Big infrastructure is back. Long relegated to a secondary development objective by the West, China's gambit to use infrastructure as a vehicle for promoting foreign policy objectives is changing the geopolitical landscape.
Infrastructure is the highest priority in almost every developing country. As I learned from working in 49 of them, when you ask the leaders about their top development priority, the answer is always the same: roads, power and water. Not necessarily in that order, and communications infrastructure is increasingly in the mix, but the response is consistent everywhere. That's because infrastructure — along with security and good governance — makes economic growth and stability possible.
Big infrastructure dates back millennia. From the Phoenician ports to the Roman roads to the pre-Columbian causeways of Mesoamerica, large engineering works enabled the growth of empire. Today infrastructure plays a crucial role in everything from economic growth to poverty reduction and from health care to national security.
Unfortunately, it's expensive. The price tag and unusual cash-flow profile of infrastructure — high upfront costs and slow long-term returns — present major problems for countries trying to secure financing for it. In developing countries, infrastructure needs are estimated at trillions of dollars through 2030 and range from 4 percent to 25 percent of gross domestic product. Recurring costs for operations and maintenance make up about half of that estimate, and security costs in countries like Afghanistan can add 30 percent to the price.
The Western Development Model
The historical approach of the United States to international development has largely tracked global geopolitical shifts. During the Cold War, U.S. development in most countries focused on small-scale technical assistance and training activities funded at just a few million dollars a year. This was part of the global chess game between the West and the Soviet Union, where presence was often more important than project impact.
That approach evaporated with the dissolution of the Soviet Union after 1991. The U.S. development footprint quickly shrank, and it refocused on promoting democracy and market economics in the newly independent states. Infrastructure was de-emphasized, although the United States continued building in a few strategic places, such as Egypt, the West Bank and Gaza Strip, and the Philippines, where large and sustained development budgets were assured. After 9/11, the focus changed back in favor of infrastructure as funding grew for reconstruction in Iraq and Afghanistan.
Private sector financing of big infrastructure has been around for centuries, as the American experience with railroads, power, water and communications attests. Starting in the 1980s, the role of the private sector expanded significantly overseas as foreign direct investment started to dominate country development. Today most private sector investment occurs in advanced countries because of the lower financial risk, but investment in developing countries is also growing through direct investment and public-private partnerships.
China's Development Gambit
In contrast to the West, China has always focused on infrastructure as essential to the development of nations. It has also learned that building infrastructure is the best and fastest way to make friends overseas. As one Chinese spokesman put it, "China wants to do business with its neighbor. Infrastructure is the first step, followed by trade and investment and industrial cooperation."
China has learned that building infrastructure is the best and fastest way to make friends overseas.
As far back as the mid-1970s, China was building World Bank-funded infrastructure in Africa and elsewhere to generate foreign exchange and employ a surplus Chinese workforce — the modus operandi still in effect today. In the 1990s, however, it became disillusioned with World Bank financing when activists used the bank's policies to try to kill funding for China's massive Three Gorges Dam project. China quickly turned to outside financial sources, and in 15 years it completed the project.
As the World Bank Group shifted away from building big infrastructure, China stepped into the breach. In 2007 it created the China-Africa Development Fund, followed by the Overseas Infrastructure Development and Investment Corp. The Belt and Road Initiative came online in 2013 and the Asian Infrastructure Investment Bank — now with 87 member countries — in 2016. These, along with the accumulation of massive foreign exchange reserves, put China in a position to use infrastructure finance as a potent vehicle for economic statecraft.
Good News for Developing Countries
China's infrastructure gambit has riveted the attention of both Western donors and recipient countries. Not only does it represent a geopolitical threat to the West, but in promoting a state-led development model of infrastructure investment, it also challenges the long-standing Western approach to development of leveraging governance, social sector and economic policy reforms.
With China building core economic infrastructure in some of the world's most strategic places, the United States is adapting to the new reality. In October, U.S. President Donald Trump signed bipartisan legislation creating the U.S. International Development Finance Corp. (IDFC) for overseas infrastructure, funded at $60 billion. As diplomats are fond of saying, the move is necessary but not sufficient. The new funding level is tiny compared with the trillion dollars China plans to spend on its Belt and Road Initiative, even though the IDFC will also leverage funds from the private sector and other sources. The IDFC establishes an alternative, however, for countries that are desperate for infrastructure but don't like the risk and sovereignty implications of some of China's financial terms.
With a range of other new financing mechanisms also evolving, the IDFC adds to the list of options now available to fund infrastructure in the many developing countries that are hungry for it. For them, this is good news indeed. It means that outside competition to finance their infrastructure is growing — a global trend that, for once, can work in their favor.