The Emperor’s New Road: China and the Project of the Century

by Jonathan E. Hillman

  “Look East”

  No one has played the game longer than Mahathir, whose first term as Malaysia’s prime minster spanned twenty-two years. A doctor by training, he is an infamously blunt speaker whose anti-Western and anti-Semitic remarks have generated a mountain of controversy.12 To the world’s surprise, in May 2018, he was back in the job at the age of ninety-two, riding a wave of public anger to a surprise victory. On the campaign trail, he made borrowing from China a major issue, warning that Malaysia was selling its sovereignty. As other opposition leaders in South and Southeast Asia watched Mahathir win, they realized he was onto something.

  Mahathir’s tactics worked so well not because he changed but because much remained the same. There was plenty in his two decades in office that prepared him for the challenge. “I have always been fascinated by the metamorphosis of bare land into housing estates, industrial estates, highways, bridges and other structures,” Mahathir writes in his memoirs.13 Indeed, he was behind Malaysia’s most iconic projects: the Penang Bridge, the KL Towers, the North-South Highway, and even a Formula One race track. Many of these grand projects were carried out under the banner of privatization and industrialization, but Mahathir believed they also had psychological benefits, putting Malaysia on par with other countries. If details of the projects were disputed, Mahathir accused critics of being against Malaysia’s development.14

  To bring about that transformation, Mahathir embraced Japan, which was the global economy’s rising star. From the ashes of World War II, Japan regained its industrial capacity and was so successful by the 1980s that some observers predicted it would overtake the United States. Two decades earlier, Mahathir’s first visit to Tokyo shaped his thinking about what Malaysia might achieve. He and his wife, Siti Hasmah, stood outside the Tokyo train station and watched the trains arrive and depart. “It was an endless stream and it was really quite breathtaking for I had never seen anything like it,” Mahathir recalled. “That scene of the Tokyo Station in 1961 implanted itself in my mind, never to be forgotten. For Malaya to have a similarly impressive railway was a dream.”15

  In 1981, six months after taking office, Mahathir launched the “Look East” policy. He viewed Japan as a source of inspiration and, smartly, as a source of investment. The policy included sending Malaysians to study and train in Japan and Korea. Mahathir explained that the goal was not to copy Japan in every way, not to become Japanese, but to borrow from the management practices, industrial policies, and work ethic that fueled Japan’s booming exports. His overtures appealed to Japanese policy makers, who were beginning to push harder at the World Bank and other Western-dominated institutions for recognition of their approach to development, in which the state played a larger and more activist role.

  Japan was emerging as a leading foreign-aid provider and would become the world’s largest donor by the end of the decade.16 Its investments were heavily focused on infrastructure in Asia, and the aggregate statistics are astounding. By the late 1980s, Japanese aid was 15–20 percent of the budget expenditures of every country in Southeast Asia.17 At one point, 60 percent of Indonesia’s loans from Japan were being used to service debt owed to Japan.18 In the early 1990s, nearly two-thirds of Japanese aid went to Asia, and in some years, roughly 40 percent of its bilateral aid went toward infrastructure.19 During the same period, the United States provided less than a sixth as much to Asia, and less than 4 percent of U.S. bilateral aid went toward infrastructure.

  Tokyo used foreign aid as a runway for Japanese firms to relocate their manufacturing capabilities. During the 1980s, overcapacity grew, and the yen strengthened, squeezing the exporting potential of Japanese firms. As Japan’s vice minister of finance said in 1991, “Japan will increasingly use its aid . . . as seed money to attract Japanese manufacturers or other industrial concerns with an attractive investment environment.”20 Japanese officials wanted to avoid the “hollowing out” they witnessed in the United States, where the departure of U.S. manufacturing to economies with lower production costs had taken a toll on American communities.21

  Maintaining control, however, required keeping a tight grip on technology. By moving production into Southeast Asia, Japanese companies risked having their knowledge and methods copied and reproduced, essentially empowering their future competitors. To protect their edge, Japanese firms in Southeast Asia often kept Japanese management in top positions. They trained local staff to operate machinery and equipment, but the more fundamental knowledge behind those processes was kept in Japan. They shared the “how” but not the “why,” as the scholars Walter Hatch and Kozo Yamamura observed.22

  As Japan pushed deeper into Southeast Asia, criticism began to mount that its foreign aid mainly benefited Japanese firms. Compared to other leading donors, Japan was giving away less through grants and relying more on tougher loan terms. Japan’s low-interest loans became more expensive for recipients in the 1980s as the yen strengthened. These loans were often “tied,” meaning they required the recipient to use Japanese firms. When Japan moved to untie more of its aid, it initially only allowed developing countries to bid against Japanese firms, protecting its companies from international competition. After the policy change, Japanese firms still won over two-thirds of all procurement.23

  Japan also had informal avenues for influencing project outcomes. Japan’s aid process required requests from recipients, for whom Japanese firms eagerly recommended projects and helped draft proposals.24 Design consultants were often Japanese and used specifications that, intentionally or not, favored Japanese firms. Bribes were sometimes chalked up as part of the cost of doing business. When President Ferdinand Marcos of the Philippines left office in 1986 and fled to Hawaii, his papers exposed a system of corruption implicating over fifty Japanese companies.25 The revelation made waves in Japan, where the Japanese parliament was dubbed the “Marcos Diet,” strengthening calls for reform that led to Japan’s first official aid charter in 1992.26

  Importantly, Japan stood to benefit even if it did not construct the projects. From the perspective of the recipient country, better infrastructure was critical but far from the only item that would benefit from foreign assistance. There were also pressing needs for education and health services, for example. This focus on infrastructure benefited Japanese contractors and, over the longer term, encouraged more Japanese firms to set up production facilities.27 Infrastructure was not merely an end but a means for developing regional supply chains that reflected Japanese interests.

  Mahathir took issue with these practices. In 1984, he asked an audience of Japanese government and corporate representatives, “Is mighty Japan earnest and sincere enough in developing her economic, political and social relationships with a developing Malaysia?” He continued, “Where you have shown enlightened self-interest, I congratulate you. But I do believe that something has to be done to improve the pattern of economic relations between our two countries. That pattern conforms in many regards to the classic pattern of economic colonialism. It is a pattern that cannot but generate tensions in the years ahead.”28 It was a potent line of attack that he would dust off and redirect toward China more than three decades later.

  Mahathir realized that technology transfer would not happen voluntarily, and he was using the bully pulpit to improve Malaysia’s bargaining position. As he told the audience in 1984, “We cannot and will not remain merely as hewers of wood and drawers of water. . . . We also have to ensure a better picture with regard to the transfer of technology, the use of local materials, equal partnership and participation with regard to consultants, sub-contractors and professionals. We must not forget manpower training and development.”29 These basic concerns about who benefits from large-scale projects are bubbling up along China’s BRI, in Southeast Asia and beyond.

  “Predatory” Economics

  Many of the criticisms leveled at China in recent years—overemphasizing infrastructure, favoring its own companies, using commercial loans that dangerously increase the debts of
smaller economies, restricting technology transfers—were made against Japan during the 1980s. In the United States, criticism of Japan’s foreign-aid practices overlapped with concerns about its trade policies. In April 1986, the U.S. Congress passed a “sense of Congress” resolution that called out “predatory” aid practices, a term that former U.S. Secretary of State Rex Tillerson, Vice President Mike Pence, and other Trump-administration officials have used to describe Chinese lending.30

  Official Japanese government plans for industrializing Asia only exacerbated these fears. In 1987, Japan’s Ministry of International Trade and Industry (MITI) released its New Asian Industries Development Plan, which envisioned turning Asian states into specialized exporters of various products. As Bernard Wysocki Jr., the Wall Street Journal’s Tokyo bureau chief, summarized the plan, “First, Japanese loans, mostly of government money, build up roads, bridges and such. Second, the Japanese government sends technical experts. Third, Japanese loans filter down to industry within the Asian country, to finance joint ventures and other business alliances. Fourth, Japan opens its doors to imports from these offshore factories.”31 It was, in short, a plan for integrating Asia around Japan.

  Like Chinese officials’ homages to the ancient Silk Road, Japanese officials used colorful metaphors to make the plan and their economic aims in the region appear innocuous. The flying geese theory, which emerged in the 1930s and regained popularity in the 1960s, was a favorite. Its supporters claimed that Japan was like the lead goose in a flying formation, breaking the wind for Asia’s less developed economies. They benefited from Japan’s advances on the leading edge of technology, the theory speculated, because Japan was shedding industries to the countries behind it. One MITI document called for Japan serving as the region’s “brains.”32 Some of this salesmanship backfired. What these images all had in common was that Japan would be in charge, at the center of things, at the top of a hierarchy.

  Memories of the decades leading to World War II still lingered, stoking suspicion about Japan’s ultimate aims. To some observers, Japan’s aims sounded like a new incarnation of the Greater East Asia Co-Prosperity Sphere, a concept that Japanese imperialists used to justify military action during the 1930s.33 “What Japan was unable to do with military force 50 years ago, it is achieving today through its money, diplomacy and technical skill,” Wysocki suggested.34 “Government officials and business executives all over the region fear that, before too long, their economies will be smothered in Japan’s embrace,” Hatch and Yamamura warned in 1996.35

  In retrospect, fears about Japan’s aid and infrastructure activities were overblown. For all the fanfare the New AID Plan received, it mainly reflected the view of a single Japanese government agency rather than the entire Japanese government. As Robert Orr, a Japan scholar and businessman who later became the U.S. ambassador to the Asian Development Bank, wrote, “The notion that Japan has hegemonic intentions in its overseas economic aid program derives from the assumption that a consensus exists within the government and the private sector on the use of aid to this end.” In reality, he pointed out, “there exists no consensus on objectives,” and this “causes confusion over Japanese intentions among aid recipients and donors alike.”36 Rather than strategically directing the might of Japan Inc. toward specific objectives set by the state, the “new” plan reaffirmed in broad terms what many Japanese multinational corporations were already doing.

  Even if such a consensus had existed, Japan would have struggled to carry it out. In Indonesia during 1987, for example, Japan had twenty-six professionals overseeing more than $700 million in aid.37 Around the same time, Japan had roughly one-third as many aid professionals as the United States, which was providing less aid.38 The New AID Plan, and the metaphors used to illustrate Japan’s activities more broadly, made Japanese actions appear more coordinated in theory than they were on the ground. The Japanese government was not an all-powerful puppet master but several competing participants and, more often than acknowledged, an observer.

  Of course, there are major differences between Japan’s experience in Southeast Asia during the 1980s and China’s BRI.39 Japan was more developed and richer in per capita terms. Japan is a democracy, most obviously, while China is not. Chinese contractors are more insulated from public pressure, able to endure corruption scandals abroad. Japan was, and remains, an ally of the United States. As early as 1980, U.S. and Japanese officials agreed to cooperate on aid projects.40 Even while Japan was being criticized for “predatory” economic practices, it had much-closer diplomatic relations with the United States.

  Yet during the 1980s, supporting China’s rise was one issue the United States and Japan could agree on. Viewing China as a bulwark against the Soviet Union, U.S. policy makers authorized the sale of military equipment to China. They also encouraged Japan to increase its foreign aid to China. Eager to access China’s large and growing market, Japan was happy to oblige. Japanese aid to China began in 1979, driven in part by a desire to encourage economic reforms announced by Deng Xiaoping, and climbed quickly. The floodgates had been opened, and by 1983, China was Japan’s top aid recipient.

  In many ways, Japan Inc. helped create China Inc. During the 1980s and 1990s, Japan provided roughly $24 billion in aid to China, much of which was used for infrastructure projects. A Japanese-government survey in 1998 found that a third of China’s total electrified railway network was constructed using Japanese loans.41 In 2000, more than 60 percent of all China’s bilateral aid was from Japan.42 As China’s defense budget grew, enthusiasm began to wane among Japanese officials, who also complained that Chinese officials were not adequately publicizing Japan’s generosity within China.

  China’s smaller neighbors were nervous much earlier. When Mahathir met with U.S. Secretary of State George Shultz in 1984, he warned about the threat that a stronger China would present. “A prosperous China, a more economically advanced China, would be equally a militarily strong China, which could then revert to the policies of hegemony, which from a historical perspective in this part of the world has always been found to be a serious concern,” Mahathir’s spokesman said after the meeting, summarizing his message to Shultz.43 After returning to office in 2018, Mahathir downplayed the threat. “I have never felt any fear of China . . . they never conquered us,” he said.44

  More than any other country, Japan shaped China’s view of foreign-aid practices. Many of Japan’s early infrastructure deals in China were repaid with oil, a model that China was subsequently criticized for using in developing countries. “China saw all of these tactics as beneficial for China’s development,” as Deborah Brautigam, an expert on Chinese aid, explains. “Japan and the West could use their modern technologies to exploit natural resources that Chinese technology could not yet unlock. China could pay for this investment later, with the resources that were uncovered. The subsidies and aid used by the West and Japan to wrap their naked hunger for China’s markets meant that China was getting a discount on finance the country needed for its modernization.”45

  Chinese officials closely studied Japan’s practices. There was genuine interest within China to understand Japan’s economic practices in general, of which foreign aid was a distinct feature. The official history of Japan’s MITI was translated faster in China than anywhere else.46 In addition to providing loans for large projects, Japan also provided technical assistance, training thousands of Chinese officials. The Japan International Cooperation Agency had accepted more than fifteen thousand Chinese trainees by 2004. Training Chinese administrators made it more likely that future officials would favor Japanese companies by adopting processes and standards set in Tokyo.

  This self-conscious modeling extended to the highest levels. When China’s Vice Premier Zhu Rongji visited Japan in 1994, he made it a point to praise Japan’s economic policies and success in gradually opening up. In Tokyo, Zhu told Japan’s Foreign Minister Tsutomu Hata that with growing Sino-Japanese economic relations, “mutual dependency will inc
rease and that is why we need more investment and technology transfer from Japan.”47 Later that year, China announced the creation of its own Export-Import Bank, the China Development Bank, and an agricultural bank, all based on Japan’s experience. Within a decade, China would become the world’s largest export creditor.48

  The Pan-Asian Dream

  In 1995, Mahathir revived a plan for a “pan-Asian” railway network. Versions of the idea have existed since the early 1900s, when British and French colonialists built some of the region’s first tracks and began drafting plans for more extensive networks.49 The concept resurfaced in an even more ambitious form in 1960, when a regional planning body at the United Nations proposed highway and railway networks connecting the region. The UN “trans-Asian” railway, if completed, would entail roughly 118,000 kilometers of railway, nearly enough to circle the Earth three times.

  But Southeast Asia has been the gap in these sweeping proposals. As of 2017, ASEAN nations were responsible for nearly 40 percent of the trans-Asian railway’s missing links.50 When technical consultants for the UN studied the region’s infrastructure in the 1990s, they noted that narrow, one-meter track gauge was often accompanied by light track, small trains, and slow speeds.51 That made the system poorly equipped for handling standard-sized containers and larger volumes of cargo. Although one-meter gauge is common throughout mainland Southeast Asia, China and Indonesia use different gauges, posing challenges for transshipments by land and sea.