Investments have either built or doomed empires. For the former to be materialized, investments are to be made considering factors beyond the purely economic ones. In contemporary times the greatest spectacle of investment is the ambitious Belt and Road Initiative (BRI), inducing development and investment in almost 152 countries across the globe. The BRI is a Xi Jinping initiative, ostensibly aimed at creating a 21st century Maritime Silk route to enhance the culture of the peaceful and cooperative cross-border trades, inherent in the process of globalization. This claim is, however, the most debated issue of 21st-century global politics. This trillion dollars Chinese project has been criticized as a Chinese weapon to consolidate its dominance in global trade, a claim most prominently made by India.
Simultaneously questions have been raised about its ultimate success. In this light, the Soviet economic slowdown of the 1970s following its gigantic investments in Siberia and the far east has often been brought into parallel with China and its East-west trade project’s possible fate. Analyzing that, especially in the context of China’s huge investment strategy in its underdeveloped and politically disturbed north-western region of Xinjiang province will be our focal point of discussion. But before that, a brief look at the history of Siberian curse on the Soviet economy is imperative.
Siberia, a humongous area to the east of Russia has always been strategically significant for the state. The credit for incorporating the lucrative region of Siberia as a crucial part of Russian economic geography goes to the Soviets. Since 1960’s low-productivity of the mines and oilfields necessitated significant changes in Soviet investment policy. With a stable growing economy since the 1950s, it decided to shift industrial production to its far east and exploit the natural abundance there in order to further strengthen the economy. This economic improvement led economists like Paul Samuelson to speculate that the Soviet Gross National Product (GNP) would surpass the American GNP.
Up until the 1970s huge capital was invested to that end but gradually the graph started declining with a widening input-output ratio. For instance, in-between 1975-1985, while the capital stock percentage in ferrous metals increased by 55, the output had only a 10% increase. Similarly, in the oil industry, while the capital stock got almost doubled, the production capacity shrank by 21%. Although there were sectors of stable input-output ratio like that of electricity generation, the total productive factor (TPF) of Soviet industrial economy witnessed a sharp drop having a significant spill-over effect on the other sectors-thus retarding the economy, as a whole. Several factors were instrumental in this context.
Firstly, the policy of reconstruction investment. The Soviet Union instead of investing in new high-productive technologies, it attempted to modernize the already existing ones, which was far more capital intensive with insignificant returns. For instance, 60% of investment in ferrous metal went for its re-equipment. The second problem was Siberia itself. The uncritical obsession with economic power, especially in the context of Cold War politics, over-shadowed the Soviet policy-makers’ prudence. They ignored the natural hurdles inherent in Siberia- its remote location and cold weather, these two factors combined- made exploitation, production and survival there, an expensive affair. For instance, the shift in coal exploitation from Ukraine to Krasnoyarsk province of Siberia resulted in the heightened capital stock of 62% and in contrary a 24% slash in TFP. The short-term strategy adopted by the Soviet leaders was to allow subsidy which in the long-run deprived other dynamic sectors from a stable economic growth.
Moreover, the cities that were built there were hardly conducive to the living conditions of the workers, which adversely impacted productivity. Alongside this shrinking production, owing to arms race, a huge portion of the Soviet economy was getting exhausted in the military industry, depriving the civilian necessities. Thus, while the Soviet Union’s desire to become self-sufficient was not very imprudent per se, its investment in Siberia and the pattern it had adopted, certainly was. As Allen said, “Resource development swallowed up a large fraction of the investment budget for little increase in GDP.” Additionally, three other problems plague the Soviet economy. Firstly, the micromanagement of the economy attempted by the Party officials proved unsustainable in the long run. Due to the government-enforced pricing, the total factor productivity of agriculture and other industries declined rapidly. The workforce, no matter how skilled, simply was not incentivized enough to produce more or innovate. The economy meandered along until the collapse of the USSR in 1990. In this light, we would reflect the Chinese context- whether history would repeat itself or not.
The Chinese economy takes off
The question naturally arises as to how did the Chinese economy outpace that of the only other country, with which it shared institutional similarities, the erstwhile Soviet Union? Both these economies were centrally planned and both placed overwhelming emphasis upon heavy industry, collectivized agriculture and stymied the inculcation of a solid consumer base. Incidentally, the two countries only embraced market reforms in order to render the economy more efficient and thereby consolidate the legitimacy of the ruling Communist Party. In spite of obstacles, China has been able to maintain a near-double-digit growth rate, a single-digit inflation rate, a huge build-up of foreign exchange reserves, a sharp decline in poverty and wide participation of different sections of society in the benefits of economic growth over the course of two decades.
The Chinese Political Brass had quietly started acknowledging the shortcomings of command economic system. Owing to the devastation wrought by the Great Leap Forward, the Leadership of Deng Xiaoping was sober enough to realize that reforms were crucial in revitalizing the economy. The first priority was to liberalize agriculture. To that end a de-collectivization drive was undertaken, allowing production to be sold in free markets at market-determined prices. This freeing up of markets was first allowed in secondary crops and household products and finally in grains. The commune land was divided into small plots and was allocated to individual households. They were allowed to keep all income from that land after paying stipulated taxes, immediately providing incentives to increase production and income. The labor released from collective farms could be re-skilled for non-agricultural employment. The second important reform instituted by the PRC was opening up the economy to FDI, which readily flowed in due to the cheap labor costs. Ultimately, over the course of 20 years, China emerged as the largest exporter in the world and as the producer of half the world’s steel. And herein precisely lay the paradox. China’s excess capacity in steel and concrete means that the market has reached a point of saturation. Additionally, the law of disproportionality is in full effect as the less productive sectors of the Chinese economy are pulling back Chinese growth from 6.9% to a 28 year low of 6.3%. The only solution to this problem is to find new markets where China sells its products. This is where the trillion-dollar Belt and Road Initiative is key, in connecting China to emerging markets. PRC hopes that emerging economies will welcome High-end goods and services and infrastructural development. The downside is that China’s pursuit of a no-strings approach to investment means governments are burdening their countries with unpayable debts, not to mention the enormous debt the PRC owes the AIIB. More recently, countries like Malaysia has axed two BRI related projects. Even close allies like Pakistan are opting out of BRI projects. Chinese investors are naturally risk averse and the BRI could just turn into a white elephant for the Chinese. By far, however, the biggest problem with the BRI is its access point, Xinjiang.
Xinjiang – the anomaly in the Chinese equation
Xinjiang located at the north-western part of the Chinese mainland has a religio-cultural homogeneity with the bordering Central Asian states rather than that with China. While this geographic position along with its abundant natural wealth, on one hand, has made Xinjiang the most significant possession of China’s economic geography, on the other hand, it is the root cause of the major ethnic crisis that the People’s Republic of China is yet to cope up with. Naturally, the Muslim domination of the ethnic-demographic composition of Xinjiang, mainly comprised of the Uighur ethnicity, stands in sharp contrast with the mainstream national patriotic values proselytized by Communist China. Although realizing its geo-strategic significance, the Chinese state has for long adopted developmental process in the region, only to aggravate the ethnic tension.
In face of the long-standing struggle for Xinjiang’s independence, the PRC along with pouring money, aimed at diverting the larger demand of political autonomy has encouraged a huge influx of Han Chinese to dilute the concentrated Uighur population of Xinjiang. However, with almost 800-840 seats being reserved for the Han Chinese in all the administrative sectors, the economic opportunities rendered by the developmental policy hardly gets appropriated by the Uighurs. To worsen the situation, the strategy adopted by the Chinese state to counter the ethnic crisis by setting up of forceful re-education camps proliferating a process of ‘Sinicization’, rigid security surveillance in everyday life of the Uighurs with police stations set up at every 100 meters and the Strike Hard campaign initiated in the 1990s further heated up the already boiling grievances.
What more, post 9/11 China in order to gain international legitimacy has connected the issue with global terrorism, alienating the Uighurs even more. In adopting this coercive and superficial integration process since the 1950s with the developmental policy hardly benefitting the underdeveloped, unskilled and poor Uighurs, the Chinese Communist State has severely lacked on a prudent foresight. Today Xinjiang features as the fulcrum of China’s ambitious BRI initiative. Due to its geographic position, it is the state’s main gateway to the Central and West Asia, as well as the European markets, through the land. It is the largest logistic center among the countries under the BRI initiative. For instance, the Southern Xinjiang Railway in Kashgar connects to Pakistan’s rail network under China Pakistan Economic Corridor (CPEC) – one of China’s principal projects under BRI.
Since 2016, following the official announcement of BRI, China has poured even more investments in the Xinjiang region, encouraging its rapid development. For example, the development of the Korla region with a grant of $ 50 billion. Unfortunately, all these heavy investments are not paying off enough. In spite, of the fact that Xinjiang has actually developed significantly, the development is concentrated only in the urban region, benefits of which are again majorly seized by the skilled and consciously constructed elite Han Chinese section.
Ironically, the Uighurs, apparently at whom all these developments were aimed at, are still majorly concentrated in the rural agriculture-based Kashgar and Khotan region of Southern Xinjiang. As a result, the Han-Uighur ethnic tension has hardly ceased, making the situation not so conducive for business, thus investment falling flat to a larger extent. For instance, India’s spice manufacturer Synthite, largest of its kind had set up a manufacturing plant in Korla to multiply its capacity and quickly ship out spices over rail route, had to hold back expansion due to labor problems, ethnic tension, strict security procedures making access to export facility difficult. Thus, in order to materialize the success of BRI as envisaged by China, with Xinjiang featuring as a crucial juncture in it, it has to go beyond mere geographical integration of the area through heavy investments and coercive political control and integrate the marginalized people instead.
Therefore, we can conclude that for China to become not only the largest economy but also the superpower, instead of searching for new markets to dump its products, it should embrace a decentralized planning system, address the problem of over-capacity and resolve the ethnic tension of its Xinjiang province.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Geopolitics.