“China is Winning the Global South” David Goldman

Posted By on January 3rd, 2024

https://compactmag.com/article/china-is-winning-the-global-south

China’s Belt and Road Initiative has transformed the economies of the Middle Kingdom and of the Global South. By 2019, China had relocated a high proportion of labor-intensive industries like textiles, apparel, toys, sporting goods, and footwear, to the benefit of Vietnam, Indonesia, Bangladesh, and other low-cost venues. By the following year, China had lent $1.5 trillion to developing countries across the world to finance exports and investment. Today, China exports more to the Global South than to all developed markets combined.

What’s less appreciated in the West is the profound impact of what Chinese officials call the Digital Silk Road: Beijing’s effort to penetrate the Global South’s digital ecosystems, especially via artificial intelligence, thus reshaping entire regional political economies to its preferences.

In 2015, as an investment banker working for a Hong Kong boutique, I arranged a tour of the Chinese tech conglomerate Huawei’s Shenzhen headquarters, with its sprawling exhibit hall, for the Mexican ambassador to Beijing. At the end, we sat in a small amphitheater to hear a Huawei employee lecture the Mexicans on how broadband could transform their economy. It was a well-researched pitch, and afterward, I learned that the firm has developed detailed, customized digital plans for 100 countries.

The combination of mobile broadband and AI portends an economic upheaval in parts of the Global South, starting in developing Asia. AI is a poor substitute for the higher functions of the human brain, but it works wonders in relieving drudgery for some of the world’s poorest people.

Three-fifths of global employment is informal, outside the margins of the world market, insecure, excluded from government services, and miserably poor. A cheap smartphone might cost 30 percent of the monthly income of the world’s 2.5 billion poorest people, but it connects them to the world economy. Impoverished people trapped in subsistence agriculture and the barter economy become entrepreneurs. In a recent study for American Affairs, I used World Bank data to show that once internet penetration reaches a threshold of 60 percent, business formation in the Global South jumps dramatically.

Western geopolitical reckoning has generally ignored the nations of the Global South. They comprise 85 percent of the world’s population and 39 percent of GDP, but, without China, that proportion falls to just 18 percent of world GDP. Corrupt elites steal national wealth, speculate against national currencies, and treat their poor like beasts of burden. For many American and Western strategists, these realities have turned them off from even bothering with the developing world.

But all this is changing fast. Real per-capita income in Southeast Asia, China’s periphery, has doubled since 2010, according to the World Bank, and the region has the world’s highest economic growth rate. Asia’s growth draws on an explosion of grassroots entrepreneurship. The region has the world’s fastest rate of business formation, rising to 7 business registrations per 1,000 people in 2021, up from only 3 registrations in 2010.

The transformation is the fruit of what I call “Sino-forming.” China does many things badly, but it did one big thing well: It took a country of subsistence farmers with a per-capita GDP of $184 in 1979 and turned it into a country of industrial workers with a per-capita GDP of $12,700 in 2021. In terms of real purchasing power, that’s a 10-fold increase, the World Bank calculates.

And China is poised to deliver similar outcomes across the Global South, thanks to new digital technologies. More than 65 percent of the world’s population now has internet access, up from 36 percent in 2013. In low- and middle-income countries, the proportion is now 60 percent, compared to 27 percent in 2013. China’s market share in digital broadband in developing countries is dominant, although precise figures aren’t easily available; Huawei, China’s national champion, reportedly built 70 percent of Africa’s mobile broadband, according to Foreign Policy.

China has the manufacturing muscle to wire the developing world. In August, I visited one of Huawei’s manufacturing plants for 5G base stations. Almost fully automated, it requires 45 workers on three assembly lines to turn out 1,800 base stations per day. Its yearly output is about a quarter of the world’s installed 5G capacity. Excluded from the Anglophone market and restricted in most of Western Europe due to pressure from Washington over spying concerns, Chinese infrastructure providers Huawei and ZTE together control 45 percent of the world market for telecom equipment, and most of the market in the Global South.

One gauge of the pace of transformation is digital payments. In 2021, nearly 60 percent of the world’s population used digital payments, according to the World Bank, up from 35 percent in 2015. Only half of the people of the Global South have bank accounts, but digital payments on cheap smartphones give marginalized people access to the financial system. In several African countries, Chinese infotech companies have partnered with local banks to build AI systems that track payment records and geolocation to provide microcredits to small merchants.

Digital payments allow the collection of sales taxes and help stabilize government finances. They also help suppress corruption. A 2021 study observed,

In developing countries, businesses and individuals make transactions worth billions every day using physical cash. Such cash payments are often insecure and difficult to trace. These attributes of cash payments stimulate illegal activities and foster the growth of shadow economies. With the advent of financial technologies, including mobile money, digital payment options offer an opportunity to control corrupt behaviors and activities.

Food spoilage is one of the biggest problems in developing economies. That’s a natural application for AI, a Huawei executive told me. A food processor in Bangladesh packages dried peppers, and a single rotten pepper will ruin the bagful. Huawei introduced a high-speed camera that photographs the conveyor belt of dried peppers thousands of times per minute, uploads the data to the cloud, and applies an AI algorithm that identifies the bad peppers on the line. The company’s spoilage rate has dropped to near zero, down from 30 percent.

“China’s approval ranges from 80 percent in Nigeria to … 57 percent in Mexico.”
It isn’t surprising that perceptions of China in the Global South are largely—often overwhelmingly—positive, in sharp contrast to strongly negative views in the developed world. YouGov, Pew, and other polling suggests that China’s approval ranges from 80 percent in Nigeria to 66 percent in Thailand and Egypt to 57 percent in Mexico.
Western commentators often dismiss China’s economic expansion into the Global South as “debt-trap diplomacy,” warning that Beijing is using its economic heft to bolster authoritarian regimes. But the facts are more complicated. The Belt and Road Initiative has many failures in its $1.5 trillion portfolio, but it also has many successes. There is no evidence that China’s trade and lending favor dictatorships over democracies. China’s exports to democratic India and Brazil have doubled since 2018, in line with its overall exports to the Global South. China is indifferent, even incurious about the way we non-Chinese barbarians govern ourselves.
Western complaints have had a scant effect on China’s Long March into the Global South. If anything, Western policy has accelerated it. Former President Donald Trump’s tariffs against Chinese exports to the United States encouraged the Middle Kingdom to ship components to third countries for final assembly and resale to the United States. India, Vietnam, Mexico, and others benefitted from this triangular trade arising from US tariffs. As Bank for International Settlements economists concluded in an October 2017 study, firms from other jurisdictions have interposed themselves in the supply chains from China to the United States. The identity of the firms that have interposed themselves in this way can be gleaned from the fact that firms from the Asia-Pacific region account for a greater portion of suppliers to US customers than in December 2021, as well as accounting for a greater portion of the customers of Chinese suppliers.
A certain amount of hysteria and a great deal of hype attended China’s economic expansion into the Global South. A Pakistani commentator, Muhammad Ali Ehsan, wrote recently, “The Global North may have its grand strategy of encircling China, but one can easily notice the Chinese counter-encirclement concept in how China is deploying its Global South strategy against the imperialist North.” That is a febrile exaggeration, but it contains a kernel of truth.
Southeast Asia is the focal point of China’s foreign investment, but it is at no risk of becoming a political dependency. Its countries have long histories with China and know better. China’s currency is financing a growing portion of world trade, but only because China is lending more money to its trading partners.
True, the inconvertible Chinese currency is still less desirable as a reserve instrument than the freely convertible currencies of the West. Nonetheless, China’s economic domain is expanding from the 1.4 billion people of the People’s Republic to a tightly integrated trading bloc of perhaps twice that many, bound together by Chinese broadband technology, physical infrastructure, and AI applications geared to the needs of developing countries. The transformation of the Global South by digital technology may be the great economic event of the 21st century. The United States has ceded this to China by default. And that may turn out to be the biggest mistake we ever made.
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