China’s Debt Trap Diplomacy in Africa

China initiated trade relations with African countries way back in 1970. Their motive was primarily strategic, i.e., creating new allies and expanding its global influence against the west, mainly the United States. African countries are the perfect victims of China’s predatory lending policies. They are capital-poor and are desperate for an influx of investments to grow and compete with the Western world.

The goal of the African Continental Free Trade Area was to break away from its colonial routes and begin trading and competing with various countries from different continents. However, the most significant benefit of this FTA was reaped by Communist China and its crony-capitalist policies. China expands its network through this FTA through new loans, trade deals, and military support. Chinese companies are dominating transportation and infrastructural development projects in Africa. According to a McKinsey Africa report, about 50% of Africa’s engineering, procurement, and construction contracts were given to Chinese companies. Africa’s extractive economy depends on its natural resources, raw materials, and primary goods. Low production values and infrastructure gap in Africa force African countries to export these commodities to China to be converted into finished goods and imported back to Africa. China also lends money to African nations to create infrastructure and improve connectivity. African countries give China exclusive access to their resources, like mining rights in Hwange National Park in Zimbabwe.

China’s Belt and Road Initiative (BRI) aims to improve regional integration, increase international trade, and stimulate economic growth by connecting Asia, Africa, and Europe via land and sea. The BRI is often referred to as “debt trap diplomacy.” China appears to be giving emerging countries questionable loans for growing capital to strategically use the recipient country’s debt to China for economic, military, or political gain. The ownership swap of Sri Lanka’s Hambantota port, in which China has forgiven Sri Lanka’s massive debt in exchange for a long-term lease of the port in 2017, is a well-known example of this.

Why Loans from China?

Using confidentiality clauses, China seems to be very secretive in its lending policies. It offers far less transparency compared to international lending agencies such as IMF. China must use more competitive interest rates compared to these organizations for African countries to so enthusiastically borrow from them.

What Might Happen in Case of Default?

As in the case of Kenya’s multi-billion dollar railway project and Sri Lanka’s Hambantota Port, China seizes control over these assets, i.e., all the revenue generated from the operations of these projects is credited to China’s EXIM bank. There is no formal judicial process in case of loan default as it is in international organizations and other Western countries. The secret contracts enable the Chinese Exim Bank to control these assets.

Does China overlook human rights violations and labor exploitation when giving loans that other countries may not overlook? Is this ethical?

Most of Africa missed out on the industrial revolution. Therefore, the lack of capital accumulation and the lack of growth (as stated by various development economists such as Solow, Meade, and Robinson) have been the primary cause of the backwardness of most African economies. This has resulted in the backwardness of physical and human capital in education, skill, and health. China saw the potential to exploit cheap and abundant labor in Africa. More liberal Western countries lean towards protecting employees and safe working conditions. However, a country like China is ruthless when capitalizing on the low labor cost for procurement and activities.

The ethics dimension of the Africa-China relationship is always under question. It can be compared to how the Europeans ruthlessly colonized African, Asian, and Latin American countries and exploited their resources and manpower for their gains. There are both advantages and limitations to China’s lending policies toward Africa. On the upside, countries are moving towards a stage of economic development with capital accumulation and mobility. At the same time, on the downside, prosperity is still not very high due to exploitation.

Everyone wants to become prosperous fast, but is it possible? Should countries live within their means?

There is no congruence between the growth of Africa and that of the rest of the world. However, there is a fine line between growth, development, and prosperity. A country can grow economically, but it may not be developing. A country may be developing, but it may not be prosperous. African nations must keep in mind that improving prosperity is a gradual process. Upliftment of the poor takes time. According to Gunnar Myrdal’s theory of Circular Causation, there is a backwash effect between China and Africa which means that savings are gradually being siphoned off from poor regions to richer ones.

In the 21st century, countries can’t live within their means. A state of complete autarky can not lift a nation from economic backwardness. A country needs investments and the accumulation of capital to grow. Citing another development economics theory, namely “The Big Push Theory” given by Rodenstein Rodan, a large amount of minimum investment is required to overcome development obstacles in an underdeveloped economy to set it on the path of development. This is where China plays a vital role. China brings in high amounts of investments to push African Economies towards the course of development. International Lending Agencies and Western Countries may be hesitant to invest a significant amount in such emerging countries.

How much leverage is acceptable?

China’s primary aim in Africa is to create allies. African nations risk losing control of their assets due to leverage. However, African countries don’t have many alternatives. Even they need to progress to meet their domestic consumption requirements and increase their international competency. That said, they can not keep increasing their debt just because there are no judicial ramifications. The only thing at stake is the control of assets, which Africans use daily to earn their bread. From Africa’s point of view, a high level of external debt to China is not wrong because of the conditions and clauses involved in their lending. The fact that 88% of Djibouti’s GDP stems from Chinese investments reflects that China has an overwhelming contribution to the economy of such nations. Such a high debt to GDP ratio is not sustainable for any country, and this should serve as an example to other African nations to keep a check on borrowings and the terms and conditions laid out in the contract of loans taken from Chinese institutions.

What sort of reforms and fiscal discipline are required for a strong economy?

Fiscal discipline necessitates governments maintaining fiscal positions compatible with macroeconomic stability and long-term growth. Excessive borrowing and debt buildup should be avoided for this reason. At the same time, authorities must be cautious when it comes to attaining resource allocation and distributional goals and smoothing out output fluctuations. Creating financial buffers is also necessary to respond to both unpleasant shocks and predictable fiscal pressures, such as those caused by high levels of population growth.

The track record of fiscal management in achieving these many goals has been uneven. Weak fiscal discipline, which reflects deficit and debt sustainability issues, has frequently jeopardized stability and growth and, in the worst situations, has resulted in economic and financial disasters. Furthermore, while output stability would necessitate countercyclical fiscal policy, governments tend to favor procyclical discretionary expenditure increases and tax cuts when the economy is performing well. While the countercyclical fiscal policy may be beneficial in “hard times,” urgent deficit and debt sustainability issues make such policy difficult, if not impossible. Procyclicality becomes a significant underlying factor of poor budgetary discipline in good times.

Budgetary discipline is required to maintain overall economic stability, reduce susceptibilities, and improve economic performance. If governments are to benefit from the opportunities provided by increasingly free trade and open capital markets to improve their long-term economic prospects, fiscal discipline is required. They must, however, decrease their exposure to market sentiment fluctuations and capital flow volatility to reduce the likelihood of debt crises.

How can the global community help small, vulnerable countries? Can some frameworks be put in place to control the predatory instincts of China?

For emerging countries, the current structure of international economic organizations has proven insufficient. A positive examination focused on equity, sustainability, and social prosperity is required. Essential international organizations must be reconfigured to reflect inclusion and representative coverage now that different leaders are at the table. Allowing the African Union to join an expanded Group of Twenty (G20) would act as a catalyst, reshaping global policy and allowing for a more inclusive and sustainable world. African and other countries must look for alternatives that would allow them to be independent, as Western and Chinese policy initiatives have shown that their operations do not benefit the host countries.

Concluding Remarks

The credit line extended to other emerging countries is predatory, not benevolent. To begin with, the contracts with the host countries are murky. Contracts frequently include stipulations ensuring that contracts for infrastructure projects are awarded to Chinese businesses and that the labor engaged in these projects is Chinese rather than local. These contracts ensure that a considerable portion of the money returns to China. As manufacturing possibilities decline in China, the country’s large labor force is repurposed and does not become a burden on the Chinese economy.

In many ways, the plan is comparable to what Imperial Britain achieved by establishing colonies, albeit more subtle and with minor tweaks as the CCP adapts it for the twenty-first century. While initially appealing to poorer countries, China’s offering to fund infrastructure projects frequently becomes a trap for them. The projects do not generate enough cash for the host countries to repay their debts to China. China collects its debt by seizing control of the host country’s essential infrastructure, giving it a long-term strategic advantage. These countries’ only hope is that China agrees to rework the contracts, which China typically refuses to do.