Alleviating the Thucydides' Trap through Welfare State Dependence: How the Funding Needs of the Western Welfare State Can Influence Multilateral Relations with China

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The dual threat of a US–China confrontation and the rise of populism in the West due, in part, to the gradual decay of the welfare state, paint an ominous picture for the future of the post‐war status quo of ever‐expanding prosperity. Hegemonic competition between the incumbent superpower (the USA) and the challenger (China) framed as the Thucydides' Trap and adverse demographic and financial trends are the main causes behind both crises. In this paper, we argue that amidst deteriorating demographics, the sustainability of the Western welfare state could be significantly enhanced by positioning Western institutional investments in the regions across India and South East Asia – areas with strong modernization dynamics and the world's nascent most populous middle class. Such a policy could generate long‐term higher risk‐adjusted returns for Western pension funds, especially if Western investors look for complementarities with China's Belt and Road Initiative (BRI). The proposed geographical calibration in Western institutional investments could lead to a relationship of strong reciprocal dependence between economic and social growth in the target regions, exports of Chinese construction and financial capacity, and Western welfare state viability. We call the suggested policy the ‘welfare state dependence’ hypothesis. The key objective of the hypothesis is the promotion of peaceful economic and geopolitical co‐existence in Eurasia through rational re‐alignment of the incentives of Western polities with Eurasian growth. But to make this new approach feasible, a number of BRI policy reforms that support its multilateralization are required.

Policy Implications

  • A rational re‐alignment of long‐term interests and symmetric–reciprocal benefits between China and the West which places the funding of the Western welfare state at its centre has the potential to reverse heightened tensions between China and the West thus alleviating the Thucydides Trap.
  • Strong modernization dynamics in the BRI region will create the most populous middle class in the world with bustling consumption demand. Therefore, shifting investible funds to the BRI region (particularly Indochina, Southeast Asia and the Subcontinent) means higher risk‐adjusted returns. These would alleviate demographic pressures and low investment returns for Western pension funds thus ‘buying time’ for a sustainable reform of the Western welfare state. A '1 per cent increase of returns for Western pension funds would decrease contributions by 10 per cent' providing vital fiscal space and buy political time for sustainable reform of fragile welfare systems.
  • Offering solid policies that can shift BRI's focus from regional domination to a genuine partnership between Chinese (state) and private (Western) institutional investors based on world class soft – regulatory infrastructure. This partnership could also close the funding gap and augment debt and environmental sustainability approval tests for BRI projects.
  • Upgrade and modernize the fiduciary framework of Western Institutional Investors to enable them to take long‐term bets in emerging markets. Canada's Pension Plan Investment Board (CPPIB) could serve as an example of a safe shift of institutional assets towards Eurasia.
  • Disincentivize a rollback 2.0 containment strategy and other forms of geopolitical confrontation which now extend to calls for a China–US financial war.
  • A grand investment forum in Beijing engaging with institutional investors and the world's development banks would offer a great opportunity to set networks of experts in place. This event could also provide an opportunity for China's Development bank and China's EXIM (state directed development banks) to join forces with the Asian Infrastructure and Investment Bank, eventually shifting focus from bilateral to multilateral development financing.