The Political Economy of Regionalism, Trade, and Infrastructure

The following sections are included:

• About the Book
• About the Editors
• Contents
• Foreword
• Acknowledgments

The following sections are included:

• Belt and Road Initiative and Global Development
• (Southeast) Asian Institutions
• Global Value Chains and Global Production Networks
• Economic Strategies
• Structure and Themes
• Epilogue: Belt and Road Initiative in Post-Pandemic Southeast Asia
• Acknowledgment
• ORCID
• References

Developing economies, especially emerging market economies (EMEs), face complex challenges in investing for growth, including building infrastructure. Many developing economies are trying to sustain the growth catch-up process, and manage disruptions related to transition to the “new economy”, as well as headwinds from protectionist tendencies in trade and technology. Investing for the long term — including in infrastructure — has therefore become a critical issue. In this context, the Belt and Road Initiative (BRI) has captured the imagination of the world. An ambitious initiative involving more than 70 countries collaborating through investments in infrastructure, it seeks to improve connectivity for cross-border trade and investment, and generate economic benefits for the countries involved. It seeks to address large infrastructure gaps and build capacities for growth. And it helps countries unable to get affordable financing for plugging savings-investment shortfalls. However, the BRI has drawn criticisms over China’s underlying geopolitical motives, and BRI partner countries have been warned of the risk of becoming heavily indebted or getting locked into business platforms created by China. This paper aims to contribute to the policy debate over the BRI from an ASEAN perspective. It analyzes the reasons for the persistent infrastructure investment gaps in EMEs from an ASEAN perspective; assesses whether BRI is more of a development opportunity or a debt trap; outlines a framework to address the risks and concerns in order to unlock the potential benefits; and uses case studies both outside of and within the ASEAN region to distil key themes needing policy attention.

Global economic governance is in flux. The centralized international trade architecture of the post-Bretton Woods era is decentralizing as new regional institutions are being established for various reasons. Decentralization per se is neither good nor bad. It depends on whether there is “healthy” competition and functional complementarity or “unhealthy” competition between global and new regional institutions. This paper has three objectives, to: (i) review the decentralization of the international trade architecture; (ii) identify the benefits and the risks of the decentralization process and its implications for the centrality of the World Trade Organization (WTO), and (iii) recommend policies for the WTO to manage the process. The paper argues that, so far, the benefits of new regional institutions and trade decentralization appear to have outweighed the risks, and as a result global economic governance may have improved. Looking ahead, the paper recommends a number of policy actions that the WTO should take to manage trade decentralization. The paper argues that Asian countries, especially those that are members of the G20, should play a greater role in lobbying and driving the needed reforms of the WTO. They should also seek to expedite the conclusion and ratification of the Regional Comprehensive Economic Partnership (RCEP) and eventually institutionalize the complementarity between RCEP, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Belt and Road Initiative (BRI).

The change of trade structures from the dynamic development of production networks globally had caused processing trade to become more prominent in China. This change drives ASEAN5 to be more aggressive in developing vertical intra-industry trade (VIIT) with China. This study aims to identify the catalysts that strengthened the VIIT relationship between ASEAN5 and China for manufacturing sub-sectors. Both decomposition-type threshold method and spatial panel econometric modelling are used and the results show that foreign direct investment (FDI) and difference in gross domestic products (DGDP) are the influential determinants of VIIT although their impacts vary across manufacturing sub-sectors. The results also confirm the presence of spatial interaction effects among ASEAN5 countries in relation to China’s trade. These suggest that deeper economic integration among ASEAN5 countries is vital in strengthening bilateral VIIT with China. Moreover, to foster the value chain between the two regions, emphasis on performing similar tasks with differentiated varieties of products is essential as the two regions have similar comparative advantages.

This paper seeks to investigate the motivations of countries that participate in the One Belt and One Road (B&R) Initiative, a China-led economic development programme with the intention of enhancing regional economic cooperation. We examine the income convergence hypothesis for B&R countries with both linear and nonlinear unit root tests to detect the presence of economic integration over the periods 1960–2016 and 1979–2016. For the B&R countries that are found to show income convergence to China in our income convergence testing, we argue that they tend to have a strong existing economic relationship with China. By contrast, the countries that have relatively weak economic relationships with China tend to show no convergence to China, and they take advantage of the B&R as an opportunity to catch up. Moreover, we find evidence that more countries converge to China’s real per capita income for the years after 1978 when China started its transition to a market economy and initiated the open-door policy to embrace globalization. The results suggest that China contributes to a higher degree of income convergence in regional integration.

This paper assesses how China’s Belt and Road Initiative (BRI) can bring investment and technology into ASEAN and its impact on ASEAN’s electricity market. With the theoretical framework of scenario analysis, this paper provides three scenarios for ASEAN electricity market integration: the Lao PDR–Thailand–Malaysia–Singapore (LTMS) arrangement, a power exchange between heterogeneous grids in the Greater Mekong Sub-region (GMS) region, and a fully competitive electricity market with a fully-developed ASEAN Power Grid (APG). Based on these scenarios, the paper examines the extent to which the BRI can assist electricity market integration in the ASEAN region. It is found that BRI can best fit with and facilitate the first scenario. Given the uncertain outlook for the electricity market integration in the GMS region, how China’s BRI can play a role in facilitating the GMS electricity market integration is not clear under the second scenario. Further, BRI may be less helpful in the third scenario in which the region’s master plan of APG would be realized. In any sense, how BRI can fit with and facilitate ASEAN’s electricity market integration would more depend on the host countries rather than the Chinese side.

Southeast Asian economic sentiments toward China tend to dither between competitive and cooperative instincts. Initial warmth among the Association of Southeast Asian Nations (ASEAN) members toward the China-led Belt and Road Initiative (BRI) is slowly giving way to project-related concerns as well as fears that “China is buying the world”. This paper examines Chinese outward foreign direct investment (OFDI) in global and ASEAN contexts shortly after the start of the country’s “going out” strategy. The analysis draws on country- and firm-level investment data. It shows that a handful of ASEAN economies have become more important to Chinese investors as their motivations, capabilities and needs evolve. Nonetheless, with the exception of three (Cambodia, Laos and Myanmar), ASEAN economies have not become “reliant” on Chinese investment post-BRI launch, once one considers the increased weight China carries as a foreign investor in the developing world. This is either because these countries generally do not rely on FDI, or because traditional foreign investors from industrialized economies and more advanced ASEAN member states are far more entrenched than Chinese investors in the host economies.

Assessment of the likely impact of Chinese OFDI on the ASEAN members of the Belt and Road Initiative (BRI) requires understanding of the evolution of Chinese policy, regulations and institutions. Utilizing recent developments in institutional theory, this paper examines the interplay between China’s OFDI regulations and enterprise supportive policies. Liberalization of FDI regulations complements policies of technological catch-up and the development of regionally focused multilateral institutions. Evidence of an increasing level of Chinese OFDI since 2003, and of a larger share attracted to the BRI group, particularly the ASEAN countries, is consistent with the theorizing.

In recent years, China has been increasingly witnessed as a major global outward investor, especially since the launch of the Belt and Road Initiative (BRI) in 2013. The question of whether and if yes how the BRI reshapes firm outward investment motives remains under-researched. Using a project-level database of China’s Outward Direct Investment from the Ministry of Commerce from 2010 to 2015, this paper investigates the changing investment motives of state-owned and private-owned enterprises (SOEs and POEs) before and after the implementation of the BRI in two periods, namely 2010–2013 and 2014–2015. Our conditional logit models show that (1) market-seeking is one of the key motives for both POEs and SOEs; (2) POEs pursued natural resources in ASEAN based on geographical and relational proximity in the pre-BRI period while SOEs are directed to exploit natural resources in ASEAN besides remoter destinations after the launch of the BRI; (3) POEs are risk-taking in both periods, which runs counter to conventional expectations. This can be explained by the long-term investment tradition of POEs in ASEAN in which POEs are attracted predominantly by socio-economic factors and often less sensitive to variegated host institutions among ASEAN countries and (4) the BRI promotes Chinese OFDI in ASEAN through increased senior leader visits and enhanced diplomatic relations.

In this paper, we use the Belt and Road Initiative (B&R) as a semi-natural experiment and apply a difference-in-difference analysis together with the propensity score matching approach to estimate the impact of the B&R on China’s A-Share listed firms with outbound FDI to the B&R countries during 2011–2017. We find that China’s firms investing in B&R countries, compared to those investing elsewhere in the world, tend to reduce their total employment, increase the share of skilled labor, and increase wages. Various tests show that the key results of B&R impacts remain robust. We also find that the adjustment after investing in B&R countries is mainly found in non-SOEs, the firms in key provinces that enjoy pilot B&R policies. Both vertical and horizontal FDI firms are found to significantly adjust their employment, skill structure, and wage payment, with the former as more responsive.

While China’s Belt and Road Initiative (BRI) is widely considered as an attempt to reshape the global geo-political landscape through its massive investment/engagement in capital-intensive infrastructure, an often-neglected topic is the performance of Chinese-funded firms in manufacturing sector. Therefore, this paper sought to examine the efficiency levels of Chinese manufacturing firms in Malaysia. By using firm-level data supplied by Malaysia’s Department of Statistics, this study employs Data Envelopment Analysis to examine the efficiency levels of Chinese manufacturing firms in comparison with local and other foreign firms in 2010 and 2015. The results show that Chinese manufacturing firms show higher efficiency levels than local and foreign firms in 2010 and 2015, implying that these firms have the potential to transfer technology and share managerial skills to local firms. However, the efficiency levels of Chinese firms deteriorated from 2010 to 2015, suggesting that firms’ relocations decision may have been driven by distortions created by incentives and other supports provided by the Chinese government rather than by firms’ efforts to sustain or raise efficiency levels. The findings suggest that Chinese firms have to be careful in making strategic decision to relocate operations abroad to ensure that government initiatives are in sync with firm-level performance.

Singapore and China started their close economic collaboration in the early 1990s. The collaboration model in the first 25 years focused mainly on the government’s role in foreign investment promotion, urban development, industrial infrastructure development and other related government policies. Platforms of collaboration included the Suzhou Industrial Park, Tianjin Eco-city, Chongqing Connectivity Initiative, the Software Transfer Project, training programs for thousands of Chinese officials and bilateral economic councils. Singapore’s pragmatic leverage on globalization trends and thoughtful application of market forces have been a major factor in the shaping of China’s own highly successful economic growth model.

Singapore–China economic collaboration model 2.0 will be different. China is now the second largest economy in the world and is expected to establish its global leadership in the world. Singapore has developed successfully into a leading global business hub complete with trading, manufacturing, financing and professional services as the engines of the business hub. Model 2.0 will be about mutual sharing and partnership. We should see more collaboration outside of China, driven by the private sector and in new technologies. If collaboration model 2.0 is successful, we will see both China and Singapore emerging stronger, in a more sustainable way. Major companies in both countries will be more tightly coupled in projects and joint ventures in China and elsewhere.

This article argues that Singapore, courtesy of its strong state capacity and long-standing connections with China, has promoted effective polices and coordinated mutually reinforcing institutional mechanisms in engaging with the Belt and Road Initiative (BRI). While some of these institutions predate the BRI, they have been continuously enhanced or modified to meaningfully foster Singapore-China cooperation. In certain cases, new institutions have been created to fulfill specific demands the existing institutions cannot adequately serve. These two types of institutions not only complement each other but also promote cooperation between the bureaucrats, politicians, transnational corporations, government-linked corporations, small- and medium-sized private firms and business associations. The article also illustrates the flexibility of the ‘networked state’ in formulating collaborative ties linking key international and domestic actors, demonstrating how a small state like Singapore can partner China effectively and deepen its strategic importance to the BRI to enhance its own strategic and economic interests. Lastly, the article highlights the two key conditions in BRI-related nations for their successful engagement: the existence of mutual interests between China and a counterpart nation bolstered by conducive perceptions and policies, and the institutionalization of competent mechanisms to materialize and operationalize these interests.

How do territorial disputes affect bilateral foreign direct investment (FDI) between claimant states? Using a difference model, we find that a regime’s position on the South China Sea (SCS) significantly impacts Chinese FDI. We used a novel dataset on firm registrations in the Philippines, finding that the annual number of new firm entrants with Chinese investment significantly increases when maritime border disputes are stabilized. In contrast, we observe that conflictual relations in the maritime borders tend to decrease the number of new firms. We also notice that disputes do not influence FDI from non-claimant states.

In recent years, China has been catching-up with other advanced economies and become one of the “leading geese” in the Asian economy. China not only plays a leading role in regional production network but also in various regional economic cooperation. Indonesia, being one of the following geese, needs to adjust its position to benefit from this change in global and regional order. While other more advanced economies have less to offer, Indonesia has gradually moved closer toward China in terms of economic cooperation. Using the flying geese model, this paper argues that China’s BRI might change trade and investment trends in Indonesia. China BRI might complement the role of Japan as a catalyst for economic development in the Asian region in general and in Indonesia in particular. There is no official BRI project agreed by Indonesia so far. However, there are a number of completed and ongoing China–Indonesia projects, which arguably might pave the way for future BRI investment. Currently, apart from the Jakarta–Bandung high speed railways, most of the projects are concentrated in resource-exploitation needed by China and the fulfilment of Indonesian development needs, such as power generation, mineral smelters and industrial parks. From the Beijing’s perspective, these projects are perceived as part of BRI. Since these so-called BRI projects have not been completed, it is therefore impossible to assess their impacts on Indonesia’s industrialization at this point. However, we can still argue that BRI might have initiated a new type of investment that might in turn change the industrial trends, structure and performance in Indonesia. If this change leads to improvement in products quality or value added, industrial upgrading, technological transfer and export boost, then one may argue that BRI has brought promised benefits to the host economy (i.e., Indonesia). Otherwise, the benefits would be negligible.

Malaysia’s Mahathir Mohamad stands in a delicate position vis-à-vis China’s Belt and Road Initiative (BRI). The BRI’s Silk Road-like scenarios of transcontinental rail links to extend market-facilitated trade and investment have a place within a ‘Mahathirist imaginary’ that opposes inequities in a western-ruled global order and sees hope for the ‘rise of Asia’. In vision he shares the ‘Chinese Dream’ of resurrecting ancient land and maritime trade routes as an ‘imperative of globalization’ despite attempts by others to entangle the BRI in narratives of geopolitics long repugnant to his deep non-aligned convictions. His unprecedented resumption of premiership in May 2018 gave Mahathir a dream-like chance to engage with the BRI but he has been jolted by some Malaysian-China projects contracted in the name of the BRI by the Najib Razak-headed regime (2009–2018). Concerned that those projects could strain Malaysia’s debt burden and undermine its sovereignty, Mahathir must balance his support for BRI with undoing some of its local manifestations without jeopardizing long-term Malaysia-China trade, investment and diplomatic relations.