THE “Belt and Road Initiative” (BRI) is a new champion of globalisation by the Chinese government to reconstitute the ancient Silk Road into a contemporary mode in a vast area by improving the economic integration of China with Asia, Europe and Africa.
The purpose of the BRI is to enhance the prowess and expand the contacts of Chinese companies in the global economy, particularly in those countries involved in the BRI.
Hence, the inflow of foreign exchange through international activities will lead to a monetary expansion in the economy.
This will increase the official reserves of central banks, thereby allowing more credit loans in the market. As a consequence, the boom in financial activities will reinforce economic growth.
In essence, the financial services sector is able to supply financing services for projects under the BRI in order to improve regional connectivity.
For instance, the banking sector provides the mobilisation of funds and credit supply, while the insurance sector provides risk transfer and indemnification.
The Asian Infrastructure Investment Bank (AIIB), as the main financial arm for the BRI, is anticipated to shoulder the important responsibility of plugging the infrastructure gap in Asia.
Additionally, the insurance sector can provide insurance coverage and risk management consultations for global expansion and financing services for players in the BRI.
This article attempted to examine the issues of financial development in the BRI countries. Most of the countries have signed an agreement to participate in the BRI as they believe that involvement in the BRI can enhance their opportunities in the competitive global market. In promoting and achieving the BRI, financial development and globalisation will develop progressively. Various financial services have different impacts on different countries due to their diverse economic, political and industrial environments.
The theories and empirical works suggest that there are two views on the finance-growth relationship: the demand-following phenomenon and the supply-leading phenomenon.
In the demand-following argument, they depicted that when the real economy grows, there will be a demand for financial services, which will induce an expansion in the financial sector.
On the other hand, the supply-leading theory explains that financial services can promote economic development. The current momentum of studies is leaning towards the supply side argument, which emphasises the significance of the liquidity, financial diversification and risk-sharing functions provided by financial services to economic growth.
However, most of the studies neglected the important role of non-life insurance on economic growth. Non-life insurance is related to mandatory insurance schemes such as motor vehicle insurance, marine insurance, liability insurance and homeowner’s insurance, which are important for reducing risk and to channel funds in a proper system in order to support business activities in the economy.
Against this backdrop, this study included the variables of banking development and insurance development (life and non-life insurance) to proxy financial development. Furthermore, the insurance sector is believed to be equally important as the banking sector since it has the key responsibility of covering the risks involved in various stages of the projects in the BRI, from the planning to the final implementation, and finally, to the operation.
Some 50 countries were selected from among the BRI countries and the period of study was from 2010 to 2015. The data proposed that the development of banking in BRI countries was relatively high compared to the development of insurance (the mean for banking development was above 53% compared to the mean of insurance development at 0.93%).
Both banking indicators and non-life insurance development indicated a negative but insignificant effect on growth. The negative and insignificant influences of the banking indicators and non-life insurance development on economic growth could be due to delays and snags in the projects that caused the lag in the effects of their roles on the BRI.
For instance, the former Malaysian prime minister who led his Opposition alliance to victory over the ruling coalition in the May 2018 general election has called for a suspension of the East Coast Rail Link project that was first mooted several years ago as part of the BRI plan to build up rail connectivity for economic integration and strategic reasons.
Another project (in the deep-water port of Kyaukpyu in southern Myanmar), that was initiated by the BRI and was aimed at expanding trade links across the world, is also being slashed back because of concerns about the possibility of ending up in a debt trap.
Therefore, in realising that not all countries have the same government systems and cultures, China has been given a dominant position over its partners to integrate these countries by utilising financial services to fund the infrastructures more effectively.
Hence, the world has to wait and see how financial development evolves and contributes to economic growth in the coming years in the BRI countries.
Although non-life insurance showed insignificant results towards economic growth, life insurance penetration showed a significant and positive impact on economic performance.
This suggests that a well-functioning life insurance market supports economic development in the BRI countries since life insurance can facilitate the monetary flow in the long term that enhances the financial market and economic growth.
Additionally, this suggests that a prospective substitution effect between life insurance and banking exists in the BRI countries.
As a policy recommendation, the BRI participants could consider insurance services to support their projects, and policymakers may promote economic and social globalisation to spread the ideas and people where they can create a long-term flow of services to shape the modern world.
ASST PROFESSOR DR LEE HUI SHAN
Universiti Tunku Abdul Rahman
The views expressed here are entirely the writer’s own.
The SEARCH Scholar Series is a social responsibility programme jointly organised by the Southeast Asia Research Centre for Humanities (Search) and the Centre of Business and Policy Research, Tunku Abdul Rahman University College (TAR UC), and co-organised by the Association of Belt and Road Malaysia.
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