The Economic and Geopolitical Consequences of Belt and Road Initiative (BRI)for China: A preliminary model-based analysis

The debate about the Belt and Road Initiative (BRI) in the west seems to have reached an impasse in the absence of any model-based scientific analysis. In order to assess the impact of BRI using consequentialist logic, it is desirable to have model-based counterfactual results. This paper is a first step in that direction. Aggregate consequences for the Chinese economy in terms of economic growth, output and employment impacts are estimated for two BRI scenarios—a high investment and demand scenario and the current low investment and demand scenario. Some important dynamic econometric issues are discussed in an appendix. Also, a more complex economic systems model with explicit banking and financial sectors for the Chinese economy is presented for further, more sophisticated modeling work. As a first approximation, the current modeling results show that BRI will certainly not harm the Chinese economy; but the low demand scenario does not translate into great gains either. The high demand longer term scenario is much more attractive for the economic policymakers in China. However, even in that instance the economic consequences alone cannot justify the strategic importance given to BRI by the Chinese rulers. One possible conclusion is that the geopolitical motives are the main drivers of BRI with modest prospects of economic gains but real prospects of energy security and overall trade and investment security. But this is a delicate and fraught game in geoeconomics and geopolitics in the 21st century.