Debt-trap diplomacy
Debt-trap diplomacy is a term to describe an international financial relationship where a creditor country or institution extends debt to a borrowing nation partially, or solely, to increase the lender's political leverage.
A neologism, the term was first coined by Indian academic Brahma Chellaney in 2017 to contend that the Chinese government lends and then leverages the debt burden of smaller countries for geopolitical ends.
In 2013, China, which was less affected by the 2008 crisis than the U.S. and Europe, started its Belt and Road Initiative (BRI), making loans available through its policy banks and other state-linked firms for infrastructure projects primarily in the same sorts of emerging markets that private investors were focusing on.
[12] This hypothesis attracted wide interest, being covered in prominent newspapers like The Guardian and The New York Times and reiterated in foreign policy analyses by other academics, and inspiring anxiety in the governments of the U.S. and its allies.
[13][14][15][16] The U.S. administration publicly endorsed the hypothesis; Rex Tillerson, then the U.S. Secretary of State, decried China for "using opaque contracts, predatory loan practices and corrupt deals that mire nations in debt and undercut their sovereignty, denying them the long-term, self-sustaining growth," in a May 2018 speech aimed at African governments before starting an official tour there.
[16][11][18][19] By 2023, according to the Associated Press, a consensus had formed among experts that Chinese lending to foreign governments was "far too haphazard and sloppy to be coordinated from the top," coming from "dozens of banks on the mainland" without signs of any overarching geostrategic plan.
[30] The Associated Press reported, in May 2023, that a dozen countries, including Pakistan, Kenya, Zambia, Laos and Mongolia, were on the "brink of collapse" under the weight of overwhelming foreign debt, "much of [it] from the world’s biggest and most unforgiving government lender, China."
However, the analysts quoted in the article disputed the idea that this was in line with any grand geostrategic plan of China's, saying that there is "no single person in charge" of the lending as it comes from "dozens of banks on the mainland" and "is far too haphazard and sloppy to be coordinated from the top."
[36][37]A May 2018 paper by Sam Parker and Gabrielle Chefitz from the Belfer Center for Science and International Affairs posited three strategic goals behind China's lending: "filling out a 'String of Pearls' to solve its 'Malacca Dilemma' and project power across vital South Asian trading routes; undermining and fracturing the US-led regional coalition contesting Beijing's South China Sea claims; and enabling the People's Liberation Army Navy to push through the 'Second Island Chain' into the blue-water Pacific.
"[15] A March 2018 report released by the Center for Global Development said that between 2001 and 2017, China restructured or waived loan payments for 51 debtor nations (most of the BRI's participants) without seizing state assets.
[44] The article also reported the views of Australian National University senior lecturer Darren Lim, who (referring to the Rhodium Group study) said that much of the leverage shifts to the borrower rather than the lender after the loan has been made.
[44] La Trobe University head of humanities and social sciences Nick Bisley said that China aimed to build political capital through the BRI, but asset seizures would not achieve that end.
[5] Deborah Bräutigam, a professor at Johns Hopkins University, described debt-trap diplomacy as a "meme" which became popular due to "human negativity bias" based on anxiety about the rise of China.
[51] The study said, “contrary to the debt-trap narrative, if a wave of African defaults materializes in the near future, as International Financial Institutions officials have been fearing since at least 2015, it will be catalyzed more by private-sector maneuvering and intransigence than by Chinese scheming.
[62][63][64][65] The founder of the activist network Committee for the Abolition of Illegitimate Debt wrote: "The World Bank and the IMF have systematically made loans to states as a means of influencing their policies.
[67] In the book Confessions of an Economic Hit Man, whistle blower John Perkins wrote that international lenders, including the World Bank and the IMF, persuaded leaders of underdeveloped countries to accept loans for large development projects.
[69]: 69 African countries rapidly increased their borrowing from China between 2000 and 2014[74] (totaling US$94.5 billion) as they sought to end their dependence on the IMF and World Bank, which demand market liberalisation in exchange for loans.
Writing in The Atlantic, Bräutigam stated that the debt-trap narrative is “a lie, and a powerful one" and that her research shows that "Chinese banks are willing to restructure the terms of existing loans and have never actually seized an asset from any country".
This includes a controversial $2.5 billion loan from the China Development Bank to the state-owned South African electrical utility Eskom which was arranged under the Jacob Zuma government.
He claimed that although Maithripala Sirisena defeated Rajapaksa in the 2015 presidential election with campaign promises to "extricate Sri Lanka from the Chinese debt trap" and then suspended work on Chinese-funded projects after taking office, Sri Lanka's increasingly-dire economic situation forced Sirisena's administration, in Chellaney's eyes, to take out more loans from China and "[acquiesce] to a series of Chinese demands," such as restarting the Port City Colombo project and selling China a $1.1 billion majority stake in the Hambantota International Port.
[119] Many professionals writing prominent pieces against Chellaney's case gave Sri Lanka and Hambantota a similarly-prominent role in their counterargument, such as Deborah Bräutigam and Meg Rithmire in The Atlantic or international politics academics Lee Jones and Shahar Hameiri for Chatham House.
[85][120] Jones and Hamieri, for example, conclude that debt-trap diplomacy is a myth, noting that recipient governments such as Sri Lanka undertake loans for their own domestic purposes like sustaining economic growth.
Academic Muyang Chen writes that contrary to such narratives, the $1.12 billion in new equity by China Merchants Port increased Sri Lanka's foreign reserves and allowed its government to repay debts to non-Chinese creditors.
[139] A statement issued by 182 leading economists accused private creditors - mostly Western banks & hedge funds - who hold 40% of Sri Lanka's debt of effectively taking the country hostage.
Colombo had originally arranged a bailout from the IMF, but decided to raise the required funds by leasing the under-performing Hambantota Port to an experienced company as the Canadian feasibility study had recommended.
[162] Mahathir Mohamad and Finance Minister Lim Guan Eng criticized the projects[163] as expensive, unnecessary, superfluous, non-competitive (because open bidding was prohibited), conducted with no public oversight, and favored Chinese state-owned firms and those affiliated with Razak's United Malays National Organisation (UMNO) party at inflated prices.
[172] In October 2023, a senior economist at Singapore's ISEAS–Yusof Ishak Institute was quoted as saying that Laos was in "the definition of a debt trap," with the government starting to borrow from domestic lenders to repay China.
[174] China's BRI has made a number of investments in the European Union and continental Europe, including the port of Piraeus in Greece, Portugal's energy and transport sectors, and Hungarian railways.
[182] A 2019 study compiled by Boston University's Global Development Policy Center stated that Chinese lending has not driven Latin American countries over IMF debt sustainability thresholds.
[69]: 88 An article published by Carnegie-Tsinghua Center for Global Policy said China's loans in Venezuela are not debt-trap diplomacy nor "creditor imperialism", but simply "lose-lose" financial mistakes in which both parties stand to lose.
