Demystifying the “Debt Trap” Scenario – The Diplomat
In the recent Diplomat article “Is ‘Chinese Debt Trap Diplomacy’ in Greenland Just on Ice? Greenland is claimed to be at “high risk” of falling into the Chinese debt trap as Beijing continues to expand its economic interests in the Arctic. In addition to the fact that the overall concept of China’s “debt trap diplomacy” is the subject of considerable debate and re-examination based on recent research, a review of the political and economic situation in Greenland, as well as the current state of Chinese investment on the island, offers evidence that Greenland is at all vulnerable to current or future predatory Chinese lending practices.
First, Greenland has a very low debt-to-GDP ratio – in fact, Greenland would have the fourth-lowest debt-to-GDP ratio in the European Union, if Greenland were a member – and healthy public finances with a subsidy from Denmark. of about 20 percent of Greenland’s GDP.
The notion of a debt trap, including with regard to China, concerns countries which struggle to access regular financing, and Greenland does not fall into this category. Greenland is today far from being vulnerable to such a scenario. Greenland’s gross debt, including both national, municipal and state-owned corporate debt, stood at 27% of GDP in May 2021, and net debt at DKK 3.7 billion ($ 563 million ), which is equivalent to 18% of GDP. For comparison, Denmark has a gross debt of 42.1% of GDP and the European Union has a total of 90.1% of GDP. Internationally, Greenland has a very low debt-to-GDP ratio.
The original article asked if an independent Greenland could reject Chinese funding and thus avoid falling into the Chinese debt trap. In answering this question, the article claimed that “a majority” of Greenland’s GDP is financed by Denmark. Yet, as detailed in the latest figures (2020), direct subsidies from Denmark amounted to 3.959 billion crowns, or 19.67% of Greenland’s total GDP at 20.123 billion crowns. It could be argued that the actual number is closer to 25-30% of GDP, also including indirect spending, based on an estimate made on the 2014 report “Til Gavn for Grønland(“For the benefit of Greenland”) from the University of Copenhagen, but it is still far from being a majority, and this distinction is essential when considering whether Greenland is vulnerable to a future trauma of external debt after independence.
Second, Greenland’s current policy should be carefully considered when assessing the possibilities for future Chinese investments. After the Greenlandic elections in April 2021, Inuit Ataqatigiit formed a coalition with Naleraq, ousting the social democratic party Siumut. After leading government coalitions since 2013, Siumut had promoted the construction of three international airports (two large and one smaller), in Ilulissat, Nuuk and Qaqortoq, with the aim of allowing direct flights to regions likely to develop tourism. and enable the export of high quality fresh fish products directly to large urban markets. Siumut and its allies voted in 2013 to allow uranium mining to increase the chances of generating greater revenue for the Greenlandic Resource Fund, which would allow Greenland to quickly become financially and subsequently politically independent.
IA favored a more cautious approach to both airports and mining, and during the election campaign the party mainly focused on the ambition to ban the rare earth element mining project and uranium at Kuannersuit near the town of Narsaq. This project was supervised by an Australian firm, in cooperation with the Chinese Shenghe Resources, but it is now on hold. In addition, the decision of the AI-led government to halt oil and gas exploration in Greenland has meant that the possibility of Chinese investments in fossil fuels has also waned. The only major mining project remaining in Greenland involving a Chinese partner is the planned zinc mine at Citronen Fjord, but its timing remains undecided, and even that project appears to be headed towards renewed interest in US investment in Greenland. China’s economic footprint in Greenland has shrunk significantly over the past two years, reducing the possibility that Beijing will have more say in Greenland’s economic affairs in the near term.
Claims that the controversy over the funding of the Chinese Communication Construction Company (CCCC) was due to the CCCC’s offer to finance the airport construction projects are misleading at best. The reality is more complicated, as the Greenlandic government has prequalified CCCC for airport projects, raising concerns in the Danes and the United States that this offer would include a pledge of funding. Yet the CCCC never made an offer of funding, nor did it state that it planned to do so. The then Danish Defense Minister, Claus Hjorth Frederiksen, even said that CCCC could build the airports without Danish interference, if the funding came from Danish and Greenlandic sources. Ultimately, CCCC decided not to make an offer in June 2019 after the Danish government offered its own financial support to the projects.
Third, the argument that climate change mitigation would be a financial burden for Greenland also needs a second examination. Climate change has two potential costs for Greenland. One of the costs involves the thawing of permafrost, which may lead to an increasing need for housing construction, but the overall cost would be funded by rent from government or municipality funded housing or would be owned by the private sector because people are building new houses on the basis of mortgages. The other cost is socio-economic. When fish stocks migrate north with increasing ocean temperatures, it becomes more difficult to make a living from inshore fishing for some areas while others benefit. This cost can be mitigated through relatively inexpensive policy measures such as re-educating the unemployed to work in tourism after the construction of new airports or through increased economic redistribution. However, increasing ocean temperatures are also bringing new species to Greenlandic waters, allowing for more extensive deep sea fishing, bringing new income to Greenland. So climate change will absolutely complicate Greenland’s economic mosaic in the years to come, but it ignores the fact that one of the outcomes will be the increased need for risky Chinese financing.
In summary, the scenario of the current Greenlandic finances leading to an independent, cash-strapped Greenland in the future does not sufficiently take into account economic realities or political interests. Almost all of the parties in favor of Greenland independence declare that political independence from Denmark requires prior financial independence. This is why the Greenlandic elections since Greenland and Denmark passed the Self-Government Act of 2009, granting Greenland self-determination, have focused on financial independence. There is no doubt that most Greenlanders vote for separatist parties, but almost all parties promote a responsible path to full autonomy by first developing strong finances. It’s also why mining at Kuannersuit has been a subject of division between historical coalition partners Siumut and IA, with Chinese company Shenghe ultimately caught in the middle.
Postulating a Chinese debt trap scenario for Greenland not only flies in the face of existing evidence, but it also fails to take into account Greenland’s commercial interests (including its current ‘open for business’ policy). , seeking a variety of different economic partners), Denmark’s continued policies to protect Greenland from perceived threats (including from Beijing) to its economic sovereignty, and the growing role of the United States, which over the years the past two years, have also sought to engage Greenland more directly, including potentially as an independent state. Given the current political (and environmental) state of the Arctic, it is important to avoid tropes and assumptions in understanding the challenges facing its people, including in the case of Greenland.