Economic Entanglements and the Limits of Economic Statecraft

• In Event: The Causes and Effects of China’s Economic Statecraft

Abstract

The question of how asymmetric economic relations between countries affects political power is a classic one in social science (Hirschman 1945), but has taken on a new urgency in the context of China’s rapid rise from capital importer to capital exporter (Lee 2017, Rithmire 2022). By year end 2021, China had extended $600 billion USD worth of loans and increased its overseas investment capital stock to $2.7 trillion USD; the bulk of both kinds of capital flows went to developing countries. A literature has developed around the long-term sustainability of these capital flows, their effects on domestic politics in host countries, and whether China is able to harness its capital exports in service of its own strategic goals, often called “economic statecraft” (Kaplan 2021, Norris 2016, Repnikova 2022, Wang, Pearson and McCauley 2022, Wong 2021).

The question of how Chinese capital affects institutional capacity and economic stability in the developing world is of particular importance. After generations of capital flows almost exclusively from international financial institutions (IFIs) and western governments, typically organized with “neoliberal” or “good governance” principles, China presents an apparently illiberal source of aid, debt, and investment whose effects on host countries are debated intensely. Policymakers in the west have pointed to “debt-trap diplomacy” as a way in which Chinese capital can constrain the autonomy of host states, while Chinese actors tout the Chinese developmental model as an appropriate alternative to western conditions that expands the autonomy of host states in choosing their own developmental and institutional paths.
While many approaches to understanding China’s role as global financier focus on a specific type of capital (i.e., loans or FDI) or take a large-n approach to Chinese projects (Dreher et al. 2022), we argue that the effects of Chinese capital on domestic institutions and host country politics is best understood at the level of analysis of the host country, by examining several types of Chinese capital holistically, and by asking not just how Chinese capital affects policy (discrete outcomes, like democratization or debt) but also politics, meaning various debates about national identity and new forms of interest articulation (Abdelal and Kirshner 1999). Such a national-level, comprehensive approach also enables understanding of how various Chinese actors, including firms and different parts of the Chinese state, interact in host country settings and how their coordinated and uncoordinated efforts affect China’s strategic goals. We deploy this “economic entanglements” approach in an analysis of two countries in South Asia, Sri Lanka and Pakistan, which have both received all forms of Chinese capital for the last two decades, well before the Belt and Road Initiative (BRI) took shape in 2013. Both countries have hosted large-scale Chinese infrastructure projects (ports in Hambantota, Colombo, and Gwadar), development zones, and commercial real estate investment. In both countries, China’s economic influence has refracted through fractious domestic politics and fragile political institutions, and in both countries China’s “soft power” and fiscal health has been threatened by politicization of projects and a lack of host country capacity. Based on intensive fieldwork and privileged access to contracts in both countries between 2016 and 2020 and in 2023, the paper traces the processes through which Chinese actors became entangled in local politics without recruiting local economic allies, exacerbating host country capacity weaknesses and providing a lightning rod for local opposition political movements.

Authors

• Meg E. Rithmire, Harvard Business School

• Hong Zhang, Indiana University Bloomington