China’s Chance To Lead: Acquiring Global Influence Via Infrastructure Development And Digitalization

>> Glenn Tiffert: Thank you for joining us today in the latest installment of the project on China's Global Sharp Power speaker series. Today we have a special guest coming to us directly from Shanghai. Richard Carney engages in political economy research with a focus on business-government relations. He received his PhD in political science from the University of California, San Diego.

He's the author of Authoritarian Capitalism, published by Cambridge University Press in 2018, and is currently an assistant professor in the Department of Strategy and Entrepreneurship in the China Europe International Business School in Shanghai, as I said. He's also an advisor to the World Bank for its flagship project, Businesses of the State.

His next book, which he's going to talk about with us today, China's Chance to Lead, will be published later this year by Cambridge University Press. Richard, thank you for joining us today. Over to you.

>> Richard Carney: Thank you very much, Glenn, and thank you to all of you for coming today.

It's a great pleasure to have the opportunity to share the research I put into this project with you, and I'm looking forward to your questions and comments later. So let me begin with the question that's motivating my project. So the question is, why does Chinese foreign spending on infrastructure and digital technology exports vary across countries?

And just to give you a little bit of background, which I'm sure you're all familiar with, but just so we're all on the same page, you'll recall that President Xi became president formally in March 2013. In September 2013, he announced the launch of the Silk Road while he was on a visit to Kazakhstan, connecting China to Europe over the Eurasian landmass.

And then he, on a trip to Indonesia in October of that year, announced the Maritime Silk Road. Both of these announcements were directed toward the infrastructure component of the Belt and Road Initiative. 18 months later, in March 2015, there was an announcement made by the National Development and Reform Commission regarding information connectivity, and this has later been called the beginnings of the Digital Silk Road part.

I want to pose a puzzle to you to motivate the analysis here and the argument that I'm going to offer. So Indonesia, as I mentioned, was the location where he made this big announcement about infrastructure in the context of the maritime portion of the Silk Road. The amount of Chinese foreign spending going into Indonesia from 2012, the year before the announcement, up through 2016, almost didn't change.

It was flat, about $3.75 billion in 2012 and about $3.77 billion in 2016. And there were almost no significant digital technology projects that were initiated in Indonesia. Okay, so that's just what I just mentioned, and I'm on the bottom part where I'm talking about this puzzle. So Indonesia had virtually no change between the year before the project was announced in Jakarta in 2013 till several years later in 2016.

Malaysia, on the other hand, experienced this very significant increase, in fact, over a 100% increase in Chinese foreign spending going into the country, from around 3.5 billion to over 8.5 billion. And also, it launched some major digital tech projects, including the Digital Free Trade Zone with Alibaba in 2017.

And Kuala Lumpur became the first city outside China to adopt Alibaba's smart city platform, City Brain. So the puzzle is heightened when you consider some other characteristics of Indonesia and Malaysia. So Indonesia's economy is three times larger than Malaysia's. It also has a population nine times larger than Malaysia's.

Indonesia was also a major natural resources exporter to China before its launch, whereas Malaysia was not. And Indonesia's GDP per capita is far lower than Malaysia's, or was at the time, and still is, about $3,600 GDP per capita, compared to Malaysia's, which was nearly 11,000. And finally, Indonesia's government was a democracy, it was democratic.

It's still consolidating, but nevertheless, it had checks and balances, which typically are regarded as promoting policy stability and reducing political risk for foreign investors. And that's typically regarded as attractive for foreign investment. Malaysia's government was autocratic, right? I mean, they had elections, but they were semi-competitive, which means the incumbent was regarded as being the heavy favorite to win.

So all these characteristics suggest Indonesia should be very well-positioned to attract a far larger volume of Chinese foreign spending. But as I said, it didn't. It was flat. Malaysia jumped by over 100% during the next four years. Why? So existing explanations to explain Chinese foreign spending focus overwhelmingly on China's characteristics, right?

And they try to understand the motivations for China's political and economic elites and why they are trying to do what they're trying to do. There is a very big gap coming at this from the other perspective, that is, the demand side. So we could think of China as the supply side.

The demand side is all these recipient countries. Typical explanations regarding the demand side have come from thinking about foreign investment with regard to the interests of private business. And so many of those characteristics I showed you a moment ago, such as checks and balances, reducing policy risk, those are especially important for private business.

Another common explanation is thinking about whether a country falls along a democracy-autocracy continuum, a sort of linear approach to thinking about political issues. Now, I'm gonna argue that we need a new approach to understanding recipient country characteristics that are salient to Chinese foreign spending. And I argue that political regimes have two characteristics that are especially helpful for understanding why countries vary in the way they attract Chinese foreign spending.

The first is the public-private orientation of the corporate sector. In other words, how prevalent is the The state in the corporate sector, how large a share of ownership of the biggest companies do they have, how much control do they exert? And the second characteristic is clientelism. By clientelism, I mean, do the political leaders depend upon allocating resources to certain groups in the country in order to secure their political support.

This first characteristic of political regimes, the public private orientation, builds on my previous book, Authoritarian Capitalism. The novel theoretical approach in this book is about the clientelism and applying this whole approach to explaining Chinese foreign spending. So let me explain now exactly what the argument is. And I want to begin with closed autocracies.

So closed autocracies are those countries that do not hold elections, or do not hold multiparty elections of any kind. So an example of a closed autocracy is China, or Saudi Arabia, or North Korea. In the context of those countries, there typically is a small group of elite, loyal supporters of the regime, and often in the context of Saudi Arabia, or you might even think the UAE.

They are wealthy business owners, wealthy merchants, right? And they are the ones who need to be major partners with the regime in ensuring that the regime retains political leadership, and I guess legitimacy in a way, in so far as they are catering to this particular group of elites, right, to remain in power.

Sometimes these closed autocracies will introduce elections, and that's where you get these semi competitive authoritarian regimes. Now, when you hold an election as an autocrat, typically you're doing so in order to demonstrate the legitimacy of your rule, right? To at least suggest that there is popular support for your being elected leader, for you holding the leadership position of the country.

The consequence of that means those leaders must allocate a larger share of clientele resources to a larger swath of the population. So in a closed autocracy, they're really focusing the allocation of their resources to a relatively narrow group. They can use repression on a larger segment of the population who they don't allocate these resources to.

But once you begin introducing elections, you need to widen the group of people to whom you're allocating these clientele resources. So electoral autocracies exhibit a greater demand for client to list resources because of these semi competitive elections that they hold. So as a consequence, there is a higher demand for Chinese foreign spending in the context of these electoral autocracies than enclosed autocracies.

Because those semi competitive authoritarian leaders want those resources to allocate so that they can secure political support to remain in power. Sometimes they lose, that does happen, and they are worried about losing the next election. So what they're mainly concerned about is maintaining the veneer of legitimacy for the whole.

Electoral democracies hold genuinely competitive multi party elections. The difference between electoral democracies and liberal democracies is the institutions of electoral democracies are still weak. By that I mean, for example, the legal system can be politically influenced relatively easily, for example, or there's generally a high level, or higher level of corruption in electoral democracies than in liberal democracies.

And so in electoral democracies, you also can see demand for Chinese foreign spending. However, the role of the state is typically reduced in the context of electoral democracies because a lot of what the state would otherwise do has been moved to these private business owners. So the large family business conglomerates you can think of Indonesia, India, Brazil, as compared to large electoral autocracies such as Russia, or Malaysia, as I mentioned a moment ago, or Turkey is another electoral autocracy.

In those places, the state tends to be much more influential and to have larger ownership stakes over the biggest companies on average. And so in liberal democracies, then you're going to have the lowest demand for Chinese foreign spending because they have the lowest need for clientele resources to allocate to potential voters, because typically that's regarded as a form of corruption, okay?

So they're not going to be able to easily allocate those resources without facing criticism from their political opponents. Okay, so the evidence in the book includes 17 data sets. Many are unique and newly self collected, altogether encompassing more than 20 million firm year observations across more than 150 countries.

There's also some detailed case studies on countries representing each of these different political regimes. So the UAE for closed autocracy, Djibouti, Malaysia for electoral autocracy, Indonesia for the electoral democracy, and Greece as a liberal democracy. The common feature across each of these regimes is they each have a majority project initiated by China, which allows for basis of comparison in the way these projects are executed.

And finally, the research that has gone into this is based upon extensive discussions and interviews I've conducted with hundreds of chinese and foreign executives through the teaching I've done at the China Europe International Business School in Shanghai. And I can talk more about that later if you're interested.

Okay, so I'm just going to show you a couple highlights of the evidence because there's a lot of data. I think I'll show you just what I think is some highlights. So this figure shows you the foreign construction spending in the context of the Belt and Road Initiative by political regime.

So remember the BRI started in 2013, at the end of 2013. So that's why you see a relatively low number in 2013, and then you see high numbers after that. The dashed line-

>> Larry Diamond: How are you identifying, how you classify each of these regimes, what is the basis?

 

>> Richard Carney: Yeah, so this comes from the. The regimes of the world data set, which is created from the V-Dem, Varieties of Democracy.

>> Larry Diamond: Varieties of Democracy project.

>> Richard Carney: Right. Yes. So, I don't, it's not my own subjective.

>> Larry Diamond: Great.

>> Richard Carney: Yeah.

>> Larry Diamond: Perfectly correct.

>> Richard Carney: Okay, so you can see the dashed line at the top, it represents electoral autocracies, and it's a pretty remarkable difference.

It's about three to four times higher on average, than the next two categories, which represent electoral democracy, and closed autocracy.

>> Richard Carney: And the bottom is liberal democracy.

>> Richard Carney: You might ask, well, what proportion of the global economy do electoral autocracies represent? Or, what fraction of all countries do electoral autocracies represent?

And I'll show you that in a moment. But I just want to tell you that, the numbers you see here are far higher, than either of those proportions. So there's something going on, something about electoral autocracies, that makes them especially avid recipients of Chinese foreign infrastructure spending.

>> Richard Carney: I supplement, so I should just quickly mention, that the data source for the foreign investment data comes from this China global investment tracker database.

Which is compiled by Derek scissors at the American Enterprise Institute in Washington, DC. It's been used by the World bank and the OECD to study, China's Belt Road initiative. So it's, I think, also a credible representation of Chinese foreign spend. I supplement that data with project level data, which comes from the Refinitiv BRI database.

So, Thomson Reuters, in collaboration with, I wanna say Blackrock, but I don't, Blackstone, thank you. Okay, so, they're the ones who have compiled this data, and they give descriptions of each of projects. So there's over 2000 projects that are used in this data set, and ten different characteristics were coded for each of those projects.

So, it was a huge endeavor. And you can see, I want to highlight just a couple points here. And what you can see on the bottom is the breakdown of all these projects by political regime, the proportion. And you can see it's consistent, that electoral autocracies have a far higher share, of these projects, than the next category.

So, electoral democracies is about half, of electoral autocracies. So this gives you some confidence for the findings of that previous slide, using a completely different data set. The other thing I wanna highlight here which is, quite interesting, is the percentage of projects completed, of those initiated by category.

Now, you might think, liberal democracies are the ones most likely to follow through on their commitments, on their promises, right? When they engage in a contract to have something built, it will likely get built. Surprisingly, they are by far the lowest, of many of these regime categories to have the project completed, and the highest is electoral autocracies.

I mean, I can give you my interpretation of that, I'll save that for later. But it's just an interesting artifact that emerges from the data here.

>> Larry Diamond: These are very low completion rates.

>> Richard Carney: Yes.

>> Larry Diamond: Is that because some of them are still ongoing?

>> Richard Carney: I think that's partly reasons for that.

 

>> Richard Carney: I just wanna show you one other piece of evidence from the project level data. So, what I'm highlighting here, are six different China SOE characteristics. And what this is showing you is the difference in proportions between electoral autocracies, and each of the other regime types. So, for example, electoral autocracy may have, if we look at owner China SOE, we see 0.03.

Which suggests electoral autocracies, may have 25% of the projects where a Chinese SOE is the owner, only 22% for closed autocracies, where a China SOE is the owner. So that's essentially what that means. And so what you can see here is, regardless of the regime that you're comparing electoral autocracies to, Chinese SOES are always more involved in this projects, in the context of electoral autocracies.

The other thing I want to highlight is the host country, SOE. And again, you can see electoral autocracies, SOES are always more involved in these projects than the SOE of the other.

>> Richard Carney: So there's, proposal of them, there's a greater involvement, China SOES and host country SOES in the context of electoral autocracies.

And finally, what's especially interesting is the difference for financing. So you can see that, for electoral autocracies and closed autocracies on the left column there have a much smaller reliance on Chinese financing. And that's probably because, many of them are oil rich monarchies. And you also see a very low, even lower reliance on Chinese financing for liberal democracies.

And that's because typically they can rely on more private sources of financing. So the crucial difference then, is electoral autocracies and electoral democracies. That's where you see a smaller difference. And I just want to give you one highlight, or a couple highlights, I guess, from these figures about the digital exports.

And specifically, this is about aid, and this comes from the aid data, data set developed by people at William and Mary. It's version two, so it goes up to 2017 it's their latest version of the data. The left figure shows you Chinese information and communications technology, total amount of aid commitments.

 

>> Richard Carney: And notice in 2015, when there's the launch of the digital Silk Road, there's a spike in aid going to electoral autocracies. And there's a divergence, over the next couple of years with respect to electoral democracies. Now, you might say that total amount of aid may be driven by one project, for example.

So, on the right side, I show you the number of aid commitments, and it displays a similar pattern, right? Clearly, there's something different happening from 2015 onward, and that coincides with the launch of the digital Silk Road. Okay, why does this matter? There are three main reasons. One is that China's infrastructure development initiatives are important and helpful for reducing poverty around the world in two ways.

Actually, one way is that, just on its face, by building infrastructure, they can help alleviate poverty. The second way is indirect, by spurring competition with advanced economies, who then may feel the need to also allocate more funding to develop infrastructure in these developing economies. So that's quite a beneficial outcome, I would argue.

And many of the projects that they're developing are going into industrial parks, port facilities, urbanization projects, transport and logistics. And often these are sold together as something called a Port-Park-City model. So this actually is intended to sort of replicate the development of Shenzhen. It's called the Sheku model, the fishing village that sort of led into the development of Shenzhen, what it is today.

So they tell other countries, we can help you build something like Shenzhen, or would you like to build something like Shenzhen? We can help you do that. The second reason why it matters is because introducing these infrastructure projects can then allow for the introduction of digital technology exports and Chinese technical standards that can lock in that country and its businesses and consumers into Chinese products and services.

And even if other technical standards from western companies are better, it will be, China's hoping it will be, too costly for those customers and countries to change. In essence, they're stuck with what China is offering them. And this creates huge advantages, as you would expect. And these are happening across a wide range of digital technology products, as you can see listed there, e commerce, logistics, smart cities.

This is something China, as many of you know, is hugely invested in, smart manufacturing and industry 4.0. This is affiliated with the building of industrial parks, telecommunications, financial services, and altogether yielding this outcome that I just mentioned, about locking out Chinese competitors and keeping Chinese companies in with an advantage.

And then finally, the third important reason why it matters is because this can enable China to align different countries' development strategies for regional efforts that grant them economies of scale and scope that they would not otherwise enjoy if they were fragmented in the way that they developed. They can also align their regulatory and technical standards, reducing transaction costs.

They can enhance cross national trade and investment. And finally, altogether, this can increase the interdependence among these countries and the connectivity which places China at the center. Okay, now I want to talk about three trends that seem likely to increase China's influence globally over the coming years, if not decades.

The first trend is the retreat of democracy. Second is global economic growth. And third is urbanization. So first is the retreat of democracy. So we've seen democracy increasing across low- and middle-income countries since 1980. However, starting about a decade ago, autocracies have been on the rise. And in fact, if you look at the share of the world population living in autocracies, in 2011, it was about 49%.

A decade later, in 2021, it was 70%.

>> Larry Diamond: That's largely because India is no longer a democracy.

>> Richard Carney: Is that so, okay. So-

>> Larry Diamond: If you go by the v-dem, which I have come to agree with.

>> Richard Carney: So that's where this data goes from.

>> Larry Diamond: 18% of world population right there.

 

>> Richard Carney: So insofar as China's increasing ties with electoral autocracies is important, this is a significant pattern. And just to give you a sense of where this is from, 2019. So it doesn't account for what you just mentioned, Larry, thank you for that. You can see that many of these electoral autocracies are clustered in Africa and Central Asia.

And so what's interesting is that what I've shown you so far, the evidence is descriptive. I haven't shown you regression analysis controlling for alternative explanatory variables such as natural resource endowments and so forth. I've run those regressions and I control for those. And the political regime variable remains statistically significant.

And so it's, I'm not saying that natural resources don't matter. They do. But I would argue that the political regime characteristics are important and overlooked. As the example of Malaysia, I think nicely illustrates. The second trend is global economic growth. And you can see here, this is from the IMF, that since around the year 2000, emerging and developing economies have grown at more than twice the rate of advanced economies.

And they're projected to continue that trend over the next several years, as you can see at the end of that figure. So Covid was a temporary interruption to that elevated growth rate. And so I think what's important to take away is how this has changed the share of global GDP that each of these countries contributes to.

So, in 1990, emerging developing economies contributed about 39% to global GDP, advanced economies, 61%. That's nearly reversed. Right. And it is going to continue to widen in the next decade, at least. So, as I showed you on the previous map, 70% of the global population is living in autocracies.

And with India becoming an electoral autocracy now, that's the largest share of political regimes in the world, countries having electoral autocratic regimes. And if these emerging economies, developing countries, are predominantly autocratic, then China is going to be at the center of the group of countries that contributes to over to nearly two-thirds of global GDP by the end of the decade.

The third trend. Is urbanization rates. And I mentioned that China's infrastructure development efforts are often geared towards developing new cities or port park city projects, but also smart cities and urbanization efforts, replicating what they have accomplished in mainland China. And so it's natural to look at where urbanization's happening the fastest to see where China may have the biggest chance at assisting infrastructure development.

And so if you look across the world, according to the UN Department of Economic and Social affairs, up to 2030, it's african countries. And recall, they are predominantly electoral autocracies. So these various trends, I mean, I'm just pointing out for the next decade basically to 2030, but I think these trends are likely to continue past that or good arguments to think they could continue past that.

So the implications, I just want draw a couple implications. One is with regard to semiconductor technology. There's been a lot of discussion about the ship war and the effort to pull China back from developing leading edge semiconductor manufacturing capabilities. Now, that may be successful, but I think it ignores the bigger problem of China potentially capturing or not capturing, but having predominant influence over the group of countries that contributes to nearly two-thirds of global GDP by the end of the decade.

And so even if they are not at the leading edge, they can satisfy the demand of these low and middle income countries with lagging edge semiconductor technology, that's adequate to meet their demands. And if they have access to the resources available from this large share of the global GDP, surely they will in time catch up to the leading edge.

 

>> Richard Carney: So what should the US and its allies do? So one, I would argue, is there needs to be stronger government support for private firms to compete in developing countries. So one of the major challenges for private companies to be willing to invest in infrastructure projects in these low and middle income countries is the risk they face, the costs of doing business in those countries.

And these costs in part are elevated by the FCPA, the Foreign Corrupt Practices Act. And so I'm not suggesting the government change that. Rather, I'm suggesting the government needs to provide some additional financial assistance so that western companies can compete and not give away the market to Chinese firms without putting up a good fight.

And second, there needs to be stronger multilateral government arrangements to assist private firms, not just the us government with respect to its own firms, but multilaterally. Context of, well, maybe the Asian Development Bank or the African Development Bank or the World Bank, for example. But there was an effort with the build back better world project that didn't really go anywhere.

There needs to be a much stronger, bigger commitment, a meaningful commitment to making that happen. Okay, thank you.

>> Glenn Tiffert: Thank you very much, Richard. I wanna encourage the members of our online audience who are coming in over Zoom to pose their questions by clicking on the Q&A button.

I will take a queue of hands here in the room, but I'd like to prime the discussion by pursuing that point a little bit further. The United States and Europeans have both announced initiatives that are designed to challenge China, but coordination here is the key across countries, but also within borders.

How can the US actually do better to get the aid where countries need it to organize our political systems and economic systems very different than China's, which can provide turnkey solutions in a way that the US generally does not? Is that the path that we should follow by organizing coalitions or firms to present entire pork projects from A to Z the way China does?

 

>> Richard Carney: Thanks, great question. So one of the challenges, I think, that organizations like the World bank faces, and they're sort of at the leading edge of addressing these infrastructure needs, is they are explicitly apolitical. And so they do not differentiate with respect to a country's political regime when deciding the appropriateness of whether a country deserves an infrastructure project.

But the problem here is that I think you have an explicitly political logic driving the kinds of projects that are being implemented across countries. And so that sort of defangs anything that the World Bank could do. I mean, they're already defanged because of the mission of the bank being explicitly apolitical.

So there needs to be some compensating mechanism that is more explicitly tied to the political drivers of the infrastructure, of what's driving these infrastructure investments to compete effectively.

>> Glenn Tiffert: Larry.

>> Larry Diamond: So I think one could argue that the situation is even more alarming, articulated in the following respects.

First of all, we're seeing more signs of closed autocracies, for example, Saudi Arabia and electoral democracies. For example, Lula just was in China really deepening their financial and economic relationships with the PRC as all of these other trends proceed. Second of all, I don't know if you have any thoughts about how China's move into a digital yuan will affect things we produced to report on China's movement to a central bank digital currency that we can give you if you don't have it.

And of course, this is a gradual phenomenon, but we're starting to see agreements to denominate trade in the renminbi rather than the dollar. And the third thing I would note is that we also had a project which Glenn and I were involved. Glenn co-authored a handbook on China's penetration of Sub-Saharan Africa, in part politically.

And so China's sharp power projection has been part of the factor That has landed a growing number of these African countries in the electoral autocracy category, frequently moving them. So that's not an entirely independent variable. It partly follows from the logic of the Chinese relationship, and it's corrupting influence.

So that's all on the negative side of the ledger. Looks like things are looking worse. On the other side there have been reports that China just doesn't have the money anymore to put into global infrastructure development because of its own financial disarray and budget exigencies. And so could you comment on both sides of those ledgers, those developments that look like they may be accelerating and intensifying the story of China's rise and increasingly favorable competitive position.

And also what China's internal difficulties financially may mean for the future of those.

>> Richard Carney: Okay, thank you, that's a big question, sorry, multiple questions.

>> Larry Diamond: But you got plenty of time.

>> Richard Carney: All right, so let me talk about the China side first with regard. I guess I'll talk first about digital currencies.

Two things, one, this is a natural outgrowth of the emergence of digital transactions in the domestic Chinese economy. On the one hand, it's not necessarily a geopolitical effort to undermine the dollar, although it may be turning out that way, but it's very much a domestically emerging phenomenon just because everybody relies on electricity currency payments.

But related to that, I'm sure that they are seeing the benefits of transitioning to this form of cross country or bilateral payment mechanisms. And so they're taking advantage of this to evade going through US banks when they have to do these bilateral cross national payments. And that's the future.

They're increasingly moving that direction. I think the one weakness of the push in that direction is China's currency is not a reserve currency. And I don't think central banks around the world want to hold it as a reserve currency. So that's going to significantly limit its ability to replace the dollar for the foreseeable future.

That said, there are these. This other direction with regard to. Yeah, so I think you make a great point that China's infrastructure spending, it pushes countries towards, that may be on the weak electoral democracies, and China's spending may push those countries in the direction of electoral autocracy, absolutely.

And in fact, I mentioned that I do case studies on two electoral Malaysia and Djibouti. And it's precisely to look at whether weak electoral autocracies are more avid recipients of Chinese spending than strong electoral autocracy. So Malaysia was weak. Najib knew he was in a precarious position leading up to the 2018 election, and it was that dynamic that led him to so aggressively pursue Chinese spending to help him shore up political support through the allocation of Chinese projects.

Whereas Djibouti's leader has had very weak political opposition, and so he hasn't had to be as aggressive. Although they have had a lot of Chinese foreign spending come in, it's not as aggressively done as Malaysia has done. So they're definitely, absolutely. I see that clearly. And in the data analysis that I've done, you see that, too.

And then with regard to China's, this is a great question, something that I've been thinking about, the lack of money that China has to continue infrastructure spending going into the future. So one point in this regard is to look at, and nobody has done this to my knowledge.

It's something that I'm thinking would be interesting to do, is to look at how China is engaging differently with countries in these debt negotiations, vis a vis the Paris Club members, for example. So does China have different approaches to negotiating with electoral hypocrisies versus electoral democracies? And I certainly expect that there are important differences based on the volume of lending that has occurred on the.

There must be some important differences. So that's something to look at next. And then the question is, will they have money in the future? So China has accumulated a large volume of us dollar holdings, comparable to what they had at the beginning of the BRI. So I think on the one hand, they're learning as they go about the risks to engaging in these infrastructure projects, trying to be more careful about which ones that they support.

They don't want to have loss making projects. They want profitability with the projects. The soes that are initiating these projects are not profit maximizing like private firms, right? That's an important point, but they do need to be profitable. And so China, going forward, is going to reassess which projects that they are going to commit to.

But I think it will evolve. The nature of the DRI project will evolve, but I don't think that's going to mean it's going to, it may be scaling back for the near term, but I think it will continue in the longer term. Partly because the gap between the demand for infrastructure development versus the supply of capital to address that demand is so huge.

It's like a, if I'm not mistaken, it's like a $28 trillion gap between 2016 and 2030. And China's contributing about $2 trillion optimistically to helping countries meet that need. So there's just this incredible unmet demand for infrastructure, and that means a great opportunity for China.

>> Glenn Tiffert: So we've got a pretty deep list of people on the queue.

It's a bit like an auction house. If you made eye contact with me, you made a view. So I'll turn over to Kara. And we'll keep things moving so that everyone can get a shot.

>> Kharis Templeman: I'll try to be quick about this. I'm intrigued by the difference between electoral autocracies and electoral democracies that you find in your data.

And I wonder if you could talk a little bit more about what you think the mechanism driving that difference is. And I invite you especially to speak about the Malaysia case, since you brought it up. The jeep lost in 2008.

>> Richard Carney: Yes.

>> Kharis Templeman: That, to my mind, looks like a shift towards electoral democracy there.

Given what the data show, we would expect Malaysia to be less hospitable to China's investments. Do we see that, number one? And number two, if that's the case, is it greater transparency, greater rule of law, or something else that's driving that shift?

>> Richard Carney: Great, thank you. So, yeah, so Indonesia and Malaysia are just really nice cases to illustrate the differences between these two political regimes.

In Malaysia, you see these very large. There's like six mega projects where you have a Chinese SOE partnering with a Malaysian SOE to build these projects worth more than $500 million. And a couple notable projects are two gas pipelines that went down the west coast of Malaysia and East coast rail line, rail link.

And they were used by Najib to help funnel money to pay for the debts of a sovereign wealth fund owned that he controlled, and got exposed, of course, and this is partly what led to his downfall in 2018. And so, as you indicate, so it did lead to a drop, a sudden drop in the next year Mahathir came in.

It's sort of a, to say that it was a shift to electoral democracy may be a step too far, because Mahathir, of course, was the previous prime minister of the country when it was an electoral autocracy. And I think many people regard that it is still an electoral autocracy.

There was a dip, but that was during the Mahathir renegotiated the project. It was a criticism he loved at Najib for paying too much, and this is why that's what gave him the money to then allocate. So they renegotiated, so there's a dip in the subsequent year. But then there was a reinvigoration by Mahathir, attracting more money, again back to Malaysia.

So it's consistent, ultimately, with what I argue you should see. In Indonesia, the biggest project there is the Indonesia Moorwali Industrial Park, which is a private Indonesian conglomerate and a private Chinese conglomerate located in Shanghai, actually, and it's devoted to nickel mining and refining. There is the Jakarta Bandung high-speed rail project, but that's had a lot of problems, and the Japanese have been invited back in to help rectify those issues.

But that's sort of the, if you're gonna look at one mega project in Indonesia, that's in a way equivalent to Malaysia's mega, that would be it. But it's problematic to say it's the same as the Malaysian project with regard to the state's control over the way it's being implemented.

So to get to your point about the mechanisms, so it's very clear in Malaysia, these projects are a mechanism to reward political support, to Woo potential voters or political supporters into his coalition to ensure that he gets adequate votes to sustain his hold on power, the prime minister, that is, and his party.

Whereas in Indonesia, the prime minister and the ruling party very much depend on financing provided by the owners of these family-owned conglomerates, the private conglomerates. So that means they must give them privilege when they're negotiating with China for these projects. They're the ones who are gonna more often control how the projects get implemented.

It's not occurring through the state owned enterprises so much.

>> Speaker 5: Right, thank you very much for the really fascinating talk, I enjoyed it very much. So I guess a few questions. So I'm enormously sympathetic with the electoral autocracy result, which I kind of take as the really kind of core point of the talk, right?

Which is that electoral autocracies, the data suggest, are kind of particularly substantial recipients of Chinese aid and investment, et cetera. And so, yeah, so I'm enormously sympathetic to that, and I guess I'm just kind of trying to think more about why this is, right? So you mentioned that most of the world's electoral autocracies are in sub-Saharan Africa, right?

So I can think of sort of three pretty substantial reasons that we might expect them to be sort of particularly substantial recipients, or at least more so than other countries. So you mentioned the client is something, right? With respect to Malaysia, in particular, as a way for the incumbent to sort of target these projects, right?

In Africa, I think that's pretty actually well accepted. There's a wonderful paper by the aid data group that shows that Chinese aid projects are far more likely to go to the native regions of African autographs, much more so than democrats, in ways that World bank projects aren't, right?

So there's something sort of like, I think, sort of genuinely something kind of particular about Chinese aid projects that facilitates us. So I think you're on something in Africa, and I think it's pretty well accepted. I suppose the other thing, though, or two other things that I can imagine are also relevant.

So most African autocracies, much less affluent than most closed autocracies, which I gather are heavily, but not entirely, no pec, right? And so consequently, I can imagine that a really important part of the story would be increased demand, right, relative to close autocracies. And then that would account for kind of the premium over close autocracies.

And then another, I think, idea that somebody down there suggested with respect to democracies is that Africa's electoral autocracies have much weaker property rights, right? And so, consequently, are kind of locked out of lending markets in the private sector, certainly, but also from the Bretton Woods Institutions, at least relative to the common democracies.

So I guess I'm kind of curious to what extent these other kind of mechanisms are also quite salient in your mind. With respect to I wasn't quite. And then you mentioned that the regime-type findings were robust to sort of various statistical estimators. And I feel like that's one of those things where it's like a math problem.

It's important to kind of show one's work that, so we can kind of really understand sort of what the models are. But, yeah, if you could talk more about to what extent you think the Africa electoral autocracy result is really kind of also being driven by these other dynamics, that would be really helpful.

 

>> Richard Carney: Great, yeah, thank you. So, yeah, let me just speak to your first point. Low income in electoral autocracies, that's often common, and it distinguishes them from many close autocracies, as you indicated, which are oil-rich monarchies frequently. And I would argue that that level of the low income of many of those electoral autocracies is, in fact, a key driver of what makes clientelism so effective.

Because when you have a large group of poor people, it is easy to buy their vote, buy their loyalty. And so as a leader, if you can allocate money, and Malaysia did this actually under Najib and And his predecessors, and this happens in Africa and South America, for that matter.

You divert resources to a particularly poor group of people in order to get them to be your loyal supporters. And it takes less money to do that, the poorer they are. So that's-

>> Speaker 5: The difference between electoral autocracies and close autocracies in that respect, would be that the voters kind of want more patronage.

 

>> Richard Carney: That it's more effective, that China's foreign spending is more effective. And closed autocracies, I mean, so it's a little bit different in closed autocracies because they don't have elections. And so the leaders don't feel the same need to buy the votes of the vast swath of the population.

Really, they just care about the elites who are surrounded by them, where they're surrounded by the large merchants, wealthy business owners, owners and other political elites, typically. So that drives a greater demand for clientelest resources on the part of electoral hypocrisies. They have elections, so they need to show some veneer of legitimacy to being elected.

So that makes their need for clients resources greater than with regard to electoral autocracies lacking access to debt markets. That's absolutely true, but that's also true for electoral democracies. They also are not much. They also have a similarly difficult access to debt market, or at least a similarly low level of GDP per capita to electoral.

Electoral autocracies are a little bit lower income, but with respect to their access to debt markets, there's not a big difference. And so why is there such a big difference with regard to chinese foreign spending to electoral autocracies, but not electoral democracies?

>> Speaker 5: Democracies receive Bretton Wood support anyway.

Yeah.

>> Richard Carney: Yeah. Sort of-

>> Speaker 5: I'm trying to think.

>> Richard Carney: Right, I'll try-

>> Speaker 5: Also driving this, which I do find interesting, but.

>> Richard Carney: Yeah, yeah, yeah, yeah.

>> Glenn Tiffert: I want to pull a couple of questions from the feed from our remote audience, maybe put them together. You mentioned the Foreign Core practices act a little earlier, and partly, I think, also it was relevant to your answer to the question I posed at the beginning.

But one of our attendees really asked the question. Many of the countries and the regions of the world that are dominated by electoral also have profound political corruption and elite capture. Why should the United States compete in these environments? And can the United States compete in environments where it isn't just about delivering aid that is valuable on the merits, meaning infrastructure needs and so forth?

But it is also about political elites and economic elites taking a cut off the top of any contract that comes their way in a way that is very difficult for the, for aid from liberal democracies and multilateral lending institutions to compete against. How do we even get in there?

And do we want to compete in those spaces and get dragged down to that level?

>> Richard Carney: Yeah. So I think that's a difficult question, given that there has been this very important effort to reduce the ability of American companies to engage in corruption, to facilitate the continuation of rulers who depend on corrupt rule.

And the World bank launched an important initiative complementing that or proceeding in that or following that, rather, I should say.

>> Glenn Tiffert: Good governance was such a big piece of their lending.

>> Richard Carney: Right, exactly. And so. Right. So now I'm sort of quite, let me say, I'm not saying that we should backtrack from that.

First of all, let me say that I think we should maintain that, but I think we should reframe how we think about what's happening and what the FCPA may be unintentionally doing. So I think when you look at the bigger picture with regard to the distribution of global GDP and which power, which country is gaining greater access to those economies, the trends are favoring China in developing and emerging economies, and the IMF itself projects that they will account for nearly two thirds of global GDP by the end of this decade.

And so if you don't want to engage in projects in those countries, then you may sacrifice this bigger issue about who controls the global political economy. And your commitment to the FCPA may be moot by that point. In some ways.

>> Larry Diamond: There's one factor that I don't think you're adequately weighing, which is that the people of these countries are not happy about having their leaders take corrupt under the table payments from the Chinese Communist Party state.

And in a number of countries, we have or could have as allies, the societies of these countries. And so one way of dealing with this problem is dumbing down our own practices to, in one way or another, through whatever euphemism you want to use, enable our companies to, once again, which I think they're probably already doing in very oblique ways through the intermediaries and representatives that they hire in these countries, compete in this way.

But the other is to level the playing field by making it more difficult for China to bribe these people and lifting up independent media, civil society organizations, corruption monitoring organizations and so on. So they can't get away with this. I'm not sure that isn't a better approach.

>> Richard Carney: So I think that's a great point.

I feel like I was sort of saying we should get rid of the FCPA. And I didn't mean to say that.

>> Larry Diamond: Yeah, no, you didn't say that.

>> Richard Carney: I don't want to give that impression either, but absolutely. So I think Malaysia is a good example where exactly as you're saying, you see a group of people, especially the middle class, emerging and increasingly large middle class in many of these developing countries get angry about corruption because they're the ones who are having their money being diverted away from productive uses to pay for these corrupt practices.

So I think that's a great point. That's something that the US or other organizations can contribute is to helping shed light on what's happening, to mobilize domestic voice against those practices. The other thing I think that is necessary goes back to my concluding slide about what the US needs to do, and that is provide financial mechanisms, mechanisms to make it attractive for private companies to compete with chinese companies for projects in these countries.

 

>> Larry Diamond: And is that loan guarantees, export import bank what is.

>> Richard Carney: So I don't-

>> Larry Diamond: Deposit the federal insurance for overseas.

>> Richard Carney: So I haven't explored in detail what the appropriate mechanisms would be. Maybe some or all of. Those, but there needs to be an examination.

>> Glenn Tiffert: I want to give everyone a chance who's in the queue.

So maybe pose a narrow question and a briefer answer and then we'll keep things moving. I think Jim, you're in the queue next.

>> Jim: Thank you. Thank you for this. Do you give this talk or some version of it in Shanghai and what sort of reaction do you get?

 

>> Richard Carney: Thank you for that. So I did give a version of this talk at the EU Chamber of Commerce about a month ago, and they were very receptive. They really valued the insights I offered with respect to the digital technology exports and the competitive advantage China is gaining relative to western country governments and businesses and how that might yield long term advantages.

So these were CEOs of major western companies, primarily from the EU, but some American as well. I teach a course at the China Europe International Business School that is very closely related to many of the topics I discuss here. And they're aged 40 to 45, around that age, and they come from all over the world and they really like.

It's one of their favorite courses. Yeah, it's one of the favorite courses and I teach it also to MBA students and they also really like it. In fact, the favorite topic among all the chinese audiences that I teach is about the likelihood of war between the US and China and the risk of that.

And the reason they like that so much is because in the context of a classroom, you feel you have an open, safe space in which to talk intelligently about these things. And you can frame your opinion not as a subjective view, but in the context of an analytical framework that I give you.

So it's not your viewpoint, it's the framework telling you what the likely outcome is. So it's a safe way of expressing their opinion.

>> Glenn Tiffert: Frances.

>> Frances Hisgen: I'm glad I'm next in the queue because I was also going to ask about your teaching experience and your students. And particularly to pick up on a thread from the beginning of your presentation where you talked about how you're drawing on qualitative insights for many of your students who've come from these developing countries.

Or come from countries where China has had investment, have been on the ground in managerial or executive positions. So I'm curious, are there things that you learned from your interlocutors that you want to highlight? And then also pulling back one level, how open were your interlocutors? And has that changed, especially as COVID and rising tensions?

 

>> Richard Carney: Yeah, great question. Thank you for asking me that question, because it gives me a chance to say something I want to say. So, yeah. So one of the great opportunities I had to talk about some of these. Talk about some of these projects with somebody is the way ZTE would win contracts in Algeria, which is an electoral autocracy.

And so that sort of gave me very specific insight into the mechanisms by which the government can influence the way projects are allocated in a politically beneficial way. So, specifically, the government would invite bids on building 5g infrastructure from all different companies, and they would provide a list of a specific set of subcontractors or favored firms who, if included in the bid, would let that bid have more points when it was evaluated against other bids.

So whichever company had the highest number of points in their bid would win the contract. And so you could elevate your points by including a specific list of companies as part of your group of subcontractors or other kinds of firms in your proposal. And that list was a private list given only to specific firms when they were submitting their bid.

And that list of firms, of course, was the group of firms who were regarded as politically allied to the leader of Algeria. And so you see similar mechanisms like that, I mean, permutations of it happening in other countries, but that was sort of a very nice and vivid example of how this happens.

And, yeah, so.

>> Frances Hisgen: And then I was wondering also how open your students have been and if that openness has shifted against COVID and against the backdrop of sort of rising US/China tension.

>> Richard Carney: So, I think, in general, they're very open. So, at first, I think there's a lot of hesitation when I begin teaching or when they first meet me.

So, typically, the way I really get to know students and get to talk to them is after I teach them for a period of time. And in this elective course that I teach, it's over a course of several weeks for MBA students or three days for executives, but I teach them another course as well.

So, yeah, at first I sometimes get hostility or sometimes challenges. They want to test if I am being my political loyalty or check where I'm coming from politically. And the way I try to counteract that is I will critique the United States as well. And I will say, the United States is not the gleaming beacon on the hill that Americans like to pretend it is.

It has a lot of problems, and I'll be the first to point them out and talk about them. And the more they hear what I have to say, the more they trust me. That's basically what it is, right? Establishing trust, that I'm not going to use what they say against them or use it in a manipulative or bad way.

I'm just trying to understand what's happening. And so at first they're a little bit hesitant, but once they get to know me and trust me, they open up.

>> Glenn Tiffert: All right. Christian.

>> Christian: Really great talk. I enjoyed it a lot. Thanks a lot, Richard. I have actually a short technical question speaking.

You mentioned in your talk that you see some examples of China as part of the digital Silk Road imposing tech standards. Now, I'm aware in the 90s there was a big push by China to stop paying royalty payments for TDS and developed its own indigenous technology standards like TDS, CDMA.

I thought that had all kind of fallen by the wayside. So I'm wondering can you talk about any specific examples of in these projects which tech standards are being promoted and were they adopted?

>> Richard Carney: Yes, I'm very tempted to pull up a slide. I'll just tell you I have a table in my book.

So I look at smart city affiliated technologies that are exported to countries, and there's a list of seven categories of technologies, surveillance, municipal services, I forget all of them now, but there's seven different categories. And within each of those general categories are many specific products. And so, I mean, each of those individual products.

And affiliated services has specific standards that will be decided. Well, they can use this. So the example I use in the book, I give a very simple example about railway. I don't know if this is what you're after. I don't think it's what you're after because you want to know the specific technical standards.

 

>> Christian: Technical standard. But it's just more the question of are they promoting standards that don't have interoperability with other? Is that what you're saying there?

>> Richard Carney: That's right. That's exactly right. With non-Chinese technologies. That is what they're promoting.

>> Christian: Is it non chinese or just maybe specific to that company?

So if Huawei comes in with a smart city thing and says, you need to use Huawei stuff, is that what you mean, or do you mean.

>> Richard Carney: So the government tries to establish standards that are common across all Chinese companies so that all the companies in China will abide by those same standards, okay?

It's different from western. So that's part of what makes it challenging for western companies to compete effectively in the context of digital standards organizations, for example, because they're fragmented and you have each large multinational western company proposing its own standards, and they will fight, compete to win. China comes in and they're unified in promoting one set of standards, typically.

And Huawei is often at the helm leading this effort because they're the biggest participant among Chinese companies. But I think even more influential than that effort is the implementation of de facto standards, ignoring the standards that-

>> Christian: So do you think the push of these standards in these areas is a byproduct of the fact that China goes for its own standards anyway because it has an antipathy towards royalty payments-

 

>> Richard Carney: Yes.

>> Christian: And wants to develop its own stuff, and this is a secondary result of that? Or do you think this is. Does your research show that this is something that is part and parcel of the digital initiatives overseas, to lock in these?

>> Richard Carney: It is part of that, yes.

So in 2015, there was an explicit initiative to include digital standards as part of the building of infrastructure projects. The integrating digital sensors and other kinds of digital equipment into the building of infrastructure to make it smart infrastructure and to have them using Chinese technical standards. Yes.

>> Glenn Tiffert: Thank you.

Thank you very much for a rich discussion, for an excellent presentation. Richard. I remind our audience that his book will be out towards the end of this year on Cambridge University Press. So look for it. And that concludes this meeting. Thank you.