Construction Crane

Images and Text by Austin Rose

In the coming weeks, the White House will take the battle to renovate and upgrade the Overseas Private Investment Corporation (OPIC) to the Senate. The newly empowered entity, renamed the  International Development Finance Corporation (IDFC), would go toe to toe with the many tendrils of China’s economic foreign policy across the globe. But what is this modern battlefield, exactly? What does it look like, and why indeed should the US take the field? Recent Chinese engagement with Kenya is a useful example of the system that illuminates larger lessons for Washington.

The first thing any investigation of Chinese economic activity in Kenya uncovers is the sheer size of Chinese involvement. China accounts for more than 70% of bilateral debt in Kenya, eight times more than the second largest creditor, France. Indeed, Chinese loans in the past ten years have significantly outstripped all World Bank funding to the country. In 2018, the Kenyan government is projected to pay 54% of total federal revenue to finance its debts. In just the past few months, the credit ratings agency Moody’s lowered Kenya’s rating and the IMF closed down a standby credit line to the Kenyan government after a failure to satisfactorily resolve concerns about the national deficit. At the same time, Kenya joined the Asian Infrastructure Investment Bank, a Chinese-led institution that effectively competes with the World Bank by placing fewer conditions on its loans.

Due to China’s repressive model of state control inside its own borders, it can bring to bear a more confusing array of policies with may be understood as state directed than free countries can. Simply put, it can and regularly does impose major costs on its “private” sector in order to achieve Party goals. State Owned Enterprises, private companies with an interest in staying on the state’s good side, strategic changes in state policy, and a population influenced by propaganda are all tools in China’s toolbox that the US cannot and should not use. China is able to be highly strategic and truly full spectrum when approaching the economic dimension of their ties to other countries.

As to whether China is indeed behaving strategically in the case of Kenya– well, the largest infrastructure project in Kenya’s history, a rail line between the nation’s capital, Nairobi, and its second city, Mombassa, was completed more than a year ahead of schedule to conveniently begin service on the eve of a highly contested Presidential election, which the incumbent won in the face of a total boycott by his opposition. This line, 90% financed by the Chinese ExIm Bank and built by the China Road and Bridge Corporation, happens to sell passenger seats cheaply, allowing average Kenyans to use the service. It does so because the real financial backbone of the project, the thing that makes the railway a worthwhile investment, is cargo shipping. But the cargo service has been disastrously unsuccessful, and the rail line may never make money. Clearly, Chinese involvement in Kenya comes from more than a motive for profit.

China has invested in Kenya; it has done so strategically. To what end? To cultivate soft power. A foreign policy of deceptively free money, shiny new projects, and cultural engagement is very plainly intended to overpower the influence that the US, its allies, and its institutions wield over decision making within Kenya. China is now a lender that President Kenyatta and his successors are indebted to politically and economically, more so than to the US. As Chinese propaganda hints, one use for this soft power is to build support in the international community for an accepted definition of national sovereignty that is stricter than US norms provide for. China emphasizes that it is “not interfering in Kenya’s internal affairs,” and although the transparent falsity of that claim will surely demonstrate itself the moment that Kenya falls behind on debt payments, China surely gains from convincing other countries that they have no business looking too closely at others. Chinese President Xi Jinping’s argument that  “You cannot know whether the shoes fit or not until you wear them” surely is convenient given that his own nation is in the process of detaining millions of people from its Uighur minority in re-education camps.

However carefully constructed Chinese activity in Kenya is, it cannot decisively pre-empt public opinion. The rumors, the bad press– the general impression that Chinese activity makes on ordinary Kenyans– matters. If China’s pursuit of influence in Kenya crowds out the US, as it must, then Kenya will become ever more a nation which sides with a repressive, antisocial police state in the international arena in spite of the fact that its own people resent their position. Indeed, there is evidence to show that, while the US garners more general approval and is viewed as less of an economic threat, specific infrastructure projects accumulate a great deal of goodwill towards chinese involvement.

Danstone Ndula, the founder of Overseers’ Education Centre, an education nonprofit in Nairobi, was one of many people I met who were well-versed in rumours around Chinese development. His perception, that “the Chinese hire mostly expatriates and, if they hire Kenyans, they pay them very little,” while not terribly accurate, was one of the tamest rumors circulating in the city. Another popular one was that the Chinese were trying to foster dependency and keep Kenyans from learning technical trades: “at night, they do most work, and the complicated work, with only Chinese. They hide it from the locals.” In a decidedly darker turn, he shared stories of how “the Chinese lie with local women and get them pregnant, but no one can identify who did it because they look the same. The women come to the manager and demand compensation, but the manager says ‘OK, who did it?’ And the woman cannot tell.”

Rumors may run the gamut from economic fear to racial hostility, but they are compounded by very real stories. A Chinese-built bridge collapsed in 2017, injuring 27, which has stoked fears of shoddy Chinese workmanship. Similarly, high-profile conflict between Chinese managers and Kenyan workers has fed concern that the Chinese disrespect locals.

Furthermore, it is unclear that China has thought through what placing Kenya in a debt trap will do to their favorability going forward. Resentment at the creditor when bills come due can plausibly drive a great deal of political backlash.

The easiest way to understand this disconnect between public opinion about China and public opinion about Chinese projects is as pragmatism.

Jackson Kasir, a Masai tribesman from Lamu County in the southwest of the country, is one such pragmatist. The China Wu Yi Construction Company won a bid to upgrade a significant section of the southwestern C12 highway in 2016, and as a result “from here and from different tribes many people have jobs.” As we stood watching a team of construction workers doggedly trying to repair a section of the old road that had washed out overnight and made the road otherwise impassable, Jackson explained how important it was to his community to have resilient infrastructure. For him, a new road certainly meant faster travel times and could very well increase tourism. Most importantly, a new road would help to ensure his children got a better education. “We are very happy that we can get support for the community for the school, the more people that come the more people can give support. That’s good.” Although he admits that “the Masai like Americans, the Chinese are no good” and believes that the US would do the job better, he has no illusions about who is actually helping his community. At the end of the day,  it was the Chinese who bothered to invest.

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A Mombassan official who wished to remain anonymous expressed frustration with unmet expectations for growth in the port city after the rail line was completed. They held out hope for the future, however: “We expect that the prices of goods will come down because the costs are reduced, and the time taken to move these goods is reduced.” When questioned about the nation’s looming debt crisis, fed by the Kenyatta government’s voracious appetite for new projects, the official went on the offensive. The issue with debt was not that it was being accumulated- that was right and natural for Kenya to do, seemingly at any level. The issue with debt was overbearing lenders.”Banks want too much in interest rates, not in the interest of the masses.” Domestically, it is true that this is the party line of Kenyatta’s Jubilee government, as demonstrated by recent rulemaking that has simply capped the maximum possible interest rate banks may demand on loans.

The obvious problem with such antagonism against creditors is that interest rates are set relative to risk, which in turn is set by a market. If it were the case that banks were charging arbitrarily high interest rates, then one bank would stand to make enormous gains against their competitors by simply lowering their rates to point still above a fair understanding of the rate needed to neutralize risk but lower than their competitors, thus becoming more attractive to all consumers and dominating the market. Following this logic, then, there is no meaningful “cushion” in interest rates. Banks that can’t break even on a given risky loan simply won’t give it, stifling growth in the country.

The official’s final word on the issue? “The world bank gives us lots of conditions. The Chinese don’t give us conditions.”

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World Bank conditionality, while annoying, is far superior to the stick of control that lurks behind Chinese carrots of easy money. For example, when debt came due in Sri Lanka, the nation was forced to hand over a major port to Chinese control. But, that argument can be hard to make in cash-strapped developing countries eyeing attractive short term gains.

Gladly, the US model could be improved with new legislation. The OPIC is an agency which brings a suite of assets to bear on investment in foreign countries. It can help the private market by financing, political risk insurance, advocacy and by partnering with private equity investment fund managers.” Critically, the OPIC, unlike in the World Bank or other tools in the US arsenal, can modify at executive discretion the conditionality which makes US investment so burdensome in comparison to China. “If the President determines that such activities by the Corporation would be in the national economic interests of the United States,” then requirements such as high labor or environmental standards can be lowered. These core concepts are strengthened in the IDFC, and built upon with new authorities for equity finance and local currency loans to ameliorate currency exchange risks.

While it is of paramount importance that the US not sacrifice its values to earn influence in other countries, and thus should be leery of too much flexibility, the simple truth is that the US is no longer the only game in town. It is one thing to negotiate from a position of absolute dominance, confident that your economic partnership is the only offer that a nation might take. In that scenario, it makes sense to push for many concessions. But in a world with an aggressive China already beating the US in involvement in many nations, as in Kenya, the perfect becomes the enemy of the good. It should be possible to find negotiating positions which have more conditionality than Chinese offers, but which are less problematic for foreign partners to accept than taking the easy loan and dealing with China. The US should push for more flexibility to find this happy medium and compete.

The US, although held in higher esteem, cannot expect to coast by on goodwill and non competitive levels of economic cooperation, in Kenya or elsewhere. By failing to invest abroad, we make China’s soft power campaign the uncontested choice for pragmatic economic short term thinking. This is not only less preferable to the citizens of Kenya and other nations, it opens these peoples up to major threats. And, certainly, it means the decline of relative American influence across the globe, replaced with the influence of a dangerous adversary.

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