The Economic Effects Of Chinas Belt And Road Initiative On Selected Southeast European Countries

During the current political atmosphere in Europe with rising nationalism and the fact that for the first time in the EUs history a country plans to leave the union, Montenegro and Serbia still face lots of challenges before they will be able to become EU member states. Until then it is likely that they will continue to look for fast and, at least on the first look, uncomplicated and unproblematic financing methods. The low bureaucratic hurdles and the fast implementation of Chinese-backed infrastructure projects will continue to be a lucrative alternative to the funds provided by the EU. That these advantageous parameters are also caused by the bypassing of EU regulations, as well as national laws on tendering, procurement, safety or labor laws are partially circumvented. The 16+1 format could be a good way to coordinate these investment flows across European borders. But it also poses challenges to the cohesion of the EU as a whole through the growing influence of China through its financing activities and a wide range of other soft power activities in the East and Southeast European countries involved in the format.


Introduction
Throughout history, humans moved goods from place to place to each other for mutual benefit. This comparison to the Marshall plan is essential and very helpful to be able to classify the possible impacts of the BRI solely through its investment volume. While the Marshall plan had a significant effect on war-torn Europe (Kozul-Wright 2019) and played an important role in the reconstruction of Western economies the potential economic effects of China's BRI initiative are still mostly subject of discussion. But like the Marshall Plan the BRI could also 7 have significant economic implications, for example, through reducing the infrastructure gap in many developing countries. Furthermore, the initiative is also enjoying growing support in Europe, for example through the expansion of the Chinese-owned port of Piraeus in Greece, the recent move of the Italian government to endorse the BRI (Johnson 2019) or the initiative of China to extend and intensify economic cooperation with 16 Central and Eastern European countries, 11 of them being EU member states, also known as the 16+1 format (Grieger 2018). In contrast, the BRI also has many critics in Europe and around the world which became obvious again after the widespread negative reactions on Italy's move to endorse the BRI in early 2019.
The short-and medium-term effects on large economies like Germany or France that officially have not even endorsed the BRI might be difficult to estimate. Consequently, this thesis will focus on assessing the consequences of the Chinese BRI on smaller South-East European Maritime Silk Road". Together these two strategies were introduced as the "One Belt One Road Initiative", which was later rebranded to the term that is used by Chinese governmental organizations today: the "Belt and Road Initiative" (BRI). 1 His speech in Kazakhstan, titled "Promote People-to-People Friendship and Create a Better Future", marked the first time that the idea of an Economic Belt was introduced to a public audience. The name of the project and the place of its announcement carried a high symbolic meaning. In his speech president Xi Jinping explained that more than 2,000 years ago an imperial envoy was first sent to Central Asia to lay the groundwork for a transcontinental silk trade route between Asia and Europe. Kazakhstan was a major part of the ancient Silk Road the fact that the BRI was already announced before any guidelines or blueprints existed resulted in high expectations in the world community but also has caused cautious reactions since China's international politics are usually introduced in a more reserved way (Zhang 2018, p.5).

Historical Background
According to the National Development and Reform Commission of the People's Republic of China the Belt and Road Initiative "covers [...] the area of the ancient Silk Road" (NDRC 2015).
The widely known terms "Silk Road" or "Silk Routes" which are used to introduce the ambitious project were first introduced by the German geographer Ferdinand von Richthofen in 1877 to describe "the historic routes of economic and cultural exchange across Eurasia" (Waugh 2010   To achieve these ambitious targets the White Paper identifies five fields of priority:

The Official Framework of the BRI
• First, the coordination of common policies is described as an important factor for benefiting from the BRI for example through the cooperation in large-scale projects.

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• Second, a key factor of the initiative and the focus of this thesis is the improvement of the connectivity to form a transcontinental infrastructure network in terms of passageways, port infrastructure and energy infrastructure while paying respect to the territorial sovereignty of each nation.
• Third, China motivates countries participating in the BRI to remove or lower tariff and non-tariff barriers to improve and facilitate trade and investment. In the White Paper China specifically encourages Chinese companies to "participate in infrastructure construction in other countries along the Belt and Road" (NDRC 2015).
• Fourth, the financial integration which, among other things, formulates the goal of creating international development banks and funds to access financing but also allow private and commercial funds to invest in key projects of the initiative.
• Fifth, the Chinese side wants to strengthen the bonds between the people of the BRI countries through academic and cultural exchanges. This is also described as a key priority but will not be analyzed very intensively in this thesis since the author will focus on the economic aspects of the BRI (NDRC 2015).    [13][14]. However, existing literature shows that these investments have strong implications on public debt, especially in small and/or developing economies.

Literature Review
Rising debt distress and also debt default with severe consequences is becoming a more and more important issue in recent literature and will be thoroughly examined in the course of this thesis.

China's Motivation
The Chinese White Paper for the BRI lays a strong emphasis on the mutual benefits for all participating countries and for third countries which are not officially a part of the BRI scheme.
And of course, the high investment volume will most likely have effects on BRI countries and the world economy. The White Paper describes the effects of the BRI as exclusively positive and does not mention any aspects that might pose potential risks, liabilities or uncertainties to BRI countries. The essence of the vision is that every country that participates in the "mutually beneficial" (NDRC 2015, p.2) initiative will profit from a "win-win cooperation that promotes Additionally, many authors suggest that the BRI has the core purpose of "reviving the Chinese The skeptical response towards many especially Western countries to join the initiative and the often critical public reporting on the existing Belt and Road projects shows that many national governments see a variety of risks and potential disadvantages of participating in the initiative. The important question is if China's objectives behind the initiative could diminish the undeniable positive implications that usually come with infrastructure spending and trade liberalization. In the following chapters of this thesis the author will critically reflect on the positive but also the negative effects that the BRI might have on participating countries on the example of Montenegro and Serbia.   The port is a key access point of the BRI in its function as a inland gateway to Europe and the EU markets as this a much faster option than shipping containers to other ports in Northern

The BRI in Europe
Europe (Konings 2018, p. 2). A similar strategy was discussed for the Montenegrin port of Bar  Authors' elaboration visualized with a map from Google Maps).

Country Overview
One of the countries that is being analyzed in this thesis is Serbia, formally known as the There are four main Chinese-financed BRI projects in Serbia: • The Belgrade-Budapest high speed railway which is part of the rail transport system through North Macedonia, Serbia and Hungary that will create the Land-Sea Express The construction began in May 2015 and was expected to be completed in mid-2019 but that deadline was extended due to delays in construction works.

Country Overview
The second country that will be analyzed in this thesis is the Southeast European country of

Montenegro and the BRI
There is one big BRI-related construction project in Montenegro that will be heavily analyzed in this thesis as it has strong implications on the small countries' financial structure and could also have effects on the countries' external financing-dependent economy. •

Effects on Economic Growth and Employment
On a global scale most BRI economies will profit from increased growth and lower  Summarizing, the BRI core projects, like every other one in Montenegro and Serbia, are all deficit-financed investments that most likely have an impact especially in the short-and also in the medium-term. In the long term due to crowding out the gains would be larger if the investment would have been deficit neutral (Stupak 2017, p. 16). Figure 10 shows the expected development of Montenegro's GDP with and without the construction on the highway. Although there will be some spillovers in the short-and medium-term as shown in figure 9 the long-term growth of the country's' GDP will not be significantly with real GDP growth being lower with the construction of the highway than without it in 2024 (see figure 10).

Effects on Trade
In principle the upgrading of infrastructure and investments in transports are expected to have positive consequences on the participating country and the global economy. As the BRI spans over several economic corridor's countries can not only profit from better transportation networks in the domestic market but also in potential transit countries for the ex-or import of goods and services to third countries. Investments have the potential to reduce transport time and cost, consequently leading to an increase in trade and foreign direct investment (FDI).
The  and Serbia that is also involved in some BRI projects, will be used to analyze the trade effects.
Of course, it the effects on Albania will not be exactly like the effects on its neighbor countries but still allows to make some assumptions on possible similar effects on trade.
As     14). Montenegro and Serbia, although playing a key role in the BRI's maritime gateway to Europe will not benefit as much as the core countries of the initiative but will be able to take advantage from the BRI's network effects.    (Hurley et al. 2018, p. 11). The threshold at which these significant consequences might come into effect of course varies from country to country but in this thesis the analysis of Montenegro's and Serbia's will be based on statistically significant thresholds mentioned previously.

Effects on Financial Stability
Before the international financial crisis of 2007/2008, the countries that are being analyzed managed to reduce their government debt to a level of only slightly more than 30 percent (see  need to launch such an investment and that the country's "debt without the highway would have been sustainable" (Lindquist et al. 2017).
Assuming that Montenegro will not build the second and third phase of the highway debt levels will start to decline and in the medium-term achieve a sustainable level (Lindquist et al. 2017).
Given the high costs for the two phases of around EUR 1.2 billion Montenegro can "not afford to complete the remaining sections of the highway in the foreseeable future" (Lindquist et al. 2017). According to a IMF country Report on Montenegro from 2018 financing of the next phases of the highway would pose a huge risk for the country's' debt sustainability (Petri et al. 2018   ratings in the last decades is the decision of the two credit rating agencies to change the credit rating outlook to "stable" in the last two years or in Moody's case even to a "positive" outlook. Serbia on the other hand started worse off than Montenegro when it comes to its credit rating. In 2008, S&P and Fitch both rated the Serbian credit risk at BB-, two levels worse than S&P's credit rating for Montenegro in the same year 4 (see figure 17). Due to the growing debt levels after the international financial crisis Serbia's debt levels slightly worsened until 2014 (see figure 18). But as explained earlier, Serbia managed to control its debt and debt has been shrinking since 2016 and is expected to continue to do so in the coming years ( figure 15). As a result, since 2016 ratings of all three major credit rating agencies started to increase, reducing the risk premium Serbia has to pay when borrowing capital. In contradiction to 2008, today all agencies rate Serbia's credit rating higher than Montenegro's. Moody's ranks Serbia's credit risk at "Ba3", one level higher than Montenegro's and describes it as a financial obligation with some speculative elements and substantial credit risk (Moody's Investors Service 2019). S&P and Fitch rank Serbia even better with a rating of "BB", two levels better than the S&P rating for Montenegro meaning it is "less vulnerable to nonpayment than other speculative issues" (Standard & Poor's 2019). For both countries there is a distinguishable correlation between government debt and the credit rating of the country which was just described in the previous paragraphs and can be easily comprehended by analyzing figure 17 and 20. Montenegro's credit rating is still worsening as a result of growing government debt while Serbia's credit ranking is getting better due to decreasing government debt in the last years. Two developments that will most likely continue in the future when analyzing the expected debt developments of the two countries in the previous chapters. Serbia appears to be on a stable path and should be able to avoid suffering from severe debt-related negative implications. In Montenegro the high government debt that was caused by the extremely high BRI-investment in relation to the country's' GDP and the subsequently increasing capital costs leaves the country worse off in comparison to its Eastern neighbor. In addition to that, figure 19 allows one to observe that not only the total government debt of Montenegro is growing but especially the relative debt to China is increasing significantly.

Summary and Conclusions
During the current political atmosphere in Europe with rising nationalism and the fact that for the first time in the EU's history a country plans to leave the union, Montenegro and Serbia still face lots of challenges before they will be able to become EU member states. Until then it is likely that they will continue to look for fast and, at least on the first look, uncomplicated and unproblematic financing methods. The low bureaucratic hurdles and the fast implementation of Chinese-backed infrastructure projects will continue to be a lucrative alternative to the funds provided by the EU. That these advantageous parameters are also caused by the bypassing of EU regulations, as well as national laws on tendering, procurement, safety or labor laws are partially circumvented. The 16+1 format could be a good way to coordinate these investment flows across European borders. But it also poses challenges to the cohesion of the EU as a whole through the growing influence of China through its financing activities and a wide range of other "soft power" activities in the East and Southeast European countries involved in the format.
Since most of the work on the construction sites is done by Chinese workers the immediate effects on local unemployment rates in Montenegro and Serbia will be relatively small.
Additionally, many of the goods used to construct the projects are imported from China and exempt from local VAT, resulting in short-term economic spillovers that will be small as well.
Nevertheless, the medium-and long-term effects caused by the BRI projects in the two countries will be more significant. The projects have the potential to increase productivity and stimulate economic growth. Functioning as a "gateway to Europe" the two countries and the Southeast European region as a whole could have the opportunity to leave its rather peripherical position in Europe behind and evolve to a transit hub for Asian trade to Europe and vice versa. Especially the projects in Serbia seem economically viable and will most likely play an important role in Serbia's future development. However, it is crucial that the projects are fully implemented since some of them rely on their interconnectivity to other infrastructure projects in neighboring countries. The high speed railway from Piraeus to Budapest is on a promising path to achieve this goal although there are still underdeveloped parts of the route, Serbia with a high total FDI inflow from China in comparison to its Southeast European neighbors but a relatively low BRI investment volume in comparison to its GDP seems to be able to mostly benefit from the initiative. While the country is profiting from Chinese infrastructure know-how, overcapacities and loans with low interest rates and long grace periods it is able to cope with the debt in a relatively unproblematic manner. Decreasing government debt levels confirm this claim that is supported by many international institutions reports on the country's finances. Nevertheless, smaller countries like Montenegro seem to be increasingly endangered by growing government debt. While on the first look the BRI appears to be an extremely good opportunity for many small countries with limited access to financial funds to further stimulate their economic growth and development one must not forget that there are also substantial uncertainties connected to these loans and every BRI must consider very carefully whether it is economically viable to undertake such an investment. The example of Hambantota port in Sri Lanka and also the debt developments in Montenegro show that the easily accessible funds can also pose a huge risk. The future will show whether Montenegro will be able to consolidate their fiscal policy in a time of an apparent slowdown in global growth. As suggested by the IMF it is crucial to refrain from implementing the second and third phase of the highway to guarantee the financial stability of the country. Only if a more sustainable financing measure is identified and the cross-border connection and coordination are further strengthened the continued development of the Bar Boljare highway would be sustainable.
China is facing a different economic environment with slowing economic growth and the ongoing trade war with the United States. Although that could make Chinese policy makers focus on stimulating domestic economic growth, so far, no clear signs could have been observed that the BRI would lose its importance as China's main international strategy. The BRI is most likely to be continued in its current form, if not even extended. Undebatable, the gains for the world economy will be significant in terms of trade growth and infrastructure development. Even countries that do not officially participate in the BRI will be able to gain from the initiative. But to guarantee that the BRI is mutual beneficial and in the interest of everyone in the world community it is crucial to avoid that small and debt-prone countries suffer from dramatically increasing government debt and the severe consequences implied.

Affidavit
I declare that I wrote this thesis independently and on my own. I clearly marked any language or ideas borrowed from other sources as not my own and documented their sources. The thesis does not contain any work that I have handed in or have had graded as a Prüfungsleistung earlier on.
I am aware that any failure to do so constitutes plagiarism. Plagiarism is the presentation of another person's thoughts or words as if they were my own-even if I summarize, paraphrase, condense, cut, rearrange, or otherwise alter them. I am aware of the consequences and sanctions plagiarism entails. Among others, consequences may include nullification of the thesis, exclusion from the BA program without a degree, and legal consequences for lying under oath. These consequences also apply retrospectively, i.e. if plagiarism is discovered after the thesis has been accepted and graded.