The Credit-Constraint Paradox of the Belt and Road Initiative: Debt, Institutions, and Structural Change

Abstract

This paper examines the dual effects of infrastructure financing under the Belt and Road Initiative (BRI) and develops the concept of a “credit-constraint paradox.” While BRI lending can relax sovereign credit constraints and accelerate infrastructure investment in the short run, it may tighten constraints over time if it fails to generate sustained productivity gains and foreign-exchange earnings. We identified three mechanisms underlying this paradox: macro-financial pressure and debt overhang, structural change and premature deindustrialization, and political economy dynamics associated with institutional weakening. Drawing on comparative case studies of Pakistan, Malaysia, and Kazakhstan, we show that outcomes depend critically on state capacity, particularly in project appraisal, contract management, and debt governance. The findings suggest that the key issue is not whether countries borrow, but how they borrow and govern investment.