Eleanor Finch
Debt diplomacy, or debt-trap diplomacy, is a term used to describe an international financial relationship where a creditor country extends debt to a borrowing nation to increase the lender's political leverage. The term was first coined by Indian academic Brahma Chellaney in 2017 to describe China's lending and leveraging of the debt burden of smaller countries for geopolitical ends. While China has been accused of using debt diplomacy to further its strategic ambitions, particularly in South Asia, there is debate surrounding the validity of these claims, with some arguing that debt diplomacy is not a deliberate strategy employed by the country.
Characteristics and Values of Debt Diplomacy
| Characteristics | Values |
|---|---|
| Creditor country or institution extends debt to a borrowing nation | Increase the lender's political leverage |
| Borrowing nation becomes unable to meet its repayment obligations | Extracting economic or political concessions |
| The conditions of the loans are often not publicized | Money commonly pays for contractors and materials sourced from the creditor country |
| Term "debt-trap diplomacy" was first coined by Indian academic Brahma Chellaney in 2017 | China lends and leverages the debt burden of smaller countries for geopolitical ends |
| China is the largest bilateral lender in the world | Its financial influence has grown dramatically over recent decades |
| China has written off many of its loans and also provided debt relief to borrowers | China's lending to risky borrowers is not a plot |
| China's leverage in debt was limited in power | China's lending is not in compliance with the international efforts promoted by the World Bank and International Monetary Fund in developing countries |
| China's Belt and Road Initiative (BRI) has sought to enhance Chinese infrastructure and investment potential globally | China is strengthening its leverage in Asia and Africa |
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What You'll Learn
China's Belt and Road Initiative (BRI)
The "Belt" element involves plans to revitalise ancient overland trading routes connecting Europe and Asia, largely with Chinese expertise. The Maritime Silk Road, on the other hand, entails establishing new sea trade infrastructure along the old Marco Polo route, connecting China, Southeast Asia, Africa, and Europe. This route would bypass the Malacca Strait, incorporating fuelling stations, ports, bridges, industry, and infrastructure through Southeast Asia and into the Indian Ocean.
The BRI is an international development and financial expansion strategy boosted by Beijing's investments and loans. It provides an alternative market for China's state-owned companies, encouraging businesses in the country's central provinces to compete for BRI contracts. As of March 2020, 138 countries have joined the BRI by signing a Memorandum of Understanding (MoU) with China.
Critics of the BRI have accused China of pursuing a policy of "debt-trap diplomacy", particularly in Sri Lanka, the Maldives, Malaysia, Laos, Kenya, and Djibouti. They argue that China lures developing countries into unsustainable loans for infrastructure projects, intending to seize strategic assets when these countries struggle to repay their debts. However, some analysts and research papers have disputed these claims, arguing that there is limited evidence of predatory lending practices and that China has written off many of its loans and provided debt relief.
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China's influence in Africa
Debt-trap diplomacy is a term coined by Indian academic Brahma Chellaney in 2017 to describe an international financial relationship where a creditor country extends debt to a borrowing nation to increase political leverage. The creditor country extends excessive credit to the debtor country with the intention of extracting concessions when the debtor country becomes unable to meet its repayment obligations.
Chinese investments have fueled an infrastructure boom across Africa, addressing critical development bottlenecks. China has launched ambitious ventures such as the Mombasa-Nairobi Standard Gauge Railway in Kenya and the Addis Ababa-Djibouti Railway in Ethiopia, improving transportation networks and trade corridors. China has also invested in power plants, hydroelectric dams, solar energy facilities, and telecommunication infrastructure, enhancing access to electricity and connectivity across the continent.
However, there have been concerns and accusations that China is engaging in debt-trap diplomacy in Africa. Critics argue that China lures African countries into unsustainable loans for infrastructure projects, intending to seize strategic assets when these countries struggle to repay their debts. For example, there are concerns that China could gain control of a port in Tanzania due to its inability to repay loans.
While some analysts and reports support the idea of Chinese debt-trap diplomacy in Africa, others dispute it. They argue that China has written off or restructured loans and provided debt relief. Additionally, they claim that African countries' debts are owed primarily to international organizations or private Western institutions, not solely to China. The complexity of the relationship between China and Africa challenges the simplistic notion of debt-trap diplomacy, and the choices made by African nations today will determine whether China's influence empowers or entraps the continent in the future.
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China's influence in South Asia
Debt-trap diplomacy (DTD) is a term used to describe an international financial relationship where a creditor country or institution extends debt to a borrowing nation to increase the lender's political leverage. The term was first coined by Indian academic Brahma Chellaney in 2017, who claims that China lends money to smaller countries and then leverages the debt burden for geopolitical ends.
China has been accused of using debt-trap diplomacy in South Asian countries like Sri Lanka, the Maldives, Malaysia, and Pakistan. In the case of Sri Lanka, China acquired a 99-year lease of 70% of the Hambantota port when the country was unable to repay its loans. However, it is important to note that Sri Lanka owed more to Japan, the World Bank, and the Asian Development Bank than to China. Additionally, China has been willing to restructure the terms of existing loans, and there is no evidence of any Chinese military activity at the port.
In the case of Pakistan, China agreed to invest $50 billion in five hydropower projects, with accumulated interest of almost $5 billion per year, leading to a total repayment of $200 billion over 20 years. Scholars suggest that this debt could give China undue influence in Pakistan's affairs. Part of the agreement was scrapped by Pakistan in 2017 due to objections to its terms.
China has also financed projects in Malaysia, including the East Coast Rail Line, Kuantan Port Expansion, and Green Technology Park in Pahang. However, it is worth noting that Malaysia has a more diverse range of lenders, and China is not its primary creditor.
While there are concerns about China's lending practices, some analysts dispute the idea that China is intentionally pursuing a strategy of debt-trap diplomacy. They argue that China has written off many loans and provided debt relief to borrowers. Additionally, China has restructured or waived loan payments for 51 debtor nations without seizing state assets.
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The role of the US
Debt-trap diplomacy is a term used to describe an international financial relationship where a creditor country or institution extends debt to a borrowing nation to increase the lender's political leverage. The term was first coined by Indian academic Brahma Chellaney in 2017 to describe China's lending practices.
The US has also used the term "debt-trap diplomacy" in its public diplomacy, with two successive administrations employing the term. This indicates that the US recognises the potential risks and implications of debt-trap diplomacy on a global scale. Additionally, US analyst Constantino Xavier has commented on China's lending practices, suggesting that they are part of a "larger modus operandi" to acquire political leverage in borrowing countries.
However, it is important to note that the existence of "debt-trap diplomacy" as a deliberate strategy has been disputed by some academics and professionals. There is a debate about whether China's lending practices are truly malicious or if they are simply filling a void left by the absence of alternative options for developing countries. Some analysts have suggested that instead of criticising China, the US should counter by providing a New International Financial Framework to support poor and developing countries.
Furthermore, while the US has expressed concern about debt-trap diplomacy, it has also been implicated in similar practices. For example, in the case of Sri Lanka, the US backed off from providing aid and assistance, which led the Lankan government to resort to China for development loans. This decision ultimately contributed to Sri Lanka's worsening debt crisis and the acquisition of the Hambantota port by a Chinese company.
In summary, the US has played a significant role in bringing attention to and critiquing debt-trap diplomacy, particularly in relation to China's lending practices. However, there are also criticisms of the US's own financial practices and its response to countries in need of aid and assistance. The complex nature of debt diplomacy and the involvement of major global powers like the US and China highlight the need for a comprehensive and nuanced approach to understanding and addressing these issues.
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The role of India
Debt-trap diplomacy is a term used to describe an international financial relationship where a creditor country or institution extends debt to a borrowing nation to increase political leverage. The term was first coined by Indian academic Brahma Chellaney in 2017 to describe China's lending and leveraging of the debt burden of smaller countries for geopolitical ends.
India has played a significant role in the discourse and analysis of debt-trap diplomacy, particularly in relation to its neighbouring countries and China's Belt and Road Initiative (BRI). Indian commentators and academics have frequently argued that China is using the BRI to pursue 'strategic ambitions' in South Asia. For example, in the case of Sri Lanka, where China provided loans for the development of the Hambantota Port, Indian analysts have suggested that China sought to create a naval outpost, leveraging its possession for strategic gains. Similar concerns have been raised by India regarding China's activities in other countries surrounding the Indian Ocean and Indo-Pacific region, including countries in South Asia, Southeast Asia, and the Horn of Africa.
In some instances, India has been implicated in countering China's potential debt-trap diplomacy. For example, in the case of the Maldives, India helped reduce the country's debt burden of approximately $117 million. However, the Maldives still faces a significant Chinese debt burden, and its economy is vulnerable according to global rating agencies. Additionally, in the case of Sri Lanka, when the country faced difficulties in servicing its debt, there were reports that Sri Lanka's finance minister considered turning to China for bilateral financing but did not do so due to political reasons.
While there are varying opinions on the existence and extent of China's debt-trap diplomacy, with some arguing it is a myth or not intentionally pursued, India remains cautious of China's activities in its neighbouring regions. India's role in this context is influenced by its strategic interests and geopolitical dynamics in the region.
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Frequently asked questions
Debt diplomacy, or debt-trap diplomacy (DTD), is a term used to describe an international financial relationship where a creditor country extends debt to a borrowing nation to increase the lender's political leverage. The creditor country extends excessive credit to the debtor country with the intention of extracting economic or political concessions when the debtor country becomes unable to meet its repayment obligations.
China has been accused of using debt diplomacy to promote its geopolitical interests in Asia and Africa by giving huge loans to borrowing nations and acquiring their assets when they fail to repay. China is the largest bilateral lender in the world and its financial influence has grown dramatically over the years. However, there is also evidence that suggests that China has written off many of its loans and provided debt relief to borrowers.
Debt diplomacy can lead to the erosion of debtor sovereignty and negatively impact the fiscal sovereignty of borrowing nations. It can force countries to make difficult policy choices, sacrificing long-term strategic autonomy for immediate infrastructural needs. The potential for severely negative consequences of large-scale borrowing from a single powerful country is significant.
