Dodging the debt trap: a better way to compete with China in our region

Oct 16, 2021
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Australia could use a small fraction of the money committed to nuclear-powered submarines to co-operate with our friends in a more cost-effective and quicker way to check China’s regional influence.

Whatever your view about the Australian AUKUS submarine deal, two things are clear. It costs a lot of money and the submarines won’t be available for decades.

We could use a very small portion of that money to co-operate with our friends in a cost-effective and quicker form of competition with China.

The Chinese Belt and Road Initiative (BRI) has left many countries in the region with huge debts to China while they still have major needs for support for infrastructure, Covid response, climate-change adaptation and basic development needs.

In the Pacific, Australia’s aid budget is almost big enough to compete with China. In the broader Indo-Pacific we would need the co-operation of the US, Japan, the EU, the UK, France and South Korea.

When Kevin Rudd was prime minister we sought co-operative arrangements with other donors in the Pacific. We gained agreement from all except China. It is time to repeat the effort, in the Pacific initially where Australia can take a lead, but more broadly across the region as well.

The AidData website and the Centre for Global Development (CGD) both report on the extraordinary level of direct and indirect indebtedness to China of many countries in the Indo-Pacific region.

The combined financial firepower of the countries and organisations above and their associated Development Finance Institutions (DFIs) would be sufficient to provide the infrastructure and other funds required in the region on better terms than the relatively high rates charged by China and its institutions.

A key question is: what to do about the very large debts already incurred. AidData found that 42 low-to middle income countries had debt exposure to China exceeding 10 per cent of its GDP. In our region, this list includes Papua New Guinea, Laos, Cambodia and Myanmar.

It may be possible to establish a consortium of DFIs and similar national organisations to buy some of this debt by providing funds as grants or at lower interest rates. This would enable some or all of these countries to free themselves of excessive and possibly security-threatening indebtedness to China.

I have never regarded the Australian Infrastructure Financing Facility for the Pacific as the best structure to provide development finance to our region. It is a second-best form of DFI. But at the moment it is all we have, and it could do some of the job that is required in our region.

Of course, this will require an increase in our aid budget, but by much less than the cost of a submarine.

Analysis by AidData and others does not support the thesis that all the Belt and Road projects are wasteful or inefficient. It is arrogant to suggest that they are. But the financing is relatively expensive and the debt burdens are becoming excessive.

CGD suggests a three-pronged approach for the US:

  • Confront China over harmful lending practices.
  • Co-operate with China on Covid and climate change.
  • Compete with China to offer development finance.

This seems a very good basis for approaching the issue for the US. Australia is not in a position to do all that. It could co-operate with the US on the approach to China’s lending practices. It could and should co-operate on Covid and climate change.

The biggest question is: how are we going to compete on development finance?

We should co-operate with like-minded countries to offer a path out of the excessive debt trap many in our region find themselves in as well as offer alternative resources for financing requirements. Whoever wins the next election should consider these options.

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