The Clash of Theory and Practice in China’s Belt and Road Initiative

China’s Belt and Road is not an infrastructure project. With the external industrial policy International Capacity Cooperation being now unwound and Belt and Road floundering as the guiding foreign economic policy, the intercontinental containerised China Rail Express (CR Express) is sitting on unsure domestic policy grounds. The system is a network of rail freight lines connecting China with Europe via an array of nodes in Central Asia. China central policy planning exists to coordinate the continued policy development of the intercontinental rail system through the 2020s, however, there is a dearth of space for policy or theoretical debate on improving either the intercontinental rail plan or China’s wider geoindustrial policy in Eurasia. Geoeconomic theory is in vogue again, yet without any recourse to political economy theory, and without any operational or theoretical model for analysing the geoeconomic factors at play in China’s Eurasian economic policy deployment.

Contemporary applications of Cumulative Causation theories remain marginal heterogenous footnotes against the distributed multilateralism of contemporary development economics, and yet Cumulative Causation explains most completely the successful industrial policy-driven economic developments in East Asia as well as the failure of other economic geography approaches to both regional and national economic development. Kaldor’s dissatisfaction with orthodoxy in economic theory highlighted the inability of neoclassical economics to account for regional variation in the economic path-dependency of national systems of economic development. While Myrdal’s sprawling works were the basis for the United Nations economic redevelopment program for Europe.

Kaldor’s model is important in the decolonisation and reindustrialisation period, where the path-dependency approach to industrial development resulted in several successful industrial development strategies in Japan, Korea and Taiwan, while the combination of a mainstream neoclassical equilibrium approach to economic development and an unimaginative United Nations bureaucratic model have failed to industrially develop any countries in Africa, South Asia, South America or the Pacific since the Keynesian crisis of the 1970s. If the hybrid of neoclassical economics and global governance worked, then where is the next Tongan technoindustrial state or Tanzanian economic miracle?

The policy governance of China’s economic development model has used different European economic theory to solve different problems. While Cumulative Causation theory is not overtly used in China policy making, it does explain many aspects of China’s development model well because it is an economic theory which readily explains structural changes in physical capital, regional differentiation, and positive government intervention to create new institutions for capital accumulation.

Harnessing the economic policy potential of future path-dependencies

Our study considered China’s central and provincial government intervention in subsidising provincial and city pseudo-private rail freight operators to support existing intercontinental lines and incentivise development of new lines. The rail infrastructure already exists to run rail freight from Central China through Xinjiang into Kazakhstan and from there either to Europe or to other Central Asian destinations. The government intervention is not in infrastructure building, but rather subsidising the China freight forwarding companies in order to offer container shipment to local importers and exporters. Collecting hard data on the subsidy system is a nightmare given the distributed nature of the subsidies and the multiple levels of China public administration which can receive them. Conservative estimates though are that at least half the cost of shipping one TEU container is covered by the subsidy system.

We tried to assess whether such a government intervention would be economically justifiable, not merely geoeconomically desirable for China state power projection, which seems the primary policy goal. Measuring the future economic benefits of a successful government intervention is impossible, particularly when assessing the creation of an entirely new market, which the Europe-Central Asia-China rail line is. Cumulative Causation though is a useful policy tool for assessing structurally transformative interventions. The multi-causal nature of Cumulative Causation analysis segues with wider social science theories which must agent both time and space simultaneously, theories of history and geography such as historical institutionalism, political geography, economic geography, and economic institutionalism.

Cumulative Causation is a difficult model for the contemporary field of development economics because it does not offer easy metrics for neoclassical economics to measure time series developments and neither does it lend itself easily to the simplistic open trade multilateralism of the post-Cold War global economy. While there are various ways of understanding Cumulative Causation, the three most important figures are Kaldor, Myrdal and Veblen. Veblen studied the industrialisation of Germany, and both Kaldor and Myrdal worked for the United Nations rebuilding post-war Europe. Taken as a unified system of thought, Cumulative Causation yields a system of understanding institutional change and industrial development, with natural applications in technoindustrial policy, international aid, and structural intervention in domestic economic development.

Figure. Stylised model of dynamic capital accumulation and decumulation with multiple external social institutional influences. Adapted and expanded from Philip O’Hara.

For our analytical framework, we used a stylised model of positivist variables as a heuristic. The real-world government intervention by China in the intercontinental rail freight market is much more deeply complex and interrelated, but this figure is useful for thinking through path-dependencies of capital accumulation and decumulation. An analytical model of the geoeconomics of Cumulative Causation explains well this process of economic change underway in Eurasia as a result of China’s Belt and Road, International Capacity Cooperation and CR Express geoindustrial policies. From a starting position of an exogenous intervention from a more economically advanced system to a lesser, from China to Central Asia via the China freight forwarders, the system can move from one state of equilibrium through a process of historical and institutional economic change of accumulation into a new equilibrium at a higher order of modality.

However all government interventions carry with them the risk of introducing a capital decumulation effect. Decumulation also occurs as a result of multivariate causality, applicable to spatial economic accumulation/decumulation as well as temporal growth/retraction, meaning that a government intervention cannot be sure of which segment of exogenous social influence the intervention will affect, or whether the result on the economic system will be accumulative or decumulative. A real-world example of decumulation would be overinvestment in steel and cement resulting in underutilisation of capacity resulting in misallocation of capital in heavy industrial infrastructure which could have been better allocated to a transport or education network development. Government public goods across all types of economies face these difficulties, but in China with a mixed planned and semi-open economy, the causative institutional intersection is more acute, with more externalities and fewer internal modifiers than Western capitalist economies.

Layers of such institutionality govern the economic feasibility of projects such as CR Express, which is why neither international relations theory analyses of Belt and Road nor positivist economic analyses of interstate or regional trade development can assess the totality of the geoindustrial policy. The point of institutional analysis is that in the absence of statistical data, political anthropology of policy analysis approaches are more useful in assessing state capitalist behaviour. Assessing any economic viability of individual systems across China’s Eurasian geoeconomic policy though remains difficult against the seeming early decay of the initial Belt and Road industrial rollout and China’s wider multilateralism vacuum, meaning that not even political objectives are being achieved, much less economic.

China’s Eurasian railway a strategic subsidy, not economic development

While China has laid claim to visionary transcontinental transport corridors through Belt and Road, in intercontinental rail freight these plans were often simply tracings of existing Asian Development Bank funded projects or codification of lines which regional cities had already built up themselves. Most real investment in connectivity and trade development in Central Asia is overwhelmingly still financed by European institutions, whether directly through European Commission funding mechanisms or indirectly through the European Bank for Reconstruction and Development or the TRACECA (Transport Corridor Europe-Caucasus-Asia) project. Asian Development Bank’s CAREC (Central Asia Regional Economic Cooperation Program) program meanwhile appears more and more state-captured by China interests—leveraging Australian, United States and Japanese capital to build railways to nowhere across both southern and northern Xinjiang and with otherworldly policy plans for crossing the Tian Shan, Pamir and Karakoram mountain ranges by rail.

Despite projected policy discourse of a China development model, if China’s diplomatic rhetoric is not based on reliable or replicable growth in freight throughput numbers, then governments, policy-makers and academics can make neither positive nor negative assessments based on unverifiable data. At present, the CR Express intercontinental rail freight system is running on China subsidies and European Union goodwill. There is very little economic incentive for either China, Central Asia or Europe to maintain this system on a market basis. For China, the ability to establish offshore industrial production clusters in Eurasia via the parallel trade policies of Bringing In and International Capacity Cooperation create a political incentive. For Central Asian or European states though, there is neither political nor economic incentive.

CR Express is also effectively an attempt to institutionally unite three customs unions: the People’s Republic of China, the European Union, and some form of Eurasian customs, trade and economic integration microregion, as either the Middle Corridor, the Eurasian Economic Union or a future projection of China’s customs, finance, and import standards. In trying to unify three customs unions, the best institutions and theories available should prevail. At this time that would mean the European Union multilevel governance model. Multilevel governance is a functionalist institutionalist alternative to Washington Consensus multilateralism. This means that even within Western globalisation there are multiple conceptions of international institutionalism. Many of the institutional governance problems that China is grappling with have already been tackled in the European Union by the multilevel governance development.

China’s international political and economic approach to institution building in Eurasia seems to be caught in the dichotomy that China should provide its own domestically cultivated alternative to the Bretton Woods institutions. However not only has China not succeeded in developing effective institutions to guide transport, industrial and financial development in Eurasia, the geoeconomic political rationale behind the dichotomy is false. The future institutional development of transport corridors in the region should be based on transparent data and best institutional practice. And yet as the geoeconomic supply is policy-driven from the China side, it is China governance models which are being exported along the Belt and Road economies. Ultimately this fails China as much as it fails the Eurasian partner economies.

Economic planning more European Commission than East Asian model

Regionalism continues to be more important than globalism. Yet the economic spatial planning of communist China’s transport policy planning architecture is an uninspiring model for economic development in Eurasia. The industrial infrastructure and the foreign policy surrounding Eurasian rail freight connectivity are both extant economic development opportunities. However where China is failing in this new Eurasian transport policy is in the monumental attempt to replace existing global and regional trade orders with a novel form of multilateralism and multipolarity.

Policy evidence from the Belt and Road transport case suggests that China’s attempt to replace global multilateralism with regional multipolarity is built on shaky economic development grounds. China’s national system of economic development that resulted in the domestic industrial growth strategy lacks the institutions to be able to export the model as a geoindustrial policy for China’s geoeconomic neighbours. The attempt to simplistically recreate China’s domestic industrialisation institutions in China’s near neighbours in Central Asia through the Belt and Road initiative are already beginning to fray.

While Kaldorian economic theory may hold true for a potential Cumulative Causation effect in the economic integration and development of the Central Asian, Caucasian and Black Sea economies through China’s investment in transport and logistics systems, the institutional vacuum within these economies means that this effect is more likely to dissipate than to materialise. Weak demand, high costs, the persistent economic alternative of maritime trade routes, and other economic factors still trump the political risk that would follow if these were not factors. More than this, the myriad variables of the political systems interfering with economic development in each of the many countries in Eurasia that the China model would have to manage, seem ultimately to create a political economy impasse for the China Eurasia rail system.

Cumulative Causation is good economic theory, allowing for examination of past and existing institutional phenomena and providing a level of predictive explanatory power for future path-dependencies in economic development. There is certainly room in the policy discussion on national, regional and global economic development for economic theory which agents space and time better, and has more practical outcomes than the current failures of development economics. However Cumulative Causation’s practical use has historically manifested itself far better in the institutions intergovernmental institutions which which rebuilt post-war Europe’s economic systems than it does in China’s contemporary state-planning apparatus pursuing an ephemeral Eurasian geoeconomic dream.

This article is a synopsis of ‘China’s ‘Belt and Road’ Rail Freight Transport Corridors—The Economic Geography of Underdevelopment’ published in Die Erde – The Journal of the Geographical Society of Berlin.