Loans masquerading as bilateral aid, and the consequences of non-repayment

Nguyen Khac Giang, a researcher at the Vietnam Institute for Economic and Policy Research

I had nine Chinese classmates back in college, and of them Lee Hang Wei impressed me the most.

She belonged to the Bai ethnic community of China, and so always tried her best to prove what she could do for her country given the fact she was not a Han Chinese, the country’s biggest ethnic group.

After getting her MA degree, Lee volunteered to work in Africa, to do articles about Chinese projects in the continent.

Four years ago Chinese investment began to proliferate in Africa, and so many African countries were eager about attracting China investors, hoping to be equal trade partners with China instead of being the supplicants they had been with Europe and the U.S.

In 2013 China rolled out its Belt and Road Initiative that focuses on connectivity and cooperation between Eurasian countries.

The initiative has been at the core of China’s foreign policy since then. China has dreamed about becoming a superpower while Africa needs a ladder to climb out of poverty and hunger. The China-Africa relationship had once been expected to be win-win for both sides.

But after a few years in Africa my friend Lee realized things were not that simple. After becoming a scholar of Oriental and African Studies at the University of London, she repeatedly criticized the lending policy of her home country after realizing that the huge loans China gave Africa had more than altruism behind them.

Around the world, people talk about China’s debt traps.

In March U.S. Secretary of State Rex Tillerson warned Africa about such traps, saying African countries should be careful not to forfeit their sovereignty when they accept loans from China, the continent’s biggest trading partner.

Last year Sri Lanka formally handed over its southern port of Hambantota to China on a 99-year lease after failing to pay a debt of $6 billion taken to fund its infrastructure, including an airport.

Malaysian PM Mahathir Mohamad in August canceled a number of Chinese infrastructure projects in his country after a visit to Beijing.

He warned against “a new version of colonialism happening because poor countries are unable to compete with rich countries just in terms of open free trade.”

But if one were to look the “aid industry” over the past 30 years, it can be seen that China is not an exception.

In a study released in December 2016 the U.S.-based Global Financial Integrity (GFI) and the Center for Applied Research at the Norwegian School of Economics pointed out that for every single dollar of investment they receive, countries in the third world would have to send back $3 to their investors.

In 2012, the last year of recorded data of the study, developing countries received a total of $1.3 trillion, including all aid, investment and income from abroad. But that same year some $3.3 trillion flowed out of them.

In other words, developing countries sent $2 trillion more to the rest of the world than they received.

The Cat Linh-Ha Dong elevated railway in Hanoi is built by Chinese contractors. Photo by VnExpress/Giang Huy

Since 1980 developing countries lost $16.3 trillion dollars through broad leakages in balance of payments, trade invoicing fraud and recorded financial transfers, the study said.

To put that into perspective, $16.3 trillion is roughly the GDP of the U.S.

It is obvious that the impact of grants and loans from rich countries to poor countries remains a controversial topic.

For various reasons, poor countries still have to seek loans and grants. Among those reasons, corruption should also be mentioned, but then the need for building infrastructure and solving social problems is real.

It is not by chance that the salary of $30,000 a month for Japanese official development assistance (ODA) consultants in Vietnam came up for public discussion: Are the products made by the Japanese really worth the high cost or is it because of the nationality of the loan, and are Japanese products really better than Chinese products?

For a long time projects in Vietnam funded by foreign loans have been stuck within a closed loop: the lenders provide money, hold auctions, choose contractors from their countries, and use experts and even the main workforce from their country at the project. With this formula, most of the loan is already back to where it came from even before Vietnam started to repay the debt.

After the entire process is complete, we may have the infrastructure we need but the cost might be much higher than originally planned.

And so clearly what needs to be discussed is no longer the monthly salary of a foreign consultant.

By the end of last year Vietnam’s foreign debts were worth VND2,451 trillion ($105 billion). Last year the government spent $10.5 billion paying part of the debt plus interest. But that sum came from another loan of $15 billion.

No country in the world has achieved prosperity through public debts, and the debt crises in Greece and Argentina are still shining examples of that.

Shedding illusions about foreign loans, whether they come from China, Japan, Europe, or the U.S., is the first thing a country should do to develop successfully, and Vietnam is no exception.

*Nguyen Khac Giang is a researcher at the Vietnam Institute for Economic and Policy Research. The opinions expressed are his own.