October 11, 2024

Analysis

Marshall Plans

At September’s UN General Assembly in New York, Brazil’s President Lula described the international financial system as a “Marshall Plan in reverse” in which the poorest countries finance the richest. Driving the point home, Lula thundered, “African countries borrow at rates up to eight times higher than Germany and four times higher than the United States.”

Lula is not alone in this diagnosis. Centrist technocrats par excellence Larry Summers & NK Singh coauthored a report earlier this year arguing that the development world’s mantra to scale up direct financing to the global South—from “billions to trillions”—has failed. Instead, global finance seems to be running in the opposite direction, from poor to rich countries, as was the case last year. Summers and Singh summarize the arrangement thusly: “millions in, billions out.” Added to this is the great global shift to austerity that makes a mockery of climate and development goals.

It’s in this context that talk of “green Marshall Plans”—proposed by Huang Yiping in China and Brian Deese in the US—must be received. Negotiations over technology transfer, market access, and finance deals are a permanent feature of the new cold war: call it strategic green industrial diplomacy.

Both the American and Chinese proposals, such as they exist, aim to subsidize the export markets of allied countries to build foreign support for domestic industries. For developing countries, this could mean manufacturing green goods to grab a slice of the trillions of future green economic output and develop themselves, and a policy choice to meet their development goals by either making or buying cheap, clean energy generation, electricity storage, and transport.

Putting aside the dubiousness of the historical analogy to the United States’ postwar aid program to Europe, the critical element—and the one that seems least likely for either China or the US to pursue in earnest given their domestic political obstacles—is the provision of the kind of financial and industrial support that low- and middle-income countries need. The geoeconomic contest between the US and China rests on which of the two can forge domestic political coalitions that meet the demand of developing countries for local manufacturing value add in green value chains, without which the South will remain merely an export market or a resource colony.

China, Europe, and the US hold more than the lion’s share of the world’s knowledge and capital intensive clean technology capacity (IEA Energy Technologies Perspective)

The reason developing countries want local clean industries is clear. They could significantly boost profits, tax revenues, create higher-skilled jobs, and raise economy-wide productivity spillovers.

Two plans

China’s Belt and Road Initiative has long been the subject of Marshall Plan comparisons . The military-strategic core of the analogy has only become more relevant since the turn to war footing, as well as more recent concerns about overcapacity in Chinese renewable energy tech. Huang Yiping, a prominent economics professor at Peking University and a former PBOC official, picked up the analogy in May and spoke of a “Global South Green Development Plan.” He proposed establishing “an economic community with a shared future,” so that “China can help developing countries make these transitions, encourage them to buy China’s products, introduce China’s technologies, and even encourage some of Chinese enterprises to go abroad.”

Such a plan, Huang explained, would entail the internationalization of the renminbi, which could be advanced by denominating support for clean importers in Chinese currency. With China’s two large trade partners—the US and Europe—shunning green goods with tariff walls, the idea is for China to seek out markets with some form of vendor financing for debt-stressed countries so they can purchase affordable Chinese green goods. The outbound gear shift is real. China “appears to be undergoing a significant shift, from capital importer to capital exporter,” wrote FDI Intelligence in June.

Stateside, Brian Deese—formerly Joe Biden’s National Economic Council director and current Kamala Harris campaign advisor—penned an August essay in Foreign Affairs calling for a “Clean Energy Marshall Plan,” with the aim of extending Bidenomics to the international arena. For Deese, climate is all dollar signs, nothing less than the “largest capital formation event in human history.”

But dollars for what? Deese’s idea is to scale up US industries to meet global needs, winning greater influence in the process. The vision relies on US technical superiority in carbon capture and storage (CCS), hydrogen, nuclear, geothermal, and also on utilizing the US Treasury’s Exchange Stability Fund to deploy new international policy financing without running into Congressional hurdles.

The optimistic Marshall Plan proposals are not entirely hot air; each attempts to extend aggressive domestic policies globally. China and the US have both made bids on an investment-led partial solution to their respective domestic political and economic challenges, with a focus on clean-energy industries. Their shared formula can be summarized as national strength through industrial renewal. In both countries, domestic industries have been offered ample fiscal support; Biden’s suite of tax credits and subsidies has already spurred more than $400 billion in investment in clean energy and clean-tech manufacturing and generation, and China’s central government, already dominant in clean tech manufacturing, is now concentrating its efforts on next-generation technologies and economic self-reliance.

Domestically, US is playing catchup to China’s green industrial policy

Both countries’ investment policies are intended foremost for domestic economic goals. China’s domestic growth is trending green; per the IEA, China is expected to account for nearly 60 percent of all renewable energy capacity installed worldwide between now and 2030.

The relationship between China’s dominance in renewables capacity and its designs for international influence is not yet clear. (Xi grandly proclaims that there are moments in time when “major technological breakthroughs” greatly enhance “humanity’s ability to understand and utilize nature” and enhance “social productivity.”) But even less certain is whether those new grand designs will adequately address the climate and development challenges faced by most global South countries.

Shortcomings

What is the likelihood that either Chinese or American governments will use their industrial policy to meet those challenges, which have come under increased pressure due to new geopolitical tensions and the climate crisis? For years now, developing countries have been telegraphing their development priorities. (These needs are contingent and specific to each domestic and regional context, short of any unified framework for a new international economic order.) Back in 2022, surveying the new China–US competition from the point of view of the “non-aligned” South, we outlined the following pragmatic goals:

1. Core technologies to power future growth;

2. Advanced military hardware for enhanced security;

3. The upper hand in trade negotiations with Europe, the US, and the new Russia-China bloc;

4. Essential commodities like food, energy, metals and fertilizers from the new Russian-Chinese bloc;

5. Better terms to restructure their debt to Western and Chinese creditors during a punishing global dollar debt crisis that threatens their sovereignty.

Neither the US nor China appears willing to meet many of these requirements.

Deese’s proposal has already been criticized for its disconnect from what global South partner countries actually want; for misunderstanding the original Marshall Plan’s financial agenda, and—most cuttingly—for a deluded view of American clean-power manufacturing prowess. This was a chief criticism from Alan Beattie at the FT, who underscored that the US lacks the internal political coherence it had during the first Marshall Plan. (Adam Tooze noted that many of the technologies Deese identified are also the preferred “solutions” of the dominant US fossil-fuel industry, and are overall marginal to the actual energy needs of the world’s majority; this is particularly so with the expensive, technically difficult, and emissions-ambiguous CCS and hydrogen.)

Deese’s article is representative of a Washington-wide reluctance to acknowledge, let alone address, the actual substance and scale of our global challenge. No poor nation is satisfied by becoming an export market for American clean tech. No nation besides the US is going to reject building a transformative base of clean cheap energy with imported Chinese solar panels.

There are further limitations in White House foreign-policy leadership. A new essay by Anthony Blinken exalts the administration’s global achievements while remaining mostly concerned with G-7 and other wealthy allies; security and trade alliances such as AUKUS, the Quad, the US–EU Trade and Technology Council, and the Indo-Pacific Economic Framework are the focus.  America’s “strategic fitness,” he argues, “rests in large measure on its economic competitiveness.” If some allies had first worried about the Biden administration’s domestic investments, they have, “with time,” come to see how  “American renewal can redound in their favor. It has boosted demand for their goods and services and catalyzed their own investments in chips, clean tech, and more resilient supply chains.” This  may well be the case for wealthy allies with monetary and fiscal agency; the EU is embracing industrial policy and tariffs (German opposition notwithstanding); Japan and South Korea never really abandoned it. For low-income countries spending almost a quarter of their external revenue on debt servicing, American industrial renewal holds less promise.

Blinken is self-congratulatory on the 2021 distribution of $650 billion worth of Special Drawing Rights, the IMF reserve currency; an African Union seat at the G20; and World Bank reforms as major Biden administration contributions to Global South countries. But the key promise is the Partnership for Global Investment and Infrastructure—a US-led Western response to the BRI—which will rely on mobilizing hundreds of billions of dollars of private capital, despite decades of evidence of failure. The much smaller Just Energy Transition Plans, or JET-Ps, have failed to deliver—or even to launch—in large part due to their reliance on the same.

US Government Accountability Office compared US and China’s foreign infrastructure investments 2013-2021 within the same five sectors: transportation; energy; industry, mining and construction; communications; and water supply and sanitation

Scale and self-interest

The US knows it is far behind China in terms of gross finance flows for infrastructure in developing countries. A report from the US Government Accountability Office in September finds that China outspent the US by almost nine-to-one on foreign infrastructure finance between 2013 and 2021—$679 billion compared with $76 billion. Leading Chinese recipients were Russia ($104 billion), Malaysia ($36 billion), Pakistan ($34 billion), Nigeria ($29 billion), Angola ($29 billion), and Indonesia ($28 billion).

But China’s outbound investments in highways, power plants and rail projects have been pared back—a decline that began in 2018 and plummeted in the 2020s. Last year, China’s loans to Africa totalled $4.6bn—the first annual increase in years—but were still far off the over $10bn per year of the early BRI era. China also resumed lending for energy projects in 2023 after a two year hiatus, but at a tiny quantum, which Carbon Brief explains reflects both a shift away from big fossil-fuel projects and increasing African preference for equity investments, rather than being saddled with more debt:

As the Chinese leadership pricks the country’s dangerous real estate bubble, exporting high-value clean tech is a key part of the government’s strategy for maintaining growth.

The Forum on China-Africa Cooperation (FOCAC) last month yielded stirring words of Third World solidarity from President Xi, but the headline commitment to the continent of Rmb360 billion over three years was in line with financial flows of recent years; and removal of tariffs for the Lesser Developed Countries represented only a small change to the existing system. The action plan announced by Beijing also included promises to “develop local value chains, manufacturing and deep processing of critical minerals”, “30 clean energy and green development projects” and a “Special Fund for China-Africa Green Industrial Chain.”

As for the challenge of enabling countries to move up the chain, escaping the fate of being simply sources of raw commodities, the only clear success is in South East Asia. In South Africa, Latin America, and South Asia, China’s clean-tech manufacturing collaborations have so far amounted to producing final assembly plants for “knockdown kits,” with the value-added components imported from China and assembled locally. The recently announced BYD plant in Pakistan, the SAIC plant in South Africa, the BYD, Great Wall Motors plant in Brazil, all look less than promising for domestic firms integrating and developing with Chinese know-how.

Finance

Adequate finance remains the most necessary component for most countries, and is the most glaring shortcoming in US & Chinese offers. The US is constrained by politics, including an obstinate Congress, while Beijing’s provision of finance has waned since 2019 amid slowing growth. Increasing debt distress among its own provinces is one barrier to its granting debt relief internationally. There are political obstacles in China, too. “Why give free money to foreigners when we are suffering?” is a potent cry on both sides of the Pacific.

The “modality” of financial flows out of both the US and China is complex; it entails concessional debt, commercial debt, grants, equity.  A simple test is provided by Gandhi’s talisman: recall the face of the poorest person you have seen, and ask if this action will be of any use to him or her.

So, how do the planet’s two superpowers contribute to the International Development Association—the World Bank’s facility for the poorest countries?

Source: “U.S. Leadership in Scaling Capital for Multilateral Clean
Energy Finance,” by Lily Bermel, Brian Deese, Brad Setser, Tess Turner, and Michael Weilandt

High and dry in Angola

The challenges faced by developing nations with regard to international financing, clean tech, and raw materials, are well-illustrated by recent events in Angola.

The southern African country was the biggest recipient of Chinese finance in the BRI lending surge and is almost completely dependent on oil export revenues. It quit OPEC last year as the cartel squeezed its smaller members’ quota allocations in the face of softening oil prices. The country has been deepening its relations with the US—Biden was slated to make the only African trip of his presidency there this month—but also maintaining good relations with China, obtaining upgraded diplomatic ties and cuts in debt repayments earlier this year.

Ahead of the FOCAC summit, finance minister Vera Daves De Sousa told Reuters that whichever country provided financing could expect to be able to sell more of its own products—whether or not they were the ideal provider. If China does  not provide the finance and support needed to grow Angolan industries, it could expect to lose out. “We will buy more solar panels from Europe because the financing is coming from there,” Daves de Sousa said. Germany for example is providing Angola with 62,250 home solar systems.

From the US perspective, the main focus in Angola is the Lobito Corridor railway, which is shaping up to be a test of Western and Chinese commitments to African development. If fully realized, it would massively expand and speed up the transport of minerals from the “Copperbelt” of Zambia and the DRC to Angola’s Port of Lobito.

The Western parties have to contend, however, with China’s deeply established minerals and mining supply chains in the region, as well as with China’s superior technical expertise in the clean-tech manufacturing that resource-rich African countries would require to add more domestic value to their commodities. China is also supporting a $1 billion upgrade of the Tazara railway—an almost 2,000km line supported by Mao during the poverty-stricken 1970s. Like the Lobito Corridor, Tazara also taps the Copperbelt around Zambia and the DRC, but it carries transition minerals in high demand for electrification and clean technology eastwards, for export via the port at Dar es Salaam.

Both China and the US are, of course, doing what serves their immediate economic and  political needs. Marshall Plans continue to be a mirage; the marriage of decarbonization and development requires far more internationalism than political coalitions in either great power are currently willing or able to underwrite.

The Polycrisis is a publication focusing on macro-economics, energy security & geopolitics.

Further Reading
A New Foreign Policy

Understanding the “New Washington Consensus”

What Was Bidenomics?

From Build Back Better to the national security synthesis

A New Non-Alignment

How developing countries are flouting Western sanctions and playing the great powers off each other

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