China Starts Controversial Lao Rail Project

China Starts Controversial Lao Rail Project

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A poverty-stricken country is handed a huge and expensive infrastructure deal that mainly benefits China

On Christmas Day last year, work officially started on the China-Laos high-speed railway, a major engineering feat snaking from Kunming, in China’s southwestern Yunnan Province, to Vientiane in Laos.

Beijing hopes the track will form part of a larger transportation system, dubbed the Pan-Asian Railway, which one day may carry passengers and goods all the way from China to Singapore while critics say it will saddle Laos with crippling amounts of dept. 

The project falls within China’s One Belt/One Road (OBOR) initiative, President Xi Jinping’s most important international undertaking. According to its proponents, it would also be a boon for Laos, where transportation is notoriously poor – to the point that the OECD recently singled out weak infrastructure as one of the major development challenges for the poverty-stricken, fast-growing nation.

A high-speed railway is important from that perspective, also helping to achieve Laos’ goal of becoming land-linked rather than land-locked, a popular policy slogan in Southeast Asia’s only country without access to the sea.

But development experts warn that the project could prove too expensive and risk redirecting resources away from more useful initiatives. In 2013, the International Monetary Fund wrote that the railway would push the country toward breaching its debt sustainability indicators, noting that external debt would rise above 125 percent in a year and remain over 100 percent for a decade.

One could be forgiven for thinking that such resources would be better spent on basic services, especially given that many villages across Laos are connected to urban centers only by mud roads and that about a fourth of the population live below the national poverty line.

According to the latest public information, over 62 percent of the line will consist of bridges and tunnels through mountainous terrain and will cost roughly US$5.8 billion. Laos’ GDP for 2015 was only US$12.7 billion.  While 70 percent of the total for construction is supposed to come from Chinese investment, discussions concerning loans and interest rates are ongoing, says Agatha Kratz, an associate policy fellow with the European Council on Foreign Relations.

“Whether the project will benefit Laos depends on a number of factors,” she says. “The final conditions and project structure, but also whether the railway is mainly used for passengers or freight, which remains unclear. While there is little evidence that Laos needs a passenger railway, a freight line could be used to ship goods and natural resources, and therefore make more economic sense.”

Another skeptic is Ruth Banomyong, the director of the Center for Logistics Research at Thailand’s Thammasat University.

“The challenge will come when Laos will have to repay,” she warned. “Will they have sufficient revenue generated to repay? This is doubtful as the financial feasibility study done by the Chinese does not have realistic assumptions.”

Nonetheless, Beijing is clearly keen on the plan. Launched in 2013, the OBOR initiative envisions China handing out loans to neighboring countries in order to finance railways, roads, pipelines, ports and maritime facilities across Asia. The goal is forging stronger economic and political ties with countries all over the continent and increase trade with Europe.

In theory, the full initiative could affect more than four billion people and include about 40 percent of the world’s GDP. While the reality is plainer – many of the projects falling under OBOR have been underway for some time, including the railway link in Laos, which was first proposed in 2010 – there are good reasons why belts and roads could benefit the People’s Republic.  There have  been complaints from economists in other countries including Myanmar, Sri Lanka and Pakistan that these enormous development projects are saddling their countries with debt, particularly to China’s Ex-Im Bank, while the projects mainly benefit China and not the host countries.

Some observers see the initiative as a way to create economic opportunities, especially for China’s inland provinces, which are poorer than their coastal counterparts and are set to benefit from the new routes being planned. Others point out that as the Chinese economy slows – last year, the country grew 6.9 percent, its slowest pace in two and a half decades — overcapacity is a serious issue. Encouraging companies to invest in labor and resource-intensive projects abroad would lessen their burden and save jobs.

OBOR is designed to play a crucial role in boosting Beijing’s influence abroad. Wang Jisi, a prominent Chinese foreign policy specialist and professor at Beijing University, argued in 2012 that as the US tries to contain Chinese ambitions on the high seas, Beijing should focus on developing ties with inland countries in Central Asia, precisely one of OBOR’s goals.

The Asian Infrastructure Investment Bank, which Beijing launched in 2013, is partly a tool to finance such growing ambitions. The organization was boycotted by the United States and Japan, but has been joined by 57 countries from across the world.

Laos is a small but important link in this scheme. “Both a track in Vietnam and one in Myanmar have been shelved. The only remaining one for the moment passes through Laos,” Kratz said. This means that at present the Kunming-Vientiane is the only viable route through which China can build a railway linking Yunnan province to key markets in Southeast Asia, where Beijing has significant strategic interests.

“China today perceives Southeast Asia as within its economic and geopolitical orbit. As such, Chinese trade, investment and aid are one of the highest in the region,” said Paul Chambers, an advisor for International Affairs with Naresuan University in Thailand, stressing that the infrastructure push is taking place while military ties are also being strengthened. “For Beijing, influence across the region offers strategic flexibility,” he said.

He is echoed by Ruth Banomyong, who said “China sees this area of the world as part of its hinterland. I wouldn’t be surprised if they consider Laos and Thailand as future provinces of the Middle Kingdom.”

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