Kevin Gallagher is a Professor of Global Development Policy at Boston University, where he leads the Boston University Global Development Policy Center. He is a CCICED Special Advisor and has been engaged in CCICED’s research for many years. In this interview, Gallagher shares the center’s findings on China’s key role in South–South cooperation and international development finance. He shines a light on global debt architecture reform and why it must address both short-term debt issues and the United Nations (UN) Sustainable Development Goals.
Gallagher, who leads this year’s CCICED Special Policy Study (SPS) Sustainable Development Innovation Mechanism Boosted by the Belt and Road Initiative (BRI), highlights the shift to green energy investment within the BRI. To deepen green South–South cooperation, he recommends establishing a Chinese green project pipeline facility to support energy access and low-carbon projects in developing countries.
Gallagher on the 2023 CCICED Annual General Meeting:
“The forthcoming AGM will be a wonderful celebration of our reunion in person. The gathering will allow us to renew and strengthen our relationships, laying a new foundation for further collaboration moving forward. Having worked with CCICED for over two decades, I can confidently say that it serves as a model effort that should be emulated worldwide.”
The Boston University Global Development Policy Center has a research program known as the “Global China Initiative.” What does “Global China” signify?
“Global China” is a recent phenomenon. China started to have a global presence in the early 2000s, following its tremendous economic growth. Today, China is the world’s largest trader and has become a major foreign investor in many countries, not least in the Global South.
Our center is dedicated to analyzing China’s global presence, focusing on alignment with development and climate goals. We approach “Global China” from a developing country perspective, which includes South–South cooperation.
What are your key findings regarding “Global China”?
Over nearly a decade of research, we have found that China’s overseas economic activities, including the BRI, have contributed to developing countries—closing infrastructure gaps and expanding energy access. They have increased development finance and provided more choices for emerging economies. Notably, we are increasingly seeing policy changes from both China and host countries to maximize the benefits and minimize the risks—whether they are related to finance, biodiversity, or climate change—arising from these activities.
What initiatives have China and host countries taken to mitigate risks in South–South investments?
Recently, China has demonstrated a stringent approach to due diligence in its overseas initiatives, focusing on the debt profiles of the involved nations. China has established several green banking guidelines for different sectors to promote environmentally responsible practices, and some industries, such as mining, have also issued guidelines on environmental and social outcomes. The announcement on ceasing overseas coal projects has now been incorporated into official guidelines at the banking level and the National Development and Reform Commission (NDRC).
Host countries have also taken proactive steps in risk mitigation. For instance, Peru has established a so-called “Mesa Redonda” mechanism that brings together stakeholders from the environment and finance ministries, local communities, and foreign actors for roundtable discussions to ensure comprehensive due diligence. This practice pays attention to new actors like China, which may have a limited investment history in the country.
In addition, both host nations and China are increasingly co-financing projects. Our research indicates that joint projects—when China collaborates with another nation or development bank—are typically concluded with greater efficiency and fewer social and environmental risks.
“Having worked with CCICED for over two decades, I can confidently say that it serves as a model effort that should be emulated worldwide. CCICED draws together leaders and experts in China and internationally to exchange best practices and develop innovative solutions to address environmental challenges. This approach is truly exceptional.”
You have found that dialogue and collaboration bring better results for the environment. Can you please elaborate on this?
Our collaborative research in Latin America has shown that China’s South–South activities are rooted in respect for the domestic policies of its partner countries. Chinese firms have a robust willingness to comply with host countries’ social and environmental regulations, provided that they are adequately enforced.
For example, Peru requires mining companies to participate in the Extractive Industries Transparency Initiative (EITI). Several Chinese firms in Peru have now become members of EITI. These instances highlight the value of engaging in dialogue, cooperation, and mutually adopting rules and standards between China and partner countries.
How do its partner countries in the Global South view China’s overseas investment activities?
Chinese investment is seen as a valuable resource, particularly for large-scale projects that are not heavily supported by traditional development finance institutions focused on sectors like health and education.
One of the key advantages of Chinese investments is that they offer host countries more agency and choice in the development finance marketplace—beyond the traditional financing institutions and multilateral development banks. With China as an additional partner, host countries now have more bargaining power, leading to better deals and increased autonomy in shaping their development projects.
Host countries appreciate China’s approach and the flexibility it provides in implementing projects based on their needs and circumstances. Additionally, Chinese loans have improved the credit ratings of some countries, granting them access to international borrowing at lower interest rates.
Developing countries face a significant financing gap to fight climate change and preserve nature. How can China work alongside developed countries to meet the challenge?
China’s stock of development finance over the past decade reached nearly USD 500 billion, similar to the World Bank’s total contribution during the same period. China has clearly demonstrated that it is willing to contribute its share.
Now, we need action on multiple fronts. We need a reform of the World Bank and a stepwise capital increase by all member states. In addition, the G20 must create a global policy framework that incentivizes the private sector to finance development projects and aligns existing policies with sustainable development goals.
How is the world grappling with the combination of development finance needs and debt issues?
We need to lower the cost of capital for developing countries like Indonesia, which have access to the international finance market but are facing higher borrowing rates due to the recent increase in interest rates in many advanced economies. Reducing the cost of capital for such countries is essential for economic transformation and climate change initiatives.
Other efforts are made to reform the global debt architecture. During the COVID-19 pandemic, the G20 initiated a Common Framework to address possible defaults. Despite the growing consensus for reform, reaching informal agreements on debt relief within international development banks, developed countries, and private banks has become increasingly cumbersome.
The complexity arises from diverse creditors. The aggregate benefits to the world economy from debt relief outweigh the costs, yet the distribution of these costs and the exposure of each creditor can be significant. Balancing these interests and finding a fair resolution is difficult.
Moving forward, what steps can countries take to reform the global debt architecture?
We need a treaty-based institution to address the governance gap between sovereign debt crises and restructuring. We can start by including all countries in debt distress, not just the poorest ones, within the G20 Common Framework and setting rules that compel all creditors to ensure a fair resolution, linking the debt restructuring process with sustainable development and climate goals.
The G20 and the United Nations must demonstrate strong leadership by taking an evidence-based approach to finding practical solutions. The cost of inaction is increasing every day. With several dozen countries in debt distress or in the risk zone, this can slow the entire world economy and disrupt global supply chains. Inadequate finance for addressing the challenges of sustainable development would set up a negative feedback loop for our efforts to fight climate change.
2023 marks the 10th anniversary of the BRI. What is your outlook for the BRI over the next decade?
Looking to the next decade, three key trends stand out. First, we might see a decrease in available overseas finance due to economic factors both in China and host countries.
Second, there will likely be a greater emphasis on green energy, digitalization, and a decline in fossil fuel financing, particularly coal. This shift will be influenced by China’s new environmental norms and interests, which align with global efforts to combat climate change.
Third, new business models and frameworks may emerge, combining debt and equity to manage high debt levels in developing countries. We could see a rise in foreign direct investment and special equity funds like the Silk Road Fund and the China-Latin American Cooperation Fund.
What role do you see for CCICED within this shift towards a green BRI?
Having worked with CCICED for over two decades, I can confidently say that it serves as a model effort that should be emulated worldwide. CCICED draws together leaders and experts in China and internationally to exchange best practices and develop innovative solutions to address environmental challenges. This approach is truly exceptional.
This year, our SPS on “Sustainable Development Innovation Mechanism Boosted by the Belt and Road Initiative (BRI)” focused on climate change. One of our key recommendations is for China to establish a green project pipeline facility. China has pledged to stop financing overseas coal projects and promote low-carbon growth, but some countries still want coal. It is crucial to recognize that they truly seek access to energy and employment opportunities. To meet this demand, China could establish a project pipeline facility to provide countries with green energy projects.
China is home to some of the world’s foremost green energy companies, innovations, and financial institutions. To increase the number of bankable green projects, we think this green project pipeline would encourage partner countries in the Global South to pursue climate-friendly projects that benefit both their economies and the environment.
The views expressed are those of the interviewee and not necessarily those of CCICED.