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Why are some nations more interested in following China’s global economic leadership than others?

UC San Diego's Center for Commerce and Diplomacy (CCD) Associate Director J. Lawrence Broz and co-authors address this question

In contrast to the conventional wisdom that China attracts followers by offering economic benefits, in, Explaining Foreign Support for China’s Global Economic Leadership," Professor Broz and co-authors develop the argument that unresolved grievances with global financial instability are “pushing” nations closer to China. that leaders of nations that have experienced more financial crises, more variable capital account policies, and more volatile short-term portfolio capital outflows since 1990 are more likely to follow China’s global leadership than leaders from nations less affected by external financial instability. They also find that grievances about social unrest associated with IMF conditionality increase the likelihood that nations look to China for global economic leadership.

To evaluate these claims, Professor J. Lawrence Broz, and his coauthors Zhiwen Zhang, and Gaoyang Wang, innovate a new behavioral measure of foreign support for China’s global economic leadership. Their measure focuses on foreign leader attendance and participation in the Belt and Road Forum for International Cooperation, held in Beijing on 14–15 May 2017. The 2017 summit was attended by leaders of countries with different political institutions, suggesting that nations following China’s global economic leadership are a heterogenous group. Which factors bolster support for China?

Broz et al. assume that head-of-state attendance at the summit sent a stronger signal of support for China’s leadership than cabinet minister participation. Twenty-nine heads of state, fifty-six cabinet ministers, and six lower-level officials attended. On the contrary, nonattendance, or attendance by a low-level official, indicated ambivalence or opposition to China’s global leadership. Professor Broz and co-authors use these measures to determine economic characteristics of countries that support China’s leadership.

Characteristics of countries supporting China’s leadership:

  • More frequent financial crises

Broz et. al. show that leaders of nations that suffered more financial crises since 1990 were more likely to attend the summit, consistent with their argument that leaders from crisis-prone nations are more likely to support China’s global economic leadership. They argue that grievances about international finance stem from the series of financial crises that have occurred under the US-led order. Political leaders pay the price for presiding over a financial crisis, especially since nations that experience such crises suffer longer and deeper recessions and recover slower than nations that don’t. The high political cost of financial crises incentivizes leaders to be dissatisfied with the current international order. Thus, China’s leadership may be attractive in this respect because regulating capital flows has been a hallmark of China’s policy for decades. China’s restrictive capital account policies help its planners maintain exchange-rate stability and monetary policy autonomy. China’s large economy and monetary tools serve to stabilize economies that follow China’s leadership and insulate nations from the detrimental effects of international crises.

  • Increased social unrest in response to IMF conditionality

The International Monetary Fund  (IMF) provides official emergency loans when crises prevent a nation from borrowing to fund its external deficits.  But these loans are typically accompanied by policy conditions that can lead to  social unrest. Social unrest includes labor union strikes, government crises, anti government demonstrations, and riots, which can undercut leaders’ support and threaten their political survival. Broz et al. show that the heads of nations that have experienced more IMF-related social unrest are more likely to follow China’s global leadership.

  • Less representation in global governance

The governance of the IMF (and the World Bank) is controversial because emerging-market economies feel they are not fairly represented as their share of the world economic output grows. There is a conflict between the interests of the large advanced countries that have most of the voting power, and smaller developing and emerging-market nations. Broz et al. show that leaders of nations with vote shares in the IMF that are lower than their economies’ shares of the global economy will be more likely to show interest in China’s leadership than nations without such deficits.

  • Greater infrastructure funding and trade from China

Improving infrastructure can facilitate trade expansion, speed up industrialization, attract foreign direct investment, enable more efficient supply chains, and accelerate economic growth. Beyond the development benefits of its infrastructure program, China offers greater trade and investment linkages to its partners. Broz et al. found that the impact of such “pull factors” on the probability a leader attends the summit is quite large. For example, if a nation is located along One Belt, One Road trade routes, the probability it sends a head of state to the summit increases by thirteen percentage points.

The Political Channel for these effects

Chinese infrastructure financing, trade, and investment pull more support for China’s leadership from developing countries. However, Broz et. al. also identify push factors--- financial instability, social unrest, and less representation in international institutions substantially increase countries’ support for China’s leadership. Broz et. al. suggest that these effects work through a political channel---financial instability and social unrest  have negative political consequences for country leaders, who turn to China for the prospect of higher and more stable domestic political support.