The Belt and Road Initiative was launched in 2013 by Chinese President Xi Jinping. In 2017, it became enshrined in the constitution of the Chinese Communist Party. This underlined the significance of this program for the People’s Republic. It also makes clear that this is a long-term project. So we know that the Belt and Road Initiative is important for China. But how important is it for the world?
To understand the international significance of the Chinese Belt and Road Initiative, it is necessary to understand what has happened with developing countries in the post-war era, namely under the Bretton Woods system and its Washington-based institutions, the International Monetary Fund and the World Bank.
After the US and UK-led anti-German and anti-Japanese international military alliance of 26 countries, known as “the Allies”, rebranded themselves as “the United Nations” in 1942, the growing number of military allies – largely consisting of the Soviet Union, representatives for China, and Imperial Britain and its colonies, as well as the United States and its colonies – met in a golf club resort for very wealthy guests in Bretton Woods, New Hampshire. There they formalised plans of a new international monetary system for the post-war era, at the centre of which was going to be the US dollar.
The system that was decided upon initially operated by using fixed exchange rates against the US dollar, while the dollar itself could be exchanged into gold at an administered exchange rate. This system was to hold up until 52 years ago, namely until August 1971. After a decade of massive US dollar creation by the US central bank and US banks in the 1960s had angered people in countries whose companies, land and other assets had been bought up by US investors, France had insisted on exchanging many of its resulting dollar reserves into gold. US gold reserves declined. As French Navy ships arrived in Manhattan to carry gold back to France, US president Nixon felt prompted to make his famous announcement on 15 August 1971 that the US would “temporarily” suspend dollar convertibility into gold – a US default on its obligations to the members of the Bretton Woods fixed exchange rate system.
One month before this “Nixon shock”, another important event had happened: With US National Security Council member and former Rockefeller employee Henry Kissinger the first visit to China of a senior member of the US government administration to modern China took place – by the way a trip Henry Kissinger has just repeated, more than half a century later, despite his old age of now 100 years.
At the time of his first visit, the US was suffering from the twin problems of a ballooning trade deficit and a surging government budget deficit. The latter had been caused by the rising spending on military and secret service operations, including the wars and regime change operations in dozens of countries. The former was due to the successful exporting and current account surplus nations Japan and Germany failing to find enough attractive US-made goods they wanted to buy.
When the US rescinded its promise to allow the exchange of US dollars into gold at a set exchange rate, the dollar fell and to maintain military hegemony, US leaders felt this fall had to be stopped. The solution was found in the importing needs of countries like Germany and Japan: most of their energy was imported. The US dollar was thus transformed from the gold-backed dollar into the oil-backed dollar, known as the “petro-dollar”.
US troops were deployed in the largest oil producing country, Saudi Arabia, and a deal was made that its government and royal family would be supported by the US, in exchange for the promise to sell oil only against the US dollar, and invest 80% of the resulting abundance in US dollar reserves in Saudi Arabia back into US Treasuries, thus funding the government budget deficit, and with it, the US foreign wars.
Germany and Japan now needed US dollars, in order to be able to buy the energy needed to operate their economies. Of course, some alternatives were explored, namely Germany gradually began to import gas from the Soviet Union, which always delivered reliably.
The other step to underpin the US dollar was to engineer a massive hike in the oil price, which would essentially transfer vast resources from manufacturing powerhouses Germany and Japan to Saudi Arabia and the United States. For this, Henry Kissinger had to arm-twist the Saudis to quadruple the oil price, which happened in January 1974. To divert the attention from the true sequence and cause of these events, as outlined here, and instead spread the narrative that the driving force of events was the OPEC oil embargo, central banks in the sphere of influence of the Federal Reserve, which included the Bank of England, the Bank of Japan and the Bundesbank, had simultaneously set out in 1971 and 1972 to massively expand the money supply by encouraging a grotesque expansion in bank credit, for property speculation and consumption.
This caused the inflation of the 1970s, despite the dominant official narrative that the inflation was the result of a war and its subsequent energy embargo. (Like Henry Kissinger’s visit to China, also this scenario has recurred half a century later: it was not the Russian military operation to defend the newly formed Republics on Ukraine’s borders that caused the inflation of 2021 and 2022, but the massive expansion in bank credit, coordinated by the Federal Reserve, Bank of England and ECB and implemented in March 2020).
As a result, US economic and political dominance continued in the 1970s. Meanwhile, the Bretton Woods institutions of the IMF and the World Bank had been used to manage what has been billed as a de-colonisation and movement towards independence of many countries and peoples across the globe: The British, US, French, Belgian and Dutch overseas colonial empires faced increasing demands by locals for political independence. Having argued that their fight in the second world war against Germany was for freedom and democracy, it was now difficult for these countries to delay decolonisation for the majority of the population in the world living in developing countries that were under their direct control.
We are told by modern English-language textbooks in “Development Economics” that it was this de-colonialisation that created a new academic discipline taught at their universities, called “Development Economics”. The development economics textbooks point out that this discipline did not exist until the 1950s and 1960s and it was created, because an increasing number of former colonies were becoming independent.
But development economics was not created by the leading thinkers of those newly independent countries! Instead, it was created by British and US economists. This, then, revealed the true purpose of “Development Economics”: Had the task of this English-language discipline by leading economists in the colonial powers been to teach countries and regions how to rapidly develop and move from developing country status to developed country status, it would be as old as colonialism itself: What better time is there for colonial thinkers to shape a country and implement the right policies that will result in rapid economic development, than when the country is under the control of the colonial masters.
However, during centuries of colonial rule, no need was seen for such “Development Economics”. It was only when the colonial masters had to give up their formal political and military control over their colonies that they came up with the idea that these former colonial subjects needed advice on how to develop their economies. Why should the former colonies trust their former colonial masters that had not developed Development Economics during the era of full-blown colonialism? Should they really accept uncritically the books on How to Develop Your Economy handed to them as they said good-bye to their colonial masters and became independent states?
To fend off any potential reluctance by the former colonial subjects to such advice from the sage and well-meaning former colonial rulers, the Washington-based institutions of IMF and World Bank would use the power of money to make the new rules of “Development Economics” more persuasive. The IMF and World Bank famously use “conditionality” when they dispense their loans. Other organisations, including the regional development banks, such as the Interamerican Development Bank, USAID, the OECD and the increasingly influential European Brussels-based bureaucracy, would repeat and re-enforce the Washington Consensus kind of “Development Economics”. These Washington institutions and the many other organisations under the US sphere of influence, which includes much of Europe, preach the insights of the English-language “Development Economics”, namely that countries need to deregulate, liberalise and privatise, as well as open up their markets to foreign competition and allow foreign investment to come in. The key insight they preach is that for economic growth and development, significant financial “savings” are necessary, and if countries have low savings rates, they can borrow “foreign savings” in the form of money lent to them by international banks, such as the IMF and World Bank themselves. This has indebted many developing countries to such proportions that their resources can be easily acquired by the foreign lenders in “debt-for-equity” swaps and other arrangements to “help them”.
We can tell whether a tree is good by looking at its fruits. The bottom line of the 75 years of IMF and World Bank international development policies is that there is not a single country among the more than 100 developing countries that have, thanks to IMF and World Bank-backed policies, moved decisively from developing country status to developed country status. This is not surprising, because the historical record shows that free trade and free market policies have never enabled a country to become an economic power. Instead, all economic powers had previously engaged in selective trade policy and infant industry protection in order to develop a large indigenous industry.
But it’s not just that the IMF and World Bank “Development Economics” failed to deliver. It can even be argued that it was deliberately designed in order to prevent economic development and instead keep developing countries in a state of dependency where their resources could be extracted at low cost. For the Washington-type of “development” consists in persuading developing countries, under the guise of “comparative advantage” to focus on low value-added commodities exports, but because their prices decline over long time periods relative to high value-added finished manufacturing goods, these developing countries will experience balance of payments deficits, feel the need for borrowing foreign money and their currencies weaken, causing debt traps – while making their resources ever cheaper for the rich countries to acquire.
This is not to say that there are no countries that moved from developing country to developed country status. However, there are only five countries or regions that did make a decisive move, measured by per capita income, to developed country status, namely Japan, South Korea, Singapore and China and its regions (including Taiwan). However, they achieved true economic development by ignoring the Washington-style “Development Economics” and adopting policies that are explicitly forbidden by the IMF and the World Bank, such as infant industry protection, industrial policy, and reliance on domestic bank credit creation instead of foreign money, whereby the central banks deployed ‘window guidance’ of bank credit to high value-added industries, while suppressing bank credit for consumption and asset purchases. China of course holds the prize for lifting more people out of poverty than any other country in history, thanks to policies that defied the Washington Consensus-type of “Development Economics”.
In the late 1980s, the Japanese government and many Finance Ministry officials pointed out to the leadership of the IMF and the World Bank that their policies were flawed and instead one should learn from the high growth East Asian economies in order to learn how to develop countries rapidly. But having US troops in Japan, Korea and even the Chinese region of Taiwan meant that voices from these regions could not challenge, let alone, change, the US-dominated IMF and World Bank practice. So the developing world remained under the cloud of “Development Economics” of the type that was designed to prevent economic development.
Next, China made many sincere attempts at formal IMF and World Bank shareholder meetings and at international summits and meetings to argue that IMF and World Bank policies should be changed, and also that other countries should have a bigger voice in the IMF and World Bank, as the US dominance was outdated and also had not resulted in economic success for the majority of countries. But such Chinese attempts to improve the system were rebuffed by the US.
As a consequence the Chinese leadership devised a bold alternative. This is the Belt and Road Initiative launched by President Xi Jinping. China established the New Development Bank and the Asian Infrastructure Investment Bank in Shanghai and Beijing, and became active in the BRICS group of countries. China also stepped up the activities of the Shanghai Cooperation Organisation. Now developing countries have different options and do not need to submit to the de facto continuation of colonial rule via economic policies that the Bretton Woods system of IMF and World Bank had fostered.
Unlike the Washington-led system, China does not interfere in the politics of developing countries and does not impose IMF-style “conditionality” that often goes as far as demanding changes to the constitution (as the IMF demanded from Thailand after the 1997 Asian crisis). Instead, under the Belt and Road Initiative China invests its vast foreign exchange reserves in developing countries in the form of impressive infrastructure investments that directly help develop the receiver countries’ economies and encourage mutual trade and prosperity. Developing countries are grateful for this alternative offered by a country that does not have a history of colonising other countries. What is needed next is for China to champion the establishment of many small local banks in developing countries, just as Deng Xiaoping did at home to launch the rapid rise of the Chinese economy. This would be the ultimate alternative to the Washington-based wrong-headed “Development Economics”, which considers banks unimportant and presses countries to instead focus on stock market development, despite the fact that stock markets do not result in economic growth, but instead fuel US and UK-style casino capitalism.
China’s vast economy has benefitted greatly by abandoning the old Soviet-era mono-bank system of central planning and introducing decentralisation of economic decision-making, delegated to hundreds of thousands of loan officers working for thousands of small local banks evaluating the loan applications of millions of small firms and micro-businesses. This creates a strong and large middle-class, which means inequality declines and the country can prosper, thanks to the strong purchasing power of the average citizen – while the Washington “Development Economics” has presided over an ever-growing disparity between many very poor people and a small elite of extremely rich beneficiaries.
The Belt and Road Initiative is significant for the world for another reason: As the petro-dollar system is crumbling, with Saudi Arabia now selling oil also against the Chinese currency, there is a growing desire to move away from US dominance and the heavy hand of Washington-style neo-colonialism. Through the BRICS initiative, which complements the Belt and Road Initiative, there is now the prospect of an alternative international monetary system that facilitates peaceful trade and cooperation, and does not require oil and energy wars, as is the case with the ailing petro-dollar.
Professor Richard A. Werner, D.Phil. (Oxon), is professor of banking and economics at the University of Winchester. He previously was full professor of economics or finance at Goethe University, Frankfurt, the University of Southampton and Fudan University, Shanghai. His book Princes of the Yen (Quantumpublishers.com) was a number one bestseller in Japan. In 1995, he proposed a new monetary policy for post-crisis countries, which he called “Quantitative Easing”. Based on his Quantity Theory of Disaggregated Credit he warned in 1991 that the Japanese banking system and economy would collapse and move into a great depression. His website is www.professorwerner.org
Published in China by Guancha.cn newspaper on 7 September 2023 at: https://www.guancha.cn/Werner/2023_09_07_707650_3.shtml
Chinese translation available at previous pages: https://www.guancha.cn/Werner/2023_09_07_707650.shtml