AIIB), which is dedicated to funding all the projects involved in this initiative.  According to Kennedy and Parker, OBOR is expected to begin in 2016 and be completed by 2020.

            The Maritime Silk Road, also referred to as the 21st Century Maritime Silk Route Economic Belt (Cheng, Li and Zhou 1), is one of the elements of the major OBOR initiative that focuses on investing and nurturing cooperation in Southeast Asia, Oceania and North Africa through the alignment of the water bodies. All the countries involved in the MSR have also joined the AIIB. The East African region will also be members of the MSR following a couple of improvements on the local ports and the standard gauge railway running from Nairobi to Mombasa. Apart from the AIIB, the Chinese president also announced the creation of the Silk Road Fund worth USD40 billion as a separate development fund created for the initiative. This development fund will be used to invest in businesses as opposed to lending money for the projects.

Components of the One Road One Belt Initiative

Chen, Li and Zhou also explain that the entire project will create a massive loop that will connect three continents and more than 40 countries totaling to 4 billion people (around 63% of the world’s population) (4). Moreover, Kennedy and Parker explain that the initiative will enhance policy coordination across the Asian continent, financial integration, liberalization of trade and connectivity between people. Its implementation will positively affect the region’s economic landscape, its trade patterns, development of infrastructure that will go a long way in facilitating convenient transport and eventually have strategic implications for China, United States and other major economic and political powers.

            The project is set to consist of a complex of railways, major highways, oil and gas pipelines, power networks, internet networks, marine and additional infrastructure works through Central, West and South Asia to Greece, Russia, Oman thereby escalating China’s links to Europe and Africa. Minnick explains that this initiative will introduce a new era which will see China as a geopolitical powerhouse. This idea has both political and strategic components as well as implications for all the countries involved. The countries will also benefit from the joint development, joint prosperity and energy. Security will also be provided for the potentially dangerous regions for instance the Africa’s coast that is notorious for maritime piracy and Central Asia that is known for being wild. The project intends to implement logistic hubs, improve communication networks, build more airports, complex railway lines, advanced highways, ports plus military components that allow rapid response in case of a crisis. The military will involve  long range, fixed cargo aircraft, littoral war ships that will be able to operate in shallow areas, hospital ships and enhanced ability to  carry out other armed functions other than  war.

A deeper understanding of how and why this project necessary is paramount before any analysis is done concerning it. This project is meant to involve more than 65 countries from different geographical regions ranging from Asia to Europe. The major focus of the entire project though will be on China’s neighborhood. This initiative seems to be unprecedented and unexpected but is highly regarded by many scholars as a response to the strategic realignments that were previously taking place in China’s neighborhood few years ago especially the US strategic rebalance to Asia. It is often termed a reflection of the “Look West” proposal that was made by a few policy elites in China years back. It is important to note that this project is not only a response to strategic realignment rather it is reflection of the emerging consensus  found in the Chinese foreign policy community necessary for Beijing need to make remarkable shift from low profile international strategy and actively strive for better accomplishments. Foreign policy elites from China have started making efforts to search for grand strategy to raise China’s profile to be viewed as a major power towards the end of the 2000s. Much as security tensions and misunderstanding interrupted their search for a vision, they resorted to incentivize their decision makers to develop big policy initiatives that would enable them to deal with the perceived negativity around its neighborhood (Mingjiang 2).

Benefits of OBOR for China

 The Rajin-Hassan Project between Russia and North Korea has gained momentum and triggered South Korea to participate at the same time inducing North East Asian cooperation. The participation of China in this project will form an economic bloc around the Tumen river region. Creation of Pan –East Sea economic bloc is created over Hunchu – Rajin – Hassa –Busan – Nikata with Rajin at its base and further North East Asia. European Network was constructed over Hassa and Liayuangang a basic framework will be created for international cooperation in North East Asia. Implementation of President Park’s Eurasia Initiative would have China’s North Eastern region boosting of openness and expanded development thus strengthening its regional competitiveness. In the long run, this means that the North East region would become a new engine of growth for the Chinese economy. Moreover, the creation of the North East Economic bloc will also provide a major development opportunity for China consequently making the Tumen River basin to grow into one of the pillars for China’s overall regional development strategy. The Tumen River Basin will not only take up the role as a strategic pillar for China’s Changjitu Development Project but also great promise for being grafted onto the One Belt One Road strategy(Cost-benefit Analyses28).

            In response to the skeptism raised about the development of the Silk Road with China being at the fore front, Durden writes an article to explain that the OBOR project is meant to have open and friendly cooperation stemming from security and economic development (n.p). The benefits of the Silk Road will be shared thus promoting the prosperity of the entire region. According to Durden, if chief companies in China such as the SOES and private enterprises embrace this project, it will bring a lot of value to their businesses (n.p). So far, it has caught much attention of the market resulting to approximately 70% of the industries in metal and mining companies formulating their approaches and plans in one way or the other. This project will also present three phases that will mould China’s influence abroad.

            First, China funded infrastructure using a lot of materials and machinery made in China as well as adopted technology and its own construction companies will also be coupled by a lot of the Chinese workforce especially in its initial stages. Secondly, it will increase the demand for Chinese brands, its customer products and artistic products due to increased interaction between countries that are receptors of OBOR investment increases from China. In addition, Chinese consumer goods companies will be able to take advantage of the intercontinental growth phase just as Coca Cola and Disney became major US exporter in preceding decades. Finally, this initiative will also see to it that there is the full incorporation of China through the international economy as worldwide influences will seep back into China. This means that there will be creation of international companies from China that are transnational in nature such as Unilever rather than companies which are only China-plus.

            Jian Chang, who is a Chinese economist, believes that the development of the New Silk Road will add in to management of China’s development at 5-7% in the succeeding years thereby having affirmative impact on China’s manufacturing upgrade as well as economic transformation (Durden n.p). The One Belt One Road initiative has a great impact on the Chinese economy compared to the current state owned companies. The return on investment is diminishing coupled with overcapacity and is currently at just above 4%. An analysis of the current investments in the US treasury shows that they have even fewer returns.

            Moreover, Durden explains that, embarking on great communications and transport projects with YDYL recipients will also eliminate one of the major problems in China. This is the transition development based on investment to that which is dependent on consumers and a shortage of international demand have joined to leave China’s manufacturing sector in state of perpetual overcapacity.

http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/2015/06/ChinaFAI.jpg
http://www.zerohedge.com/sites/default/files/images/user92183/imageroot/2015/06/ChinaOvercapacity.jpg

 Durden further explains that the YDYL countries provide a potential outlet since there is an urgent requirement for FAI in terms of roads, railways as well as power generation. Although the expansion of infrastructure in these particular countries have prospects in providing short term economic enhancement, increased presence for China would produce both long and short term advantages. These could be summed as the short term, medium and long term. Short term is focused on easing industrial overcapacity; develop demand for Chinese resources and consumer commodities. This would help to reduce the disparity between the inland and coastal China since OBOR terrain based projects concentrate on central and western parts of China.

            For the medium level, its intention is to raise the demand for Chinese products and goods thus assisting China to transition towards a consumption driven economy. In this way, it will help in maintaining it export growth (Cheng, Li and Zhou 10). Medium to long term level involves internalization of the Chinese currency whereby some loans to OBOR nations which consists of RMB in currencies will be used to dominate and pay loans using US dollars. Long run benefits would include promotion of tour, artistic exchange and lasting cooperation in geographic and political, military and business areas. It will also include the improvement of China’s image in the international stage. Moreover, it will increase its returns for China’s reserves that contributed to development funds and diversify its risks. It will also potentially relieve tension among states that involve territorial disputes.

According to Cheng, Li and Zhou, the Silk Road will present new opportunities as well as a great future for China and all other countries that the road is meant to develop (1). Apart from the infrastructure that will enable speedy transportation, China will have a trade network that will have more abundant goods and high-end trade. China alone is has sixteen provinces as well as autonomous regions all covered by the One Belt One Road  initiative geographically (Cheng , Li and Zhou 1). It is also worth noting that most of the Asian countries that will be part of initiative are less developed compared to China itself especially in terms of infrastructure. Countries especially in Central Asia are notably underdeveloped in physical infrastructure and telecommunications. Central Asia is beneficial to China since it is vital in supplying it with energy.  The OBOR initiative will make investment in oil and gas to shoot thus benefitting several Chine pipeline companies (Cheng, Li and Zhou 6).

The infrastructure investment program scheduled to be under the OBOR is also meant to benefit the construction machinery companies, the intended construction companies, the companies that produce the building materials as well as the operators in charge of infrastructure in China. Majority of the Chinese enterprises are also set to benefit from the initiative since China will be taking a leadership role in the entire development project. It also possible for China’s construction company to produce a whole range of products necessary for the project since they have accumulated a wide range experience  in handling projects such as this especially in harsh conditions ( Cheng , Li, Zhou 1).

According to Chinese officials they claim that OBOR will be part of China’s stepping stone to its opening up. This is notably true considering China is currently facing a lot of challenges related to overproduction, overcapacity especially in the steel and building materials. This challenge can easily be handled by the OBOR which will go a long way in opening up foreign markets to its companies. Moreover, as the costs of labor increase, China will be in a position to shift its labor intensive and low value-added manufacturing facilities overseas. These two ways, of OBOR will speed up China’s pace in its domestic economic restructuring. In addition, this project will also enable China’s interior to quickly develop that has for a long time been lagging behind. Another important factor is that China is currently net capital exporter therefore Chinese investors will be searching for opportunities to invest overseas (Mingjiang 2).

International Benefits of OBOR    

The OBOR initiative also has massive implications on the international circles. Apart from economic cooperation, this project will also help in deepening the linkages between China and its neighbors through trade, investment, energy and infrastructures as well as the internationalization of RMB. Moreover, Cheng, Li and Zhou say that the implementation of the entire project would centralize efforts of different departments in the government towards achieving better results as well as avoiding duplications of the efforts and resources given at the regional levels (5).  It could also lead to a series of bilateral contracts between China and particular countries or probably between China and regional organizations such as ASEAN. There is also a possibility of the linkages being used as regional free trade zone that incorporates all the countries involved in the OBOR project.

The objective of the OBOR is clearly seen by the way in which President Xi Jinping has had on several nations within the Silk Road. All these visits are intended to garner enough support for the One Belt One Road initiative which was warmly received by over 50 countries (Cheng, Li, Zhou 2). In addition, China intends to foster closer cultural and political ties in all the countries concerned thus leading to a model of mutual trust and respect since the trade routes are intended to create a closely knit community with common interest and responsibilities. The OBOR represents China’s vision of a community that is independent in terms of its economy and politics that stretches from East Africa to Western Europe.

             In China’s domestic circles, the Chinese government would use this initiative as a platform to draw up plans to demarcate zone that will be receiving special fiscal and economic support in order to spearhead the development as well as implementation of the OBOR (Cheng, Li, Zhou 6). Moreover, the implementation of the OBOR will help in accelerating development of central and western China which has for a long time lagged behind eastern China. This development especially at the coastal region will help alleviate the disparity within the country. The table below shows the regional development of China by 2013 (Cheng, Li, Zhou 6).

 DEVELOPMENT & LIVELIHOOD INDEXECONOMIC DEVELOPMENT INDEXLIVELIHOOD IMPROVEMENT INDEXSOCIAL DEVELOPMENT INDEXECOLOGICAL DEVELOPMENT INDEXTECHNOLOGICAL DEVELOPMENT INDEX
EASTERN REGION73.17%83.54%79.67571.04%72.29%49.02%
CENTRAL REGION62.35%67.57%69.19%70.00%65.94%22.73%
WESTERN REGION60.08%68.89%64.85%67.86%63.25%20.62%

Several countries will benefit from this project. A careful analysis of some of the countries meant to benefit intensely from this project indicates that the OBOR will play a big role in the economies of these countries most of which are developing countries. The OBOR will see to it that there is a linkage between China, Russia and Kazakhstan. An announcement by the Beijing Municipal government said that China would build a 7000 kilometer high speed railway starting from Beijing to Moscow that will link Russia and Kazakhstan. For Thailand, China has confirmed that it will build an 867km railway network as well as buy two million tons of rice. This is programme is referred to as ‘Rice for High Speed Rail’. It was confirmed by the signing of two memorandums towards the end of last year (One belt, one road 2). The African continent will benefit from the Chinese willingness to construct a high speed railway network that will connect the capitals within the continent. This is evidently marked by the completion of upgrading a 1,344kilometer railway that passes through Angola by the China Railway Construction Corp as well as China Road and Bridge Corp that is in charge of building the Mombasa –Nairobi railway meant to extend to five other cities (One Belt, One road 3).

The construction of the standard gauge railway in East Africa will also have enormous benefits in the economic sector. The cost of transportation will reduce massively thus making it an attractive destination for investors. The environment will also have a reduced amount of carbon emission that has adverse effects on global warming. It will also quicken the industrialization process through easier and cheaper transport methods as well as induce the establishment of new industries. Moreover, it will contribute to the GDP at the time of construction, increase the competitive levels of the region will increase and easen congestion at the port of Mombasa. Furthermore, the wear and tear experienced on the roads will be reduced while at the same time increase freight security.

The OBOR strategy is expected to also have a great impact in trade for all the countries involved. A case  example of China for example shows that the waning global market  demand on its imports and imports remarkably increased by only 2.3% in 2014 thereby slightly missing their  target of 7.5%. The OBOR strategy is set to enable China emphasize its trade with its neighboring countries by enabling China identify new growth drivers necessary for its imports and exports. This would further diversify China’s trading partner portfolio that is currently at risk from weak demand from already developed countries. An analysis titled ‘One Belt, One Road’ presents the customs data that shows that the trade value between China and the OBOR countries was about RMB7 trillion in 2014 which is an upward margin by 7% YoY which accounts for 25% of the total foreign trade value. The combined weighting trade with the US, Euro zone and Japan was approximately 34%. Improved connectivity through the OBOR will make all the countries in the initiative to gain more shares among Chinese trading partners (One belt, One road 3). The efforts China has made to trade with the maritime neighbors made their exports to the ASEAN countries rise by 11.5% YoY  the first two months this year which is remarkably higher than the US (+8.2%), EU(3.8%) as well as Japan (-9.0%).

Regardless of Beijing’s real strategic motives in Central Asia, there are two conclusions to be drawn: first by it extending development in and beyond the western boarders, Beijing is seeking to correct its domestic problem of disparity between the east and the west while stretching its influence to include the whole of Asia. Secondly, amidst Washington and Moscow’s strategic competition in Central Asia, Beijing also seeks to establish strategic base for itself. Many people view that China should hasten its steps in investing in the establishment of a network of strategic channels that will effectively reduce the countries vulnerability in having energy supplies cutoff at sea and independence on strategic channels in the West pacific. Recently, China participated in transnational transportation and infrastructure projects in neighboring regions with great vigor. The new Silk Road represents how active the Chinese policy is in Central Asia. Initially, the US secretary of state had proposed the establishment of new Silk Road which would be a web of economic and transit connections across South and Central Asia based around a hub in Afghanistan in July 2011 to improve the Afghan economy and the economy prospect in the region. However as early as 1994, Chinese  rimier Li Peng made a statement saying that China was willing to join with other countries in central Asia in contributing respective efforts towards the establishment of the new Silk Road (Pae 178).

Risks associated with OBOR

Despite the benefits associated with the OBOR initiative, there are a number of risks involved in the entire project. For instance, there are some regions that lie under the Silk Road Economic Belt that are still suffering from economic instability. Moreover, these governments are also characterized by ineffective governance thus bring the risk of sabotage of the project during its implementation. Infrastructure meant to be built under Private Public Partnership (PPP) call for financial discipline and careful budgeting. Another underlying problem is that some countries that have these PPP projects could be subject to foreign exchange risks that would in turn disrupt performance. It is advisable that those participating in private sectors should have the right mechanism to weather these risks. Much as the Chinese Government is intended to lead and anchor in the development finance for some of the infrastructure projects, a fairer tender could still be used to give an open competition for the interested parties. This means that the Chinese would still have to compete for the projects based on their own strength (Cheng, Li and Zhou10).

 An assessment of the risks involved in the project show that different countries have varying risk scores. Afghanistan and Iraq are beset by conflict are have the highest scores with regard to the risks involved compared to countries such as Tajikistan and Uzbekistan where the initiative is expected to be strong, the risks analyzed range from security, legal,   regulatory, government effectiveness, political instability and infrastructure. Political risks involved weigh heavier than overseas direct investment activities that are perpetrated by private firms (6-7).

 In conclusion, much as the One Belt One Road initiative is economically sound, viable and advantageous to several economies involved in the project, it is advisable that all the concerned parties should get the important information regarding the project so that they are not eventually disadvantaged incase the project encounters any major challenges. On the other hand, there are concerns on whether the OBOR will make a significant impact on the participating countries’ economies since China seems to benefit more from the OBOR initiative. It is therefore important that Chinese government should provide all the relevant information concerning this project to avoid unnecessary disagreements in the near future. Moreover, careful considerations should be made during the implementation of the project paying much attention to careful management of the funds to avoid misappropriation and stalling. If the analysis done by economic experts is anything to go by, then the OBOR is the bridge to economic breakthrough.

Works Cited

Cheng Geoffrey, Li Jovi, Zhou Fay. 2015.  “One Belt One Road Initiative.” Bocom International. Feb. 18, 2015. Web. 12 June 2015.

Cost-benefit Analyses of Unification and Economic Integration Strategies of the Korean Peninsula: Executive Summary. Sejong-si, Korea: Korea Institute for International Economic Policy, 2014. Print.

 Durden Tyler. 2015 One Belt One road may be Chinas one chance to save Collapsing Economy. Zero Hedge.

“Prospects and challenges of China’s One Belt One Road: a risk assessment report.” The Economist. Intelligence Unit, 2015. Web. 12 June 2015.

 Kennedy, Scott and Parker David. Building China’s One Belt One Road. Centre for Strategic and international Studies (CSIS), 2015. Web. 12 June 2015. Apr 3 2015

 Mingjiang Li.  China’s one Belt One Road Initiative: New round of Opening up? RSIS Commentary. 2015. Web. 12 June 2015

Minnick Wendell. China’s One Belt One Road Strategy: Modern day Silk Road Effort could challenge us Influence in Asia, Mideast. Defense News. April 12 2015. Web. 12 June 2015

One belt, One road: Building Links, Strengthening Influence. Fidelity Worldwide Investment. March 2015. Web. 12 June 2015

Pae, Chong-ho. China’s Strategic Environment and External Relations in the Transition Period. , 2014. Print.