Can China’s Belt and Road plan bring Chinese-style prosperity to developing nations?

As the US appears to be retreating from the world, China is making big investments in ­regional and even ­global connections, especially under its “Belt and Road Initiative”. But is the strategy feasible? In other words, is China capable of translating the “belt and road” into feasible development plans?

While the belt and road strategy is intended to enable participating countries to replicate China’s rapid economic growth, it is unclear whether and how this can happen.

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China’s success has been largely predicated upon its unique ­economic, political, and social characteristics. In the Chinese context, the massive scale of infrastructure development over the past decades has been dominated by government planning and public financing, and supported by state-owned banking and industrial systems that are able to recoup their investments through monopolistic control of steadily growing domestic markets. Within this system, all the financial, political, and policy risks involved in these huge infrastructure investments can be ­absorbed internally.

It is not clear whether the belt and road countries will be able to replicate this experience, given that they do not share many of the characteristics that enabled China’s dramatic growth. It thus remains to be seen whether and how the belt and road-driven infrastructure projects will provide adequate return on ­investment for the private sector.

In many of these countries, the World Bank and the Asian Development Bank have been striving to eliminate infrastructure deficits for decades without success. How will the belt and road succeed where these institutions have failed?

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As a matter of fact, infrastructure projects operated by private investors always face the problem of ­insufficient return, due to its nature of being a public good – that is, significant positive externality to the public but limited measures to collect service charges from everyone that has benefited. Thus, government subsidies are generally needed to incentivise investment, as well as sustain the operation of the infrastructure. The subsidies required to sustain the operation of the belt and road infrastructure may become a fiscal burden.