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Unpacking the “China Debt Trap” Narrative: Nuances and Context

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By Shafiq Khattak

The announcement of a $700 million credit facility by the China Development Bank (CDB) for Pakistan has reignited the debate on the implications of the “China debt trap” for Pakistan’s struggling economy. Although the credit facility is expected to bolster Pakistan’s foreign exchange reserves and stabilize its currency, experts have raised concerns about the long-term consequences of relying on foreign borrowing to manage the country’s economic affairs.

The notion of the “debt trap” has been extensively discussed in relation to China’s Belt and Road Initiative (BRI), which involves providing loans for infrastructure projects in developing countries. The Sri Lanka Hambantota Port episode has often been cited as a cautionary tale of the potential hazards of the “China debt trap” for emerging economies. This case pertains to the construction of a port in Sri Lanka by China, which left Sri Lanka unable to repay the loans provided by China, resulting in China taking control of the port for a 99-year lease. This incident is seen as an example of the “China debt trap” strategy, in which China extends loans to developing countries with high interest rates that they cannot repay, resulting in China acquiring strategic assets in these nations.

However, it is crucial to acknowledge that not all of China’s infrastructure initiatives in emerging economies adhere to the same blueprint. There exist numerous instances of fruitful collaborations between China and developing nations, which have yielded sustainable economic progress and growth for both parties. These partnerships have yielded considerable improvements in infrastructure, commerce, and investment, thereby contributing to the economic advancement and development of these countries. Furthermore, China and Pakistan enjoy a long-standing friendship and strategic partnership that is founded on shared interests in regional stability, economic progress, and security. China has extended substantial economic and military aid to Pakistan, including the development of the China-Pakistan Economic Corridor (CPEC), a significant infrastructure project intended to link China’s western regions to the Arabian Sea via Pakistan.

Moreover, it is crucial to acknowledge that the “China debt trap” is not a foregone conclusion for every developing country that receives loans from China. Rather, the outcome depends on several factors, including the terms of the loan agreement, the economic policies of the recipient country, and the governance framework that governs the project. Countries that negotiate favorable loan terms, implement sound economic policies, and maintain a robust governance structure are more likely to benefit from Chinese loans and avoid the debt trap.

Nonetheless, it is essential to recognize that the “China debt trap” cannot be analyzed in isolation, as it is embedded within a complex geopolitical landscape. In particular, the Indo-Pacific region has recently witnessed heightened competition between China and the United States, which has consequently led to increased scrutiny of China’s investments in developing countries. Within this competitive environment, the United States has taken a critical stance toward China’s Belt and Road Initiative (BRI) and accused China of utilizing debt to achieve strategic leverage in developing countries. Additionally, the United States has introduced its own economic and security initiatives in the region, including the Free and Open Indo-Pacific strategy and the Build Back Better World (B3W) initiative.

Therefore, to fully comprehend the “China debt trap” narrative, it is crucial to situate it within this broader geopolitical context. While it is imperative to examine China’s lending practices and their implications for developing countries, it is equally necessary to consider the larger political and strategic landscape in which this narrative has materialized. The “China debt trap” narrative is fundamentally intertwined with the competition between China and the United States in the Indo-Pacific region. As such, it is essential to approach the issue with nuance and evaluate each project on its own merits and in the context of the specific circumstances of the recipient country.

It is imperative to approach the issue of debt management with careful consideration and evaluate each project on its own merits, taking into account the specific circumstances of the recipient country. In the case of Pakistan, a comprehensive and sustainable approach is required to manage its relationship with China and address its debt challenges. This approach should prioritize transparency and accountability to ensure that projects benefit all segments of society.

Furthermore, Pakistan must explore alternative options for attracting foreign investment and diversifying funding sources to avoid an over-reliance on borrowing. By drawing on the experiences of other nations and prioritizing long-term economic strategies and investments in critical sectors, Pakistan can achieve economic stability and ensure that progress benefits all.

Therefore, the “China debt trap” narrative cannot be analyzed in isolation but should be viewed within the broader geopolitical context. By taking into consideration the larger political and strategic landscape, Pakistan can pursue sustainable economic development while mitigating the potential risks associated with excessive reliance on foreign borrowing.


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BUSINESS & ECONOMY

Lifting the Bottom Billion: Will It Work This Time?

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Imagine being part of a billion people stuck in a cycle of extreme poverty—unable to break free due to war, corruption, lack of education, and isolation from global markets. These individuals make up what economist Paul Collier famously termed the “Bottom Billion.” Despite countless international efforts to address their struggles, many remain trapped in some of the most challenging conditions on earth, particularly in sub-Saharan Africa. With new strategies and technologies emerging, the big question is: Will it work this time? In this article, we’ll dive into the latest global initiatives and the hurdles still standing in the way of lifting the Bottom Billion out of poverty once and for all.

Understanding the Bottom Billion Crisis

For decades, poverty reduction efforts have centered on providing aid, improving infrastructure, and addressing public health issues. However, the situation for the Bottom Billion is complex and often resistant to traditional development strategies. According to Collier, these individuals are caught in one or more of four traps: conflict, natural resource dependence, landlocked countries with bad neighbors, and poor governance. These traps create cyclical poverty that is difficult to escape.

Recent data shows that while global poverty rates have decreased—thanks to economic growth in places like China and India—the situation for the Bottom Billion remains unchanged in many regions. Sub-Saharan Africa, for instance, continues to struggle with high poverty rates, despite decades of international aid. The challenge is not just about money; it’s about addressing the root causes that keep these populations poor.

Current Global Efforts: What’s Being Done?

Several initiatives have been put in place to address the unique challenges faced by the Bottom Billion. These include:

1. Sustainable Development Goals (SDGs)

The United Nations’ Sustainable Development Goals (SDGs) aim to end poverty in all its forms by 2030. Goal 1 specifically targets the eradication of extreme poverty, focusing on providing social safety nets, access to basic services, and job creation. While the SDGs offer a comprehensive approach, progress has been uneven, particularly in conflict-affected regions where governance and infrastructure are weak.

2. International Aid and Debt Relief

Foreign aid and debt relief programs have been crucial in offering immediate assistance to impoverished nations. In 2020, the International Monetary Fund (IMF) and World Bank launched initiatives to alleviate debt for the world’s poorest countries, especially in the wake of the COVID-19 pandemic. The IMF’s Debt Service Suspension Initiative (DSSI) has temporarily freed up resources that these countries can use for critical healthcare and social services. But critics argue that aid, while necessary, often doesn’t address the systemic issues—like governance and corruption—that perpetuate poverty.

3. Microfinance and Social Entrepreneurship

Microfinance has been a popular tool for lifting people out of poverty. By providing small loans to individuals, particularly women, microfinance initiatives aim to stimulate local businesses and empower communities. Organizations like Grameen Bank and Kiva have made significant strides, but scaling these efforts to reach the Bottom Billion remains a challenge. Social entrepreneurship—businesses that focus on generating social impact rather than profit—has also emerged as a promising solution, but its effectiveness is still debated.

The Role of Technology in Poverty Alleviation

One of the most promising developments in the fight against poverty is the role of technology. In recent years, digital tools have shown the potential to bridge gaps in education, healthcare, and financial services.

1. Mobile Banking and Digital Inclusion

Mobile banking, particularly in countries like Kenya with platforms like M-Pesa, has revolutionized financial access for the poor. These platforms allow users to transfer money, save, and even access loans without needing a traditional bank account. For the Bottom Billion, many of whom live in rural or underserved areas, mobile banking provides a lifeline for economic participation. However, challenges around digital literacy and infrastructure still need to be addressed.

2. Online Education and E-Learning Platforms

Education is another area where technology can make a transformative impact. The rise of e-learning platforms offers the opportunity to bring quality education to even the most remote regions. Projects like Khan Academy and Coursera have made strides in offering free educational content to people worldwide, but scaling this in regions where internet access is scarce or expensive remains a hurdle.

3. Telemedicine and Healthcare Access

Telemedicine has the potential to bridge gaps in healthcare, particularly in areas where access to hospitals or doctors is limited. With the help of mobile technology, remote consultations and diagnostics are becoming more common in developing countries. In the context of the COVID-19 pandemic, telemedicine has become a critical tool, allowing healthcare workers to reach vulnerable populations. However, expanding this service to the Bottom Billion will require investment in both digital infrastructure and healthcare systems.

One of the biggest barriers to lifting the Bottom Billion out of poverty is poor governance. Corruption, weak institutions, and lack of transparency make it difficult for aid and development programs to reach those who need them most. Transparency International’s Corruption Perceptions Index consistently shows that the most impoverished countries are also among the most corrupt.

In countries with poor governance, even well-meaning efforts can fail. Aid money often doesn’t reach its intended recipients, infrastructure projects stall, and political instability exacerbates existing problems. Addressing governance issues is critical to making any poverty alleviation program successful.

So, will it work this time? The answer lies in a multifaceted approach that goes beyond just financial aid. Here are a few key elements that must be addressed for any hope of success:

  1. Improving Governance: Without addressing corruption and weak institutions, any efforts will be undermined. Initiatives that promote transparency, accountability, and democratic governance will be crucial.
  2. Inclusive Economic Growth: Economic development must reach the most marginalized groups, particularly women, rural communities, and those living in conflict zones. Programs that focus on building local economies and creating jobs will be vital.
  3. Leveraging Technology: Digital tools offer immense potential, but they must be accessible to all. Expanding internet access and digital literacy will be key in enabling the Bottom Billion to participate in the global economy.
  4. Local Solutions for Local Problems: Global strategies must be adapted to local contexts. What works in Southeast Asia may not work in sub-Saharan Africa. Engaging local communities in the decision-making process is essential for sustainable progress.

Lifting the Bottom Billion is one of the most daunting challenges of our time. While the task is immense, it is not impossible. By focusing on good governance, inclusive growth, and technological innovation, the global community has a chance to make meaningful progress in reducing extreme poverty. Will it work this time? Only if we approach the problem with a comprehensive, targeted, and sustainable strategy. The stakes are high, but the rewards—improving the lives of a billion people—are worth every effort.


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Easing Africa’s Debt Burdens: a Fresh Approach, Based on an Old Idea

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In his address to the 79th session of the UN general assembly this week, South African president Cyril Ramaphosa described debt as “a millstone around the neck of developing countries”. Three legal and economic scholars set out the African debt problem and what must happen if African countries are to get out of what Ramaphosa described as “a quicksand of debt”.

The statistics are stark: 54 governments, of which 25 are African, are spending at least 10% of their revenues on servicing their debts; 48 countries, home to 3.3 billion people, are spending more on debt service than on health or education. Among them, 23 African countries are spending more on debt service than on health or education. While the international community stands by, these countries are servicing their debts and defaulting on their development goals. The Group of 20’s current approach for dealing with the debts of low income countries is the Common Framework.

It requires the debtor to first discuss its problems with the International Monetary Fund (IMF) and obtain its assessment of how much debt relief it needs. Then it must negotiate with its official creditors – international organisations, governments and government agencies – over how much debt relief they will provide. Only then can the debtor reach an agreement – on comparable terms to the official creditors – with its commercial creditors. Unfortunately, this process has been sub-optimal.

One reason is that it works too slowly to meet the urgent needs of distressed borrowers. As a result, it condemns debtor countries to financial limbo. The resulting uncertainty is not in anyone’s interest. For example, Zambia has been working through the G20’s cumbersome process for more than three and a half years and has not yet finalised agreements with all its creditors.  The need for a new approach is overwhelmingly evident. Although the current crisis has not yet become the “systemic” threat it was in the 1980s when multiple countries defaulted on their debt, it is a “silent” sovereign debt crisis.

We propose a two-part approach that would improve the situation of sovereign debtors and their creditors. This proposal is based on the lessons we have learned from our work on the legal and economic aspects of developing country debt, particularly African debt.

First, we suggest that official creditors and the IMF create a strategic buyer of “last resort” that can purchase the bonds of debt distressed countries and refinance them on better terms.

Second, we recommend that all parties involved in sovereign debt restructurings adopt a set of principles that they can use to guide the debtor and its creditors in reaching an optimal agreement and monitoring its implementation.

The current approach fails to deal effectively and fairly with both the concerns of the creditors and all the debtor’s legal obligations and responsibilities. Our proposed solution would offer debtors debt relief that does not undermine their ability to meet their other legal obligations and responsibilities, while also accommodating private creditors’ preference for cash payments.

Our proposal is not risk-free. And buybacks are not appropriate for all debtors. Nevertheless it offers a principled and feasible approach to dealing with a silent debt crisis that threatens to undermine international efforts to address global challenges such as climate, poverty and inequality.

It uses the IMF’s existing resources to meet both the bondholders’ preferences for immediate cash and the developing countries’ need to reduce their debt burdens in a transparent and principled way. It also helps the international community avoid a widespread default on debt and development.

Bondholders are a major problem

Foreign bondholders, who are the major creditors of many developing countries, have proven to be particularly challenging in providing substantive debt relief in a timely manner. In theory, they should be more flexible than official creditors.

Developing countries have been paying bondholders a premium to compensate them for providing financing to borrowers that are perceived to be risky. As a result, bondholders have already received larger payouts than official creditors. Therefore, they should be better placed than official creditors to assist the debtor in the restructuring processes. However, despite having received  large returns from defaulted bonds, bondholders have remained obstinate in debt restructurings. Our proposal seeks to overcome this hurdle in a way that is fair to debtors, creditors and their respective stakeholders.

How it would work

First, the official creditors and the IMF should create and fund a strategic buyer “of last resort” who can purchase distressed (and expensive) debt at a discount from bondholders. The buyer, now the creditor of the country in distress, can repackage the debt and sell it to the debtor country on more manageable terms. The net result is that the bondholders receive cash for their bonds, while the debtor country benefits from substantial debt relief. In addition, the debtor and its remaining official creditors benefit from a simplified debt restructuring process.

This concept has precedent. In 1989, as part of the Highly Indebted Poor Countries Initiative, the international community’s effort to deal with the then existing debt burdens of poor countries, the World Bank Group established the Debt Reduction Facility, which helped eligible governments repurchase their external commercial debts at deep discounts. It completed 25 transactions which helped erase approximately US$10.3 billion in debt principal and over US$3.5 billion in interest arrears.

Some individual countries have also bought back their own debt. In 2009, Ecuador repurchased 93% of its defaulted debt at a deep discount. This enabled the government to reduce its debt stock by 27% and promote economic growth in subsequent years. Unfortunately, the countries currently in debt distress lack sufficient foreign reserves to pursue such a strategy. Hence, they need to find a “friendly” buyer of last resort.

The IMF is well positioned to play this role. It has the mandate to support countries during financial crises. It also has the resources to fund such a facility. It can use a mix of its own resources, including its gold reserves, and donor funding, such as a portion of the US$100 billion in Special Drawing Rights (SDR), the IMF’s own reserve currency, which rich economies committed to reallocate for development purposes. Such a facility, for example, would have enabled Kenya to refinance its debts at the SDR interest rate, currently at 3.75% per year, rather than at the 10.375% rate it paid in the financial markets.

It is noteworthy that the 47 low-income countries identified as in need of debt relief have just US$60 billion in outstanding debts owed to bondholders. Our proposed buyer of last resort would help reduce the burden of these countries to manageable levels. Second, we propose that both debtors and creditors should commit to the following set of shared principles, based on internationally accepted norms and standards for debt restructurings.

Guiding principles

1. Guiding norms: Sovereign debt restructurings should be guided by six norms: credibility, responsibility, good faith, optimality, inclusiveness and effectiveness.

Optimality means that the negotiating parties should aim to achieve an outcome that, considering the circumstances in which the parties are negotiating and their respective rights, obligations and responsibilities, offers each of them the best possible mix of economic, financial, environmental, social, human rights and governance benefits.

2. Transparency: All parties should have access to the information that they need to make informed decisions.

3. Due diligence: The sovereign debtor and its creditors should each undertake appropriate due diligence before concluding a sovereign debt restructuring process.

4. Optimal outcome assessment: The parties should publicly disclose why they expect their restructuring agreement to result in an optimal outcome.

5. Monitoring: There should be credible mechanisms for monitoring the implementation of the restructuring agreement.

6. Inter-creditor comparability: All creditors should make a comparable contribution to the restructuring of debt.

7. Fair burden sharing: The burden of the restructuring should be fairly allocated between the negotiating parties.

8. Maintaining market access: The process should be designed to facilitate future market access for the borrower at affordable rates.

The G20’s current efforts to address the silent debt crisis are failing. They are contributing to the likely failure of low income countries in Africa and the rest of the global south to offer all their residents the possibility of leading lives of dignity and opportunity.

Danny Bradlow is Professor/Senior Research Fellow, Centre for Advancement of Scholarship, University of Pretoria

Kevin P. Gallagher is Professor of Global Development Policy and Director, Global Development Policy Center, Boston University

Marina Zucker-Marques is a Senior Academic Researcher, Boston University Global Development Policy Center, Boston University

Courtesy: The Conversation


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South African Agriculture Needs to Crack the Chinese Market. How to Boost Exports

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China, the world’s second largest nation by economy and population, is a big buyer of food from the rest of the world. This makes it a potential market for countries that are agricultural producers, like South Africa. But as agricultural economist Wandile Sihlobo says, South Africa has lagged behind its competitors in the Chinese market. To increase its share, the country’s policymakers must up their game

South Africa’s agricultural sector has more than doubled in value and volume terms since 1994. This success has been linked to international trade. Exports now account for roughly half (in value terms) of the annual agricultural production. Other drivers have been improvements in productivity through crop and animal genetics.

Exports are largely to the rest of the African continent. In 2023 these accounted for 38% of South Africa’s agricultural exports. The EU is another important market for South Africa’s agricultural sector, accounting for a 19% share in 2023. In recent years, Asia and the Far East, in particular China, have been identified by the agriculture sector and policymakers as the key growth frontiers.

Asia and the Middle East accounted for a quarter of South Africa’s agricultural exports in 2023. But huge pockets of opportunity remain, in terms of products and countries. China is the biggest opportunity, largely because of its population and economic size. China, the world’s second largest economy after the US, must feed 1.4 billion people. To do this, China is a huge importer, resulting in an agricultural trade deficit with the rest of the world of about US$117 billion. This suggests there’s a gap for countries with good agricultural offerings.

South Africa has lagged behind its competitors in gaining from this growth in Chinese imports. It stands at number 32 in the list of countries that supply China with food. South Africa’s agricultural exports to China accounted for a mere 0.4% of Chinese imports in 2023.

China’s size warrants more attention than it typically receives from South African policymakers. The South African agricultural sector – I am the chief economist of the Agricultural Business Chamber of South Africa – has been calling for greater effort on increasing South African exports to China.

Exhibit 1: China’s agricultural trade

Source: Trade Map and Agbiz Research

China’s top agricultural imports include oilseeds, meat, grains, fruits and nuts, cotton, beverages and spirits, sugar, wool, and vegetables. South Africa is already an exporter to various countries in the world of these products and is producing surpluses for some. This means there is room to expand to China, especially as South Africa’s agricultural production continues to increase and with more volume expected in the coming years.

It therefore makes sense for South Africa to focus more on widening export markets to China. This means arguing for a broad reduction in import tariffs that China currently levies on some of the agricultural products from South Africa. Removing phytosanitary constraints in various products is also key.

There is room for more ambitious export efforts. Three government departments must lead the conversation – Trade, Industry and Competition; Agriculture; and International Relations and Cooperation.

What’s holding South Africa back

South Africa has strong political ties with China, bilaterally and through the umbrella group known as Brics and the Forum for China-Africa Cooperation. But these forums are primarily political, not trade blocs.

What South Africa doesn’t have is preferential market access to China’s food markets. This hobbles South African farmers who compete for the Chinese market with Australian and Chilean producers. Australia and Chile have secured trade agreements that give them competitive advantage.

The lack of an agreement that secures better access for South African producers means that they face substantial trade barriers. The main ones are:

What China buys

China’s key agricultural imports include soybeans, cotton, malt, beef, palm oil, wool, wine, fruits, nuts, pork and barley. South Africa is among the top ten global agricultural exporters in most fruits, and a significant producer of wine.

South Africa’s current major exports to China are wool, citrus, nuts, sugar, wine, maize, soybeans, beef and grapes. With the exception of wool, South Africa’s market share of these products remains negligible. South Africa expects an increase in various fruits and nuts production in the coming years from trees that have already been planted.

The wine industry also continues to see decent volumes of production. The same is true for the red meat industry, which is on a path to grow and to expand its export markets. The producers of all these products could benefit from wider access to China.

What’s to be done

South Africa stands as an anomaly among the top global agricultural exporters with limited market access to China for various products. If China is to be an area of focus for export-led growth in agriculture, a new way of engaging will be essential to soften the current trade barriers.

Firstly, a strategic approach to the Chinese agricultural markets needs to be adopted. This would entail dedicated teams from both South African and Chinese departments of agriculture that would deal with details of trade barriers.

Secondly, South Africa should use the Brics platform – of which China is also a member – to call for deepening of agricultural trade among the Brics members. This would help add momentum to the bilateral engagements of South Africa and China.

Thirdly, South Africa should encourage foreign direct investment – in particular Chinese investors – in agriculture for new production in areas which have large tracts of underutilised land. These include the Eastern Cape, KwaZulu-Natal and Limpopo provinces.

Having Chinese nationals as partners in agricultural development could help boost trade and business ties between the two countries.

Lastly, China provides a good base for the demand for higher-value agricultural products, which South Africa intends to focus on in its development agenda.

Wandile Sihlobo is a Senior Fellow, Department of Agricultural Economics, Stellenbosch University


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