Institutional Economics OBOR
Snake1256
Institutional_econ7again.pptxInstitutional Economics
OBOR – One Belt One Road
Presented by:
Rubal
Sandeep
Pradeep
Zohreh
INTRODUCTION OF OBOR
The President of the People's Republic of China, Xi Jinping, originally announced the strategy during official visits to Indonesia and Kazakhstan in 2013.
One Belt One Road also known as the Belt and Road Initiative (BRI) or the Silk Road Economic Belt and the 21st Century Maritime Silk Road.
This is a development strategy adopted by the Chinese government involving infrastructure development and investments in several countries and international organizations in Europe, Asia, Middle East, Latin America and Africa.
The ‘belt’ refers to the ‘Silk Road Economic Belt‘ which is land based. It will connect China with Central Asia, Eastern and Western Europe.
The ‘road’ refers to the ‘21st Century Maritime Silk Road’ which is sea based. It will connect China to South-East Asia, Africa and Central Asia.
During the Forum, China signed cooperation deals with 68 countries & international organizations. The Forum resulted in 270 deliverables in areas including policy coordination, infrastructure building, trade, investment and cultural exchange.
Within China, the OBOR initiative has gained support from the highest levels of government and is now an official national strategy.
In May 2017, the OBOR Forum was held in Beijing China, with heads of state & senior policy makers from more than 30 countries. It was the highest profile international meeting so far on the OBOR initiative.
CPCCC: Communist Party of China Central Committee
NPC: national people’s congress
NDRC: The National Development and Reform Commission of the People's Republic of China
3
One Belt One Road
OBOR is an ambitious project and it encompasses almost 78 countries. China has planned around $1 trillion of investment in various infrastructure projects by providing loans to the countries involved at a low cost.
The area covered by One Belt, One Road can count on 55% of global GDP.
It is inhabited by 70% of the global population and holds 75% of the world’s energy resources. This great plan, which involves 78 nations.
The important aim is to strengthen its role in the Eurasian area through the construction of modern logistics and energetic infrastructures.
Chinese government wants to promotes the internationalization of its companies (so-called "Go global strategy") to bring them to levels of greater competitiveness in the global economy.
This policy has as privileged partners the five Central Asian Republics (Kazakhstan, Turkmenistan, Kyrgyzstan, Tajikistan, Uzbekistan) and include two components in order to have a win-win cooperation: on one hand, China promotes investments and provides loans to realizes logistics infrastructure (roads, highways, railways, bridges, ports).
Over the past decade, China has devoted nearly 50% of its GDP to investment, resulting in tremendous industrial capacity which can be leveraged through the OBOR initiative.
China has developed a competitive edge and gained vast experience in infrastructure development and construction activities in the last 10 years
Compared to other emerging countries, China has expertise and management skills in large scale infrastructure projects
Since the OBOR initiative was announced, China has signed 18,346 contracts with OBOR countries (as of Nov 30, 2017).
More than 8,000 construction contracts were signed with OBOR countries in 2016 alone, amounting to $126 Billion.
Chinese firms have experience conducting business along the OBOR routes and countries participating in the OBOR Initiative are the largest recipients of Chinese investment.
OBOR initiative may accelerate the rate of growth in China’s overseas projects over the next decade.
Network & Participation
Network & Participation
AIIB’s 84 members:
48 regional members: Afghanistan, Australia, Azerbaijan, Bangladesh, Brunei Darussalam, Cambodia, China, Fiji, Georgia, Hong Kong (China), India, Indonesia, Iran, Israel, Jordan, Kazakhstan, Korea, Kyrgyz Republic, Lao PDR, Malaysia, Maldives, Mongolia, Myanmar, Nepal, New Zealand, Oman, Pakistan, Philippines, Qatar, Russia, Samoa, Saudi Arabia, Singapore, Sri Lanka, Tajikistan, Thailand, Timor- Leste, Turkey, United Arab Emirates, Uzbekistan, Vanuatu, and Vietnam.
Prospective: Armenia, Bahrain, Cook Islands, Cyprus, Kuwait, and Tonga.
36 non-regional members: Austria, Denmark, Egypt, Ethiopia, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, and United Kingdom.
Prospective: Argentina, Belarus, Belgium, Bolivia, Brazil, Canada, Chile, Ecuador, Greece, Madagascar, Peru, Romania, South Africa, Sudan, and Venezuela.
OBOR
Contains following six economic corridors:
1. New Eurasian Land Bridge that connects Western China to Western Russia.
2. China – Mongolia – Russia Corridor that connects North China to Eastern Russia via Mongolia.
3. China – Central Asia – West Asia Corridor that connects Western China to Turkey via Central and West Asia.
4. China – Indochina Peninsula Corridor that connects Southern China to Singapore via Indo-China.
5. China – Pakistan Corridor that connects South Western China through Pakistan to Arabia sea routes.
6. Bangladesh – China – India – Myanmar Corridor that connects Southern China to India via Bangladesh and Myanmar.
Additionally, the maritime Silk Road connects coastal China to the Mediterranean via Singapore-Malaysia, the Indian Ocean, the Arabian Sea and the Strait of Hormuz.
SILK ROUTE ECONOMIC BELT HUB
21st century maritime silk road hub
Initiative aimed at investing and fostering collaboration in Southeast Asia, Oceania, and North Africa, through several contiguous bodies of water: the South China Sea, the South Pacific Ocean, and the wider Indian Ocean area.
Ice Silk Road
In addition to the Maritime Silk Road, Russia and China are reported to have agreed jointly to build an ‘Ice Silk Road’ along the Northern Sea Route in the Arctic, along a maritime route which Russia considers to be part of its internal waters.
Super grid
The super grid project aims to develop six ultra high voltage electricity grids across China, north-east Asia, Southeast Asia, south Asia, central Asia and west Asia.
OBOR
Transportation
-One Belt One Road has assisted many countries in developing infrastructure from transportation to electrical energy.
-For example, China has invested $14 billion in Eastern Africa Kenya’s Standard Gauge Railway (SGR), which is 485km single-track railroad, and acts as one of the most significant projects since Kenya became independent in 1963.
-The SGR also facilitates local industries and trade between Africa and China.
OBOR BENEFITING DEVELOPING COUNTRIES
Economics
-One Belt One Road promotes trade between each country and generates mutual economic benefits.
-For example, Kazakhstan is a landlocked country in Central Asia, and as its winters are very cold, there is barely any vegetable production.
-One Belt One Road connects Kazakhstan and the northwestern Chinese Xinjiang Uygur Autonomous Region. The cross-border trade of vegetables provides Kazakhstan’s people with their basic needs. The total trade between Xinjiang and Kazakhstan is more than $11 billion annually, a figure that composes 40 percent of China-Kazakhstan trade in total.
-One Belt One Road shortens the distance between each country and promotes the global economy, and will hopefully see ongoing progress and generate benefits for every country.
OBOR BENEFITING DEVELOPING COUNTRIES
Energy
One example of an One Belt One Road investment in energy is its project in Pakistan — the Nehru Tim Jielu Mu Hydropower Station.
Problem: Electricity problem in Pakistan. More than 500 million megawatt deficit on the national grid. Power cuts are frequent in hospitals, commercial buildings and residential buildings.
In 2014, the construction of Nehru Tim Jielu Mu Hydropower Station was approved and operated by a joint engineering team of China Gezhouba Group Co., LTD (CGGC) and China Machinery Engineering Corporation (CMEC).
This project invested around $4.3 billion, and its goal is to build a dam on Nehru River and provide electricity via hydroelectric generation.
This project brings light to Pakistan and also assists in the nation’s economic development.
OBOR BENEFITING DEVELOPING COUNTRIES
Asian Infrastructure Investment Bank (AIIB)
The Asian Infrastructure Investment Bank, first proposed by China in October 2013, is a development bank dedicated to lending for projects regarding infrastructure.
The primary goals of AIIB are to address the expanding infrastructure needs across Asia, enhance regional integration, promote economic development and improve the public access to social services.
The bank currently has 69 members as well as 24 prospective members from around the world.
The One Belt One Road (OBOR) and the Asian Infrastructure Investment Bank (AIIB) have been launched by Beijing as a grand economic and diplomatic strategy, which is designed and pursued to overcome the nation’s domestic economic problems.
The OBOR and AIIB initiatives will inevitably bring significant impact on the economic architecture in multiple important areas, which would in turn have strategic implications in the region and beyond.
AIIB has identified three areas of particular relevance:
Sustainable Infrastructure. Promoting green infrastructure and supporting countries to meet their environmental and development goals.
Cross-country Connectivity Prioritizing cross-border infrastructure, ranging from roads and rail, to ports, energy pipelines and telecoms across Central Asia, and the maritime routes in South East and South Asia, and the Middle East, and beyond.
Private Capital Mobilization. Devising innovative solutions that catalyze private capital, in partnership with other MDBs, governments, private financiers and other partners.
Our institution is getting stronger.
They formulated a comprehensive set of policies for AIIB’s operations and established three thematic priorities: sustainable infrastructure, private capital mobilization and cross-border connectivity. Their Board of Directors approved strategies on energy, transport, sustainable cities and private capital mobilization.
Our investment portfolio is growing.
By end-2018, they approved over USD7.5 billion for projects in 13 members, covering various infrastructure sectors such as transportation, energy, telecommunications and urban development. AIIB now has 40 percent stand-alone projects and 60 percent in cooperation with other multilateral development banks.
Our membership is increasing.
Within three years, the membership increased from 57 to 93. This demonstrates the commitment of members to multilateral cooperation and strengthens AIIB’s role in the international financial community.
AIIB Turns 3, Reflects on Startup Growth
The bank’s ambitious goal – to help bridge Asia’s estimated $26 trillion infrastructure funding gap to 2030 – carries obvious risks.
The bank funds projects in emerging markets such as Myanmar, Pakistan, Egypt and Turkey, which have experienced highly challenging credit cycles in the recent past.
They set up a risk management framework which imposed comprehensive risk limits in all areas – investment, treasury, liquidity risk, market risk – the whole bank, at one shot.
The bank’s loan book reached $6.4 billion in September 2018, and is set expand to $45 billion in loans and $2.5 billion in equity investments by 2027.
AIIB Ambitions
Infrastructure Investments
The World Bank lends to promote economic development; the IMF oversees monetary and exchange-rate policies and provides emergency loans to nations. ... China, the world's second-largest economy, wanted more of a say in global financial institutions. It announced the AIIB in 2015, with 57 countries as founding members.
AIIB VS WORLD BANK
AIIB
AIIB
World Bank Structure
AIIB VS WORLD BANK
FUNDING PROCESS
One of the effects driving the One Belt, One Road under the AIIB is the need for adequate resources in terms of funds which adopts project management style.
The institution sources at least 70% of its $ 100 billion capital from over 50 countries (The Economist, 2016). The AIIB is central to supporting and funding projects under the One Belt and One Road area which involves several countries.
The AIIB in this case evaluates the feasibility of the projects before submitting it to the board for approval. The initiatives have been able to expand due to support form other Asian countries who view it as a form of Asian integration (Dollar, 2015).
Secondly the initiative is driven by the global GDP this is because it takes place over 50 countries which in turn drives their economies.
Thus, AIIB projects are easily impacted by global market forces such as interest rates and supply and demand forces. In this regard, it implies that AIIB is answerable to multinational and significant number of shareholders.
Effects of One Road One Belt and AIIB
Thirdly, the initiative solely operates based on partnerships and cooperation making it a large network. The AIIB co-finances the projects with institutions such as European Investment Bank and the Worlds Bank.
This means that AIIB cannot independently operate and manage the projects without prior approval and guidance of the other financiers of the projects. In this case, the AIIB is requires to develop polices and guidelines regarding projects to align with international standards.
Fourthly, AIIB Belt and Road initiative is affected by sustainability whereby before projects are implemented environmental impacts must be assessed and controlled. This is found within the tenets of the AIIB in which sustainable development is core to the bank’s project development and management. AIIB is adopting a similar purpose and vision as global institutions who are integrating sustainability into their brand image in the wake of increasing environmental impacts.
Overall, the effects affecting the One Belt and One Road initiatives all arises from the cooperation and practices of global institutions because it they have social ,economic and environmental responsibility to the partners and the world.
Effects of One Road One Belt and AIIB
“Institutional Distance” Influences
“Methodology and Results” (Variable measurement and data)
(According to the panel data of 28 host countries including Russia, Singapore, Malaysia, Thailand, Philippines, Iraq, Turkey, Jordan, Lebanon, Yemen, Qatar, Kuwait, Egypt, Bahrain, India, Pakistan, Ukraine, Georgia, Azerbaijan, Armenia, Belarus, Uzbekistan, Kyrgyzstan, Tajikistan, Poland, Romania, Slovenia and Estonia along OBOR from 2006 to 2014)
The most crucial effects of institutional distance:
location choice of Chinese multinationals
impact of transportation costs,
trade and purchasing power,
Including trade, GDP per capita
the interaction term of geographic distance and bilateral trade as control variables
The dependent variable is FDI stock from Chinese firms in each host countries.
Institutional Distance (ID):
captures both regulative and normative aspects of institutional environments
based on the World Bank’s Worldwide Governance Indicators (WGI)
which cover six dimensions, namely, voice
and accountability, political stability, government effectiveness, control of
corruption, regulatory quality and rule of law. Here, the former four aspects
indicate the normative distance between two countries while the latter two show
the regulative difference.
Institutional Distance (between China and the host countries):
Institutional distance between China and the host countries shape the patterns of Chinese outward investment to the OBOR area.
Estimated coefficient for institutional distance is negative and statistically significant.
Trade relationship casts a negative impact on location choice of Chinese FDI
The interaction term of geographic distance and trade is significant at 5%.
A negative relationship between institutional distance and Chinese FDI since greater institutional distance increases the costs of doing business in a foreign country (due to greater uncertainty and non-familiarity with the local Environment)
Results: the institutional distance increases by one unit, it is associated with a decrease in Chinese FDI by 10.1% (model 1).
References
History timeline of OBOR. Retrieved from the website: https://safety4sea.com/timeline-of-belt-and-road-development/
Network and participation routes. Retrieved from the website: https://www.pinterest.ca/pin/573786808756606981/?lp=true
OBOR benefiting developing countries. Retrieved from the website: https://borgenproject.org/one-belt-one-road-benefits/
Introduction to AIIB and its features. Retrieved from the website: https://en.wikipedia.org/wiki/Asian_Infrastructure_Investment_Bank
Global investment of AIIB. Retrieved from the website: https:// en.wikipedia.org/wiki/Asian_Infrastructure_Investment_Bank
Dollar, D.(2015). The AIIB and the ‘One Belt, One Road’. Retrieved from https://brookings.edu/opinions/the-aiib-and-the-one-belt-one-road/
The Economist. (2016). The infrastructure of power. Retrieved from https://www.economist.com/finance-and-economics/2016/06/30/the-infracstructure-of-power
