The Belt and Road Initiative 2035: Bridging Emerging Economy Infrastructure Gaps and Reducing Inequality by SME Growth

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By Bob Savic, Advisor to Dezan Shira & Associates 

US President Joe Biden’s US$3 trillion infrastructure spending plan along with creating higher paid jobs are part of reforms aimed at reducing America’s growing disparities in wealth and income (see What’s in the United States Belt & Road Plan? A US$3 Trillion Spend on Its Own Infrastructure Or Is There More?).

Initiatives such as this, which create wealth and distribute it on a broad inclusive basis, should certainly be welcomed. But there’s nothing new about the ideas behind this plan. China’s government began building large-scale domestic transport, housing, and other social infrastructure more than ten years earlier in the wake of the Global Financial Crisis and has so far spent US$23 trillion there. Its global Belt & Road Initiative (BRI) for laying out vast cross border physical infrastructure officially commenced in 2013, and where US$4 trillion has been expended (see “New China Plus Investment Guide: “Identifying Opportunities Within the Belt and Road Initiative”).

Biden has also suggested to UK Prime Minister Boris Johnson, for a Belt & Road Initiative-style arrangement, likely to focus on supporting the infrastructure needs of the developing world, particularly those nations the US and its allies consider to be “democracies”. This contrasts with  China’s government which maintains an open invitation for all countries, irrespective of their governance systems, to get involved in the BRI and accompanying financial institutions.

This article is the second in a two-part series (see China’s Vision 2035: From Beijing’s Forbidden City to Interconnected Eurasian Megacity) commenting on China’s long-term goals of connecting its newly transforming megacities, expansive industrial heartlands and evolving giant consumer-driven economy with countries and regions across the world. On this occasion, we examine how the benefits of these seismic trends are emanating from the world’s most populous country, and soon-to-be largest global economy, across the vast geographies of the developing world, through the medium of the BRI.  We also look at how this economic largesse is being purposely orchestrated into inclusive forms of sustainable development, rather than single-mindedly pursuing growth for growth’s sake, all too often enriching a small and privileged minority at the expense of the rest of society.

The BRI heralds a new era of changing global geo-economics and urbanisation

The concept of “geo-economics” has recently become an increasingly prominent feature in academic literature, now given more weight with the onset of the Biden administration’s abovementioned proposals paralleling China’s multi-decade focus on infrastructure development. The meteoric rise of China’s economy and the determination of its leaders to convert their newfound wealth-creating power into a global infrastructure expansion can best be described as a form of geo-economics.  To this end, China is exerting a new developmental paradigm that is transforming both the nature of international relations in the 21st century and achieving sustainable and inclusive economic growth.

Many countries in the developing world are especially keen to participate in China’s grandiose plans for infrastructure development as their substandard and underinvested transport systems impose bottlenecks on their capacities to foster stable economic growth.

Cross-border infrastructure investment has therefore become a significant geo-economic issue. It is also a two-sided phenomenon on the one hand enabling wide-ranging opportunities to modernize post-European colonial and post-Soviet societies in need of institutional and physical restructuring, while on the other representing powerful new instruments of partnership diplomacy increasingly attracting countries into China’s magnetic orbit. Accordingly, China’s infrastructure partnerships are heralding an important shift from military power and politically conditional trade access, as a prime measure of geo-economic status, in favour of physical connectivity and trading relations but without the political strings.

Physical infrastructure also compels observers to look at what’s happening on the ground, manifesting the extent to which the provision of logistical connectivity succeeds in attaining influence in international relations.  As examples, China is providing substantial funding for Pakistan (a former colony of the British empire) and Kazakhstan (an ex-Soviet republic) to modernize and significantly upgrade their extensive railway networks and supplemental transportation systems. In turn, this has fostered new and ever closer international relations between China and these countries.

Amid the burgeoning pan-Eurasian infrastructure, modern BRI urbanisation is taking root, a phenomenon which is set to exert significant influence over how cities develop into the 21st Century.  Just as transcontinental trade established by the ancient Silk Road once led to the rise of cities such as Herat, in Afghanistan, and Samarkand, in Uzbekistan; the BRI will bring new investment, technology, infrastructure and trade relations to various cities around the world.

Once fully implemented the BRI linkages, between major cities on the Eurasian land mass and Chinese megacities, will place China’s economy at the centre of a regional network of production, financial and diplomatic platforms, associated with sustainable urban development.  From this perspective, the BRI is more than just an exercise in trade and infrastructure expansion: It is also a means by which China can shape the larger meta-pattern of urbanisation connected with its economic largesse and plans for societally inclusive development.

The experience in Europe and North America has been that economic growth linked to urbanisation has tended to concentrate in a handful of very successful city regions. By reinforcing historic land routes through Eurasia and into Europe, the BRI aims to challenge this pattern and grow the less developed regions and cities across this vast geography.

Some examples are already plain to see. In Greece’s capital city of Athens, Chinese state-owned shipping, and logistics company COSCO is privatising and extending the city’s Piraeus Port centred on Drapetsona, a working-class area that is adjacent to the port, to become the principal entry point for Chinese and European trade into continental Europe.

In Colombo, Sri Lanka, touted as the new Dubai, China Harbour Engineering Company has been leading a sea reclamation project. The goal is to create a new city from the Indian Ocean.  From this, Colombo Port City (CPC) will become a key hub for the BRI’s Maritime Silk Road – a multibillion dollar project that will become the centre for all business activities in the country (see page 122-125 “Identifying Opportunities Within the Belt and Road Initiative”).

Finally, in London, Chinese developer Advanced Business Park has been transforming the Royal Albert Dock from a 4.7 million square foot derelict, post-industrial site into a new global business zone.  The project, which commenced in 2017, has been dubbed London’s third financial centre, after the City of London and Canary Wharf, for Asian finance and tech firms.

In all three cities, urban space is being altered through a combination of transport infrastructure, real estate, and commercial projects, but also where local workers, start-up entrepreneurs and established businesses can secure opportunities from the regenerative effects of economic development.

BRI is now about fostering SME opportunities at the urban level

One critical factor in determining how the BRI translates into broad-based growth will be whether small and medium enterprises (SMEs) are able to take advantage of new trade opportunities. Because SMEs account for the vast majority of enterprises and jobs in any country, their ability to become more competitive and succeed in international markets helps ensure gains from trade are broadly shared across society.

Research by the International Trade Centre (ITC), a multilateral agency having a joint mandate with the World Trade Organisation and the United Nations, reveals that access to market information is a major obstacle for SMEs seeking to trade internationally. ITC and China’s Ministry of Commerce signed an agreement to strengthen the international trade capacities of SMEs, to foster greater South-South cooperation and meet the goals of the United Nations 2030 Agenda for Sustainable Development. Within this context, competitive, globally and regionally integrated SMEs can translate into inclusive growth across the BRI. 

Just as cities played an integral role in the connective tissue of the ancient Silk Road route, so too can they play an indispensable role in the implementation of the BRI. Enhancing connectivity, in the sense of improving physical transit routes, both terrestrial and maritime, as well as communication networks, between countries along the BRI must therefore begin in cities and the ability of SMEs to facilitate and finance them. Improving urban investment climates and removing barriers to financing will therefore be of paramount importance when it comes to the BRI’s policy support framework for SMEs.

It will also be imperative that the BRI fosters the formation of a financial system that works for the benefit of all. Once again, progress on this front begins in cities. An economic report on urbanization in Africa, released by the United Nations Economic Commission for Africa, highlights SMEs’ potential to speed up structural and economic transformation in some of the world’s most resource-rich nations, situated along various BRI regions including Central Asia, the Middle East and Africa.

China’s cities will drive a new Asia and BRI SME-connected world

The city of Shanghai in China is a particularly prominent example of how industrial SMEs can revolutionize the course of urban development in developing economies. Shanghai’s transformation into a national economic hub is the result of rapid industrial development with the support of central government and the city’s municipal government. Local authorities fostered the growth of SME manufacturing industries, as well as marketing the city internationally to attract major industrial projects. In the early 1990s, the Shanghai Municipal Government designated several “pillar industries” as the city’s industrial focus which also incorporated a high degree of SME involvement in areas such as: automobiles, electronic and communication equipment, petrochemicals, steel products, equipment assembly and biomedicine (see Shanghai: Industry, Economics, And Policy). In 2020, the city’s GDP of US$595 billion, with over two-thirds accounted for by industry output, ranked it alongside international financial centres, such as London (US$650 billion).

Multi-stakeholder partnerships can therefore effectively boost the development of many city-based SME-driven industrial sectors. This is where the BRI comes into play by promoting the creation of mutually favourable partnerships in many of the world’s most populous developing economy regions.

Development strategies can also include international forums where municipal leaders can learn from one another and cooperate on multi-stakeholder partnerships. The “BRIDGE for Cities – Belt and Road Initiative: Developing Green Economies for Cities” is an example of such an event, organized annually by the United Nations Industrial Development Organization (UNIDO) and the Finance Centre for South-South Cooperation, it offers municipal officials a platform through which to scale up their engagement in inclusive and sustainable urban industrial development initiatives.

SME-driven industrial development can therefore play a key role in adding economic value, improving living conditions within cities along the BRI, and promoting environmentally supportive production methods. By working together, in future, the international community can be anticipated to ensure the BRI’s strategic industrial priorities are best adapted to the promotion of sustainable urban development.

Mixed ownership large companies will support fairer wealth distribution through dividend policies

In addition to the BRI’s increased focus on SMEs to drive forward economic development, China’s government has been promoting mixed ownership enterprises (MOEs) for its large companies. It is a peculiarly Chinese model reflecting the traditional philosophy of “Yin and Yang”, representing a balance between two opposites. As such, MOEs involve a degree of private and other forms of ownership alongside ongoing public control and management of former Chinese state owned enterprises (SOEs). The MOE concept was first set out by President Jiang Zemin in 1997 but officially commenced in 2013 under President Xi Jinping. In  2019, the government announced that private sector entities could hold a majority stake in SOEs in certain key industries.

After starting with several select national-level enterprises, the policy has expanded in stages encouraging more SOEs to adopt MOE status. By 2018, two-thirds of all central state firms (at all levels of government) and more than half their subsidiaries fell under mixed ownership reforms involving equity purchases by the private sector exceeding US$50.5 billion while about 15% of companies listed on the Shanghai-Shenzhen component index are MOEs. Although MOEs are mandated with an economic rationale to reduce market imbalances and cut overcapacity to make decisions based on price incentives rather than national objectives, they also have a social mandate to achieve the goal of maintaining employment and consumer confidence.

This social mandate, particularly in relation to large MOEs, will likely be extended to decisions over MOEs’ future profit distribution policies under the government’s reform programs in addressing inequality and raising household incomes.  Dividends paid out by typically large MOEs are anticipated to be economically impactful in alleviating sharply rising inequality, over recent decades, given the ongoing diversity of MOE shareholders ranging from private companies and investment institutions, to a plethora of collective associations and cooperative enterprises constituting tens of millions of Chinese citizens.

Moreover, as the BRI expands and takes permanent root across various continents and regions, other countries, having broadly similar characteristics and values to those of China, may look to introduce their own versions of the MOE endorsing mixed policies of achieving a more harmonious balance between economic and social imperatives.

BRI’s local urbanisation business opportunities accessible by Dezan Shira’s unique office range

Dezan Shira & Associates is a multi-disciplinary professional services firm operating across many of the pivotal BRI regions including around 25 of its major cities and upcoming urbanisation centres throughout China, ASEAN, Russia, South Asia and the Silk Road.  In addition to liaison offices in Europe and North America, the firm is uniquely placed to engage with local urbanisation opportunities arising from the BRI’s expansion across much of the Eurasian geography. To this end the firm has about three decades of on-the-ground experience supported by large teams of lawyers, tax experts, HR, and IT professionals, as well as auditors, researchers, and business analysts, to service clients in developing business opportunities arising from the BRI’s local urbanisation.  This would include guiding foreign companies through the complex regional regulatory environments and providing assistance with all aspects of establishing, maintaining, and growing their business operations.

Many of these foreign companies are typically mid-cap businesses, subsidiaries of publicly listed corporations, large family-owned enterprises, and companies mainly constituting the Fortune 5000. This diverse client base allows the firm to strengthen its knowledge base in order to assist clients do business across the BRI’s upcoming centres of local urbanisation.

The industries covered by Dezan Shira include sectors most likely to arise from BRI local urbanisation including: Education, Entertainment and Sports, Environment and Cleantech, Food and Beverage, Healthcare, Information Technology, Manufacturing, Non-Governmental Organizations, Professional Services, Trade and E-Commerce.

Dezan Shira’s corporate offices are fully integrated in working both locally and internationally to provide multi-jurisdictional advice and planning for businesses operating across the BRI.  Expert staff teams regularly communicate and travel between offices across the various cities and urban centres where the firm is based, to pool, share, and enhance extensive regional intelligence on local BRI urbanisation opportunities. This unique aspect of the firm’s business model enables it to provide a detailed and accurate picture on the latest developments in the local region as well as cross-regional regulatory matters.  The firm’s regional presence in key BRI urbanisation centres further offers it a unique role in the provision of business insights and holistic solutions that other single-country firms cannot equal.

To support Dezan Shira’s research functions, the firm also publishes significant business intelligence about each of the markets and disciplines in which it operates the publication house, Asia Briefing Ltd. Through this bespoke facility, the firm is able to provide the latest business and regulatory news as well as market research, country comparisons and expert commentary relating to conducting business in emerging Asia’s BRI urbanisation centres.

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About Us

Silk Road Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Asia, and assists foreign investors into the region. For strategic advisory and business intelligence issues please contact the firm at silkroad@dezshira.com or visit www.dezshira.com

 

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