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2019-12 ECONOMIC INVESTMENT, CORRUPTION, FRAGILITY, AND FREEDOM: HOW THE PRC LEVERAGES STATES’ PRE-EXISTING INTERNAL CONDITIONS TO GAIN ADVANTAGE
Griffin, John J., IV; Mckinley, Andrew J.; Rastello, Erik A.; Wiblin, Wesley A.
Monterey, CA; Naval Postgraduate School http://hdl.handle.net/10945/64175
Downloaded from NPS Archive: Calhoun NAVAL POSTGRADUATE SCHOOL
MONTEREY, CALIFORNIA
THESIS
ECONOMIC INVESTMENT, CORRUPTION, FRAGILITY, AND FREEDOM: HOW THE PRC LEVERAGES STATES’ PRE-EXISTING INTERNAL CONDITIONS TO GAIN ADVANTAGE
by
John J. Griffin IV, Andrew J. Mckinley, Erik A. Rastello, and Wesley A. Wiblin
December 2019
Thesis Advisor: Timothy C. Warren Second Reader: Robert E. Burks Approved for public release. Distribution is unlimited. THIS PAGE INTENTIONALLY LEFT BLANK Form Approved OMB REPORT DOCUMENTATION PAGE No. 0704-0188 Public reporting burden for this collection of information is estimated to average 1 hour per response, including the time for reviewing instruction, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington headquarters Services, Directorate for Information Operations and Reports, 1215 Jefferson Davis Highway, Suite 1204, Arlington, VA 22202-4302, and to the Office of Management and Budget, Paperwork Reduction Project (0704-0188) Washington, DC 20503. 1. AGENCY USE ONLY 2. REPORT DATE 3. REPORT TYPE AND DATES COVERED (Leave blank) December 2019 Master's thesis 4. TITLE AND SUBTITLE 5. FUNDING NUMBERS ECONOMIC INVESTMENT, CORRUPTION, FRAGILITY, AND FREEDOM: HOW THE PRC LEVERAGES STATES’ PRE-EXISTING INTERNAL CONDITIONS TO GAIN ADVANTAGE 6. AUTHOR(S) John J. Griffin IV, Andrew J. Mckinley, Erik A. Rastello, and Wesley A. Wiblin 7. PERFORMING ORGANIZATION NAME(S) AND ADDRESS(ES) 8. PERFORMING Naval Postgraduate School ORGANIZATION REPORT Monterey, CA 93943-5000 NUMBER 9. SPONSORING / MONITORING AGENCY NAME(S) AND 10. SPONSORING / ADDRESS(ES) MONITORING AGENCY N/A REPORT NUMBER 11. SUPPLEMENTARY NOTES The views expressed in this thesis are those of the author and do not reflect the official policy or position of the Department of Defense or the U.S. Government. 12a. DISTRIBUTION / AVAILABILITY STATEMENT 12b. DISTRIBUTION CODE Approved for public release. Distribution is unlimited. A 13. ABSTRACT (maximum 200 words) As the PRC has drastically increased its level of foreign direct investment (FDI) in the developing and developed worlds, a growing number of observers claim the PRC engages in “neocolonialism” and “debt-trap diplomacy.” Currently, the U.S. government lacks indicator patterns that could predict areas where the PRC will attempt to exploit investment to gain strategic concessions. Through the use of statistical analysis and the combination of multiple open-source datasets, this thesis attempts to answer the question: How does the PRC’s use of economic investment exploit pre-existing levels of corruption, fragility, and democracy to gain strategic concessions? We identify six criteria exercising substantial influence over the amount of Chinese investment flowing into a given country between the years 2006 to 2015. These criteria, ranging from a state’s fragility score, democracy rating, and rates of perceived corruption, demonstrated statistically significant effects and foretold rates of Chinese investment globally. We recommend U.S. diplomatic, economic, and defense officials use this research to more accurately predict which countries are susceptible to PRC strategic concessions and to systematically categorize countries on a spectrum ranging from “high leverage” to “low leverage” states.
14. SUBJECT TERMS 15. NUMBER OF BRI, Belt and Road Initiative, fragility, China, corruption, concession, concessions, Djibouti, PAGES Sudan, Botswana, North Korea, Indonesia, Sri Lanka 119 16. PRICE CODE 17. SECURITY 18. SECURITY 19. SECURITY 20. LIMITATION OF CLASSIFICATION OF CLASSIFICATION OF THIS CLASSIFICATION OF ABSTRACT REPORT PAGE ABSTRACT Unclassified Unclassified Unclassified UU
NSN 7540-01-280-5500 Standard Form 298 (Rev. 2-89) Prescribed by ANSI Std. 239-18
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ii Approved for public release. Distribution is unlimited.
ECONOMIC INVESTMENT, CORRUPTION, FRAGILITY, AND FREEDOM: HOW THE PRC LEVERAGES STATES’ PRE-EXISTING INTERNAL CONDITIONS TO GAIN ADVANTAGE
John J. Griffin IV Major, United States Army BS, U.S. Military Academy, 2008
Andrew J. Mckinley Major, United States Army BS, U.S. Military Academy, 2008
Erik A. Rastello Major, United States Army BS, Western Michigan University, 2007
Wesley A. Wiblin Major, United States Army BA, Ohio University, 2008
Submitted in partial fulfillment of the requirements for the degrees of
MASTER OF SCIENCE IN DEFENSE ANALYSIS (IRREGULAR WARFARE) and MASTER OF SCIENCE IN INFORMATION STRATEGY AND POLITICAL WARFARE from the
NAVAL POSTGRADUATE SCHOOL December 2019
Approved by: Timothy C. Warren Advisor Robert E. Burks Second Reader Kalev I. Sepp Chair, Department of Defense Analysis iii THIS PAGE INTENTIONALLY LEFT BLANK
iv ABSTRACT
As the PRC has drastically increased its level of foreign direct investment (FDI) in the developing and developed worlds, a growing number of observers claim the PRC engages in “neocolonialism” and “debt-trap diplomacy.” Currently, the U.S. government lacks indicator patterns that could predict areas where the PRC will attempt to exploit investment to gain strategic concessions. Through the use of statistical analysis and the combination of multiple open-source datasets, this thesis attempts to answer the question: How does the PRC’s use of economic investment exploit pre-existing levels of corruption, fragility, and democracy to gain strategic concessions? We identify six criteria exercising substantial influence over the amount of Chinese investment flowing into a given country between the years 2006 to 2015. These criteria, ranging from a state’s fragility score, democracy rating, and rates of perceived corruption, demonstrated statistically significant effects and foretold rates of Chinese investment globally. We recommend U.S. diplomatic, economic, and defense officials use this research to more accurately predict which countries are susceptible to PRC strategic concessions and to systematically categorize countries on a spectrum ranging from “high leverage” to “low leverage” states.
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vi TABLE OF CONTENTS
I. INTRODUCTION AND BACKGROUND ...... 1
II. LITERATURE REVIEW AND THEORETICAL FRAMEWORK ...... 5 A. THEORIES OF INTERNATIONAL POLITICAL ECONOMY ...... 5 B. TRADE EXPECTATION THEORY ...... 9 C. CORRUPTION THEORY ...... 11 D. HARD POWER, SOFT POWER, AND SMART POWER ...... 14 E. ECONOMIC THEORY IN THE CONTEXT OF THE PRC ...... 17 F. POWER TRANSITION THEORY IN THE CONTEXT OF THE PRC ...... 18 G. FROM THEORY TO STRATEGY IN ACTION ...... 20 H. GAP IN THE LITERATURE ...... 24
III. QUANTITATIVE ANALYSIS OF PRC INVESTMENT ...... 27 A. DATA SOURCES ...... 27 CHINESE GLOBAL INVESTMENT TRACKER ...... 28 CORRUPTION PERCEPTION INDEX ...... 29 FRAGILE STATES INDEX ...... 30 POLITY IV ...... 30 PLA DIPLOMACY DATABASE ...... 31 B. HYPOTHESES ...... 31 C. METHODOLOGY ...... 32 UNIT OF ANALYSIS AND VARIABLES ...... 32 MODEL CONSTRUCTION ...... 34 RESULTS ...... 37 OVERALL ANALYSIS ...... 47
IV. CASE STUDIES BACKGROUND ...... 51
V. ARCHETYPICAL CASE STUDIES ...... 53 A. DJIBOUTI ...... 53 PERTINENT DATA POINTS ...... 53 CASE STUDY DISCUSSION ...... 53 B. SRI LANKA ...... 58 PERTINENT DATA POINTS ...... 58 CASE STUDY DISCUSSION ...... 59
vii VI. AFRICAN CASE STUDIES ...... 63 A. BOTSWANA ...... 63 PERTINENT DATA POINTS ...... 63 CASE STUDY DISCUSSION ...... 63 B. SUDAN ...... 67 PERTINENT DATA POINTS ...... 67 CASE STUDY DISCUSSION ...... 67
VII. ASIAN CASE STUDIES ...... 71 A. INDONESIA ...... 71 PERTINENT DATA POINTS ...... 71 CASE STUDY DISCUSSION ...... 71 B. REPUBLIC OF KOREA (SOUTH KOREA) ...... 81 PERTINENT DATA POINTS ...... 81 CASE STUDY DISCUSSION ...... 81
VIII. CONCLUSION ...... 85
LIST OF REFERENCES ...... 89
INITIAL DISTRIBUTION LIST ...... 99
viii LIST OF FIGURES
Figure 1. Corruption Perception Index and debt to GDP ratio ...... 38
Figure 2. Corruption Perception Index and GDP’s impact on investment ...... 39
Figure 3. Fragility’s impact on investment ...... 41
Figure 4. Fragility and democracy’s impact on investment ...... 42
Figure 5. Fragility and debt’s impact on investment ...... 43
Figure 6. PLA visits’ impact on investment ...... 45
Figure 7. Democracy’s impact on investment ...... 46
Figure 8. Indonesian perceived degree of corruption. Source: Transparency International (2013)...... 78
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x LIST OF TABLES
Table 1. Main Results ...... 36
Table 2. Criteria Check List ...... 48
Table 3. Djibouti Criteria ...... 53
Table 4. Sri Lanka Criteria ...... 58
Table 5. Botswana Criteria...... 63
Table 6. Sudan Criteria ...... 67
Table 7. Indonesia Criteria ...... 71
Table 8. South Korea Criteria ...... 81
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xii LIST OF ACRONYMS AND ABBREVIATIONS
PRC People’s Republic of China FDI Foreign Direct Investment BRI Belt and Road Initiative IPE International Political Economic CCP Chinese Communist Party IMF International Monetary Fund AIIB Asian Infrastructure Investment Bank CGIT Chinese Global Investment Tracker FSI Fragile States Index PLA People’s Liberation Army NDU National Defense University GDP Gross Domestic Product CPI Corruption Perception Index ASEAN Association of Southeast Asian Nations DPRK Democratic People’s Republic of Korea LTTE Liberation Tigers of Tamil Eelam
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xiv EXECUTIVE SUMMARY
A. BACKGROUND
The rise of the PRC and the reemergence of great power politics, as noted in the United States’ National Security and National Defense Strategies, has created a flurry of academic, political, and military studies and statements attempting to explain and persuade.1 It is through this maze of information that we maneuver to find clarity on the actual events occurring and their effects on U.S. national security, global stability, and the international economy.
In 2013, Chinese President Xi Jinping announced the Belt and Road Initiative (BRI), spanning over 60 countries and promising $1.4 trillion in investment, with a proposed plan to connect the world through land and maritime trading routes and spurring local economic development.2 As Chinese domestic infrastructure projects began to slow in 2013, the initiation of the BRI increased outward infrastructure investment precipitously, with the PRC’s focus on countries that hold strategic value for China.3 Most scholars agree that these commitments appear to function as means for the PRC to pursue its strategic interests.4 To achieve these strategic interests, the PRC requires other countries to grant strategic concessions to the PRC. For this study, we define strategic concessions as a thing or action that is granted by a country to another country that satisfies the receiving state’s national policy objectives.
______1 White House, National Security Strategy (Washington, DC: White House, 2015), http://nssarchive.us/wp-content/uploads/2015/02/2015.pdf.; Department of Defense, Summary of the 2018 National Defense Strategy of the United States of America (Washington, DC: Department of Defense, 2018), https://dod.defense.gov/Portals/1/Documents/pubs/2018-National-Defense-Strategy-Summary.pdf. 2 Meltzer, Joshua P. “China’s One Belt One Road Initiative: A View from the United States.” Brookings (blog), June 28, 2017. https://www.brookings.edu/research/chinas-one-belt-one-road-initiative- a-view-from-the-united-states/. 3 ChinaPower Project. “How Will the Belt and Road Initiative Advance China’s Interests?,” May 8, 2017. https://chinapower.csis.org/china-belt-and-road-initiative/. 4 Lee, Ching Kwan. The Specter of Global China: Politics, Labor, and Foreign Investment in Africa. Chicago: The University of Chicago Press, 2017.
xv B. PROBLEM
Our research found two general trends emerging in how the PRC is engaging with the world. With one approach, the PRC engages with uncorrupt, un-indebted, wealthy, stable, and democratic countries within the bounds of international norms. Alternatively, the PRC engages with vulnerable states in a completely different fashion. In countries that are corrupt, over-leveraged with debt, poor, fragile, and autocratic, the PRC uses a different engagement strategy. This second strategy is aggressive and seeks one-sided deals through which the PRC can meet its strategic goals.
C. RESEARCH QUESTION
In order to detect the presence of a pattern with regard to economic investment, we have chosen to study the PRC’s interaction with the states accepting the PRC’s FDI, including BRI projects, across the globe. The uneven distribution of PRC investment begs the question of how and why the PRC chooses to invest in individual states and whether or not they allow the PRC to gain strategic concessions within these countries. Thus, we seek to answer:
How does the PRC’s use of economic investment exploit pre-existing levels of corruption, fragility, and freedom to gain strategic concessions?
D. METHODOLOGY
In pursuit of the answer to this question, we developed four hypotheses to subject to quantitative testing. We then conducted a regression analysis of the PRC’s investment across the globe. Using the quantity of investment derived from the Chinese Global Investment Tracker (CGIT) as the dependent variable, we built a mathematical model that included a number of variables that, we hypothesize, could affect the way the PRC chooses to invest. The independent variables considered included corruption, fragility, democracy, debt, and wealth.
xvi E. SUMMARY OF KEY FINDINGS
Overall, the model paints a complex picture of how the PRC selects countries for investment. Comparing all of the findings between the four hypotheses, we find that three substantive criteria for investment exist. Importantly, the evidence presented below shows that countries meeting a larger number of these criteria also show a greater probability of significant PRC economic investment and a higher likelihood of strategic concessions.
Criteria Yes – Meets Criteria No – Does Not Meet Criteria 1. Higher Corruption and Higher Debt-GDP Ratio 2. Higher Fragility
3. Higher Autocracy
F. RECOMMENDATIONS
These findings are significant because they allow U.S. foreign policy and national security decision-makers to assess the risk within individual nations that can be leveraged into making strategic concessions to the PRC. This checklist will help assess whether or not a given country is in a “high leverage” or “low leverage” situation relative to the PRC. This risk level may, in turn, influence the approach that the U.S. would take toward that state. Finally, these criteria illuminate specific areas within a country where the U.S. can focus efforts of support to counter PRC economic statecraft, also known as “debt-trap diplomacy.”
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xviii I. INTRODUCTION AND BACKGROUND
When studying the People’s Republic of China’s (PRC) interactions with other states, it can be difficult to discern what is real and what is rhetoric. The rise of the PRC and the reemergence of great power politics, as noted in the United States’ National Security and National Defense Strategies, has created a flurry of academic, political, and military studies and statements attempting to explain and persuade.1 It is through this maze of information that we maneuver to find clarity on the actual events occurring and their effects on U.S. national security, global stability, and the international economy.
With the announcement of the People’s Republic of China’s (PRC) policy of “going out” in the early 2000s, the world saw a dramatic increase in the level of foreign direct investment (FDI) and international engagement flowing from the PRC.2 This massive flow of loans, infrastructure projects, and diplomatic engagements have spurred both cautious optimism and immediate concern in the international community. As the PRC has engaged the developing world, a growing number of observers claim that the PRC is engaged in “neocolonialism” and “debt trap diplomacy.”3 Conversely, the PRC has argued that it is assisting the developing world in closing its infrastructure gap and providing sound economic opportunities for a more prosperous future.4
In 2013, Chinese President Xi Jinping announced the Belt and Road Initiative (BRI), spanning over 60 countries and promising $1.4 trillion in investment, with a proposed plan to connect the world through land and maritime trading routes and spurring
1 Department of Defense, Summary of the 2018 National Defense Strategy of the United States of America (Washington, DC: Department of Defense, 2018), https://dod.defense.gov/Portals/1/Documents/pubs/2018-National-Defense-Strategy-Summary.pdf.; White House, National Security Strategy of the United States of America (Washington, DC: White House, 2017). 2 Hongying Wang, “A Deeper Look At China’s ‘Going Out’ Policy,” Centre for International Governance Innovation, 2016. 3 “The Perils of China’s ‘Debt-Trap Diplomacy’—Banyan,” The Economist, accessed October 26, 2018, https://www.economist.com/asia/2018/09/06/the-perils-of-chinas-debt-trap-diplomacy. 4 Yun Sun, “China’s Increasing Interest in Africa: Benign but Hardly Altruistic,” Brookings (blog), November 30, 2001, https://www.brookings.edu/blog/up-front/2013/04/05/chinas-increasing-interest-in- africa-benign-but-hardly-altruistic/. 1 local economic development.5 As Chinese domestic infrastructure projects began to slow in 2013, the initiation of the BRI increased outward infrastructure investment precipitously, with the PRC’s focus on countries that hold strategic value for China.6 Since that time, the BRI has become the main venue for the PRC to finance and execute foreign infrastructure projects. Most scholars agree that these commitments appear to function as means for the PRC to pursue its own strategic interests.7
For the purposes of this study, we will apply a broad definition of strategic interests. In congruence with other scholars, a state’s strategic interests can be roughly defined as a goal or outcome that a country pursues to achieve the end state of a national-level policy requirement. These interests can be policy items such as: access to resources, access to markets, and access to strategic physical locations. In the case of the PRC, their strategic imperatives are derived from an overall grand strategy to achieve a higher degree of global standing by 2049.8 To achieve these strategic interests, the PRC requires other countries to grant them strategic concessions which fulfill their needs. For the purposes of this study, we define strategic concessions as: materials or actions that are granted by a country to another country to satisfy the receiving state’s national policy objectives.
With regard to the PRC, the most salient examples of strategic concessions include: the 99 year lease of the Hambantota port facility, the establishment of the first
5 Joshua P. Meltzer, “China’s One Belt One Road Initiative: A View from the United States,” Brookings (blog), June 28, 2017, https://www.brookings.edu/research/chinas-one-belt-one-road-initiative- a-view-from-the-united-states/. 6 “How Will the Belt and Road Initiative Advance China’s Interests?,” ChinaPower Project (blog), May 8, 2017, https://chinapower.csis.org/china-belt-and-road-initiative/. 7 Ching Kwan Lee, The Specter of Global China: Politics, Labor, and Foreign Investment in Africa (Chicago: The University of Chicago Press, 2017). 8 Michael Pillsbury, The Hundred-Year Marathon: China’s Secret Strategy to Replace America as the Global Superpower (New York: Henry Holt and Company, 2015); Jacqueline N. Deal, “China’s Approach to Strategy and Long Term Competition,” in Competitive Strategies for the 21st Century: Theory, History, and Practice, ed. Thomas G. Mahnken (Stanford, CA: Stanford University Press, 2012); Lee, The Specter of Global China. 2 oversea PLA base in Djibouti, and the severing of diplomatic ties with Taiwan.9 These examples stand as the most obvious and extreme instances of strategic concessions granted to the PRC; however, we find that these concessions exist on a spectrum. These notable events supply the high-water mark of strategic concessions, yet along the way there exist many lesser type of concessions that a state can grant to the PRC that give them a different level of leverage over that state.
Although it is difficult to study the relations between two states when one or both are closed societies, we can see two general trends emerging in how the PRC is engaging with the world. With one approach, the PRC engages with uncorrupt, un-indebted, wealthy, democratic countries within the bounds of international norms. The PRC seeks to maintain its international reputation and benefit from the existing framework of international institutions. Alternatively, the PRC engages with vulnerable states in a completely different fashion. In countries that are corrupt, over-leveraged with debt, poor, and autocratic the PRC uses a different engagement strategy. This second strategy is aggressive and seeks one-sided deals through which the PRC can meet its strategic interests. However, the PRC attempts to obfuscate this aggressive second strategy with vulnerable states by appearing to function within the international norms.
To achieve clarity, we must attempt to isolate specific variables to draw out the patterns that occur and develop a greater understanding of the effects that the PRC’s actions are having on other states and the international community. With this in mind, we narrow our focus to the PRC’s actions through economic investment.
In order to detect the presence of a pattern with regard to economic investment, we have selected to study the PRC’s interaction with the states accepting the PRC’s FDI, including BRI projects, across the globe. Specifically, we look to the regions of Asia and Africa, as these continents contain the largest number of potentially “vulnerable” states.
9 Maria Abi-Habib, “How China Got Sri Lanka to Cough Up a Port—The New York Times,” The New York Times, accessed August 27, 2018, https://www.nytimes.com/2018/06/25/world/asia/china-sri- lanka-port.html; Dietmar Pieper, “Geopolitical Laboratory: How Djibouti Became China’s Gateway To Africa,” Spiegel Online, February 8, 2018, sec. International, http://www.spiegel.de/international/world/djibouti-is-becoming-gateway-to-africa-for-china-a- 1191441.html. 3 The PRC has committed significant resources in Asia and Africa, particularly in recent years under the umbrella of the BRI.10 Moreover, these regions have historically struggled with corruption, nepotism, and instability as evidenced by the data we have analyzed.11 The uneven distribution of PRC investment begs the question of how and why the PRC chooses to invest in certain states and whether or not they allow the PRC to gain strategic concessions within these countries.
Thus, we seek to answer: How does the PRC’s use of economic investment exploit pre-existing levels of corruption, fragility, and democracy to gain strategic concessions? The first step in gaining insight into the PRC’s activities is to review the literature that is relevant to our question.
10 Shannon Tiezzi, “China’s Belt and Road Makes Inroads in Africa,” The Diplomat, accessed November 7, 2018, https://thediplomat.com/2018/07/chinas-belt-and-road-makes-inroads-in-africa/; Robyn Dixon, “China Has Spent Billions in Africa, but Some Critics at Home Question Why—Los Angeles Times,” latimes.com, accessed November 7, 2018, http://www.latimes.com/world/la-fg-china-africa- 20180903-story.html. 11 “Corruption Perceptions Index 2017—Transparency International,” accessed October 11, 2018, https://www.transparency.org/news/feature/corruption_perceptions_index_2017. 4 II. LITERATURE REVIEW AND THEORETICAL FRAMEWORK
Many scholars have sought to examine how the PRC interacts with other states on the global stage and in the developing world to achieve its ends. These studies have ranged from anecdotal evidence of malfeasance to in-depth analysis of how the PRC is elevating the economies of the developing world.
In this section, we will review the pertinent topics and literature pertaining to the PRC’s economic engagement. To this end, we have selected the fields of International Political Economic (IPE) theory, trade expectation theory, corruption theory, as well as the use of hard power, soft power, and smart power. Second, after reviewing the literature on these theories, we place economic and power transition theories in the context of the PRC. Third, we will narrow the literature from theory to the PRC’s strategy in action. Finally, we will examine the literature on the PRC’s actions in Africa and Asia. We will conclude with the gap in the literature on this subject, in understanding how internal factors within a state effects the PRC’s ability to gain strategic concessions.
A. THEORIES OF INTERNATIONAL POLITICAL ECONOMY
International political economic (IPE) theory helps to explain how and why states pursue different economic strategies and policies in the international environment. Marlin- Bennett writes
[t]he concept of international political economy (IPE) encompasses the intersection of politics and economics as goods, services, money, people, and ideas move across borders.12
Gilpin echoes this sentiment, “In brief, political economy… means the reciprocal and dynamic interaction in international relations of the pursuit of wealth and the pursuit
12 Renee Marlin-Bennett, “International Political Economy: An Overview and Conceptualization,” in Oxford Research Encyclopedia of International Studies (Oxford: Oxford Research, 2010). 5 of power.”13 Within this field, there are many theories and schools of thought that seek to explain the actions of state and non-state actors attempting to influence one another in the global economy. Broadly conceived, three approaches dominate the discussion: realism, liberalism, and Marxism. Within these expansive categories, separate theories exist to explain the actions taken by states.
Closely mirroring their international relations counterparts, the first two approaches explain economic actions from a state-centric and state interested approach or individual- centric and individually-interested approach respectively.14 Separately, Marxism explains economic actions based on the role of class and class struggle.15 Each school of thought has relevance to how and why the PRC acts the way that it does within the international economic domain.
The liberal approach to IPE focuses on the individual rather than the state as the primary actor in the global economy. From this focus, in the late 18th century a laissez- faire mindset emerged in contrast to the mercantilist views of the day.16 The basis of this theory is:
the idea that markets should be allowed to function as freely as possible and that the purpose of economic activity is not to benefit the government, but rather to benefit individuals who, through their efforts, earn income and profits.17
Further scholars expanded the liberal approach into two subcategories of Keynesianism and Neoclassical liberalism. The dominant branch, Keynesianism, emerged from the post-WWII Bretton Woods conference and is anchored in the idea that “free markets will not always find an equilibrium at full employment. Instead, crises of
13 Robert. Gilpin, U.S. Power and the Multinational Corporation : The Political Economy of Foreign Direct Investment, The Political Economy of International Relations Series (New York: Basic Books, 1975). 43. 14 Marlin-Bennett, “International Political Economy: An Overview and Conceptualization.” 15 Marlin-Bennett. 16 Adam Smith, The Wealth of Nations (London: W. Strahan and T. Cadell, 1776). 17 Marlin-Bennett, “International Political Economy: An Overview and Conceptualization.” 6 underemployment call for public expenditures, for example, in public works.”18 Within the umbrella of Keynesianism, several concepts of integration, interdependence, regimes, and neoliberal institutionalism emerged all seeking to incorporate and explain the post- WWII global economy.19 This group of theories and concepts center around interactions of states in the international marketplace, with international economic institutions, and the propensity, or not, of states to work to together collectively, within the institutions or not, for greater collective prosperity.20
The realist approach to IPE, also known as economic nationalism and previously mercantilism, takes a state-centric view of the global economy and “…expect [s] the contest for wealth to mirror the contest for power in international relations.”21 This approach adopts an often simplistic view to explain why states do the things they do and is often critiqued as lacking contemporary application in the global economy of the 21st century with its current structures and institutions.22 However, Helleiner, argues that
economic nationalism has always been nationalist—that is, realist—first and economic second. In other words, he argues that countries choose economic policies for nationalist purposes. Sometimes these policies will be liberal, when it suits the country to deploy liberal policies; sometimes the policies will be protectionist, when protection is expected to lead to desired ends. In this analysis, liberal policies may be wholly consistent with theoretical explanations of economic nationalism.23
Central to the realist or economic nationalist approach is the idea that economic decisions are viewed through the prism of the interests of the state.24 Thus, economic strategies are not necessarily purely profit driven.
18 Marlin-Bennett. 19 Marlin-Bennett. 20 Marlin-Bennett. 21 Marlin-Bennett. 22 Daniel W. Drezner, “Mercantilist and Realist Perspectives on the Global Political Economy,” in Oxford Research Encyclopedia of International Studies (Oxford: Oxford Research, 2010). 23 Marlin-Bennett, “International Political Economy: An Overview and Conceptualization”; Eric Helleiner, “Economic Nationalism as a Challenge to Economic Liberalism? Lessons from the Nineteenth Century,” International Studies Quarterly 3, no. 46 (2002): 307–29. 24 Marlin-Bennett, “International Political Economy: An Overview and Conceptualization.” 7 At its heart, Marxism is about the division of economic society between labor and capital. These two opposing forces have evolved over history from tribal societies, to slavery, to feudalism, and finally to capitalism. At each stage, the capitalist and his class divide the laborer from his power of production. In its highest form, capitalism requires that the worker sell his labor as a means to survive.25 This is the heart of the class struggle described by Marx and later further by Lenin. In this struggle, the capitalist will take in the excess profit when the price of the goods produced by the worker exceeds the cost of the worker’s wages. The worker will only receive enough wage to meet his subsistence, whereas the capitalist will continue to accrue “surplus value.”26 Marx and Lenin then believe that this inevitably leads to friction between the classes and the struggle of the worker to rise up and the capitalist to continue to struggle to maintain dominance.
These theories set the context for how the PRC is interacting within the international marketplace. Most often, their state-managed economy takes a realist approach to economic investment; however, it also observed that many disparate elements within the PRC and in the diaspora have adopted a liberalist point of view for economic ventures and development.27
Building upon this literature, scholars have sought to refine and conceptualize how and why states will cooperate or not in pursuit of their interests and how the existence of international regimes and institutions effects states’ level of cooperation. To this end, scholars like Keohane have found Realist IPE theories to be lacking, stating, “[t]hey need to be supplemented, though not replaced, by theories stressing the importance of international institutions.”28 In the international political economic sphere—where uncertainty is pervasive, Keohane argues for the critical nature of international regimes in reducing the uncertainty by supplying actors with high-quality information and by enabling
25 Karl Marx and Frederick Engels, Manifesto of the Communist Party. In E. Kamenka (Ed.) The Portable Karl Marx. (New York: Penguin, 1848). 26 Marx and Engels. 27 Howard W. French, China’s Second Continent: How A Million Migrants Are Building A New Empire In Africa (New York: Alfred A. Knopf, 2014). 28 Robert E. Keohane, After Hegemony: Cooperation and Discord in the World Political Economy (Princeton, NJ: Princeton University Press, 1984). 14. 8 them to act predictability within the bounds of the norms and customs of the international regime.29
By taking this view from a macro and holistic perspective, these regimes enable actors to cooperate with one another in pursuit of their own ends despite sometimes taking discrete actions that are counter to their goals.30 Keohane argues that states take these actions because they value membership in international regimes and adopt a longer and fuller view of how their actions will be perceived by other members. This behavior has direct application to how the PRC interacts with other states in unique ways. Moreover, it helps us to understand why states, like the PRC, value membership in international regimes and shape their behavior in line with some of their norms.
Further expanding the scholarly work in this field, social scientists such as Baldwin have theorized about the use of “economic statecraft.” Baldwin and other scholars in this field seek to examine the use of economic means to influence politic ends.31 Economic statecraft is an important lever for the statesman seeking to influence other actors in the international arena. Baldwin elucidates the concept of economic statecraft in order to demonstrate its significance among the other elements of state power. By emphasizing that economic statecraft is means based, Baldwin makes the important connection between policymakers’ actions and the ends they are attempting to achieve. This concept is central to the actions of the PRC. As will emerge from the further review of existing literature and the analysis we will conduct, the PRC wields its economic power with the intent to influence actions far beyond the economic sphere.
B. TRADE EXPECTATION THEORY
Trade expectation theory argues economic interdependence does not necessitate peace, as liberalist economic theory suggests, nor does it support the counter that economic interdependence is insignificant relative to the causes of war or even can increase the
29 Keohane. 30 Keohane. 31 David A. Baldwin, Economic Statecraft (Princeton, NJ: Princeton University Press, 1985). 9 likelihood, as realist economic theory suggests.32 Instead, trade expectation theory argues that there are multiple factors which contribute to the possibility of conflict between two states relative to their economic interdependence. These factors include regime type, the embrace of capitalism, level of development, and most importantly, future economic outlook.33
Trade expectation theory links notions of economic liberalism-its emphasis on trade and investment between countries-with economic realism-its hedging of the costs within a dependent state were its trade and investment inhibited by an aggressor state.34 The theory proposes that, “expectation [s] of the state’s future trade and investment environment” are the key indicator of the likelihood of conflict with another state.35 This expectation variable then determines the state’s assessment of its future. If the outlook on inter-state trade is generally optimistic, then business will continue. However, if the outlook on trade becomes pessimistic, the dependent state will then turn to more aggressive policies in an attempt to reverse its anticipated long-term decline.
Significantly, trade expectation theory also identifies the importance of what Copeland refers to as the “trade-security dilemma.”36 The trade-security dilemma, based on realist theory, states there is an inherent dilemma when a state attempts to conduct hardline policies to protect its economic interests. This dilemma is rooted in the knowledge that a state which is acting aggressively to protect its commercial (trade) interests will inevitably cause other dependent states to react to its aggression to counterbalance the aggressor state. These reactions can include limiting the aggressor state’s ability to access markets and key supply routes and other economic containment methods. This economic containment can then lead to a higher degree of pessimism in the economic outlook of the
32 Dale C. Copeland, Economic Interdependence and War, Princeton Studies in International History and Politics (Princeton, NJ: Princeton University Press, 2015), 16. 33 Copeland, 27. 34 Copeland, 429. 35 Copeland, 428. 36 Copeland, 429. 10 country and develop into further aggressive behavior, potentially metastasizing into more aggressive security posture (military escalation) to protect itself.37
Trade expectation theory aptly rationalizes the behaviors of both the U.S. and PRC, their interactions with each other, and their interactions with third countries. Over the last three decades, China has seen historic growth, averaging 8% growth annually.38 This exceptional growth results in different expectations of the future for both the U.S. and China. For China, its economy is now the 2nd-largest in the world and has lifted hundreds of millions of Chinese citizens out of abject poverty.39 This highly dynamic growth created an expectation of normalcy in China, creating potential fault lines within the country if economic growth starts to slow or normalize into the rates seen in other developed countries. This slowdown into a more developed, but slower growing, economy creates a potential for more aggressive economic policies. This is concerning for the United States. If China can continue its economic boom for another two decades, the Chinese economy will surpass the U.S. economy in size and purchasing power.40 The U.S. has relied on a robust and massive economy for both economic and military security for the last seventy years, and a severe pessimism could result if the U.S. economic hegemony waned. As the two economic goliaths of the world continue to interact with each other, trade expectation theory sets the context for these interactions and their expectations moving forward in a novel and realistic way. Furthermore, this theory has important implications for how the PRC will engage with other nations in the international economic arena.
C. CORRUPTION THEORY
The literature concerning the effects of corruption on international trade and economic growth is robust. The focus of much of this research is the question of whether or not corruption affects the economic growth or efficiency of a given economy. The vast majority of scholarly work and data analysis on this subject shows that corruption at the
37 Copeland, 429. 38 Copeland, 436. 39 Copeland, 437. 40 Copeland, 437. 11 national political and sub-national firm/bureaucratic level has an adverse effect on a country’s economic growth and efficiency.41 However, there has been less study of the effects that pre-existing corruption might have on the economic interaction between states.
Scholars bifurcate corruption into two types: political or “grand” corruption and bureaucratic corruption. As Jain explains, political corruption is best described as a dictator or group of elites that have control over a state’s resources and decision making and prioritize their personal gains over the welfare of the population.42 Bureaucratic corruption refers to state officials at the sub-national level imposing additional costs for specific government services for personal gain.43 Both types of corruption affect a state’s international trade through how agreements are settled, who gets awarded a specific contract, and the costs imposed on each party.
In addition to these two types of corruption, scholars have produced different findings about the effects of corruption on trade when there is a variation of the function of corruption. The two functions of corruption are the common function, where the corruption effects all parties the same, and the restrictive function, where the corruption is used to favor one entity at the expense of others. As Thede and Gustafson explain, there is empirical evidence to suggest that there is a different effect when corruption is a restrictive function rather than a common function.44 Though the total effect of the corruption is negative, the restrictive function of, “corruption favors importers with economic power at the expense of others, thereby increasing the market access of those firms.”45 This
41 Organisation for Economic Co-operation and Development., Consequences of Corruption at the Sector Level and Implications for Economic Growth and Development. (Paris, [France]: OECD, 2015), https://doi.org/10.1787/9789264230781-en; Vito Tanzi and Hamid R. Davoodi, “Corruption, Public Investment, and Growth,” in Governance, Corruption, and Economic Performance (Washington: International Monetary Fund, 1992); Susanna Thede and Nils‐Åke Gustafson, “The Multifaceted Impact of Corruption on International Trade,” World Economy 35, no. 5 (2012): 651–66, https://doi.org/10.1111/j.1467-9701.2012.01436.x. 42 Arvind K. Jain, “Corruption: Theory, Evidence, and Policy,” in DICE Report, vol. 2 (Munich: CESifo, 2011). 43 Organisation for Economic Co-operation and Development., Consequences of Corruption at the Sector Level and Implications for Economic Growth and Development. 44 Thede and Gustafson, “The Multifaceted Impact of Corruption on International Trade.” 45 Thede and Gustafson. 662. 12 indicates that corruption can be of great benefit to a specific firm or country if they are tied into the corrupt decision-makers in a given state. This restrictive function may have relevance to how and why states tend to interact economically with other specific states.
Given these definitions and themes, two theories of corruption have emerged: distributive corruption and extractive corruption. Both theories center on corruption’s effect on the balance of power between state and society. Distributive corruption highlights the state’s weakness relative to a segment of society.46 As Amundsen relates, this theory is characterized by the supremacy of a specific segment of the population which exerts significant political power over the government.47 In this theory, the political elites bend to the will of the specific segment of the population in order to retain their political support. In turn, the segment receives benefits from the political elite in the forms of favorable regulations, better government services, etc. Therefore, in distributive corruption theory the empowered segment of the population uses its position to maximize group gains at the cost of the rest of the population.
Extractive corruption represents the opposite balance of power wherein the state is significantly stronger than any other segment of the population. In extractive corruption theory, the ruling elite of the state use their position to extract personal wealth from the country.48 Amundsen explains that according to this theory, a small ruling class makes all the decisions concerning the resources of a given state and prioritizes the personal gains of that class over those of society at large.49
These theories set the background for the study of corruption with regard to economic interaction between the PRC and different states. While both theories can be observed, the political or grand corruption characterized by extractive corruption theory has perhaps the more dominant role in international economic engagement. Furthermore,
46 Kouramoudou Keita, “Essays on Corruption and Economic Growth: A Theoretical and Empirical Evidence” (Master’s Degree, Universite de Rennes, 2011). 47 Inge Amundsen, “Political Corruption: An Introduction to the Issues,” (working paper, Chr. Michelsen Institute, 1999) 48 Keita, “Essays on Corruption and Economic Growth: A Theoretical and Empirical Evidence.” 49 Amundsen, “Political Corruption: An Introduction to the Issues.” 13 the restrictive function of corruption may have significant implications for the study of interactions between the PRC and corrupt states.
D. HARD POWER, SOFT POWER, AND SMART POWER
Since Joseph Nye introduced the concept of soft power in 1990 that complimented the existing theory of hard power, there has been a change in the global politics that necessitates a reexamination of new concepts in addition to hard and soft power.50 A rise in China as a dominant regional-authoritarian-power is among the top reasons for examining a new theory of influence: “smart power.” Today, authoritarian powers, such as the PRC, are influencing and shaping word economies and politics in a way that was not predicted a decade ago.51 These theories provide describe the application of power that the PRC uses when expanding the BRI utilizing its military, diplomacy, coercion techniques, and other forms of influence.
Nye defines hard power as the use of payment and coercion as a “push” to “affect the behavior of others to get what one wants.”52 Additionally, hard power is generally associated with tangibles like military force, and money.53 The PRC’s expansion into the South China Sea and coercive sanctions that the United States had put on North Korea to stop North Korean nuclear ambitions are all contemporary examples of states wielding hard power.
Soft power, contrary to hard power, is a “pulling force” from one country to another, and is generally associated with “intangible factors like institutions, ideas, values, culture, and perceived legitimacy of policies.”54 Nye defines the term soft power as, the
50 Joseph S. Nye, “China’s Soft and Sharp Power,” Project Syndicate; Prague, January 4, 2018, http://search.proquest.com/docview/1984531381/abstract/630845D7D0ED46D0PQ/1. 51 Christopher Walker, “What Is ‘Sharp Power’?,” Journal of Democracy 29, no. 3 (July 12, 2018): 9– 23, https://doi.org/10.1353/jod.2018.0041. 52 Joseph S. Nye, “Get Smart: Combining Hard and Soft Power,” Foreign Affairs 88, no. 4 (2009): 160–63. 53 Joseph S. Nye, Hard, Soft, and Smart Power (Oxford University Press, 2013), https://doi.org/10.1093/oxfordhb/9780199588862.013.0031. 54 Nye. 14 “ability to affect others to obtain preferred outcomes by the co-optive means of framing the agenda, persuasion, and positive attraction.”55 Soft power is derived primarily from three resources: foreign policies, culture, and values.56
Lately, the PRC has made a concerted effort to invest a significant amount in its soft power as to make its recent rise of hard power military resources and economic statecraft appear less aggressive to its neighbors.57 However, critics, to include Nye, conclude that authoritarian states like the PRC are incapable of utilizing soft power well.58 Christopher Walker, argues that authoritarian states may have issues utilizing soft power due to their “state-centric governance model.”59 Soft power belongs less to the government, and more to the people of a country. In suppressing a civil society, and controlling the political structure, “authoritarian regimes supposedly place themselves at a disadvantage [in wielding soft power]: Repression squeezes out the creativity and vibrancy that are crucial to soft power.”60 Instead, authoritarian regimes must develop a strategy that combines their military and economic might of hard power, with a fabricated attractiveness of soft power that is not influenced by the authoritarian regime’s citizens, but rather by its leaders.
“Smart power” is a new theoretical concept that expands on how a state uses both hard and soft power. In Nye’s 2008 article titled “Security and Smart Power,” he defines smart power as “a strategy that combines the soft power of attraction with the hard power of coercion.”61 In providing a contemporary example of the PRC adapting its strategy to use smart power, Ernest J. Wilson III writes the following about the PRC’s reprioritization
55 Nye. 56 Walker, “What Is ‘Sharp Power’?” 57 Nye, Hard, Soft, and Smart Power. 58 Walker, “What Is ‘Sharp Power’?” 59 Walker. 60 Walker. 61 Joseph S. Nye, “Security and Smart Power,” American Behavioral Scientist 51, no. 9 (May 2008): 1351–56, https://doi.org/10.1177/0002764208316228. 15 of efforts from investing in hard power and soft power to investing in smart power with the BRI.
China could have pursued a strategy of “China’s Militant Rise.” It could have been diplomatically dysfunctional in its treatment of African nations and clumsy in its pursuit of oil and mineral resources; instead, it created what Josh Kurlantzick (2007) called a multifaceted “charm campaign” offering African leaders foreign assistance and high-level attention.62
The PRC used this multifaceted charm campaign to attract leaders of foreign nations through a state-fabricated soft power, ultimately with the aim of obtaining something in return. Nye describes the BRI as an attractive opportunity for foreign states. He says, “A Chinese economic aid package under the Belt and Road Initiative may appear benign and attractive, but not if the terms turn sour, as was recently the case in a Sri Lankan port project.”63 China attracted the government of Sri Lanka with soft power investment opportunities to build a port, even though feasibility studies said the port would not work. As Maria Abi-Habib writes in the New York Times,
Over years of construction and renegotiation with China Harbor Engineering Company, one of Beijing’s largest state-owned enterprises, the Hambantota Port Development Project distinguished itself mostly by failing, as predicted.64
In 2012, the port was only able to draw 34 ships to its berthing areas.65 In taking on so much debt to the Chinese government without any way to pay it back, the Sri Lankan government gave the port including 15,000 acres of surrounding land to the Chinese: a deal that would last 99 years.66 It is important to mention that the president of Sri Lanka at the time, Mr. Rajapaksa, saw “large payments from the Chinese port construction fund flowed directly to campaign aides and activities,” and in turn, “agreed to Chinese terms at every
62 Ernest J. Wilson, “Hard Power, Soft Power, Smart Power,” The ANNALS of the American Academy of Political and Social Science 616, no. 1 (March 2008): 110–24, https://doi.org/10.1177/0002716207312618. 63 Nye, “China’s Soft and Sharp Power.” 64 Maria Abi-Habib, “How China Got Sri Lanka to Cough Up a Port,” The New York Times, October 8, 2018, sec. World, https://www.nytimes.com/2018/06/25/world/asia/china-sri-lanka-port.html. 65 Abi-Habib. 66 Abi-Habib. 16 turn and was seen as an important ally in China’s efforts to tilt influence away from India in South Asia.”67
These concepts set the background for the study of smart power with regard to economic interactions between the PRC and different states. While smart power can be observed in hindsight, the targeting of corrupt countries by the PRC in its BRI projects has not been sufficiently examined. Furthermore, how the PRC selects countries in which to invest, or how the PRC appeals to corrupt counties may have significant implications for the study of the interaction between the PRC and states receiving Chinese foreign investment projects.
E. ECONOMIC THEORY IN THE CONTEXT OF THE PRC
When seeking to explain the economic outlook of the PRC, scholars grapple with these theories and arrive at a further conceptual crossroads of capitalism. Capitalism, springing from its roots in liberal IPE theory and its antithesis in Marxian theory, is the word most often associated with the PRC’s current economic system. A dizzying contradiction for a state, which is run by the Chinese Communist Party (CCP), as described by two main scholarly angles on the “varieties of capitalism” being exercised with the PRC. These two paths are “Chinese state capitalism” and “capitalism in China.”68 As explained by Lee:
Inspired by economic institutionalism and Marxian political economic theory, respectively, these two fields highlight two seemingly contradictory dynamics spurring China’s economic growth. On the one hand, studies of Chinese state capitalism emphasize centralized control by the party-state over political and economic institutions, and, on the other, capitalism in China scholars point to decentralized, dispersed, bottom-up initiatives, even anarchic competition by local, state, and corporate actors.69
These two fields, like the larger IPE theories in which they are based, provide a dichotomous viewpoint on the primary actor in the economic growth of the PRC and, by
67 Abi-Habib. 68 Lee, The Specter of Global China. 69 Lee. 17 extension of the “going out” policy, the foreign economic engagement of the PRC with other states. The “Chinese state capitalism” point of view sees the state as the engine; conversely, the “capitalism in China” approach sees decentralized actors as the primary drivers. Due to the fact that the PRC employs a unique blend of political and economic levers, these divergent ideas provide context to the application of IPE theories of realism, liberalism, and Marxism to the PRC’s behavior.
F. POWER TRANSITION THEORY IN THE CONTEXT OF THE PRC
At the conclusion of his book in 1958, World Politics, Organski states, “the question is not whether China will become the most powerful nation on earth, but rather how long it will take her to achieve this status.”70 However, if China is to challenge and overtake as the dominant hegemon, this organizational change could lead to friction and competition. As political scientist Randall L. Schweller and Xiaoyu Pu point out,
Historians, such as Thucydides, noted the danger of situations in which states undergo rapid rises and declines in relative power, where one state aspires to hegemonic status and another seeks to maintain it. Indeed, history’s most destructive and influential armed conflicts have been titanic struggles called hegemonic wars: systemwide military contests of unlimited means between coalitions led by a declining leader and a rising challenger.71
While the PRCs current challenge has not led to armed conflict, the PRC is demonstrating its challenge to the current world order through insisting on greater influence in the International Monetary Fund (IMF) and the World Bank.72 The PRC is also furthering its coalition strength through the establishment of the Asian Infrastructure Investment Bank (AIIB).73 However, as the United States remains a superpower, it is
70 A. F. K. Organski, World Politics, Borzoi Books in Political Science, xii, 461, xi p. (New York: Knopf, 1958), 446, //catalog.hathitrust.org/Record/001152777. 71 Randall L. Schweller and Xiaoyu Pu, “After Unipolarity: China’s Visions of International Order in an Era of U.S. Decline,” International Security 36, no. 1 (2011): 42. 72 Douglas Lemke and Ronald L. Tammen, “Power Transition Theory and the Rise of China,” International Interactions 29, no. 4 (October 1, 2003): 269–71, https://doi.org/10.1080/714950651. 73 Lemke and Tammen. 18 important to understand these signals from revisionist powers as they begin to catch up and possibly look for a transition of power.74
Organski organizes power transition theory into three stages, “the stage of potential power, the stage of transitional growth in power, and the stage of power maturity.”75 Crucial in defining where a nation is within the stages is industrialization; the established leaders are those who industrialized first, and those who are challenging are nations that have industrialized more recently.76 An industrializing nation typically gains simultaneously in wealth, industrial strength, population, and in the efficiency of governmental organization.77 Since these are the major determinants of national power, an increase inevitably results in a great increase of power for the nation that is going through the process of industrialization.78 Organski states, “The major reason why power declines in the third stage…[is] because other nations are entering the second stage of transitional growth, and as they do so, they begin to close the gap between themselves and the nations that industrialized before them.”79 China has not only narrowed the gap, with the declaration of the BRI, but they are also beginning to focus their projection of power outward. As Hong Yu argues in his article on the PRCs motivation for the BRI, “China’s leveraging of its financial power, strong manufacturing, and infrastructure development capacity, [through the promotion of the BRI]…are reflections of the rise of China as a global power, and this will draw other Asian countries deeper into China’s orbit of development.”80 This all contributes to the fears of a rising China.
74 Schweller and Pu, “After Unipolarity: China’s Visions of International Order in an Era of U.S. Decline,” 42. 75 Organski, World Politics, 304. 76 Organski, 301. 77 Organski, 301. 78 Organski, 301. 79 Organski, 305. 80 Hong Yu, “Motivation behind China’s ‘One Belt, One Road’ Initiatives and Establishment of the Asian Infrastructure Investment Bank,” Journal of Contemporary China 26, no. 105 (May 4, 2017): 367, https://doi.org/10.1080/10670564.2016.1245894. 19 On the other hand, Chan argues that none of this is necessary, “and despite the growth of China’s economy in recent decades, the available evidence does not support any claim that China is overtaking or even approaching the U.S. as a contender for international primacy.”81 Within Organski’s transition theory, the challenger is supposed to be at least 80 percent as strong as the hegemon, which is not evident concerning China and the United States.82 The United States is still greatly superior, economically and militarily, to China, even within Asia.83 Still, this theory has significant implications for how or why the PRC will interact with certain states in the international community, potentially framing their choices of where they conduct foreign investment.
G. FROM THEORY TO STRATEGY IN ACTION
These theories are a way for economists and political scientists to view and explain the world, but the strategies that states choose to adopt based on the theories to which they subscribe are the most telling aspects of how they will act in the international arena. To formulate grand strategy, the PRC does not separate its economic strategies from its political, diplomatic, or military approaches, and in pursuit of the correct strategy the PRC looks to its own history for lessons. As Pillsbury explains, the “Warring States Period” of Chinese history was characterized by numerous competing warlords seeking dominion over one another to gain advantage and ascend to the status of the ba—translated alternatively as leader or tyrant.84 The mindset from this period is central to the grand strategy of the PRC and CCP today because it informs the way they see the actions of other states and how they should act in turn.
As Deal relates, the central lessons that the PRC draws from this period are: the necessity for acquiring and exploiting superior intelligence, the importance of concealing
81 Steve. Chan, China, the U.S., and the Power-Transition Theory a Critique, China, the US, and the Power-Transition Theory (London: Routledge, 2008), 121. 82 Chan, 121. 83 Chan, 122. 84 Pillsbury, The Hundred-Year Marathon: China’s Secret Strategy to Replace America as the Global Superpower. 20 one’s own “shape,” monitoring global trends, and selectively aligning with them.85 Pillsbury echoes these ideas with his nine tenants of PRC strategy:
(1) induce complacency to avoid alerting your opponent, (2) manipulate your opponent’s advisers, (3) be patient – for decades, or longer – to achieve victory, (4) steal your opponent’s ideas and technology for strategic purposes, (5) military might is not the critical factor for winning a long-term competition, (6) recognize that the hegemon will take extreme, even reckless action to retain its dominant position, (7) never lose sight of shi, (8) establish and employ metrics for measuring your status relative to other potential challengers, (9) and always be vigilant to avoid being encircled or deceived by others.86
These assessments are consistent with the language of PRC leadership as shown by the statement of Deng Xiaoping, paramount leader of the PRC from 1978–1989, when he said, “Observe calmly, secure our position; cope with affairs calmly; hide our capabilities, and bide our time; be good at maintaining a low profile; and never claim leadership.”87
With this mindset as the point of departure, modern observers have watched a massive economic growth in the PRC over the last three decades turn into, “…a ferocious outward trend of direct investment from China with uneven capacity and uncertain success in many parts of the world.”88 Since the beginning of Beijing’s “going out” policy at the turn of the 21st century, the PRC’s outbound foreign direct investment (FDI) has exploded to $174 billion per year in 2015, compared to the US’s $279 billion.89 An extension of the “going out” policy, the “One Belt One Road” or Belt Road Initiative (BRI), announced in 2013, serves as a primary vehicle for the PRC’s outbound foreign investment in
85 Deal, “China’s Approach to Strategy and Long Term Competition.” 86 Pillsbury, The Hundred-Year Marathon: China’s Secret Strategy to Replace America as the Global Superpower. 87 Allen S. Whiting, “Chinese Nationalism and Foreign Policy After Deng,” The China Quarterly 142, 295–316, 301, as mentioned in Jacqueline Newmyer, “The Revolution in Military Affairs with Chinese Characteristics,” The Journal of Strategic Studies, 33, (August 2010), 493–494. 88 Lee, The Specter of Global China. xi 89 Jamil Anderlini, “China to Become One of the World’s Biggest Overseas Investors by 2020,” Financial Times, June 25, 2015; OECD, “Foreign Direct Investment (FDI)—FDI Flows—OECD Data,” theOECD, accessed October 23, 2019, http://data.oecd.org/fdi/fdi-flows.htm. 21 infrastructure projects.90 This program has grown and expanded in the last five years to cover Asia, Africa, and parts of Europe. Under the umbrella of the BRI, the PRC has developed immense quantities of infrastructure in developing countries such as ports, highways, railways, and power generation all financed through China-led multilateral banks.91 Through these projects, the PRC has greatly sought to expand its influence in the infrastructure-receiving countries.
This economic investment serves a multitude of purposes for the PRC ranging from profitable foreign investment and lending to exporting labor and creating jobs. As noted by Lee in her discussion of a main aspect of the PRC’s infrastructure projects, the PRC’s concessional loans:
a concessional loan is a multipurpose tool of the Chinese government, executed through its policy banks, mostly the China EXIM Bank, for African projects. It is a means for China to (1) cultivate political influence through selection of recipients (countries and politicians), (2) create an investment outlet for China’s sizeable foreign reserve, and (3) open up new overseas markets for Chinese SOE contractors and the huge stockpiles of steel, glass, and machinery at home.92
To the benefits of the concessional loan, we can add the idea that economic investment allows the PRC access to the physical location of the country, an imperative of PRC strategy. As remarked by Pillsbury and Deal, the PRC’s fear of encirclement through physical or diplomatic means is a large driver in their global strategy, including the BRI and other foreign investment.93
While the fear of encirclement motivates the PRC’s actions, the U.S. sees a threat in these same advances. Within this perception of the Chinese threat, Yee argues five factors contibute to the Western powers’ views. The first factor was China’s quick
90 World Bank, “Belt and Road Initiative,” Text/HTML, World Bank, accessed August 27, 2018, http://www.worldbank.org/en/topic/regional-integration/brief/belt-and-road-initiative. 91 The State Council People’s Republic of China, “Full Text: The Belt and Road Initiative,” March 30, 2015, http://english.gov.cn/archive/publications/2015/03/30/content_281475080249035.htm. 92 Lee, The Specter of Global China. 54 93 Pillsbury, The Hundred-Year Marathon: China’s Secret Strategy to Replace America as the Global Superpower; Deal, “China’s Approach to Strategy and Long Term Competition.” 22 economic growth during the 1980s and 1990s, inciting fear in Western analysts, as they believed a rising powerful competitor would “quickly translate into increased military power.”94 The second factor was the PRC’s authoritarian socialist political system.95 The third factor is “the PRC’s increasing military capability and its impact on regional security.”96 The fourth factor is “the fear of political and economic collapse in the PRC, resulting in territorial fragmentation, civil war, and waves of refugees pouring into neighboring countries.”97 Lastly, the fifth factor is “rising Chinese nationalism, especially rising anti-American feelings.”98 Proponents of the Chinese threat assert that because China is new to great power competition with the west, it is not satisfied with the current architecture of geopolitics.99 Thus, China feels obligated to challenge the current geopolitical relationships by enacting “a policy of imperial expansionism,” with an objective to assert its influence not only regionally, but also globally.100 Organski theorizes that if a rising power continuously challenges the traditional power-holders of geopolitics and is successful, it will create a new international order, resulting in the transference of geopolitical influence between the old and new powers.101 However, this does not automatically mean the challenging newcomer will initiate war to gain power. Chan counters that historically a rising latecomer does not seek war against the incumbent hegemon, but instead, historically war has broken out because the latecomer was unable to prevent the hegemon from getting involved.102 These wars have been due to the breakdown of diplomacy and the escalation of threats, which initially involved the “protégé of one or the other side;” in this instance, one can look to Taiwan as a possible source of
94 Herbert S. Yee, China Threat Perceptions, Myths and Reality (London: Routledge, 2002), 2. 95 Yee, 3. 96 Yee, 4. 97 Yee, 5. 98 Yee, 5. 99 Yee, 6. 100 Yee, 7. 101 Organski, World Politics, 300. 102 Chan, China, the U.S., and the Power-Transition Theory a Critique, 122. 23 Sino-American conflict.103 Chan also argues another source of conflict arises with the current hegemon’s improper assessment and understanding of the perceived challenger. Mistaken beliefs and misperceptions about the other power can result in self-fulfilling prophecies. For example, if China is a status-quo power and the United States treats it as revisionist power, the United States’ actions could contribute to the PRC’s alienation from the international system.104
While the popular narrative argues that U.S. power is waning, the legitimacy of the United States as the leader of the current international order, with the authority and power to maintain the leadership, has continued to stand resolute.105 Crucially, any nation that seeks to upset the global balance-of-power must illustrate an alternative social and political order that is also willing to be adopted by other powerful states.106 Looking at China’s actions, the BRI and its projects could be this alternative. By utilizing the BRI, China looks to strengthen bilateral trade and integrate its economy with its neighbors, near and far, by assisting these countries in the development and modernization of their economic infrastructure and advance bilateral trade.107
H. GAP IN THE LITERATURE
While the literature about the PRC’s economic engagement is broad, we identify three lacunas in the body of work. First, the literature does not provide systemic answers about the internal dynamics of the states with which the PRC chooses to engage. Specifically, few have researched what internal economic or political factors in a given state drive the PRC’s decision to invest. Second, scholars have not addressed how local political conditions interact with PRC investments such as the level of corruption or
103 Chan, 122. 104 Chan, 124. 105 Doug Stokes, “Trump, American Hegemony and the Future of the Liberal International Order,” International Affairs 94, no. 1 (January 1, 2018): 134, https://doi.org/10.1093/ia/iix238. 106 Schweller and Pu, “After Unipolarity: China’s Visions of International Order in an Era of U.S. Decline,” 72. 107 Yu, “Motivation behind China’s ‘One Belt, One Road’ Initiatives and Establishment of the Asian Infrastructure Investment Bank,” 357. 24 internal stability and how it effects the PRC’s ability to accomplish its imperatives. Third, few researchers have focused on the effects between substantial Chinese investment into countries and its military engagements and activities with the PRC. Through the use of outward economic investment, specifically the BRI, the PRC can seek to fulfill its strategic interests. With this gap in research, we restate our research question: How does the PRC’s use of economic investment exploit pre-existing levels of corruption, fragility, and democracy to gain strategic concessions?
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26 III. QUANTITATIVE ANALYSIS OF PRC INVESTMENT
In this chapter, we will explore our quantitative analysis of the PRC’s investment across the globe. In order to access all of the factors that affect the PRC’s investment into certain states, we sought to achieve a greater understanding through the use of numerous open-source academic data sources. These data sources, collected from across diverse scholarly fields, provided our team with the necessary attributes to conduct a regression analysis on PRC investment. This chapter will be broken down into seven sections. First, we will examine and explain each data source, then hypotheses, methodology, variables, model construction, results, and finally analysis.
A. DATA SOURCES
This research relies on multiple datasets for analysis. The comprehensive list of existing data includes: The Chinese Global Investment Tracker (CGIT) from the American Enterprise Institute, the Corruption Perception Index (CPI) compiled by Transparency International, the Fragile States Index (FSI) from The Fund for Peace, the Polity IV Scale from the Center for Systemic Peace, the People’s Liberation Army (PLA) Diplomacy Database from researchers at the National Defense University, country debt to Gross Domestic Product (GDP) ratio from the International Monetary Fund (IMF), and location coordinates (latitude and longitude) of all country capitals throughout the world. These data are publicly available online. These datasets can be found at the following sites:
1. The Chinese Global Investment Tracker (CGIT) – http://www.aei.org/china-global-investment-tracker/
2. The Corruption Perception Index (CPI) – https://www.transparency.org/research/cpi/overview
3. The Fragile States Index (FSI) – http://fundforpeace.org/fsi/data/
4. The Polity IV Scale – https://www.systemicpeace.org/polityproject.html
27 5. The PLA Diplomacy Database – https://inss.ndu.edu/Media/News/Article/1249897/chinese-military- diplomacy-20032016-trends-and-implications/
6. Country’s Debt to Gross Domestic Product (GDP) Ratio, created by the International Monetary Fund (IMF)—(https://www.imf.org/en/data)
7. The World Bank’s World Development Indicators- (https://datacatalog.worldbank.org/dataset/world-development-indicators)
CHINESE GLOBAL INVESTMENT TRACKER
For the entirety of this research, our dependent variable remained the annual amount of Chinese investment in a given country. This data came from the CGIT, which tracks Chinese yearly investment globally from 2005 to 2018. While the data is comprehensive, there remain limits to what qualifies as an investment. First, investments must take place between a Chinese investor [Chinese Entity] and a company or corporation [Transaction Party] within a country outside of China. Second, the transactions between the Chinese Entity and the Transaction Party must have occurred between 2005 and 2018. Third, the U.S. dollar amount of investment must meet or exceed $100 million, and any amount of investment below this threshold does not warrant tracking on the CGIT, restricting myriad small investments throughout the world.108 Fourth, limits on this dataset result from the exclusion of certain investments depending on the location of the headquarters of Transaction Parties. For example, the firm Addax was purchased by a Chinese Entity for $7 billion and consisted of many properties and businesses which reside in Africa. However, the domicile of Addax is located in Switzerland, and the investment is labeled as “European.” Lastly, this dataset records the dollar amount of only committed levels of investment and not the actualized levels; this can skew the data, showing higher rates of investment in Chinese capital globally. Due to the lack of transparency and the myriad inconsistencies within the published Chinese government outward investment data,
108 “Chinese Global Investment Growth Pauses,” AEI, July 9, 2014, https://www.aei.org/publication/chinese-global-investment-growth-pauses/. 28 the CGIT dataset remains the most highly regarded in both academic and financial institutions for analysis and interpretation.
CORRUPTION PERCEPTION INDEX
The Corruption Perception Index (CPI) developed by Transparency International is an amalgamated-survey indicator that assesses the perceived public corruption within a nation.109 Transparency International defines corruption as “as the abuse of public office for private gain.”110 As the name suggests, this composite index score is based on the perceptions of both citizens and experts of countries throughout the world and their observation of corruption in a given state.111 Important to note, the CPI only addresses corruption in the public sector and does not consider private sector corruption. As of 2018, the CPI aggregated 13 different data sets from 12 institutions to develop the composite corruption score of 180 countries worldwide.112 Limits of the CPI are two-fold. First, the CPI is based on the subjective perception of corruption in a given state, and perception does not necessitate actual corruption.113 Second, the CPI does not analyze a country’s anti-corruption framework and how these structures affect the level of corruption in any given country. While there are limits to the CPI, the quality of rigorous standardization and transparency in data collection allows for the CPI to be an adequate dataset for this research.
109 Transparency International, “Corruption Perception Index,” https://www.transparency.org/cpi2018, n.d., https://www.transparency.org/cpi2018. 110 Anja Hülsewig, “Measuring Corruption: A Comparison between the Transparency International’s Corruption Perceptions Index and the World Bank’s Worldwide Governance Indicators,” Ifo DICE Report 7, no. 3 (2009): 44. 111 Hülsewig, 43. 112 Transparency International, “Corruption Perception Index.” 113 Hülsewig, “Measuring Corruption: A Comparison between the Transparency International’s Corruption Perceptions Index and the World Bank’s Worldwide Governance Indicators.” 29 FRAGILE STATES INDEX
The Fragile States Index (FSI) developed by the Fund for Peace attempts to measure the myriad quantitative and qualitative data of 178 countries.114 The Fund for Peace’s methodology for the FSI consists of three parts. Part one consists of “content analysis” or electronic scanning. The Fund for Peace uses a Boolean search method which scans open- source media and electronic articles associated with all 178 countries for the previous two years and attempts to compute the search queries into the states’ fragility.115 This part of the methodology is the most contentious as the Fund for Peace maintains the proprietary information of this method and does not publish this information, providing little transparency and no ability for outside researchers to replicate the results. Part two consists of aggregating quantitative data from different indices from international institutions such as the World Health Organization, UN Development Program, Transparency International, World Bank, and World Factbook.116 Part three consists of a qualitative review of nations and how they compare to parts one and two.117
POLITY IV
The Polity IV dataset attempts to codify the score of regime type in a given nation. This dataset scores each country from the years 1800 to 2018.118 The Polity Scale scores a country from fully autocratic (-10) to fully democratic (+10). The Polity IV remains one of the most well-regarded and academically rigorous indices in the world. The dataset scores six different components ranging from executive recruitment to political competition.119 However, it is important to note that the score is based on information only
114 Fund for Peace, “Fragile States Index Methodology,” https://fragilestatesindex.org/frequently- asked-questions/what-methodology-was-used-for-the-ratings/. 115 Fund for Peace. 116 Fund for Peace. 117 Fund for Peace. 118 Center for Systemic Peace, “Polity IV Project,” https://www.systemicpeace.org/polityproject.html. 119 Center for Systemic Peace. 30 including the institutions that fall within the authority of any given country. That is, separatist groups or ‘fragments’ of nations are not included under the score.120
PLA DIPLOMACY DATABASE
The PLA Diplomacy Database is based on researchers at the National Defense University, which attempts to codify the People’s Liberation Army (PLA) military to military exchanges with other nations from 2003 to 2016.121 These exchanges were categorized into three distinct categories: port calls, senior leader visits, and military exercises.122 This data heavily relied on open-source information on published visits, exercises, and port calls. These types of military exchanges are extensively published and planned meticulously by PRC representatives leaving very little functional or learning points to be discussed or accomplished. The researchers conclude that functional visits and educational exchanges are much more challenging to identify and were not codified in this data set, limiting the number of the tracked military to military exchanges.123
B. HYPOTHESES
Our hypotheses attempt to isolate variables present in countries throughout the world to determine what effects, if any, corruption, stability, democracy, and PLA military engagement have upon levels of investment. In other words, does a systematic relationship exist between our dependent variable, Chinese investment, and disparate independent variables such as CPI, FSI, Polity IV, and PLA engagement. With these variables in mind, we examined four hypotheses within this research:
1. If a country has a high level of corruption (low CPI Score), then we should expect higher levels of inbound Chinese investment
120 Center for Systemic Peace. 121 Kenneth W. Allen, “Chinese Military Diplomacy, 2003–2016: Trends and Implications,” vol. 11, China Strategic Perspectives (Washington. D.C: National Defense University Press, 2017), http://www.ssri- j.com/MediaReport/DocumentUS/INSSreportChinaPerspectives.pdf. 122 Allen. 123 Allen. 31 2. If a country has a stable government (low FSI score), then we should expect higher levels of Chinese investment.
3. If a country increases levels of military to military engagement with the PRC, then we should expect an increasing level of inbound Chinese investment.
4. If a country has a high level of democracy (Polity IV Scale), then we should expect lower levels of inbound Chinese investment.
C. METHODOLOGY
Each of these hypotheses serves to test for the existence of a relationship between a specific data indicator of corruption, stability, military engagement, and democracy versus Chinese investment. To conduct our analysis of these four hypotheses, we conducted an extensive quantitative study of the variables that are captured within each of these datasets. Generally, we used the program R to build a large dataset, then conducted a linear regression, or Ordinary Least Squares, to determine the degree to which each independent variables were associated with increases in the dependent variable.
UNIT OF ANALYSIS AND VARIABLES
The unit of analysis for this study was a country and year. In developing the database for our analysis, all of the data was cleaned and restructured into this format resulting in a single value for each variable in a given country-year.
a. DEPENDENT VARIABLE
• PRC’S Annual Investment: Throughout this report, the dependent variable remained the total quantity of PRC investment in a given country in a given year. Due to the heavy-tailed nature of this variable, we transformed this quantity using natural log (resulting in a logarithmic regression formula).
32 b. INDEPENDENT VARIABLES
• CPI Score: This variable is scored from 0–100 with the highest values being the least corrupt states and the lowest values being the most corrupt states. This data exists from the years 1998 to 2018 and required transformation from a 0.0-10.0 scale to 0–100 scale for the years 1998– 2011.
• FSI Score: This variable is scored from 0–100 with the highest values being the most fragile states (least stable) and the lowest values being the least fragile states (most stable). This data exists from 2006 to 2018.
• PLA Diplomacy Database: This variable counts the number of visits to the country by the PLA in a given year. This data exists from 1985 to 2018.
• Polity IV: This variable is scored -10 to 10 with the lowest values being the most autocratic states and the highest values being the most democratic states. This data exists from 1800 to 2018. c. CONTROL VARIABLES
• Gross Domestic Product (GDP) The purpose of this control variable was to control for the wealth of a given state and the size of the state’s economy. GDP controls for the fact that large economies such as the PRC invest heavily in other large economies such as the USA. This variable is drawn from the World Bank’s World Development Indicators database. Due to the heavy-tailed nature of this variable, we transformed this quantity using natural log.
• Debt to GDP Ratio: The purpose of this control variable is to control for the total amount of debt that each state has in a given year. The ratio of debt to GDP controls for the idea of “debt trap diplomacy” that is levied against the PRC. This variable was drawn from the IMF’s debt to GDP
33 database. Due to the heavy-tailed nature of this variable, we transformed this quantity using natural log.
• Distance to Beijing: The purpose of this control variable is to control for the closeness of a state to the PRC. This controls for the idea that the PRC is investing most heavily in its closest regional neighbors. This variable was drawn from a distance calculation from the latitude and longitude of a given country’s capital and the latitude and longitude of Beijing, the capital of the PRC.
• Previous Year Investment: The purpose of this control variable is to control for past investment in a state by the PRC. This controls for the idea that the PRC invests more where they have previously funded. Due to the heavy-tailed nature of this variable, we transformed this quantity using natural log.124
MODEL CONSTRUCTION
To conduct our analysis of the relationships between the variables, we constructed a number of linear regression models. This process was guided by seeking models that had a lower Akaike Information Criterion (AIC) score. As we added variables, we found the model became increasingly more accurate. Specifically, we used interaction terms to create a better model and, “expand [our] understanding of the relationships among the variables in the model and allow more hypotheses to be tested.”125 Interaction terms are useful because,
The presence of a significant interaction indicates that the effect of one predictor variable on the response variable is different at different values of
124 All variables that were log transformed, had a quantity of 1 added to avoid the undefined value of the log of zero. 125 Karen Grace-Martin, “Interpreting Interactions in Regression,” The Analysis Factor, January 19, 2009, https://www.theanalysisfactor.com/interpreting-interactions-in-regression/. 34 the other predictor variable. It is tested by adding a term to the model in which the two predictor variables are multiplied.126
Interaction terms were highly impactful in our study because it allowed us to dissect different levels of investment across a spectrum of wealth, democracy, and fragility.
Finally, we limited the use of interaction terms by allowing only single interactions between variables (e.g., CPI score: FSI score) rather than multiple interactions at once (e.g., CPI score: FSI score: GDP). In following the Principal of Marginality, if there are interacting variables, we also included those variables individually in the model. Through this process, we develop a model with the lowest AIC score compared to other models with the same dependent variable.
As shown in Table 1, the model with the best AIC score includes the above variables, along with interaction terms between CPI and FSI, Polity IV and FSI, CPI and debt, FSI and debt, PLA Visits and distance to Beijing, CPI and GDP, and GDP and the previous year’s level of investment.
After creating this model, we conducted a further longitudinal analysis by dividing the dataset into pre-2013 and post-2013 subsets. We selected this year because the PRC announced the beginning of the BRI in 2013. We sought to find if there were differing conditions before and after the start of the BRI.
126 Grace-Martin. 35 Table 1. Main Results
Dependent variable:
Chinese Annual Investment (All Years) (pre-2013) (post-2013)
CPI 0.117 0.137 -0.158 (0.286) (0.342) (0.529)
Polity2 -1.037*** -1.024*** -1.268*** (0.212) (0.262) (0.360)
FSI 0.535*** 0.565*** 0.413* (0.140) (0.173) (0.241)
PLA Visits 0.725** 0.673 0.527 (0.296) (0.420) (0.423)
Debt to GDP Ratio 12.550*** 13.085*** 10.833 (4.007) (4.920) (7.138)
Distance from Beijing 0.023** 0.020 0.025 (0.010) (0.013) (0.018)
GDP 0.953** 1.050** 0.544 (0.415) (0.491) (0.802)
Last Year’s Investment -0.523 -0.651 -0.473 (0.366) (0.455) (0.678)
CPI:FSI -0.001 -0.001 -0.002 (0.001) (0.001) (0.001)
Polity2:FSI 0.011*** 0.011*** 0.015*** (0.003) (0.003) (0.005)
CPI:Debt to GDP Ratio -0.111*** -0.126** -0.103 (0.040) (0.049) (0.072)
FSI:Debt to GDP Ratio -0.117*** -0.124*** -0.087 (0.036) (0.044) (0.062)
PLA Visits:Distance from Beijing -0.006 -0.007 -0.003 (0.004) (0.005) (0.005)
CPI:GDP 0.017* 0.018 0.027 (0.010) (0.012) (0.018)
GDP:Last Year’s Investment 0.030** 0.033* 0.029 (0.015) (0.018) (0.027)
Constant -72.488*** -76.525*** -53.758 (18.456) (22.115) (34.455)
Observations 1,207 843 364 Log Likelihood -4,347.079 -3,049.499 -1,282.895 Akaike Inf. Crit. 8,726.157 6,130.997 2,597.791
Note: *p**p***p<0.01
36 RESULTS
Results reported in Table 1 show the impact of all variables on the dependent variable. Some of the base terms have limited or no statistical significance; however, these same variables may become statistically significant when they interact with each other. For example, we found no statistical significance for corruption (as measured by CPI score). However, when this variable interacted with the ratio of debt to GDP, the effects were significant. In other words, the effect of corruption varies based on its interaction with other variables. We will analyze these results as they apply to each hypothesis and remark on other significant findings.
• HYPOTHESIS 1: If a country has a high level of corruption (low CPI Score), then we should expect higher levels of inbound Chinese investment.
(1) FINDINGS
The results of our model concerning corruption are different based on two key factors. The CPI score alone was not statistically significant; however, when the CPI score interacted with debt and, separately, with GDP, it became statistically significant. The first statistically significant results dealing with the CPI score interacting with debt created divergent results based on the level of debt in the country. More specifically, for countries with high levels of debt and high levels of perceived corruption resulted in a high level of PRC investment. For countries with low levels of debt and low levels of perceived corruption also resulted in a high level of investment. These results are captured in Figure 1. Figure 1 graphically depicts the interaction of CPI score, debt to GDP ratio, and the expected level of PRC investment in countries globally. The CPI score [independent variable] is depicted along the x-axis (lower score meaning more corrupt) and the dollar amount of PRC investment [dependent variable] is depicted along the y-axis. Lastly, the level of debt (debt to GDP ratio) [independent variable] of countries is faceted ranging from the lowest debt of the sampled countries, low debt (representing the mean of the lower tercile), the median debt, high debt (representing the mean of the upper tercile) and the highest debt of the sampled countries.
37 We observe that the slope of the plot changes from positive to negative as debt increases. At the lowest debt levels, there is a positive relationship between CPI and investment meaning that countries with lower corruption (high CPI score) receive more investment. We see this relationship shift as debt levels increase. At the highest debt levels, there is a negative relationship between CPI and investment meaning that countries with higher corruption (low CPI score) receive more investment.
Figure 1. Corruption Perception Index and debt to GDP ratio
The second statistically significant result occurred when corruption interacted with GDP, the results were divergent based on the wealth of the country. More specifically, for wealthier countries, a lower level of corruption resulted in a higher level of investment. Alternatively, for poor countries, a corruption had little impact on investment. These results are captured in Figure 2. Figure 2 graphically depicts the interaction of CPI score and GDP, 38 and their effects on the amount of PRC investment in countries globally. The CPI score [independent variable] is depicted along the x-axis (lower score meaning more corrupt) and the dollar amount of PRC investment [dependent variable] is depicted along the y-axis. Lastly, the level of wealth (GDP) [independent variable] of countries is faceted ranging from the lowest GDP of the sampled countries, low GDP (representing the mean of the lower tercile)), the median GDP, high GDP (representing the mean of the upper tercile) and the highest GDP of the sampled countries.
Figure 2. Corruption Perception Index and GDP’s impact on investment
We observe that the slope of the plot changes as GDP increases. At the lowest levels of GDP, the slope of the plot is fairly flat, indicating no effect of corruption on investment. As GDP increases, we see the slope shift to positive. At the highest level of GDP, we see
39 a positive relationship between CPI score and investment. This indicates that in wealthy states low corruption (higher CPI score) correlates to higher investment.
(2) ANALYSIS
These findings partially support Hypothesis 1. We find that the relationship between corruption and investment is dependent on the levels of debt and GDP (wealth) in a given country. Further qualitative study is required to validate these results, but we can postulate that the PRC’s selection criterion for investment may be based on the existing wealth and debt in a given country. For wealthier nations and those with low debt, the PRC is not willing to risk investment in corrupt economies; conversely, in nations with high debt, the PRC will invest in corrupt economies. This may indicate that the PRC see an opportunity in indebted states to gain a large degree of leverage against the state to garner strategic concessions.
• HYPOTHESIS 2: If a country has a stable government (low FSI score), then we should expect higher levels of Chinese investment.
(1) FINDINGS
The results from analyzing stability as an individual variable were statistically significant; however, they were correlated in the opposite direction of our hypothesis. Overall, our model indicates that the PRC invests more in countries that are less stable. These results are captured in Figure 3. The figure graphically depicts the relationship between the FSI score and the amount of PRC investment in countries globally. The FSI score [independent variable] is depicted along the x-axis (lower score meaning less fragile) and the dollar amount of PRC investment [dependent variable] is depicted along the y-axis. As shown in Figure 3, we observe that the slope of the plot is generally positive indicating a positive relationship between FSI score and investment. This means that higher the fragility (high FSI score) the greater the investment.
40
Figure 3. Fragility’s impact on investment
In addition to the significance of stability as an individual variable, our results showed statistical significance when the FSI score interacted with both democracy (Polity IV score) and level of debt. The first interaction, when the FSI score interacts with democracy, as measured by the Polity IV score, resulted in a divergent effect. More specifically, in highly democratic countries (high Polity IV score), low levels of stability (high FSI score) resulted in high levels of investment. Conversely, in highly autocratic countries (low Polity IV score), the effects were more moderate and there exists a slightly negative relationship between FSI score and investment. These results are captured in Figure 4. The figure graphically depicts the interaction of FSI score and democracy, and their relationship to the amount of PRC investment in countries globally. The FSI [independent variable] score is depicted along the x-axis (lower scores mean less fragile) and the dollar amount of PRC investment [dependent variable] is depicted along the y-axis. Lastly, the level of democracy (Polity IV score) [independent variable] of countries is 41 faceted ranging from the lowest Polity score of the sampled countries, semi-autocracy (representing the halfway point between a neutral state and autocracy)), neutral, semi democracy (representing the halfway point between a neutral state and democracy) and the highest polity score of the sampled countries. As shown in Figure 4, these results demonstrate that the PRC will invest moderately more in autocratic, stable countries and significantly more in democratic, unstable countries.
Figure 4. Fragility and democracy’s impact on investment
The interaction between levels of debt and the FSI score also created a divergent effect based on the level of debt in the country. For countries with higher levels of debt, a higher level of stability resulted in a moderately higher level of investment. For countries with lower levels of debt, a lower level of stability resulted in a significantly higher level of investment. These results are captured in Figure 5. The figure graphically depicts the 42 interaction between FSI score and debt, and their effect on the amount of PRC investment in countries globally. The FSI score [independent variable] is depicted along the x-axis (lower scores mean less fragile) and the dollar amount of PRC investment [dependent variable] is depicted along the y-axis. Lastly, the level of debt (debt to GDP ratio) [independent variable] of countries is faceted ranging from the lowest debt of the sampled countries, low debt (representing the mean of the lower tercile)), the median debt, high debt (representing the mean of the upper tercile) and the highest debt of the sampled countries.
Figure 5. Fragility and debt’s impact on investment
43 (2) ANALYSIS
These findings partially support Hypothesis 2; however, we find divergent relationships which deviate based on the levels of democracy and debt in a given country. Overall, the PRC’s investment is going to the least stable governments. However, a closer look indicates that highly democratic, highly fragile, un-indebted states tend to receive high levels of investment. Additionally, highly autocratic, highly stable, highly indebted states receive slightly higher investment. These results paint a complex picture, but we again observe a bifurcated approach in the PRC’s investments. The PRC chooses to invest in different types of states in different ways. The criterion of stability is only fully understood when juxtaposed with democracy and debt. With regard to Hypothesis 2, we can postulate that the PRC may see fragility as an opportunity to gain high leverage over another state to gain strategic concessions after investing.
• HYPOTHESIS 3: If a country experiences higher levels of military to military engagement with the PRC, then we should expect an increased level of inbound Chinese investment.
(1) FINDINGS
The results from analyzing the amount of PLA military engagement with a given country were found to be statistically significant as an individual variable. Our model indicates that the PRC invests more in countries that receive more PLA visits. These results are captured in Figure 6. The figure graphically depicts the relationship between the number of PLA visits to a given country and the amount of PRC investment in that country. The count of PLA visits [independent variable] is depicted along the x-axis and the dollar amount of PRC investment [dependent variable] is depicted along the y-axis. As shown in Figure 6, these results demonstrate that the PRC will invest a more considerable amount into countries that receive more PLA visits.
44
Figure 6. PLA visits’ impact on investment
(2) ANALYSIS
These findings support Hypothesis 3. The PRC is sending the largest volume of PLA visits and exchanges to countries that it has invested in. This finding is in line with our expectation that the PRC engages with the states using multiple elements of national power in order to gain influence or strategic concessions. This military engagement with other states may assist in creating conditions for the PRC to gain strategic concessions.
• HYPOTHESIS 4: If a country has a high level of democracy (Polity IV scale), then we should expect lower levels of inbound Chinese investment.
(1) FINDINGS
The results from analyzing democracy as an individual variable show that there is a statistically significant negative association between democracy (Polity IV score) and the 45 amount the PRC invests. Figure 7 graphically depicts the effects of democracy on the amount of PRC investment in countries globally. Within Figure 7, the Polity2 score [independent variable] is depicted along the x-axis (lower score meaning more autocratic) and the dollar amount of PRC investment [dependent variable] is depicted along the y-axis. As shown in Figure 7, the PRC will invest a more considerable amount into countries that are highly autocratic (low Polity IV score). Conversely, the PRC will invest the least in highly democratic (high Polity IV score) countries.
Figure 7. Democracy’s impact on investment
(2) ANALYSIS
These results support Hypothesis 4. The PRC is investing the most in highly autocratic states. Moreover, these findings speak to the idea that the PRC supports states that govern in a similar, autocratic, manner as the CCP. 46 Further qualitative study is required to validate these results, but we can postulate that the PRC’s selection criteria for investment may involve finding states that have similar systems of government. This similarity in the type of governance allows for the PRC to influence the political elites within autocratic regimes to gain strategic concessions. This would likely be much easier than shaping an entire population in a highly democratic state to achieve similar concessions.
OVERALL ANALYSIS
Overall, the model produced paints a complex picture of how the PRC selects countries for investment. Comparing all of the findings from the four hypotheses that the model produced, we find that some results are more substantive than others. Specific variables and interaction terms seem to have a great impact on the level of investment observed. For example, the impact of the interaction between CPI and debt was more impactful than the interaction between CPI and GDP as can be seen in the observed plot slope changes across different levels of debt. As a result, not all of the statistically significant variables and interaction terms represent substantively significant criteria for investment.
However, the model tells us, with high levels of statistical significance, that countries with certain criteria will likely receive lower or higher investment from the PRC. Table 2 outlines those characteristics that are distilled from our model. As previously mentioned in our introduction to this research, we see two general trends emerging in how the PRC is engaging with the world and this evidence supports that claim. With one approach, the PRC engages with uncorrupt, un-indebted, wealthy, democratic countries within the bounds of international norms. These countries we characterize as “low leverage” because the PRC does not gain any advantage over other states by virtue of the existing internal conditions of the state. Moreover, the PRC seeks to maintain its international reputation and benefit from the existing framework of international institutions.
Alternatively, the PRC engages with vulnerable states in a different fashion. In countries that are corrupt, over-leveraged with debt, poor, and autocratic the PRC uses a
47 different engagement strategy. We characterize these states as “high leverage” because it appears that the PRC can gain advantage through recognition of the internal conditions of these states. This second approach appears to divert from what is in keeping with fair practice of international investment and execution, and instead acts through practices which are closer to those of predatory loan sharks. Thus, the PRC can gain advantage by engaging with these types of states to meet its strategic interests.
The PRCs “loan shark” dealings are found in states that are more corrupt and have higher debt, or in states that are fragile. For example, we can look at how corruption, debt and characteristics that lead to fragility impact a states’ sovereign credit rating. A sovereign credit rating is a rating given to sovereign governments, and “are assessments of the relative likelihood a borrower will default on its obligations.”127 Like consumer credit ratings, those with low risk generally have better credit, and are more likely to receive an investment. Likewise, those with high risk, generally have worse credit, and will have a hard time receiving an investment.
Table 2. Criteria Check List
Criteria Yes – Meets Criteria No – Does Not Meet Criteria 1. Higher Corruption and Higher Debt-GDP Ratio 2. Higher Fragility
3. Higher Autocracy
A report by Ugo Panizza at the Inter-American Development Bank conducted a study to see what factors matter in establishing a sovereign credit rating. Interestingly, they used the same metrics of CPI, GDP, and debt to GDP ratio to run a regression to gauge
127 Richard Cantor and Frank Packer, “Sovereign Credit Ratings,” Current Issues in Economics and Finance 1, no. 3 (June 1995): 1. 48 corruption’s impact on a sovereign credit rating. Panizza’s study found was that there is a statistically significant correlation between corruption, factors that lead to fragility, and a sovereign credit rating.128 Their data shows that states that are more corrupt, have higher debt, or have indicators that lead to fragility (e.g., inflation rate, debt), are likely to have poor sovereign credit ratings.
Poor sovereign credit ratings have a direct impact on the amount of FDI a country receives. A study by Greg Violante finds that the relationship between the credit rating of a country and FDI, is significant, and has a positive relations ship with the amount of FDI inflow to one country. So much so that the estimated value of a “one-point credit rating upgrade increases FDI by 1.3 billion dollars.” 129
In addition to investing higher amounts of FDI in countries with higher sovereign credit ratings, China also chooses to invest into countries that have high corruption, high debt, and factors that lead to fragility, and thus have low sovereign credit ratings. Acting in such a manner diverts from what is expected to be in keeping with deals that are fair in practice and execution, and instead acts through practices, which are closer to those of predatory loan sharks. This allows the PRC to take advantage of these countries, so it can meet its strategic interests.
Additionally, there is reason to believe that one of China’s strategic interests is to promote other autocracies, and undermine democracies. For example, Bader, Grävingholt, and Kästner’s research states that China has “undertaken active foreign policy measures to directly or indirectly promote authoritarian tendencies in their regions.”130 They cite examples by noting that China has supported non-democratic forces in Cambodia, and
128 Ugo Panizza, “The Use of Corruption Indicators in Sovereign Ratings” (Inter-American Development Bank, October 2017).; The details of their regression amongst the three leading credit rating agencies is found in Table 1. 129 Greg Violante, “Do Credit Ratings Matter? An Examination of the Relationship Between Sovereign Ratings and Capital Flows Pre and Post Financial Crisis,” Economics Department Student Scholarship 1 (2016): 12–13, https://crossworks.holycross.edu/econ_stu_scholarship/1/?utm_source=crossworks.holycross.edu%2Fecon _stu_scholarship%2F1&utm_medium=PDF&utm_campaign=PDFCoverPages. 130 Julia Bader, Jörn Grävingholt, and Antje Kästner, “Would Autocracies Promote Autocracy? A Political Economy Perspective on Regime-Type Export in Regional Neighbourhoods,” Contemporary Politics 16, no. 1 (2010): 81–100. 49 supported incumbent autocratic leaders “in their attempt to stabilize the country, thus contributing to the consolidation of authoritarian rule.”131
Our research is consistent with these findings, as we found that the PRC is more likely to invest into more autocratic counties. Also, we have found that the PRC is willing to invest more into very fragile democracies, further reinforcing Bader, Grävingholt, and Kästner’s claim that China will try to undermine democracies, possibly by making bad deals with those democracies, and further de-legitimizing democracy as a viable government.132
For ease of understanding and maximum utility, we combined the results of our quantitative assessment, and culled three criteria that serve as a checklist for the likelihood of investment by the PRC with the goal of gaining strategic concessions (see Table 2).
This paints a compelling picture of how the PRC wields the economic instrument of power, as quantified by FDI. We will conduct further analysis of these findings to determine where qualitative cases match the quantitative analysis. Where these quantitative and qualitative overlaps exist, we must search for the existence of strategic concessions being granted to the PRC by the state. At the confluence of these factors, we may gain insight into how the PRC selects states for investment, and what the U.S. can do to influence this phenomenon. In the following chapters, we will explore several case studies that will further illuminate this topic.
131 Bader, Grävingholt, and Kästner. 132 Bader, Grävingholt, and Kästner. 50 IV. CASE STUDIES BACKGROUND
In order to further elucidate the findings of our quantitative study of the PRC’s global investment, we sought to find case studies within the developing world that could highlight examples of differing levels of investment, and differing levels of strategic concessions. Moreover, we sought to determine if they met the criteria we developed in Chapter III. By examining the qualitative factors at play in these countries, we can further understand how and why the PRC invests their funds abroad. Furthermore, we can ascertain whether or not the PRC is gaining strategic concessions from the states that also meet our criteria identified in Chapter III. At the intersection of these two areas, we can build an argument for the efficacy of our criteria in determining high and low leverage countries.
As previously defined, strategic concessions are materials or actions that are granted by a country to another country to satisfy the receiving state’s national policy objectives, such as: access to resources, access to markets, and access to strategic physical locations. These concessions exist along a spectrum, but a key distinguishing factor for a strategic concession, beyond the above definition, is the recognition of granting an edge to another state. By granting a strategic concession, the granting state gives the receiving state a competitive advantage over other states.
In order to delimit our analysis to pertinent regions of the world where we believe that these factors hold the greatest effect, we opted to draw our case studies from Africa and Asia. These regions have highly variable levels of PRC investment and highly variable levels of each of the independent variables: corruption, fragility, PLA diplomacy, democracy, debt, and GDP. Additionally, these regions are critical venues for competition between the United States and the PRC.
In order to further clarify the granting of strategic concessions to the PRC, we selected two cases that display archetypical examples of strategic concessions—Djibouti and Sri Lanka. The strategic concessions granted by Djibouti and Sri Lanka to the PRC represent the “high water mark” or most extreme instances of this phenomena. Based off of our observations in these two cases, we will examine several other cases in which the
51 country granted lesser strategic concessions along a spectrum—Sudan, Botswana, South Korea, and Indonesia. We will focus on the qualitative aspects of these cases throughout this portion of the study by scrutinizing the presence or absence of strategic concession; however, at the outset of each case we will briefly highlight how our three criteria apply and the appropriate data points regarding the internal factors of the case. Our assessment of these criteria, based on qualitative factors, combined with the quantitative data points will be the basis for determining whether a state meets the criteria on the checklist. To this end and in an effort to provide the most relevant context for each case study, we comparatively ranked the independent and dependent variables against its neighbor countries in the region rather than the entire globe. We will provide the averages for these variables during the period of 2005 to 2016 where the data was most robust.
Through this method of examination, we test our criteria for investment and determine whether they can be used as a tool for decision makers. With this in mind, we will first examine the cases of Djibouti and Sri Lanka, then move on to Sudan, Botswana, South Korea, and Indonesia.
52 V. ARCHETYPICAL CASE STUDIES
A. DJIBOUTI
Table 3. Djibouti Criteria
Criteria Yes – Meets Criteria No – Does Not Meet Criteria 1. Higher Corruption and X Higher Debt-GDP Ratio 2. Higher Fragility X
3. Higher Autocracy X
PERTINENT DATA POINTS
• PRC Investment: $191 million /year (26/41 highest Chinese FDI into African states) • Corruption: 32/100 (27/41 most corrupt African states) • Debt to GDP Ratio: 49 (17/41 highest indebted African states) • Fragility: 83/100 (25/41 most fragile African states) • Democracy/Autocracy: 2.67 (21/41 most democratic African states)
CASE STUDY DISCUSSION
Djibouti is a small east African state that sits astride the Bab-el-Mandeb Strait, a strategic location at the southern end of the Gulf of Aden. Approximately 12.5-20% of the world’s trade passes through this chokepoint annually, making this position of critical economic and military importance.133 In 1977, Djibouti declared its independence from France; shortly thereafter, the PRC established official diplomatic ties with the nation on January 8, 1979. The relationship began as a series of economic partnerships to close the
133 Monica Wang, “China’s Strategy in Djibouti: Mixing Commercial and Military Interests,” Council on Foreign Relations, accessed August 21, 2018, https://www.cfr.org/blog/chinas-strategy-djibouti-mixing- commercial-and-military-interests. 53 infrastructure gap in Djibouti.134 Due to its strategic location, low population of less than one million, and its lack of natural resources, Djibouti has sought to leverage the desire of foreign powers to project power into east Africa and the Middle East. Since 1999, President Ismail Omar Guelleh has held power in Djibouti with a fairly autocratic government predicated on bringing in foreign investment for the nation. Guelleh has succeeded in providing a large volume of foreign investment through lease of tenant locations inside Djibouti. A number of countries including the United States have military facilities in Djibouti. Most recently, on August 1, 2017, the PRC made their presence permanent by officially opening a military facility in western Djibouti, the first People’s Liberation Army (PLA) base on foreign soil.135 The establishment of this facility represents a strategic concession from the government of Djibouti to the PRC. In order to understand this concession and the relationship of Djibouti and the PRC, we will explore the different facets of their engagement militarily, economically, and diplomatically. Since 2008, the PRC has been involved militarily in the region, participating in anti-piracy activities around the Horn of Africa, throughout the Gulf of Aden, and in the Red Sea.136 These activities were bolstered with the establishment of the PLA facility in Djibouti. The PRC consistently downplays the military facility as a logistics and resupply site which is not used to project power; however, the site is capable of housing up to 10,000 personnel.137 This base is significant because it provides the PLA direct access to the Red Sea through the Doralah Port and it allows them to further project their power in the region through naval resupply.138 The PRC’s economic investment in Djibouti is the foundation of their growing influence in all sectors. Since the outset of the PRC and Djibouti’s economic ties, the PRC
134 Global Security, “Djibouti—China Relations,” accessed August 23, 2018, https://www.globalsecurity.org/military/world/djibouti/forrel-prc.htm. 135 Jeffrey Becker and Erica Downs, “China’s Djibouti Military Base the First of Many,” East Asia Forum (blog), June 27, 2018, http://www.eastasiaforum.org/2018/06/27/chinas-djibouti-military-base-the- first-of-many/. 136 Becker and Downs. 137 Becker and Downs. 138 Becker and Downs. 54 has sought to capitalize on the location of Djibouti, adjacent to one of the world’s busiest shipping lanes. Thus, a critical piece of economic infrastructure in Djibouti is the Doraleh Multi-Purpose Port, a project constructed under the BRI. This port is a joint venture with the China Merchant Group (CMG), a PRC SOE.139 Completed in 2017, this port was operated by the contracted corporation DP World, based in Dubai, for almost one year. However, in February 2018, Djibouti, nationalized the port, canceled its contract with DP World, and gave the contract for operations to Pacific International Lines, a Singapore- based subsidiary of CMG.140 In addition to this port, the PRC has four large infrastructure projects that it has developed in Djibouti. First, the Ethiopian-Djibouti electric railway, completed in 2016, is the first and only electric railway in Africa and is valued at $4B USD. The railway, a part of the BRI, was 70% financed by the Export Import Bank of China (EXIM), and constructed by the China Railway Group and China Civil Engineering Construction.141 More than 50% of the personnel that operate this railway are PRC immigrants and employed by China Railway Group. Second, a water pipeline funded by the Import-Export Bank of China, valued at $300M, transports drinking water from Ethiopia to Djibouti.142 Third, on July 5, 2018, “Djibouti opened the first phase of the Djibouti International Free Trade Zone (DIFTZ), a $3.5 billion project that spans an area of 4,800 hectares.”143 Within the DIFTZ, there are multiple areas zoned for different purposes including a $370 million pilot zone that consists of, 240-hectares, “four industrial clusters which will focus on trade and logistics, export processing, business and financial support services, as well as
139 Wang, “China’s Strategy in Djibouti.” 140 Abdi Latif Dahir, “Thanks to China, Africa’s Largest Free Trade Zone Has Launched in Djibouti,” Quartz Africa, accessed August 21, 2018, https://qz.com/africa/1323666/china-and-djibouti-have-launched- africas-biggest-free-trade-zone/. 141 BBC, “Ethiopia-Djibouti Electric Rail Opens,” BBC News, October 5, 2016, sec. Africa, https://www.bbc.co.uk/news/world-africa-37562177. 142 Wang, “China’s Strategy in Djibouti.” 143 Dahir, “Thanks to China, Africa’s Largest Free Trade Zone Has Launched in Djibouti.” 55 manufacturing and duty-free merchandise retail.”144 Fourth, the Djibouti International airport located 25km south of the capital was sponsored by the PRC.145
The PRC has coupled its economic investment with a concerted effort to influence the image of the PRC in Djibouti. Using soft power investment and a pro-PRC narrative, the PRC has sought to build on economic success through the use of information. In Djibouti, this is characterized in two ways: (1) PRC investment in Confucius Institutes and (2) “gift” projects that provide a tangible physical reminder of the PRC’s good will. These methods seek to demonstrate that the PRC’s investment in Djibouti is in good faith and that they have the best interests of the people in mind. Moreover, they are a means for the PRC and the Djiboutian government to control the narrative in a positive way.
Confucius Institutes are Chinese language and cultural education centers sponsored by the PRC. They are funded through the Chinese Communist Party (CCP) affiliated company Hanban. Though they are advertised as benign educational entities, many of their hiring practices and approved topics of discussion have called their true purpose into question. A recent report from the National Association of Scholars (NAS) has recommended that universities in the U.S. close their Confucius Institutes because, “Confucius Institutes permit an agency of a foreign government to have access to university courses, and on principle that is a university function.”146 Djibouti has a Confucius Institute in Djibouti City, one of the only language education centers in the country.147
Gift projects provide the people of Djibouti with an everyday reminder of the PRC’s good will toward their country. The PRC uses highly visible projects like sports stadiums as a way to positively influence their image to the general public. Specifically, the PRC
144 Dahir. 145 Felipe Cruvinel Diplomat The, “China’s African Knot,” The Diplomat, accessed August 23, 2018, https://thediplomat.com/2017/08/chinas-african-knot/. 146 Elizabeth Redden, “Report on Confucius Institutes Finds No Smoking Guns, but Enough Concerns to Recommend Closure,” Inside Higher Ed, April 26, 2017, https://www.insidehighered.com/news/2017/04/26/report-confucius-institutes-finds-no-smoking-guns- enough-concerns-recommend-closure. 147 John Braude and Tyler Jiang, “Djibouti Is Jumping,” Foreign Policy Research Institute, accessed August 23, 2018, https://www.fpri.org/article/2016/03/djibouti-is-jumping/. 56 has built three major gift projects in Djibouti including: a large conference center known as the “People’s Palace,” the national sports stadium, and a modern hospital all located in the capital, Djibouti City.148
Based on these economic and informational ties, the PRC has built a strong diplomatic relationship with the current regime in Djibouti. President Guelleh has maintained his power based on the influx of foreign investment and infrastructure.149 Moreover, though the Polity IV score of Djibouti classifies the state as a lower level democracy, the reality is that Guelleh and his political party maintain a stranglehold on power in the state.150 There are few checks on executive power and the legislature is largely considered a “rubber stamping” body.151 Political opponents claim that the PRC’s largesse has cemented Guelleh’s position. They claim that the PRC has established a relationship with the Guelleh regime—not the country.152 This regime-based relationship allows the PRC to exert greater influence over the internal politics and foreign policy of Djibouti. Already, the PRC has extracted diplomatic concessions from its African ally by forcing Djibouti to cut ties with Taiwan.153
Recognizing the importance of personal relationship cultivation, in November 2017, Guelleh was welcomed in Beijing for a state visit in order to usher in a “strategic partnership” with PRC President Xi Jinping.154 This diplomatic approach allows the PRC to achieve higher levels of investment and to pull Djibouti deeper into its debt, creating a
148 Global Security, “Djibouti—China Relations.” 149 “Djibouti Risks Dependence on Chinese Largesse,” The Economist, July 19, 2018, https://www.economist.com/middle-east-and-africa/2018/07/19/djibouti-risks-dependence-on-chinese- largesse. 150 M Marshall and K Jaggers, “Polity IV Country Report 2010: Djibouti,” Center for Systemic Peace, 2010, 3. 151 Marshall and Jaggers. 152 “Djibouti Risks Dependence on Chinese Largesse.” 153 Al Jazeera, “China’s Xi Welcomed in Senegal at Start of Africa Trip,” Al Jazeera, July 21, 2018, https://www.aljazeera.com/news/2018/07/china-president-xi-welcomed-senegal-start-africa-trip- 180721191038977.html. 154 Ben Blanchard, “China Grants Economic Aid to Djibouti, Site of Overseas Military Base | Reuters,” accessed August 23, 2018, https://www.reuters.com/article/us-china-djibouti/china-grants- economic-aid-to-djibouti-site-of-overseas-military-base-idUSKBN1DN126. 57 debtor-state relationship. In 2018, Djibouti was projected to take on 88% of the country’s GDP ($1.72B) in debt, with the lion’s share belonging to PRC155 Djibouti has almost no natural resources and a population of less than 1 million people. These circumstances have put them in a precarious position with regard to GDP versus national debt.
As we view the sum total of internal and external factors at play in Djibouti, we can see a comprehensive engagement strategy by the PRC. With the strategic location that Djibouti occupies and the internal factors that exist within the state, the PRC has seized an opportunity to gain several strategic concessions: a permanent military facility, operations of a major port, numerous infrastructure projects with associated loans, and cessation of ties with Taiwan. Furthermore, when we use the qualitative lens to add color to the quantitative data used to develop our criteria, we find Djibouti meets all three of our criteria to be a high leverage state.
B. SRI LANKA
Table 4. Sri Lanka Criteria
Criteria Yes – Meets Criteria No – Does Not Meet Criteria 1. Higher Corruption and X Higher Debt-GDP Ratio 2. Higher Fragility X
3. Higher Autocracy X
PERTINENT DATA POINTS
• PRC Investment: $1.12 billion/year (13/36 highest Chinese FDI into Asian states) • Corruption: 34.3 (21/36 most corrupt Asian states) • Debt to GDP Ratio: 80.974 (3/36 highest indebted Asian states)
155 Amy Cheng, “Will Djibouti Become Latest Country to Fall Into China’s Debt Trap?,” Foreign Policy (blog), accessed August 21, 2018, https://foreignpolicy.com/2018/07/31/will-djibouti-become-latest- country-to-fall-into-chinas-debt-trap/. 58 • Fragility: 93.5 (6/36 most fragile Asian states) • Democracy/Autocracy: 4.4 (14/36 most democratic Asian states)
CASE STUDY DISCUSSION
Strategically located south of India, Sri Lanka finds itself near the major Indian Ocean sea-lanes.156 Sri Lanka became an independent nation in 1972 and currently has a population of approximately 22.5 million people.157 While a presidential republic, the country’s history is marked with nearly thirty years of civil war caused by tensions between the government and an internal resistance force, the Liberation Tigers of Tamil Eelam (LTTE).158 The LTTE was finally defeated in 2009.159
Sri Lanka established diplomatic ties with China in 1957, as Sri Lanka was one of the first South Asian nations to recognize Mao’s People’s Republic of China as the legitimate government of China. Through the latter half of the 20th century, China and Sri Lanka agreed to multiple trade pacts expanding trade and economic relations between the two countries.160 This close relationship with Beijing greatly assisted the Sri Lankan government in defeating the threat of the LTTE. For example, following the United States withdrawal of military funding in 2007, China capitalized and expanded its presence in Sri Lanka by providing military and diplomatic support.161 China was also able to block proposed sanctions against Sri Lanka over human rights abuses within the United Nations.162 However, this advancement in diplomatic relations between the two nations established the foundation for China to expand its presence and influence in Southern Asia.
156 “South Asia :: Sri Lanka—The World Factbook—Central Intelligence Agency,” accessed November 4, 2019, https://www.cia.gov/library/publications/the-world-factbook/geos/ce.html. 157 “South Asia :: Sri Lanka—The World Factbook—Central Intelligence Agency.” 158 “South Asia :: Sri Lanka—The World Factbook—Central Intelligence Agency.” 159 “South Asia :: Sri Lanka—The World Factbook—Central Intelligence Agency.” 160 T.K. Premadasa, “A Glimpse of Trade between Sri Lanka and China,” Sri Lanka Guardian, October 1, 2009, http://www.srilankaguardian.org/2009/10/glimpse-of-trade-between-sri-lanka-and.html. 161 Panos Mourdoukoutas, “China Is Doing The Same Things To Sri Lanka That Great Britain Did To China After The Opium Wars,” Forbes, January 28, 2018, https://www.forbes.com/sites/panosmourdoukoutas/2018/06/28/china-is-doing-the-same-things-to-sri- lanka-great-britain-did-to-china-after-the-opium-wars/. 162 Abi-Habib, “How China Got Sri Lanka to Cough Up a Port.” 59 Following the defeat of the LTTE, Sri Lankan President Mahinda Rajapaksa was looking for a political and economic victory by rejuvenating one of the poorest regions, which was also the region of his main political base and his hometown. With the country located along a busy shipping route, President Rajapaksa wanted to capitalize on the potential of attracting a portion of the 75,000 ships navigating around the south of Sri Lanka each year to use Hambantota as a port.163 While the country already had a large deep-sea port in Colombo, and Sri Lankan government research pointed towards concerns of building a second port in Hambantota, President Rajapaksa saw this as an opportunity to create an infrastructure package that would industrialize the underdeveloped region and decided to go forward with construction..164
Most international banks were not willing to back the development project in Hambantota, citing economic concerns within Sri Lanka.165 China, however, even with concerns that port revenue would be unable to match the operating costs, funded the project.166 During the development of the port, Hambantota incurred additional unforeseen construction costs, including removing a large rock blocking part of the entrance, and the loan agreements began to pile up.167 But the port would never reach the potential hoped for, even when it became fully operational in 2012, largely because Sri Lanka could not entice the significant number of ships to dock at the port while passing along the southern tip of the country.168 Unsurprisingly, Sri Lanka could not keep the revenue of the port in positive numbers, and facing a growing debt crisis, decided to hand China 70 % ownership of the port and agree to a 99-year lease in exchange for debt forgiveness.169
163 “The Story of Hambantota Port: A Flunking Token of Political Corruption,” Ship Technology (blog), September 18, 2018, https://www.ship-technology.com/features/hambantota-port-china-sri-lanka/. 164 “The Story of Hambantota Port.” 165 Umesh Moramudali, “Is Sri Lanka Really a Victim of China’s ‘Debt Trap’?,” May 14, 2019, https://thediplomat.com/2019/05/is-sri-lanka-really-a-victim-of-chinas-debt-trap/. 166 Moramudali. 167 “The Story of Hambantota Port.” 168 “The Story of Hambantota Port.” 169 Kai Schultz, “Sri Lanka, Struggling With Debt, Hands a Major Port to China,” The New York Times, December 12, 2017, sec. World, https://www.nytimes.com/2017/12/12/world/asia/sri-lanka-china- port.html. 60 Through the inability to pay its debt to China, this case study illustrates China’s use of the BRI to gain strategic concessions in Southern Asia. China now owns, through the 99-year lease, a port very close to a strategic competitor, India. While China continues to say the BRI is for the enrichment of the world, it is important to highlight the possible motives behind the operation. Although the PRC has denied it, there are multiple reports PRC demanded information on ship activities during the negotiations of the initial port investment.170 In addition, within the provisions of the Hambantota lease, China retains 70% ownership of the port, and 15,000 acres of surrounding land for industrial zoning.171 While there are concerns China could militarize the location, Sri Lanka insists its navy will maintain unilateral security of the port.172 However, this location provides an additional deep-sea port to dock Chinese submarines. In 2014, a Chinese submarine docked in the Colombo Port for the first time in Sri Lankan history. Not only did this cause controversy with neighboring India, but it was also suspected to showcase Chinese military might to the Japanese, as the Japanese Prime Minister Shinzo Abe was visiting Sri Lanka for a state visit at the same time.173
At its core, the Sri Lankan case study provides an example of “debt-trap diplomacy” by the PRC against a highly indebted country; moreover, it highlights the PRC’s ability to use corruption and state fragility against a nation with weak democratic institutions in order to gain strategic concessions. Overall, Sri Lanka meets all three of our criteria for high investment into a “highly leveraged” state. This case study highlights that not only do these criteria allow for greater investment, but also increases the ability for the PRC to capitalize on this leverage and gain strategic goals once these criteria are met.
These archetypical case studies provide us with examples of the most extreme instances of a state granting strategic concessions to the PRC. These two cases serve as the
170 Abi-Habib, “How China Got Sri Lanka to Cough Up a Port”; Abi-Habib. 171 “Sri Lanka Signs Port Deal with China,” BBC News, July 29, 2017, sec. Asia, https://www.bbc.com/news/world-asia-40761732. 172 “Sri Lanka Signs Port Deal with China.” 173 “Chinese Submarine Docks in Sri Lanka despite Indian Concerns,” Reuters, November 2, 2014, https://www.reuters.com/article/sri-lanka-china-submarine-idINKBN0IM0LU20141102. 61 high-water mark and the far end of the spectrum of strategic concessions. As we continue to explore different case studies, we will show that the PRC adopts unique approaches in different states. Furthermore, the PRC gains different types of concessions at varying degrees of severity from states and in some instances is unable to gain any concessions whatsoever. As we will see, the internal factors of these states, as captured by our model’s criteria, assist in explaining this phenomenon.
62 VI. AFRICAN CASE STUDIES
A. BOTSWANA
Table 5. Botswana Criteria
Criteria Yes – Meets Criteria No – Does Not Meet Criteria 1. Higher Corruption and X Higher Debt-GDP Ratio 2. Higher Fragility X
3. Higher Autocracy X
PERTINENT DATA POINTS
• PRC Investment: $144 million /year (29/41 highest Chinese FDI into African states) • Corruption: 59.78/100 (41/41 most corrupt African states) • Debt to GDP Ratio: 15.433 (39/41 most indebted African states) • Fragility: 66.23/100 (39/41 most fragile African states) • Democracy/Autocracy: 8 (3/41 most democratic African states)
CASE STUDY DISCUSSION
Botswana is an African nation located in the southern portion of the continent bordered by South Africa to the south, Namibia to the west, and Zimbabwe to the north and east. Botswana boasts one of the most democratic, stable, and uncorrupt governments in all of Africa.174 Botswana, a former British protectorate, is the world’s largest producer of diamonds which supports a mid-level economy for its small population of 2 million
174 “Botswana Country Profile—BBC News,” accessed August 5, 2019, https://www.bbc.com/news/world-africa-13040376. 63 people.175 Since achieving independence in 1966, the nation has seen a high level of democracy and political freedom with multiple peaceful transitions of power.176
Diplomatic relations between the PRC and Botswana began on January 6th, 1975 but have not always been close.177 In 2017, diplomatic tension developed between Beijing and Botswana under previous Botswanan President Ian Khama over a proposed official visit by the Dalai Lama—a Tibetan separatist.178 The PRC held the position that the visit by the Dalai Lama was a vote of support by the Botswanan government to the Tibetan separatist movement.179 However, Khama maintained that his country had the right to allow anyone it wished to visit and compared the PRC’s attempts to intimidate him with similar diplomatic threats from Apartheid South Africa.180 Khama stated,
They [Apartheid South Africa] went over for several years those threats, and they carried them out if you would remember, they raided us, they blockaded us but we stood firm as Botswana in principle that no we are not going to allow ourselves to be bullied, intimidated and threatened, we would stick to our principles and allow those people to come here. So similarly, we were not a Bantustan of South Africa to do their bidding nor are we a colony of China. We are an independent sovereign country we can allow whowever (sic) to come in. Whoever has problems with China does not mean to say we have problems with them either.181
Additionally, President Khama related his disdain for the Chinese Ambassador’s attitude towards African states and the Ambassador’s implication of tolerance for corrupt dealings.182 Khama noted that the ambassador’s attitude insinuated that, “…if you are in
175 “Botswana Country Profile—BBC News.” 176 “Botswana Country Profile—BBC News.” 177 Embassy of the People’s Republic of China in Botswana, “China-Botswana Relations,” accessed August 5, 2019, http://bw.china-embassy.org/eng/zbgx/. 178 Wang Cong, “China Continues to Support Botswana as Its New Government Seeks Better Ties with Beijing—Global Times,” Global Times, 2019, http://www.globaltimes.cn/content/1161053.shtml. 179 Dikarabo Ramadubu, “‘We Are Not a Colony of China’ – Khama—Botswana Guardian,” accessed November 5, 2019, http://www.botswanaguardian.co.bw/news/item/2790-we-are-not-a-colony-of- china-khama.html. 180 Ramadubu. 181 Ramadubu. 182 Ramadubu. 64 an African country you can engage in corruption and violate laws, but here in Botswana it is not tolerated. I just found that unacceptable.”183 In sum, President Khama refused to be bullied by the PRC and did not allow them to dictate the actions of his government.
In April 2018, a new President, Mokgweetsi Masisi, took power in Botswana with a mandate to diversify the country’s economy—which is over-reliant on the diamond trade.184 To this end, Masisi has pursued closer ties with the PRC. Botswana was a participant in the 2018 Forum on China-Africa Cooperation (FOCAC) where the two states continued to build closer relations.185 Moreover, on July 5th, 2019, the PRC and Botswana signed an agreement on “Economic and Technical Cooperation and exchanged Letters on the Feasibility Study for two road projects” in the Botswanan capital of Gaborone.186 Despite these overtures and numerous diplomatic engagements between the leaders of these two states, there is a dearth of significant systemic investment in Botswana by the PRC.187 In May of 2019, Botswana’s Ambassador to China, Mr. Mothusi Palai, was asked by the Belt and Road News, what is his top priority as the Botswana Ambassador to China?188 To which Palai responded,
Botswana’s primary interest is economic; therefore, my priority is to see whether I could persuade Chinese companies to invest in Botswana. If I can make it happen, it will be a great achievement. Unfortunately, I have not succeeded in doing this.189
183 Ramadubu. 184 Cong, “China Continues to Support Botswana as Its New Government Seeks Better Ties with Beijing—Global Times.” 185 “China and Botswana Sign Agreement to Boost Cooperation—Xinhua | English.News.Cn,” accessed August 5, 2019, http://www.xinhuanet.com/english/2019-07/05/c_138202100.htm. 186 “China and Botswana Sign Agreement to Boost Cooperation—Xinhua | English.News.Cn.” 187 “China-Botswana Relations.” 188 Belt & Road News, “Botswana Eyeing Chinese Foreign Investment: Ambassador—Belt & Road News,” May 13, 2019, https://www.beltandroad.news/2019/05/13/botswana-eyeing-chinese-foreign- investment-ambassador/. 189 News. 65 Furthermore, Botswana held its first Global Expo Botswana in August 2019 in an effort to garner foreign investors.190 The event was attended by over 250 companies from around the globe; however, only 1 Chinese company was in attendance.191 According to the event organizer, Keletsositse Olebile chief executive at the Botswana Investment and Trade Centre, “he had expected about 200 Chinese companies, but ‘we don’t know what happened.’”192 Despite claims that the Chinese firms could not attend because the event was moved up, it appears that the PRC’s interest in large-scale investment in Botswana is very low.
This begs the question: why is not the PRC interested in Botswana? In answer to this question we can look to our theory of the two approaches that the PRC uses to choose where to invest and engage with different kinds of states. Based on the model created and explained in Chapter III, we built support for the idea that the PRC engages with some states in a manner consistent with international norms, typically these states are wealthy, uncorrupt, stable, unindebted, and democratic. These states provide the PRC with significant economic opportunity. Conversely, it also invests and engages with states that are poor, corrupt, fragile, indebted, and autocratic. These states provide the PRC with an opportunity to gain strategic concessions. Botswana does not meet the criteria for either of these strategies.
Botswana does not meet any of the “high leverage” criteria developed by our model. Moreover, we can see from the recent history of diplomatic relations that Botswanan leaders are unlikely to bend to the will of foreign power—even at great cost. This likely springs from the strongly democratic nature of the government. The will of the people is felt at the highest levels and the dearth of corruption ensures that the political elites are not unduly swayed by the influence of foreign powers. In total, Botswana provides an example of what the PRC is not looking for. Our next case, Sudan, will show an example of what the PRC is looking for.
190 Cong, “China Continues to Support Botswana as Its New Government Seeks Better Ties with Beijing—Global Times.” 191 Cong. 192 Cong. 66 B. SUDAN
Table 6. Sudan Criteria
Criteria Yes – Meets Criteria No – Does Not Meet Criteria 1. Higher Corruption and X Higher Debt-GDP Ratio 2. Higher Fragility X
3. Higher Autocracy X
PERTINENT DATA POINTS
• PRC Investment: $742 million/year (16/41 highest Chinese FDI into African states) • Corruption: 14.76/100 (1/41 most corrupt African states) • Debt to GDP Ratio: 76.46 (8/41 highest indebted African states) • Fragility: 111.32 (1/41 most fragile African states) • Democracy/Autocracy: -3.8 (37/41 most democratic African states)
CASE STUDY DISCUSSION
Sudan is situated in the northeastern portion of Africa, just south of Egypt. In 2010, oil profits from Sudan led the country to earn the spot as the 17th fastest growing economy in the world.193 However, in 2011, a civil war in Sudan split the country into two, costing the lives of 1.5 million people, and driving over 2 million people from their homes into Darfur.194 With the succession of South Sudan from Sudan, the country suffered great economic hardship as over 80% of the oilfields in Sudan were now located in South Sudan.195
193 “About Sudan,” United Nations Development Programme in Sudan, accessed September 4, 2019, http://www.sd.undp.org/content/sudan/en/home/countryinfo.html. 194 “Sudan Country Profile,” BBC News, July 12, 2019, sec. Africa, https://www.bbc.com/news/world-africa-14094995. 195 “About Sudan.” 67 With the loss of oil revenues, Sudan looked to relying on its existing agriculture sector to make up for losses. The government of Sudan attempted to expand and diversify crop and livestock production. Animals, such as sheep and camels were exported to Saudi Arabia and Egypt, amongst others, but failed to energize an already suffering economy.196 Sudan was forced to look at other options where it could expand its economic growth.
Rich in other natural resources, such as gold, gas, manganese, and other rare earth minerals, Sudan strengthened its relationships with Asian counties, especially China, in hopes of economic growth. Foreign investment from China was thought to have given Sudan a boost in its economy in exchange for natural resources and other rare earth minerals.197 By the end of 2011, Sudan saw more than 60 Chinese infrastructure projects, including railway lines, power stations, electricity grids, and even the construction of the presidential palace.198
Currently, China is by far the largest of any country that invests into Sudan.199 Additionally, China represents the largest source of imported goods into Sudan, a share of 24%, which is more than double the amount of the second-largest country that imports into Sudan, the United Arab Emirates.200 Since the United States imposed sanctions on Sudan in 1995 due to the country’s past ties to Osama Bin Laden, and other terrorists, China has been able to dominate the investments into Sudan with virtually no competition.201
Additionally, there are large amounts of infrastructure projects that give China a small, but strategic concession. This concession currently comes in the form of exceptions to labor laws.202 This concession can be associated with corrupt Sudanese leaders who
196 “About Sudan.” 197 “About Sudan.” 198 Roie Yellinek, “China and the Sudan Coup,” Begin-Sadat Center for Strategic Studies, May 2, 2019, https://besacenter.org/perspectives-papers/china-and-sudan-coup/. 199 Joseph Hammond, “Sudan: China’s Original Foothold in Africa,” The Diplomat, 2017, https://thediplomat.com/2017/06/sudan-chinas-original-foothold-in-africa/. 200 Yellinek, “China and the Sudan Coup.” 201 Hammond, “Sudan: China’s Original Foothold in Africa.” 202 Hammond. 68 are knowledgeable about the labor law practices, which are unfair to the Sudanese people, and favor Chinese workers. These “exceptions” advance China’s agenda of exporting labor and creating jobs, which is captured by Lee’s description as a main aspect of the PRC’s infrastructure projects, to “open up new overseas markets for Chinese SOE contractors…”203 When asked about why Sudan fails to enforce labor laws on China that require international companies to staff 80% of their workforce with local Sudanese, the Sudanese foreign minister replied with,
Yes, Chinese companies are in violation of this but, it is the smallest possible violation. Within the oil industry today most of the engineers and technical experts in Sudan and South Sudan are Sudanese. They were trained in China, and we see more and more of them… Sudan is the only country in Africa where over time more locals have gotten jobs from Chinese companies.204
Based on the data from transparency international’s corruption perceptions index (CPI) used throughout this study, Sudan was in the top five most corrupt nations in the world every year from 2006 to 2015. It is no surprise that with the amount of corruption in Sudan, especially with the civil war splitting off most of its revenue sources, it appears a probable Sudan will turn a blind eye to practices that seem to benefit certain powerful individuals (e.g., failing to enforce labor laws by Chinese SOEs).
Looking forward, we see the possibility of China pursuing more concessions from Sudan, as we believe that the current Chinese strategy involving Sudan is to establish a “foothold,” where smaller concessions may grow into larger concession in the future. Due to the geostrategic location of Sudan for BRI expansion, Sudan’s demand for growth in GDP, and its vast natural resources, it would seem likely that China will continue to invest massive sums of money into Sudan. While Sudan’s decision not to enforce labor laws associated with Chinese SOEs does not equate to the scale of strategic concessions of establishing a military base or granting a 99-year lease on a port, it illustrates the leverage that the PRC holds over Sudan. Moreover, Sudan meets all three criteria and the ongoing
203 Ching Kwan Lee, The Spectre of Global China: Politics, Labor, and Foreign Investment in Africa (Chicago: The University of Chicago Press, 2018). 204 Hammond, “Sudan: China’s Original Foothold in Africa.” 69 investment and initial evidence of strategic concessions suggest that Sudan will remain a prime location for expanded strategic concessions in the future.
70 VII. ASIAN CASE STUDIES
A. INDONESIA
Table 7. Indonesia Criteria
Criteria Yes – Meets Criteria No – Does Not Meet Criteria 1. Higher Corruption and X Higher Debt-GDP Ratio 2. Higher Fragility X
3. Higher Autocracy X
PERTINENT DATA POINTS
• PRC Investment: $2.9 billion/year (3/36 highest Chinese FDI into Asian states) • Corruption: 29.33/100 (20/36 most corrupt Asian states) • Debt to GDP Ratio: 27.24 (24/36 highest indebted Asian states) • Fragility: 81.63/100 (19/36 most fragile Asian states) • Democracy/Autocracy: 8.2 (6/36 most democratic Asian states)
CASE STUDY DISCUSSION
Indonesia is an archipelago nation residing in Southeast Asia consisting of over 17,000 islands.205 Its total population of over 270 million inhabitants makes it the largest Muslim majority democracy in the world.206 Indonesia’s location adjacent to the Malacca Strait and an abundance of natural resources like copper, petroleum, and natural gas, make the country a strategic partner to many countries throughout the world.207 Not only does
205 “East Asia/Southeast Asia :: Indonesia—The World Factbook—Central Intelligence Agency,” accessed August 15, 2019, https://www.cia.gov/library/publications/the-world-factbook/geos/id.html. 206 “East Asia/Southeast Asia :: Indonesia—The World Factbook—Central Intelligence Agency.” 207 Dikanaya Tarahita and Muhammad Zulfikar Rakhmat Diplomat The, “Understanding Indonesians’ Souring Sentiment Toward China,” The Diplomat, accessed August 15, 2019, https://thediplomat.com/2019/06/understanding-indonesians-souring-sentiment-toward-china/. 71 Indonesia consist of a sprawling landmass with a sizable population, but it has one of the largest economies in the world, with an annual GDP of over $1 trillion.208
China and Indonesia’s relationship has evolved through fits and starts since beginning in 1950.209 The relationship frayed in 1967 when Indonesia accused China of backing a coup attempt by communist rebels within the country, resulting in the termination of diplomatic relations until 1990.210 However, starting in 1985, the two countries signed a bilateral trade agreement, which saw almost $1 billion worth of goods traded within the first five years.211 The beginning of this economic relationship quickly grew due to the relatively large and prosperous minority of ethnic Chinese within Indonesia.212
Indonesia sits on the Strait of Malacca, a critical maritime chokepoint through which 40% of global trade flows, making it a prime objective for building Chinese influence through investment.213 Additionally, as China continues to expand and invest in the BRI, the PRC views its relationship with Indonesia as crucial to extend China’s reach into the fishing and the oil-rich South China Sea.214 In 2009, China ranked as the second- largest consumer of oil in the world.215 Seeking new sources and diversification of its energy sources to reduce dependence upon foreign oil, China has begun to “increase
208 “The World Factbook—Central Intelligence Agency,” 2018, https://www.cia.gov/library/publications/the-world-factbook/geos/id.html. 209 “China, Indonesia to Resume Relations,” Los Angeles Times, July 4, 1990, https://www.latimes.com/archives/la-xpm-1990-07-04-mn-86-story.html. 210 “China, Indonesia to Resume Relations.” 211 “China, Indonesia to Resume Relations.” 212 Diplomat, “Understanding Indonesians’ Souring Sentiment Toward China.” 213 Copeland, Economic Interdependence and War, 458. 214 “Indonesia Guards Its Front Door,” Stratfor, accessed September 8, 2019, https://worldview.stratfor.com/article/indonesia-guards-its-front-door. 215 Leszek Buszynski, “The South China Sea: Oil, Maritime Claims, and U.S.–China Strategic Rivalry,” The Washington Quarterly 35, no. 2 (April 1, 2012): 141, https://doi.org/10.1080/0163660X.2012.666495.
72 offshore production around the Pearl River basin and the South China Sea.”216 However, the PRC has complained that Indonesia, along with other ASEAN countries, has “intruded into its waters and it is within China’s right to enforce its claim against” the intruding nations.217 There remains similar friction between China and the ASEAN countries within the fishing industry. China has sought to monopolize fishing in the South China Sea and has established “fishery patrols,” which are converted naval vessels, to patrol the ocean and seize “illegal” fishing boats.218 In 2009, ASEAN countries claimed China seized over 180 fishing vessels and then charged an overpriced fee for their release.219 Indonesia’s wealth of natural resources and strategic location, combined with a large ethnic Chinese population, make the state an attractive partner and source of potential wealth and security for the Chinese government.
Based on the data from our model, Indonesia ranks 2nd of the 36 Asian nations in terms of average annual investment by the PRC from 2006 through 2015. This allows us to objectively rank Indonesia as a ‘high investment’ country for Chinese FDI. Importantly, this basis of substantial Chinese investment moving into Indonesia will allow us to better understand the relationship between our three criteria and Chinese investment. Finally, we will use these criteria to examine the factors within the nation of Indonesia to ascertain how various conditions have affected Indonesian strategic concessions to the PRC.
Within this case study, we ask the questions: (1) Has Indonesia agreed to any strategic concessions to the PRC given the high degree of Chinese investment in the country? (2) What potential exists for Indonesia to meet more of the criteria in the future? To answer these questions, we look back to our theory of the two PRC investment approaches. Based on the model created and explained in Chapter III, we built support for the idea that the PRC engages with some states in a manner consistent with international norms, typically these states are wealthy, uncorrupt, stable, non-indebted, and democratic.
216 Buszynski, 141. 217 Buszynski, 141. 218 Buszynski, 144. 219 Buszynski, 144. 73 These states provide the PRC with significant economic opportunity, typically referred to as ‘return on investment.’ Conversely, it also invests and engages with states that are poor, corrupt, fragile, indebted, and autocratic. These states provide the PRC with an opportunity to meet strategic goals through economic coercion or “debt-trap diplomacy.”220
Looking through the lens of our three criteria, Indonesia meets one of the criteria (Criterion 2) that enables high PRC investment and the potential for PRC leveraging of strategic goals. However, it fails to meet the other two criteria, which suggests Indonesia may or may not be an ideal state to grant the PRC concessions. Before we determine whether or not Indonesia has proffered strategic concessions to the PRC, we must first understand Indonesia’s strategy within its relationships with both the PRC and the US.
Indonesian strategy consists of two priorities – the first, maintaining the integrity of the nation as a whole. Indonesia’s geographical size and diversity of the 6,000 inhabited islands totaling more than 100 ethnolinguistic cultures creates a sophisticated and extraordinarily tricky task of maintaining Indonesian sovereignty.221 Jakarta’s second priority aims to use Indonesia’s location between the Pacific and Indian oceans to its absolute advantage.222 The “Maritime Fulcrum” strategy, coined by President Joko Widodo (Jokowi), aims to completely control its seas and associated avenues to ensure Indonesia’s position as indispensable to both the U.S. and China.223
Like many countries in Southeast Asia, Indonesia attempts to balance its relationship with both the U.S. and China.224 This balance will maximize Indonesia’s benefit from both countries while not aligning solely with either.225 Indonesia does this through the bifurcation of its security and economic relationships between the two goliaths
220 Banyan, “The Perils of China’s ‘Debt-Trap Diplomacy,’” The Economist, September 6, 2018, https://www.economist.com/asia/2018/09/06/the-perils-of-chinas-debt-trap-diplomacy. 221 “Indonesia Guards Its Front Door.” 222 “Indonesia Guards Its Front Door.” 223 “Indonesia: Balancing the United States and China, Aiming for Independence” (Koninklijke Brill NV), 20, accessed September 6, 2019, https://doi.org/10.1163/2468-1733_shafr_SIM210040027. 224 “In China’s Backyard, Charting the Course of Most Advantage,” Stratfor, accessed September 6, 2019, https://worldview.stratfor.com/article/chinas-backyard-charting-course-most-advantage. 225 ““Indonesia,” 16. 74 of the Asia-Pacific.226 Indonesia refers to this approach as a “free and active” foreign policy.227 In recent years, Indonesia has moved closer in its security relationship with the US, due to its increasing use of counterterrorism operations, as well as foreign military sale purchases.228 Alternatively, Indonesia has seen considerable increases in Chinese investment in a similar timeframe, exponentially increasing in investment with the advent of the BRI in 2013.229
Additionally, Indonesian foreign policymakers consist of two camps. The first group sees the U.S. as Indonesia’s closest partner with shared democratic values as the foundation of its two governments.230 Concerningly, the second camp of policymakers in Jakarta speaks of a “pragmatic and materialistic approach to foreign policy,” where tangible investment from the PRC takes priority over the shared values between the U.S. and Indonesia.231 As PRC investment continues unabated into Indonesia, it may weaken the influence within the first camp of Indonesian policymakers, eroding U.S. influence within Southeast Asia’s largest economy. Additionally, this current rise in pragmatism over idealism may herald a time of strategic concessions in the future, especially as Chinese investment continues unabated and unchallenged.
While Indonesian strategy remains to find the balance between the U.S. and China, the continued acquisition of Chinese investment for mega-infrastructure projects may suggest an increasing strategic imbalance of more considerable PRC influence.232 Additionally, our research has found increases of Chinese investment remains tied to substantially more Indonesian military engagements with the PLA annually [see our Findings Section of Hypothesis 3, Chapter III]. We believe this increase of military
226 ““Indonesia,” 16. 227 ““Indonesia,” 18. 228 “Indonesia Guards Its Front Door.” 229 “In China’s Backyard, Charting the Course of Most Advantage.” 230 ““Indonesia,” 24. 231 ““Indonesia,” 24. 232 Dan Blumenthal, “The China Challenge, Part I: Economic Coercion as Statecraft,” § Senate Committee on Foreign Relations, Subcommittee on East Asia, the Pacific, and International Cybersecurity Policy (2018). 75 cooperation, coupled with the already drastic increases of Chinese investment, may result in an Indonesian imbalance of both security and economic partnership with the PRC compared to its U.S. relationship. This future imbalance, may not only reduce relations with the U.S. but also may create the leverage needed for the PRC to gain strategic concessions from Jakarta in the future without the necessity to meet any more of our criteria. To date, however, Indonesia has not provided any strategic concessions to the PRC. This evidence suggests that Indonesia’s meeting of one criterion does not carry enough weight to garner strategic concessions to the PRC at this time.
Now we will discuss our second question to this case study, what potential exists for Indonesia to meet more of the criteria in the future? First, we must discuss where Indonesia currently sits with the other two criteria. Currently, Indonesia does not meet Criterion 1, higher corruption and a higher debt-to-GDP ratio. Nor does it meet Criterion 3, higher autocracy. In fact, Indonesia scores consistently high in democracy scores, averaging 8.2 out of 10 from 2006 to 2015.233 Therefore, we assume the likelihood of Indonesia meeting Criterion 3 is unlikely now or in the future, unless an autocrat comes to power and usurps the democratic foundations of the current government.
Next, this case study will look at the specifics of Indonesian corruption and how it might relate to Indonesia meeting Criterion 1 in the future. Looking deeper into Criterion 1, we see Indonesia’s corruption score remains high (especially for such a wealthy country), averaging 27 of 100 from 2006 to 2015. To determine if a high degree of corruption will continue in the future, we must analyze the historical trends and types of corruption found in Indonesia to predict future corruption. Lastly, if the trend of significant corruption continues into the future within Indonesia, we must determine the possibility of whether Indonesia’s debt-to-GDP ratio will increase significantly. If this debt-to-GDP increase occurs, coupled with the ongoing corruption, Indonesia may meet Criterion 1 in the future.
Corruption in Indonesia is nothing new; studies cite firms pay as much as 10% of their total costs on “bribes” and another 10% on “management smoothing business
233 Center for Systemic Peace, “Polity IV Project.” 76 operations” within Indonesia.234 As corruption is difficult to study, the costs to Indonesia are not entirely known; however, these values range anywhere from hundreds of millions to billions of dollars in lost revenue for firms and lost taxes for the Indonesian government.235
Corruption within Indonesia, not surprisingly, is a concern for its citizens. In 2018, Transparency International rated Indonesia at 36 out of 100 on the Corruption Perception Index (CPI).236 This puts Indonesia ranked at 96th of 180 countries throughout the world, which is near last within the G20 members, only beating Russia and Mexico.237 Interestingly, Indonesian students are statistically less likely to partake in bribe-taking, evincing a moral argument against such acts.238 However, this aversion to corruption decreases when studying public servants, who justify such practices because of low wages and the pervasive nature of bribing throughout the country.239 This observation contends, however, that bribing is not necessarily a cultural norm, but a societal symptom of the more significant problem of lack of government oversight and low wages for public servants.240 Additionally, Transparency International’s survey of Indonesians’ perception of corruption within different institutions in Indonesia is illuminating (see Figure 8) The judgment highlights that politicians throughout all branches of the government have a high rate of perceived corruption.241
234 J. Vernon Henderson and Ari Kuncoro, “Corruption in Indonesia,” Working Paper (National Bureau of Economic Research, August 2004), 1, https://doi.org/10.3386/w10674. 235 Charles Kenny, “Measuring Corruption in Infrastructure: Evidence from Transition and Developing Countries,” The Journal of Development Studies 45, no. 3 (2009): 314–332, https://doi.org/10.1080/00220380802265066. 236 “Transparency International—Indonesia,” accessed August 17, 2018, https://www.transparency.org/country/IDN#. 237 “Transparency International—Indonesia.” 238 Vivi Alatas et al., “Subject Pool Effects in a Corruption Experiment: A Comparison of Indonesian Public Servants and Indonesian Students,” Experimental Economics 12, no. 1 (March 1, 2009): 113–32, https://doi.org/10.1007/s10683-008-9207-3. 239 Alatas et al. 240 Alatas et al. 241 Howard Dick and Jeremy Mulholland, “The Politics of Corruption in Indonesia,” Georgetown Journal of International Affairs; Washington 17, no. 1 (Winter/Spring 2016): 44. 77
Figure 8. Indonesian perceived degree of corruption. Source: Transparency International (2013).
As Figure 8 illustrates, corruption within Indonesia ties directly to its public servants. Historical factors, such as the patronage-based society propagated by Dutch colonialism, somewhat explain the pervasive nature of corruption in Indonesia.242 However, the main argument for the pervasive corruption in Indonesia is due to state weakness. As Henderson argues:
Localities in Indonesia are hampered by insufficient revenues from formal tax and transfer sources to pay competitive salaries […]because local tax rates are capped by the center and inter-governmental transfers are limited.243
As the supply for increased public servant wages has not met demand, corruption increases, especially within specific industries that overwhelmingly rely on interactions with government officials.244 One of the most corruption-prevalent sectors is the
242 Robert Cribb, “A System of Exemptions:,” in The State and Illegality in Indonesia (Brill, 2010), 31–44, http://www.jstor.org.libproxy.nps.edu/stable/10.1163/j.ctt1w8h1mz.6. 243 Henderson and Kuncoro, “Corruption in Indonesia,” 1. 244 ROSS H. McLEOD, “Institutionalized Public Sector Corruption:,” in The State and Illegality in Indonesia (Brill, 2010), 45–64, http://www.jstor.org.libproxy.nps.edu/stable/10.1163/j.ctt1w8h1mz.7. 78 construction industry.245 Indonesian historical factors relate to construction contractors and their need for political alliances to win contracts, due to the monopoly of European technocratic rivals as first seen in the 1930s.246 As Aspinall et al. argue, Indonesian contractors were not as educated as the colonial Dutch, and thus had to rely on their ability to create political connections to win bids, as opposed to merit.247
Today, there is an even more blurred line between the political entity and the construction contractor, where
Provincial and district parliaments are full of contractors who live on building projects they decide on. Contractors are prominent in the campaign teams for directly elected district heads and governors.248
As the researchers continue, “achieving political control not only gives them [contractors] access to state budgets, it also allows them to keep out rivals.”249
Within Indonesia, the BRI has invested $5.5 billion in the Jakarta-Bandung high- speed rail network and almost another $2 billion in Indonesian Slum upgrades.250 Based on the historical trends correlating corruption between Indonesian construction contractors and public servants, we contend corruption will continue to remain rampant as large scale and expensive infrastructure projects continue, as Foreign Policy editors write:
With Chinese companies being generally less transparent than their international peers, and with Beijing’s zeal to curb bribery and corporate malfeasance limited to its domestic economy, a massive influx of Chinese
245 Edward Aspinall and Gerry van Klinken, eds., The State and Illegality in Indonesia (Brill, 2010), http://www.jstor.org.libproxy.nps.edu/stable/10.1163/j.ctt1w8h1mz. 246 Aspinall and van Klinken, 144. 247 Aspinall and van Klinken, 139. 248 Aspinall and van Klinken, 140. 249 Aspinall and van Klinken, 161. 250 “Soviet Collapse Echoes in China’s Belt and Road,” Bloomberg.Com, August 12, 2018, https://www.bloomberg.com/view/articles/2018-08-12/soviet-collapse-echoes-in-china-s-belt-and-road- investment. 79 funds into countries with weak governance is likely to exacerbate ongoing corruption problems.251
Because of the severity and institutional underpinnings of corruption within Indonesia, we can assume corruption will remain a problem for Indonesia in the future. We then need to determine if the debt-to-GDP will significantly increase in Indonesia to a degree where Indonesia then meets Criterion 1. For this case study, we will use Sri Lanka as our archetypal country to analyze against.
As the current debt-to-GDP level sits, Indonesia lies at a ratio of 27.23. Alternatively, Sri Lankan debt-to-GDP ratio scores at 80.97. Indonesia would need a massive uptick in deficit spending, requiring nearly a 300% increase in debt-to-GDP ratio to meet Sri Lankan debt levels. While this huge increase in debt remains unlikely, unabated Chinese investment into Indonesia will remain a potential source of increased debt, especially if Indonesia cannot pay its obligations in the future due to poorly performing investments, similar to that of Sri Lanka and its Hambantota port.
In closing, Indonesia sees a high degree of Chinese investment flowing into the country, although the country meets only Criterion 2 for high investment. While massive Chinese investment is entering into Indonesia, it has not conceded any strategic interests to the Chinese as of 2019. This suggests the factors for increased Chinese investment, such as high fragility and high corruption, have been stymied by the strong democratic institutions within Indonesia, as well as Jakarta’s balanced finances (low debt-to-GDP ratio). Nevertheless, this analysis suggests future concessions may result, but only if Indonesia sees a drastic increase in its debt or significantly curtails its democratic institutions, which would enable Indonesia to meet two or more of the criteria and significantly increase the chances for PRC leverage to be gained.
251 “On China’s New Silk Road, Democracy Pays A Toll,” Foreign Policy (blog), 2018, https://foreignpolicy.com/2018/05/16/on-chinas-new-silk-road-democracy-pays-a-toll/. 80 B. REPUBLIC OF KOREA (SOUTH KOREA)
Table 8. South Korea Criteria
Criteria Yes – Meets Criteria No – Does Not Meet Criteria 1. Higher Corruption and X Higher Debt-GDP Ratio 2. Higher Fragility X
3. Higher Autocracy X
PERTINENT DATA POINTS
• PRC Investment: $936 million/year (21/36 highest Chinese FDI into Asian nations) • Corruption: 54.06/100 (29/36 most corrupt Asian nations) • Debt to GDP Ratio: 31.946 (21/36 highest indebted Asian nations) • Fragility: 38.76/100 (32/36 most fragile Asian nations) • Democracy/Autocracy: 8.0 (7/36 most democratic Asian nations)
CASE STUDY DISCUSSION
Occupying the southern half of the Korean Peninsula, South Korea sits in a strategic location in Eastern Asia as it borders the Sea of Japan and the Yellow Sea.252 The region is extremely mountainous, forcing most of the population to occupy the lowlands in highly dense urban areas.253 Following World War II, the United States and Soviet Union agreed to establish two zones within the peninsula; a pro-U.S. Republic of Korea in the south, and a Soviet-backed Democratic People’s Republic of Korea (DPRK) in the north.254 This would remain the status-quo for about five years, until in 1950; South Korea declared their
252 “East Asia/Southeast Asia :: Korea, South—The World Factbook—Central Intelligence Agency,” accessed August 21, 2019, https://www.cia.gov/library/publications/the-world-factbook/geos/ks.html. 253 “East Asia/Southeast Asia :: Korea, South—The World Factbook—Central Intelligence Agency.” 254 History com, “South Korea,” HISTORY, August 21, 2018, https://www.history.com/topics/korea/south-korea. 81 independence as a sovereign nation.255 The DPRK, with support from China and the Soviet Union, invaded south to try to regain control of the entire peninsula, leading to the 1950–53 Korean War.256 After losing an estimated 2 million lives to the war, both sides agreed to an armistice, leading to the establishment of the current demilitarized zone (DMZ) along the 38th parallel.257
South Korea was able to arise from the devastating war, successfully industrializing and developing itself, becoming one of the world’s leading technological nations within just a few decades.258 South Korea is now a presidential republic with nine provinces, and a population of nearly 51.5 million people.259 With a GDP comparable to the poorest countries after the establishment of the armistice, South Korea surpassed $1 Trillion (USD) in GDP by 2004, and $2 Trillion (USD) in 2017.260 The country is also the top five export countries in the world with $577.4 billion (USD).261
While our model predicts lower investment from the PRC, it is important to identify other environmental influencers. The largest outside influence is the highly intricate geopolitics and turbulent relationship between South Korea and the PRC. Following the Korean War, China refused to recognize two separate Koreas, and in turn, South Korea only recognized Taiwan as China.262 It was not until late 1992, after North and South Korea joined the U.N. as separate countries, that the two countries would officially establish diplomatic relations.263 In exchange for recognition, South Korea agreed to cut
255 History com. 256 History com. 257 History com. 258 “East Asia/Southeast Asia :: Korea, South—The World Factbook—Central Intelligence Agency.” 259 “East Asia/Southeast Asia :: Korea, South—The World Factbook—Central Intelligence Agency.” 260 “East Asia/Southeast Asia :: Korea, South—The World Factbook—Central Intelligence Agency.” 261 “East Asia/Southeast Asia :: Korea, South—The World Factbook—Central Intelligence Agency.” 262 Hong Liu, “The Sino-South Korean Normalization: A Triangular Explanation,” Asian Survey 33, no. 11 (1993): 1088, https://doi.org/10.2307/2645001. 263 Liu, 1089. 82 diplomatic ties with Taiwan and recognize the ‘One-China’ policy.264 By recognizing the PRC as the legitimate government of China, this provided access to a huge potential Chinese market for Korean products, leading to China becoming the leading trade partner for South Korea since 2004.265
Other geopolitical factors to consider are allies. China is the largest ally to South Korea’s greatest threat, the DPRK. In 2010, China refused to denounce two separate North Korean provocations, both which led to the deaths of South Korean soldiers and sailors.266 Then on the other side of the peninsula, South Korea and the United States remain close allies since the Korean War, to include the United States maintaining a strategic defensive presence in the country.267 For the United States, South Korea is one the most important strategic and economic partners in Asia.268 In addition to allowing forward staged U.S. personnel, South Korea recently approved deploying the Theater High Altitude Area Defense (THAAD) system to counter North Korean ballistic missile threats.269 These geopolitical factors could factor into either the PRCs hesitancy to invest more, or South Korea’s reluctance to receive more investment.
Overall, our research has not identified any strategic concessions extended from South Korea to the PRC, concurring with our criteria, as South Korea does not meet any of the three criteria for high investment into a “highly leveraged” state. It is important to note, however, that while South Korea maintains a strategic location within the Korean Straight and is a strong military ally with the United States, China is South Korea’s number one importer and exporter for goods. Moreover, South Korea saw a dramatic increase in
264 Liu, 1088. 265 Liu, 1088; Scott Snyder, China’s Rise and the Two Koreas (Boulder, CO: Lynne Rienner Publishers, 2009), https://www.cfr.org/excerpt-chinas-rise-and-two-koreas. 266 Jooyoung Song, “Understanding China’s Response to North Korea’s Provocations,” Asian Survey 51, no. 6 (2011): 1134, https://doi.org/10.1525/as.2011.51.6.1134. 267 Mark E Manyin et al., “U.S.- South Korea Relations,” March 28, 2016, 10. 268 Manyin et al., 1. 269 Ankit Diplomat, “What Is THAAD, What Does It Do, and Why Is China Mad About It?,” The Diplomat, February 25, 2016, https://thediplomat.com/2016/02/what-is-thaad-what-does-it-do-and-why-is- china-mad-about-it/. 83 PRC investment following the announcement of China’s BRI. However, China remains a strong ally of South Korea’s existential threat, the DPRK. Economic indicators such as GDP and lower corruption levels indicate a strong potential for return on investment, but the geopolitical situation between the PRC and South Korea suggests the PRC sees little to gain with more investment.
84 VIII. CONCLUSION
This research aimed to elucidate the criteria involved in PRC decision making for the advancement of Foreign Direct Investment (FDI) into countries worldwide. Overall, this research developed a moderately complex model that produced multiple statistically significant results. The complexity of the model illustrates the complexity of foreign direct investment and global trade relationships between countries. Although not purely representative of all the nuanced inputs responsible for Chinese investment globally, the three criteria derived from our model provide a solid starting point in predicting the amount of Chinese investment flowing into countries worldwide with the specific aim of soliciting strategic concessions.
Our quantitative analysis identified three statistically significant criteria leading nations to receive substantial amounts of Chinese investment, as discussed at the end of Chapter III. While there was no “silver bullet” in the criteria for substantial Chinese investment in a country, we did find myriad trends within the research. First, we found statistically significant results indicating that countries receive higher Chinese investment when corruption is high, and debt is high (Criterion 1). Correspondingly, we found that countries receive higher Chinese investment when corruption is high, and GDP is low. We believe these findings illuminate the way the PRC prioritizes its investment overseas for two reasons. First, these findings showcase that countries in need of cash, either due to high debt or low GDP, are more willing to take Chinese investment. Second, high levels of corruption are useful to the PRC because it ensures government officials or policymakers can be bribed more efficiently, increasing the likelihood of significant Chinese strategic concessions within the invested country.
Delving deeper into corruption rates and Chinese investment, our research showed that countries with low levels of corruption and low debt or countries with low levels of corruption and high GDP also receive substantial Chinese investment. These findings suggest if the PRC finds an inability to invest in highly corrupt countries, standard economic principles take over, and countries with strong foundations of a sustainable and
85 profitable economy, like low debt and high wealth, remain beneficial for Chinese investment.
Second, highly fragile states receive more investment than highly stable states (Criterion 2). Higher Chinese investment into highly fragile countries seems to be counter- intuitive to sound investment strategy, and this research could not distinguish the sole reason for this result. However, evidence suggests the PRC may be more willing to invest in highly fragile nations not because of a better Return on Investment (ROI), but for the higher potential of strategic concessions within highly fragile countries.270
There are also two sub-criteria relating to a state’s fragility and its inbound Chinese investment. First, our research found that states with high fragility and high polity (democracies) receive significantly higher amounts of investment than states with low fragility and high polity scores. Alternatively, we found stable, but autocratic states received more investment than fragile autocracies. These results are not only illuminating in-and-of themselves, but they also exemplify the complexity of the approaches the PRC uses when inserting FDI into any given country.
Our third key finding from our quantitative analysis determined that more autocratic states received substantially higher rates of Chinese investment (Criterion 3). There are a few possible explanations for this result. First, the PRC, itself an autocratic government, places a priority on investing in countries with similar ideologies.271 Second, autocratic rulers may be more amenable for strategic concessions, as long as corrupt practices allow for an ability to enrich themselves with Chinese money. Third, autocratic countries are less likely to receive investment from western-backed institutions, for the lack of freedoms associated with those regimes, allowing China to step-in and invest heavily.
270 Monica Wang, “China’s Strategy in Djibouti: Mixing Commercial and Military Interests,” Council on Foreign Relations, accessed August 21, 2018, https://www.cfr.org/blog/chinas-strategy-djibouti-mixing- commercial-and-military-interests; Michael Pillsbury, The Hundred-Year Marathon : China’s Secret Strategy to Replace America as the Global Superpower / Michael Pillsbury, Accessed from https://nla.gov.au/nla.cat-vn6808854 (New York: Henry Holt and Co, 2015). 271 Bader, Grävingholt, and Kästner, “Would Autocracies Promote Autocracy? A Political Economy Perspective on Regime-Type Export in Regional Neighbourhoods.” 86 Following the quantitative analysis of our model, we further studied its results through the use of multiple qualitative case studies of countries with both high and low annual Chinese investment in Africa and Asia. We chose these two continents because of the broad portfolio of investment the PRC holds on both continents. Moreover, both continents consist of countries with high, medium, and low investment from the PRC. The ability to study countries with opposing amounts of Chinese investment further elucidates our understanding of how the PRC prioritizes its investment globally.
We then identified one Asian and one African country that we could use as our archetypal case study example where strategic concessions to the PRC were clearly granted, for which we selected the countries of Djibouti and Sri Lanka. These countries not only provided clear examples of one-sided strategic concessions to the PRC, but they also met all three of our criteria outlined at the end of Chapter III. This allowed us to compare and contrast our archetypal countries with other Asian and African countries during our case study analysis.
While the complexities of Chinese investment create difficulty in identifying why and where China invests, this research found statistically significant trends in Chinese foreign direct investment criteria. There remain two general reasons for substantial Chinese investment – the potential for strategic concessions or basic economics of return on investment. This research found three underlying criteria for substantive amounts of Chinese investment into a given country that also displays the potential for granting strategic concessions. While it is impossible to be completely comprehensive in scope, these criteria illustrate how Chinese investment can be determined and potentially predicted. Importantly, a country that meets all three criteria does not necessitate the granting of strategic concessions in grandiose fashion (e.g., Djibouti and Sri Lanka). Instead, countries that meet all three criteria, like Sudan, may grant smaller or initial concessions that indicate the potential for more significant concessions in the future. Lastly, a country that meets only one of the criteria, like Indonesia, garner considerably more Chinese investment than countries that meet none, like Botswana and South Korea.
As our research focused on the criteria necessary for economic investment into countries, future research could illuminate how that same investment affects those 87 identified criteria such as corruption, state fragility, and government type (polity). This research could further explain how Chinese money affects societies, governments, and institutions. Further research along these lines could help determine if China’s economic might proves helpful or harmful to its neighbors and the world writ large. In sum, the most substantial take away from this study is the ability to characterize a given country as “high leverage” based on the degree to which that country meets the three criteria we have developed. As our case studies showed, a country that meets all three criteria can be categorized as “high leverage” (e.g., Sudan). Additionally, a country such as Indonesia, meeting only one of the criteria, can be categorized as “moderately leverage,” in which its democratic underpinnings and low debt defend against Chinese leverage. However, the corruption seen within Indonesia enables a moderate degree of leverage by the PRC. The characterization as high or low leverage can serve as an indicator of not only the expected volume of PRC investment, but as an indicator of the likelihood of strategic concessions granted to the PRC. This information can serve foreign policy and national security decision-makers in formulating options for approaching relations with different states.
As our research focused on the criteria necessary for economic investment into countries, future research can illuminate how that same investment affects those identified criteria such as corruption, state fragility, and government type (polity). This research will further explain how Chinese money affects societies, governments, and institutions. Further research will help determine if China’s economic might proves helpful or harmful to its neighbors and the world writ large.
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