The imminent threat of corrosive capital from China

States have continued to prioritize the implementation of various mitigation measures to recover from the setbacks caused by the COVID-19 pandemic. Emerging economies, including those that are in dire need of capital, have become more reliant on foreign investments to generate jobs, support key industries, and accelerate economic growth.

By allowing the transfer of technology and capital from developed countries, foreign investments have played a critical role in ensuring long-term economic growth and development. Despite its economic benefits, however, some of these investments have become a cause for serious concern due to their nature and potential impact on private enterprise and democratic processes.

There is growing evidence that “corrosive capital,” or foreign investments emanating from authoritarian states such as China, have adverse effects on recipient countries. By undermining the rule of law and exploiting governance gaps, these investments have become a tool for authoritarian states to manipulate countries, especially those with weak transparency and accountability mechanisms, to pursue their foreign policy agenda and advance their political and economic influence.

In Southeast Asia, China has strategically used its Belt and Road Initiative (BRI) to broaden its network of economic relations and put pressure on countries, including the Philippines, to align with its policies. The BRI is a long-term infrastructure development and investment program launched in 2013 with the ambitious goal of increasing connectivity in the region and the rest of the world. The program involves bilateral exchanges with China in terms of policy coordination, financial integration, and investment flows. Despite its image of a “win-win” program, however, it has also gained much criticism from the international community due to its predatory financing, lack of transparency, and disregard of democratic values, including human rights and the rule of law.

In its entirety, the impact of Philippines’ economic relations with China from 2016 to 2019 has been at best minimal or negligible. This is based on ADRi’s October 2019 Occasional Paper entitled “Turning Point: What Philippines’ Political-Economic Shift to China Means.” In brief, the paper traced the evidential negative implications of trade relations with China, its Official Development Assistance, and the Philippine Offshore Gaming Operations (POGOs).

In particular, China has pledged funding for the implementation of the flagship infrastructure projects under the Build, Build, Build Program (BBB). Due to the supposed priority given on economic largesse by the current administration, President Rodrigo Duterte chose to set aside the country’s strategic interests over the West Philippine Sea for warmer relations with China. To this date, however, none of the Chinese-funded projects such as the New Centennial Water-Source Kaliwa Dam Project, the Chico River Pump Irrigation Project, and the Safe Philippines Project have significantly progressed. Instead of realizing development projects, China has deviously succeeded in accelerating its maritime expansion through the increased presence of coast guard vessels, declared administrative posts on reclaimed features, and extended jurisdiction beyond the West Philippine Sea.

The experience of the Philippines with corrosive capital demonstrates the capacity of authoritarian states to influence other states and alter their policies to their advantage. It also shows how such investments can be a socio-economic threat to states and fundamentally challenge democratic norms and institutions in the region.

The Stratbase ADR Institute, together with the Center for International Private Enterprise (CIPE), conducted four case studies on BRI-related and Chinese-funded projects in the Philippines. Under the BBB program, the implementation of the Chico River Pump Irrigation Project and the New Centennial Water Source-Kaliwa Dam Project faced several issues including the lack of strict compliance on the consultation process, lack of transparency on contractor selection and contract terms, and the absence of an environmental impact study. These projects have been heavily scrutinized for their preferential treatment to China at the cost of feasible and sustainable development.

For the other studies, security risks were heavily emphasized given the nature of the projects and how these may be utilized by China to their advantage. The entry of China-backed DITO Telecommunity was a welcome development in the telecommunications sector given that the Philippines only had two operators. However, with data sensitivity and information security risks, it has also created a collateral issue as it potentially compromises national security interests. Similar to this development, the Safe Philippines Project, a joint project with the Chinese government, also raised concerns about data privacy and cybersecurity threats. Given China and its surveillance approach to public order and security management, these projects are vulnerable to hidden gateways for monitoring and espionage by another state.

Corrosive capital thrives in countries with fragile democratic institutions. In this context, there is a crucial need for the Philippine government to closely look at these investments and make sure that transparency and accountability mechanisms are in place in order to harness their benefits and neutralize their risks. The private sector and civil society organizations must also get involved to ensure that the government is properly implementing policies and measures that safeguard the country from the imminent threat of corrosive capital.

Through a whole-of-society approach, the Philippines can put these corrosive influence efforts under the spotlight and effectively manage and utilize foreign investments for economic growth without the fear of being manipulated and without risking any of its strategic interests.

Victor Andres “Dindo” C. Manhit is the President of the Stratbase ADR Institute.