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Essay: Influence of transfer of finances in regards to political leanings

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1. Introduction

The globalisation aspects of modern society have transformed the economies of societies all over the world, with the resultant environment providing corporate entities and entire government with access to resources outside their borders. The globalised economic environment has created a means for these entities to cooperate with other actors outside these national boundaries, as is the case with foreign direct investments (FDIs) and inter-government loans. In the current global environment, there is a concern regarding the bargaining power that the financial obligations of countries provide in both political and economic fields (Sun et al. 2016). Financial aid to countries has proven to produce economic improvements in the recipient countries (Petras 2017), but are also concerns regarding the goals of these investments as well as the nature of the expected returns Lumumba-Kasongo, T. 2011; Bond, P. and Garcia, A. 2015. While prior researchers have analysed the case of China’s investments in Africa (Scoones et al. 2016), it is also interesting to understand the influence that China’s developmental loans have in a country’s immediate environment. This research seeks to analyse the influence that these developmental loans have had in the Asia-Pacific region, with a specific focus on the political outcomes of these financial inputs.

While close strategic alliances between countries is not a new phenomenon, there remain reservations amongst analysts regarding the influence that the transfer of finances or other resources have in regards to political leanings (Sun et al. 2016). As evidenced in past economic interactions such as in the investments that the United Kingdom (UK), Russia, Brazil, United States (US), and China, there are distinct correlations between financial loans and policies governing trade and democratisation (Keukeleire and Hoojimaaijers 2014). The agreements that these countries make after the distribution of these financial resources have been identified as opportunity-seeking in their capacity to mobilise the recipient country’s resources through the subsequent bilateral relationships between these nations (Rondinelli 2013). As a result, these alliances are secured with strategic investments by the donor countries, with the resultant benefits including free trade agreements, development partnerships, and bilateral agreements that have economic and political importance on a national scale. However, aside from securing these relationships, Cooley (2015) also find that developmental loans also have linkages to policies that increase the donor’s access to the recipient’s natural resources while also promoting exportation to the donor nation.

Currently, there exists a wealth of evidence of the economic influence that developmental loans and foreign direct investments have on the recipient countries (Shaw 2016; Sun et al. 2016; Petras 2017). While there is a distinct focus on the impact of actions by western countries, the Asia Pacific region and China’s participation in the development of the region is an issue that requires additional scholarly scrutiny. The global influence of this economic powerhouse has been felt in many African countries and received the requisite attention, but it is also necessary to understand the actions that China’s investments closer to home have on the region’s political landscape. One key consideration is that the regional nature of these relationships also can influence other policies such as migration and infrastructural arrangements (Yeh and Wharton 2016). The proposed research thereby focuses on the Asia Pacific region as the key target for the analysis, with the primary variables being the developmental loans that China provides to the countries in the region as well as the subsequent political outcomes of these investments.

2. Literature Review

As highlighted in the introduction, developmental aid can not only influence the economic landscapes of the donor and recipient countries but also change the political alliances between nations as well. While China is not historically a participant in the global developmental aid framework, the country has made great strides in its investments in developing countries in the Asia Pacific and African regions. However, compared to other countries that have a long past of contributing loans in the global environment, there is an increased urgency to understand the political influence that China stands to gain from becoming a donor economy. Moreover, there is also need to improve the knowledge base on this issue considering the adversarial approaches that past researchers have used when analysing the economic moves that China makes. Looking at the country as not only a strong economic force but also as a single entity in the Asian peninsula will thereby be the purpose of this literature review, which will enable the identification of changes in political influence resulting from Chinese developmental loans to countries in the Asia-Pacific region.

History of China’s Participation in Developmental Finance

According to Zhou and Ziong (2017), China has had a presence in the Asian Development Bank and the African Development Bank Group since the mid-1980s, providing the country with a platform for reducing poverty and increasing development in African and Asia Pacific nations. The foundations of the developmental loans that China provides to the recipient countries is meant to provide a foundation of respect and friendship with China, with the aim being the strengthening of ties between these countries rather than a master-slave relationship (Jayasuriya 2015). However, it is also difficult to ignore the fact that China is an economic powerhouse, and has vast financial resources that it can utilise as a means for seizing more opportunities and increasing the regions over which it can exert its influence. Moreover, China also offers a lucrative investment source for countries that abstain from seeking similar financial inputs from western countries (Zhou and Ziong 2017). Notably, this makes the China developmental loans a target for scrutiny due to the country’s willingness to invest in countries in which the western developmental agencies prefer not to invest.

China’s investment-related participation in the Asia Pacific region dates back to the formation of the Asian Infrastructure Investment Bank (AIIB), which was developed to provide financing for airports, railways, roads, and other infrastructure projects in the region’s nations (Cai 2016). According to Petras (2017), the continued investment in these sectors of the economy has a gradual effect of increasing the country’s ability to continually influence favourable compromises in the countries receiving its financial investments. One of the key challenges that political analysts perceive regarding China’s influence is the developmental loans that the country has received from Japan in the past, with investments in the 1979-1983 period alone totalling $1.4 billion (Thuan 2017). Even as these investments can be seen as providing Japan with influence over China, it is also necessary to acknowledge China’s need for infrastructure development and the uncovering of natural resources as a primary goal of the loans. The resultant relationship saw China minimise Japan’s political influence over the country while also propelling China’s development forward on its path to becoming an economic powerhouse.

The issue of China increasing its influence in the Asia Pacific region has been debated since the country announced its loan intentions to the tune of $492 million in 2006 as well as its later additions of $1 billion in 2013 (Dornan and Brant 2014). While there has been historical competition between China and Taiwan in providing aid in the region, China’s increasingly active role in providing both financial and workforce resources to improve infrastructure and industry in the Pacific region. Countries such as Cambodia have a direct military, diplomatic, and political ties to China through its role as a developmental and military benefactor as a result of the over $3 billion that Cambodia has received as developmental grants since the 1990s (Thuan 2017). Other countries such as Sri Lanka also have a similar need for China’s funds, with the aim being infrastructure development in a country that has benefitted by gaining key deep-water and transnational transport networks. In these cases, it is evident to find grounds for China’s capacity to influence policy directives with these Asian countries owing to the ties developed through bilateral economic relationships.

Evident Goals of China’s Developmental Funding

As Cai (2016) highlights, China’s goal as a development partner is not to influence issues such as democratisation in the recipient countries but rather, the development of a foundation of a business that can propel both donor and recipient economies forwards. As a result, there is minimal evidence of China’s dependence on analyses of matters such as regime type as a decision-influencing factor when determining the destination of the country’s developmental loans. Yeh and Wharton (2016) note that the infrastructure-oriented investments that boost the recipient country’s income status while also making it a key partner to China’s economy through the resultant bilateral agreements between these countries. This act of increasing the economic bargaining power of recipient countries provides China with additional support for its national agenda while also connecting the recipients with initiatives such as the 21st Century Maritime Silk Road and the Silk Road Economic Belt (Ye 2015). As shown in figure 1, surveys of the country’s perceptions of the Silk Road initiative’s contributions indicate an increase in positive results regarding its contributions to China’s political bargaining position, economy, and national security.

Figure 1: Review of China’s perceptions on the Silk Road between January 2014 and May 2015 (Source: Ye 2015)

While the financial elements of China’s developmental goals are an essential detail in the focus on the country’s influence on recipient nations, it is also imperative to consider the grounds on which China bases its investments. Llanto et al. (2015) note that China’s approach differs from those of other BRICS members in that it has minimal expectations regarding the ability to spur rapid economic growth without resorting to the liquidation of state control. On the contrary, the developmental agenda of China’s loans is focused on building loyalty by providing evidentiary improvements in economic growth rather than the practical seizure of vital resources for long-term benefits to the donor economy. According to Llanto et al. (2015), the emphasis that China places on infrastructure as a source of economic development is rooted in a developmental approach that seeks to reduce poverty without interfering in the governance of recipient nations as highlighted in Figure 2. As a result, there is minimal pressure on countries receiving China’s developmental loans to switch their alliances for them to benefit fully from the availability of economies which can provide export revenue while also minimising political allegiances between these countries.

Figure 2: Model framework for infrastructure as a poverty reduction mechanism (Source: Llanto et al. 2015)

With the absence of political demands, China’s loans appear more lucrative to Asia Pacific countries when compared to the perceivably patronising demands made by western investor nations such as Australia (Heilmann et al. 2014). Notably, this might also be attributed to the fact that China’s investments are more infrastructure-related while those made by western members of BRICS are primarily targeted towards influencing economic and political reforms in the recipient countries (Shaw 2016). As a result, while BRICS investments increase the amount of indebtedness that nations have to their donors, China’s investments come with less stringent requirements such as conditions for outsourcing decisions to include Chinese labour and companies. Evidently, this allows countries that are at the limits of their debts to acquire these concessional loans with limited restrictions on non-performance on the loans during periods of debt distress within these recipient nations (Cai 2016). However, Bader (2015) also notes that this lack of attention to changes in policy frameworks makes the loans that China makes subject to high-level corruption, financial mismanagement, and frustration of local business efforts as a direct consequence of China’s approach to delivering financial aid.

Military Influence of China’s Developmental Loans to Asia Pacific Countries

Even as China continues increasing its outward-facing economic developments, it is also essential to acknowledge its role as a military power with influential positions such as its military presence in the South China Sea. Llanto et al. (2015) notes that even as China provides financial aid in the Pacific Islands region, there is also limited pressure for the countries that receive this foreign aid to also support China’s positions through its increased diplomatic influence over them. As a result, there is minimal expectation that China seeks to replace other key security partners such as the United States, Australia, and Japan in the region through extensive defence cooperation. Nonetheless, the US State Department is highlighted as perceiving an enhancement in China’s strategic position in the Asia Pacific region as a threat to Washington’s influence over the region and as a source of imbalance to the existing ties between the US and Asia Pacific countries (Saunders 2013). The lack of a military agenda is thereby perceived as an advantage for Chinese-sourced developmental loans when compared to the more reform-oriented approaches of western elements of the BRICS donor countries.

The South China Sea dispute is among the key issues causing concerns amongst analysts of China’s investments in vital resources such as the Hambantota port in Sri Lanka, which the latter country was unable to complete making payments for and subsequently provided China with managerial control (Campbell 2017). The resultant deal provides China with a lucrative military position from which it can increase its capacity to cover the South China Sea and gain support from the supplicant countries in its position on the issue. In comparison, the restrictions in the loan agreements that other BRICS countries sign with recipient nations are meant to ensure that the rule of law is applied in the use and repatriation of the loaned funds. Therefore, even as China’s actions can be perceived as strategic, Yeh and Wharton (2016) note that it is vital to also consider that the loans that the country provides do not include any restrictions on the acquisition of loans from other nations and organisations. Lamour (2017) also considers that these notions of Asia Pacific countries as vulnerable to manipulation are outdated since they pit the recipient nations as unwilling participants in the global economy.

Political Influence of China’s Developmental Loans to Asia Pacific Countries

From a political perspective, there is an apparent need for China to avoid isolation from the neighbouring Asia Pacific region due to the maritime resources that these strategically positioned nations have influence over. However, as Yeh and Wharton (2016) argue, the lack of conditional measures attached to the loans that China provides to its development partners is also key in maintaining their allegiance in the event of hostile economic or military action from other large economies such as the US. The strength of the economic ties between these nations and China thereby becomes a point of inducement to pre-empt conflict and minimise China’s exposure to pressure from outside forces. The result is that rather than siding with China when these countries negotiate with the US for instance, their response is a lack of complicity in taking any action against China’s interests and thus limiting the hold that the US has on the region (Goh 2014). However, there is a thematic of direct competition with US contributions as highlighted in Table 1, which further increases the tools of diplomatic persuasion that China can bring to the table when seeking to improve the quality if its political influence in the region.

Asian Region US Exports US Imports Total Chinese Exports Chinese imports Total

Northeast $216,078 $567,966 $478,044 $409,679 $381,550 $791,229

Southeast $91,609 $123,892 $215,501 $139,109 $155,616 $294,725

Southwest $20,475 $35,205 $55,681 $44,198 $21,627 $65,825

Asia Pacific $328,162 $727,064 $1,055,226 $592,986 $640,516 $1,486,288

Total $1,287,442 $2,103,641 $3,391,083 $1,429,000 $1,132,000 $2,561,000

% to Asia 25.5% 34.6% 31.1% 41.5% 56.6% 58%

Table 1: Comparison of Chinese and US trade with Asia Pacific nations in 2008 (Source: Saunders 2013)

Overall, there is an evident thematic of China’s provision of developmental loans and the bilateral agreements into which it enters with recipient countries as a means for investing the financial resources available in the donor economy as a result of its producer elements. However, it is impossible to deny that the reduced restrictions that China places on the use of funds also minimizes the risk of being perceived as a less favourable option when compared to other BRICS alternatives (Heilmann et al. 2014). Nonetheless, the gains experienced in the recipient countries is also in question in places such as Cambodia where the nation’s stance in delaying agreements with the US erodes Cambodia’s reputation on an international scale while also providing China with increased political leverage in the region (Shambaugh 2015). The imbalanced dependence that such countries have on China as a partner also increases with the lack of effective diversification of developmental funds to include other international investors. Consequently, the resultant environment is one where China has a dominant presence in the Asia Pacific region due to its financial contributions even as it lacks an evident political target for these investments.

While the key goal of China’s developmental loans may not be the establishment of influence over the Asia Pacific region, there is still an evident pattern of intensification of strategic rivalry with the US as both countries seek to partner with the region’s nations. However, China’s approach of providing fewer restrictions for its loans improves its appeal as a source of developmental funds for the region while also providing it with key bargaining power over the diplomatic and political environment of the region (Goh 2014). Here, China is perceived as a fair source of the capital necessary for economic development, making it a destination for nations seeking funds that are not attached to hegemonic projects as is the case with BRICS countries. As China seeks to minimize the influence that it gains through these direct investments, it also obtains a capacity to influence the political leanings of recipient countries through its partnerships (Saunders 2013). Therefore, China’s influence on the political environment in the Asia Pacific region is a direct influence of its developmental loans to countries in the region even as it avoids the direct imposition of its policies and ideologies on these recipient nations.

Gaps in the Literature

One key outcome of the literature review is the identification of a thematic of non-restrictive terms for Chinese loans in the Asia Pacific compared to investments from other BRICS countries. However, while there is expansive literary evidence of the political influence that BRICS developmental loans have in this region due to the existence of policy change and regulatory requirements, the less stringent nature of China’s terms limits the breadth of correlations to political goals. The capacity to maintain control over strategically located infrastructure assets such as sea and airports built using its developmental loans nonetheless indicates that there is an underlying link to military and political influence obtained indirectly through these financial investments in Asia Pacific countries. Moreover, while the literature also analyses the statistical elements of BRICS investments, the correlations to political gains for the US and other western countries remain the focus of scholarly research. Therefore, there is a need for improvements to the knowledge base regarding the soft power that China and Asia Pacific countries gain or lose through China’s developmental loans within the region.

3. Research Aims, Objectives, and Questions

Aims and Objectives

The proposed research aims to quantify the impact that China’s development loans to Asia Pacific countries have had on the political environment within this region. The researcher will utilise the following objectives to guide the research exercise:

1. To analyse the trends of China’s developmental loans in the Asia Pacific region

2. To identify the policy changes that recipient countries have made as a result of receiving developmental aid from China

Research Questions

While the research will focus on China as the donor country, it will also be essential to include comparisons of investments from other BRICS countries to provide a comparative view of the possible political outcomes resulting from increases and decreases in Chinese investment in the Asia Pacific region. To ensure full coverage of the research aims and objectives, the research will utilise the following research questions to benchmark its progress:

1. What perceivable political impact have China’s developmental investments in the Asia Pacific region had?

2. How have China’s financial loans in the Asia Pacific region compared to those of other BRICS countries over the years?

3. What policy changes have been effected in the recipient countries as a result of China’s developmental loans?

4. Methodology

The complexity of the issue under analysis necessitates the utilisation of a research methodology and philosophy that will allow for the comprehensive analysis of the data available in the field. For the proposed study, the researcher seeks to use a pragmatic methodology to facilitate an effective review of the political influence of China’s developmental loans in the Asia Pacific region. The mixed methods approach was selected due to its inclusion of elements from both qualitative and quantitative methodologies, thereby enhancing the study’s capacity to utilise both theoretical and empirical data in the analysis (Yin 2013). Moreover, Creswell (2013) also notes that this methodology can improve researchers’ capacity to understand ongoing processes, which makes it a beneficial tool for perceiving relationships between analysed phenomena. The use of developmental funds to influence political environments is widely documented as highlighted in the literature review and provides evidence of thematic links between donor-recipient bilateral agreements and strategic political and economic advantages for donors. As a result, content analysis of extant literature will be essential in developing a theoretical understanding of the relationships between the analysed variables and enable the identification of factors whose correlations necessitate further review.

According to Creswell (2013), the grounded theory allows researchers to perceive the meta-theoretical linkages that exist in analysed data sets, thereby providing foundations for the development of theoretical understandings based on actionable information. Given that the proposed research will base the quantitative analysis on data sets from the content analysis, it will thereby be essential to formulate a priori knowledge from the content analysis regarding the necessary analytical approach. For this research, it is essential for the inclusion of an ontological analysis of the literature to ensure the establishment of a derivative understanding of the concepts introduced through the content analysis. Bryman (2015) argues that ontological research philosophies provide a means for researchers to analyse concepts alongside and abstracted from their parent classes, thereby improving their capacity to make objective conclusions on the identified data sets. This approach provides the research with a firm understanding of the theoretical linkages between the variables and ensures that the data that populates the analysis stage of the research and maximises the utility of the study’s findings.

5. Data Sources and Empirical Support

The descriptive evidence will be drawn from World Bank, International Monetary Fund (IMF), Asian Infrastructure Investment Bank (AIIB), and scholarly sources for figures of the investments that BRICS countries made in the Asia Pacific region between 1990 and 2015. The review will seek to include up to 40 Asia Pacific countries for a total of a 1000 country-year analysis, with the amounts that these countries receive from China and its western BRICS counterparts acting as the dependent variable. The primary independent variable is the political leanings of the receiving country with regards to its leanings towards hostile or friendly relationships with China, BRICS members, and neighbouring nations. The robustness of this data will be based on whether the patterns identified in individual countries will persist across other Asia Pacific nations to which China or its competing BRICS partners direct their developmental aid. The thematic review of the content analysis will also provide backing for these findings by indicating their conformity or lack thereof to the actual political environment in the region. This approach will provide a means for collating both qualitative and quantitative data for a more effective analysis of an issue that is of great relevance to the global community.

6. Data Analysis Strategy

An analysis of the variables involved highlights a complexity in quantifying the political environment outside the qualitative context. However, DuGoff et al. (2014) note that the continued interactions of state actors can result in patterns that increase the complexity of randomising selection, thereby necessitating the use of propensity scores to effectively capture these interactions. The research will estimate the quality of predictors such as per capita GDP, previous developmental aid from China and BRICS countries, the official stance on issues such as control over the South China Sea, IMF participation, and existing disputes as measures of the correlation to subsequent investments. Effective predictors will have to report alpha levels of 0.25 and above to be considered as statistically significant, with the qualifying variables being considered for a subsequent regression analysis. The matching of similar observations will also allow for a more comprehensive analysis by providing a measure of the influence that the independent variable has on the dependent variable when all other control variables remain constant (Harrell 2015). Consequently, identifying the statistical significance of the demographic and socio-political environments in Asia Pacific countries that have received Chinese aid will prove essential in quantifying the relationship between developmental aid and political outcomes in the region.

7. Expected Outcomes of the Research

One of the key outcomes expected from this research is empirical evidence of the political changes or lack thereof that the countries in the Asia Pacific region have experienced as a result of China’s investment in the region. The research is expected to confirm the hypothesis of an increased affinity for policies that foster bilateral relationships with China. Moreover, the researcher also expects that the study will also uncover an increased affinity for these recipient countries to cooperate more closely with China when making decisions regarding vital issues such as governance of the South China Sea. Although the military elements of developmental aid also factor into the issue of politics, the researcher expects that these are provided with the same intentions of improving ties rather than influencing political outcomes for the recipient countries. In this manner, the researcher expects that the study will offer insight into the issue while also having limited divergence from prior studies that indicate an increased affinity for China’s development loans in the Asia Pacific region. Therefore, it is expected that this research will provide a comprehensive comparison of political outcomes in the region over time while also contributing to the literature on China’s contributions in its immediate environment.

8. Implications of the Research

The literature analysis reveals a wealth of evidence regarding the role of China in improving infrastructure in Asia Pacific countries through developmental loans that it disburses across the region. However, there is limited scholarly evidence of the political intentions and outcomes of these investments, with Yeh and Wharton (2016) noting that the majority of literature has negative leanings towards China’s seemingly benevolent contributions to its neighbours. While cases that provide China with direct access to political assets are well documented and limited to extreme cases, such as the transfer of assets developed using Chinese funds as a means for repaying debt (Thuan 2017). As a result, this research has the potential to highlight the political outcomes for countries that can conform to China’s bilateral loan agreements. With the lack of strict regulations on loan provision and utilisation in China’s developmental aid programs, it will be interesting to perceive the political changes that result from the reduced dependence on restriction-oriented loans from other BRICS countries and organisations. Therefore, this research can make a valid contribution to the current knowledge base regarding shifting political environments in the Asia Pacific region as well as what role China plays in influencing these outcomes.

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