Debt Diplomacy is a term commonly used in reference to the practise of powerful nations using loans as a manner in expanding their influence over other nations, primarily developing ones. This method has attained significant attention, especially with China and their Belt Road Initiative (BRI) which includes a number of developing nations including Pakistan, Mongolia and Afghanistan, being the closest to China.
Although these arrangements can drive economic development in third world Countries, it creates a dangerous level of dependency where those nations that are borrowing from these powerful Countries, find themselves in a cycle of endless debt.
China's Belt and Road Initiative (BRI)
The BRI has been a critical tool for China to attain geopolitical influence by offering large loans for infrastructure projects across Asia, Africa and parts of Europe.
Although these loans can boost economic development, they come with many heavy financial obligations causing some countries into debt distress.
For Example, nations like Pakistan and Laos have taken on substantia debt under the BRI, leading to concerns about their ability to repay these loans.
As of 2023, it is said that Pakistan owes around $30 Billion to China, around 30% of its total external debt.
Laos has also taken massive debt through the BRI, with its debt to China reaching around 45% by 2023. Their construction of a $6 Billion railway funded by Chinese loans has been seen as controversial due to its potential in leading Laos into debt trap.
Alongside, Pakistan and Laos, it is said that about 12% of the countries involved in the BRI are at high risk of debt distress due to the huge loans taken from China.
Many African nations also have gained significant BRI related debt with certain countries like Djibouti struggling massively, owing more than 70% of their GDP to China.
Risks and Benefits for Borrowing Countries:
Although Loans from Initiatives like the BRI can accommodate much needed infrastructure development, they can also come with risks.
Nations that are not so able to manage the debt could find themselves in a vulnerable position as they could lose control and ownership over assets.
This was seen in Sri Lanka with their Hambantota Port which was built with Chinese Loans. This port was then leased to China for 99 years in 2017 after Sri Lanka was unable to pay their debt.
Laos also agreed to a deal allowing a Chinese owned company to control its national power grid, raising alarms about Chinas growing influence over the country and its critical infrastructure.
The Port of Piraeus, Greece's largest port, is another example. In 2016, the China Ocean Shipping Company (COSCO) acquired a 51% stake in the port, which later increased to 67% in 2021.
Tajikistan, also deeply indebted to China, reportedly ceded around 1,158 square kilometres of land to China in 2011 as part of a debt settlement deal.
However, despite the clear risks that come with the BRI, there are also many benefits. Benefits that have been seen in a number of countries involved.
The China-Pakistan Economic Corridor (CPEC), another BRI project, has brought in over $62 billion in infrastructure investments, including roads, railways, and energy. These investments have the potential to significantly boost Pakistan’s economic growth.
Ethiopia has also seen significant infrastructure improvements, such as the Addis Ababa-Djibouti railway, largely funded by Chinese loans. Despite the debt, the railway has the potential to boost trade and economic growth by providing a direct link to the port of Djibouti.
Long-term Impact on Global Financial Stability and Alliances:
Debt diplomacy can lead to shifts in global power structures.
Nations that are heavily indebted to powerful nations might align their foreign policies with the nations they owe their debt to, to avoid defaulting on loans, potentially leading to new geopolitical alliances.
However, there are concerns that this could destabilize global financial markets if widespread debt distress leads to defaults, particularly in smaller, developing nations