By: Angelo Krüger
On 26. June 2022, the world’s most advanced economies – the G7 – announced a $600 bn. infrastructure investment initiative primarily to counter China’s Belt and Road Initiative (BRI). While the 2013 announcement of the BRI was initially deemed inefficient or infeasible, Beijing successfully put in motion its estimated $1tn. dollar plan to invest abroad, at least until the Covid-19 pandemic put an early stop to most activities in the world economy. With the new Partnership for Global Infrastructure and Investment, the Group of Seven now aims to further curb Beijing’s global activity and become key investors in vital economic sectors themselves. However, Chinese investments are not the problem. The imminent global investment gap is. Thus, it is necessary for the G7 to finally turn rhetoric into action by realizing projects and streamlining its loose network of investment strategies.
Supply: Counter Offers to the BRI
Within the first six years after its announcement and according to official numbers from the Chinese Assets Supervision and Administration Commission, the BRI saw some 3,100 projects developed by China’s state-owned enterprises. These investments have been mainly funding “hard” infrastructure in the transportation, energy, and information and communications sectors. Additionally, China negotiated economic zones, free trade agreements, currency swap agreements, as well as tariff reductions.
In 2016, the G7 began deliberating over counter projects and soon announced various strategies. In 2018, the European Union (EU) jumpstarted its EU Strategy on Connecting Europe and Asia. The EU aimed to facilitate private sector investments and provide corresponding financing vehicles such as the Neighborhood, Development and International Cooperation Instrument (NDICI). The European Commission (EC) emphasized the feasibility of environmental, social, economic, and fiscal sustainability while “shaping the flows of globalization.” In late 2019, EC President Ursula von der Leyen announced the Global Gateway Initiative (GG), a €300 bn. infrastructure development program to develop digital- and education-, energy-, transport- and health sectors around the globe and fill investment gaps sustainably to offer a “true alternative” to China’s BRI.
Together with Australia and Japan, the United States also initiated a joint global investment strategy in 2019, the Blue Dot Network (BDN). With an initial endowment of $60 bn., the BDN was set to provide infrastructure development projects globally and to invest private capital abroad. Two years later it was incorporated into the G7’s Build Back Better World Initiative (B3W). This was the first attempt to bundle capabilities and to create a uniform strategy across the G7. However, the B3W does not directly compete with China, putting its foci on vastly different areas like promoting health security, digital technology, or gender equality across the globe. Furthermore, like the BDN, B3W soon faced challenges over mobilizing private capital for its policy goals.
“However, Chinese investments are not the problem. The imminent global investment gap is.”
Beijing, on the other hand, which ran into a similar situation, subsidized missing funds through bilateral funding agreements between debtor states and its banks. Additionally, China created new institutions such as the Asian Infrastructure Investment Bank (AIIB), a multilateral development bank, and the Silk Road Fund. Within six years, the AIIB became a major public and private development finance lender. In line with China’s BRI strategy, it supplies mainly loans at commercial rates to large-scale infrastructure projects. At the same time, G7 initiatives have mainly targeted smaller projects with bigger grant elements in the past. Most importantly, their loan and operational modalities remain often opaque, and funds are not easily accessible.
The recent strategies of G7 members, especially the Global Gateway Initiative, so far have not been on par with Chinese investment activity in terms of attractiveness. Time will tell if the same holds true for the Partnership for Global Infrastructure and Investment, which is meant to be “no charity” – a not very attractive signal for governmental and private clients. At the same time, China’s global investment strategy, recently called into question over new initiatives and a slowed down investment activity abroad, will need to revive its image after it suspended and abandoned some of its mega projects.
Demand: Mind the Investment Gap
Despite the complementary characteristics between the advanced economies (small-scale, diversity and sustainable projects) and Chinese strategies (big infrastructure investments), the global investment gap for the developing world will grow $15 tn. until 2040. Developing- and emerging economies are struggling to attract foreign investments: Prior to the Covid-19 pandemic, the developing world received inward foreign direct investments totaling $557 bn., a level last seen in the early 2000s. Earlier assessment reports from 2017 show that the investment gap has since been growing from $5.5 tn. While peak estimates of global spending were at 3.26% of global GDP in 2016, projections by the Global Infrastructure Hub indicate a decline to 2.72% in 2040. This development would mean a growing investment gap of $3.3 to $4.5 tn. annually. To sum, while global investment strategies have been endowed with billions of USD or Euros, the need for investment has been growing even faster.
Today, the biggest investment need by amount lies in middle-income countries, such as Brazil, Russia, India, China, and South Africa. However, much of the developing world relies on foreign direct investments, and many projects could be accelerated with comparably small investment commitments. The transport sector (road infrastructure) will have the most salient investment need, with a growing gap of $435bn. by 2040, followed by the energy sector with over $164bn. Rail infrastructure, telecommunications, and the water sector are further vital areas that have high investment needs between $39 to $61 bn. Furthermore, in many emerging markets and developing countries, private capital investments face significant administrative backlogs, which consume five to ten percent of total project costs. Project preparation facilities and infrastructure-related initiatives, such as the Global Infrastructure Facility, showed limited success in addressing these issues. Taking the Sustainable Development Goals into account, the numbers concerning this investment gap triple.
“The G7 must acknowledge the widening investment gap and provide a uniform platform and corresponding financing- and security vehicles for private capital investors around the globe.”
What to Do: Lead by Example
What must be done to counter China and address the global investment gap, especially in the most vulnerable regions? A first important step is to catch up with China by mobilizing the committed capital. In 2016, institutional investors and banks overall held a combined $120 tn. in assets, with 87 percent of these resources coming from advanced economies and $6 tn. located in sovereign wealth funds alone. Thus, states can provide adequate funding to meet investment needs. However, these institutions are highly fragmented and not coordinated, which leads to an incoherent development finance space with institutional overlap and inefficiency. Second, there needs to be clarity about funding and allocation strategies. While single states among the most advanced economies reached record levels of outflowing FDI, little is known about how the funding channels of the Global Gateway, B3W, or the newly announced Partnership for Global Infrastructure and Investment will work with and facilitate investments beyond existing investment mechanisms. Third, questions remain about how these initiatives and their corresponding instruments will accelerate private capital contributions, a significant aspect of the announced investment strategies, to be invested in high-risk areas.
The European Neighborhood, which spans from Morocco to Syria, the West Balkans and Turkey, to the geopolitical hotbed of the Eastern Partnership countries Ukraine, Moldova, Georgia, Armenia, and Azerbaijan, as well as Central Asia and Sub-Sahara Africa alike, rely on investment despite pandemic and war via EU policy funds. Thus, the G7 needs to provide more than a set of individual initiatives and should implement a single coherent strategy that addresses global investment needs. Furthermore, they must acknowledge the widening investment gap and provide a uniform platform and corresponding financing- and security vehicles for private capital investors around the globe. Only then will the club of seven be able to counter China’s BRI through an increased attractiveness of its investment strategy and archive financially sustainable investments, which work towards effectively closing the global investment gap.