China and Russia’s inroads in Europe, elsewhere may not pay off
Published 1:30 am Monday, April 8, 2019
While domestic politics has dominated the headlines, changes in the international scene are presenting the U.S. with new challenges.
China is trying to buy up and build port facilities in the Mediterranean, most recently in Italy, and continues its military presence and economic projects in Africa. Russia is providing economic and military aid to African countries, sold an air defense system to Turkey — a NATO member — and deployed a company-sized military unit in Venezuela.
The economic setting for these activities magnifies their national security implications. Europe’s economy is slowing down and may even shrink in some of its member countries. So, EU members are hungry for foreign investment that could jump-start growth and avoid a drift into recession. Whether or not they are willing to pay the price for this investment, though, is still in question.
Italy, for example, has signed onto a deal with China’s Belt and Road Initiative (BRI), a global infrastructure program that is supposed to spur trade and economic development. The European Union, though, is less enthusiastic about the idea, and sees the record of failed projects and muddy financing in Italy and now in Pakistan as a good reason for a careful, critical look at the fine print in any of these projects, including BRI deals with China.
One thing that a careful look at BRI will reveal is that it is essentially a scheme to finance the sale of China’s building and construction services. The projects are paid for by the host country by issuing bonds underwritten by China. It is, at heart, a clever adaptation of a sales financing technique developed and used successfully by aircraft and automobile manufacturers.
Concern about China and Russia is certainly understandable. Neither country’s history lacks aggressive behavior. And their relationship with their friends and allies has not been without abundant portions of self-interest. Work on BRI projects in Chinese friend Pakistan, for example, has been suspended pending a review of the financing and economic impact of the scheme. And, fundamentally, the last thing most underdeveloped countries need is more debt.
The economic impact of any investment — domestic or foreign, public or private — doesn’t happen automatically. A true stimulus is not as simple as flipping a switch or writing a check. The effort to stimulate our economy in the wake of the 2008 financial crash and subsequent recession serves as an example of how complex the economic impact of government spending really was.
Who would have thought that an injection of nearly a trillion dollars could virtually disappear without a trace, with no measurable economic impact on the recession? But it did.
The underlying reason is straightforward enough. It is “productivity.” The core of modern economic theory is Adam Smith’s observations of how specialization of work raises productivity in a factory. If Smith had been hanging around a bank, a school, or a law firm, the mystery of productivity and economic growth would still be a mystery.
Public infrastructure projects often have a different problem: mismatched timing. The cost of these projects is incurred quickly, while the economic impact might not be fully realized for decades. Investors or signatories to a public infrastructure deal should equip themselves with a sharp pencil and pay attention to the fine print.
The most effective and fastest impact is going to be felt when funds are invested in activities where productivity is easiest to improve. Almost invariably we find these areas in manufacturing.
Manufacturing’s share of the U.S. economy has been shrinking for decades, though, so until very recently it didn’t have the attractiveness as the ideal target of either public or private investment. And in a democracy, you can get a lot more legislative enthusiasm for health care or education spending than for projects where workers have to wear coveralls or hair nets. Health care and education might be wise long-term investments for a developed economy but if you are looking to boost a complex economy out of a recession, they are not so good. In a poor country, though, they can have an almost immediate impact.
A similar split exists in the field of education. In an underdeveloped economy, investment in education can have an almost immediate economic impact. In more developed economies, though, despite huge public and private investment, productivity in education seems frozen in time. In fact, it may even be declining. There are those, for example, who believe that we need to change our K-12 system into a K-13 system to prepare high school graduates for further learning.
Should we be concerned about the national security dimension of Russian and Chinese moves in Europe, the Mediterranean, Africa and Venezuela? Certainly. But as China and Russia will find out, economic results are harder to come by.
