Latin America playing a risky game by welcoming in the Chinese dragon
Op-ed by Kevin Gallagher
30 May 2013
The Chinese president, Xi Jinping, travels to the US and Latin America
this week, for the first time since he took office in March. What a
difference a decade makes. Ten years ago, there would hardly have been
any fanfare about a Chinese visit to the region. Now, for Brazil, Chile
and others, China is the most important trade and investment partner.
China-Latin America trade surpassed $250bn (ï¿½165bn) last year.
Although China's impact in Africa receives the most attention, China
trades just as much in Latin America as in Africa, and has more
investments in the region. Chinese finance in Latin America ï¿½ chiefly
from the China Development Bank and the Export-Import Bank of China ï¿½ is
staggeringly large and growing. In a recently updated report, colleagues
and I estimate that, since 2005, China has provided loan commitments of
more than $86bn to Latin American countries. That is more than the World
Bank or the Inter-American Development Bank have provided to the region
during the same period.
China's presence is a great opportunity for Latin America, but it brings
new risks. If the region can seize the new opportunities that come with
Chinese finance, countries could come closer to their development goals,
and pose a real challenge to the way western-backed development banks do
business. However, if Latin American nations don't channel this new
trade and investment toward long-term growth and sustainability, the
risks may take away many of the rewards.
First, the positive side. Chinese trade and investment is partly a
blessing for Latin America because it diversifies the sources of finance
ï¿½ finance that for too long has relied on the west. The US and European
economies have been anaemic since 2008, and trade with China has tugged
Latin American growth rates to impressive levels. Every 1% increase in
Chinese growth is correlated with a 1.2% increase in Latin American growth.
Chinese finance is more in tune with what Latin American nations want,
rather than with what western development experts say they "need".
Whereas the US and international financial institutions (IFIs) such as
the World Bank and IMF tend to finance in line with the latest
development fads such as trade liberalisation and micro-anti-poverty
programmes, Chinese loans tend to go into energy and infrastructure
projects in a region that has an annual infrastructure gap of $260bn.
Neither do Chinese loans come with the harsh strings attached to IFI
finance. The IFIs are notorious for their "conditionalities" that make
borrowers sign up to austerity and structural adjustment programmes that
have had questionable outcomes on growth and equality in the region.
But there are risks. While the Chinese do not attach policy conditions
to their loans, they have required that borrowers contract Chinese
firms, buy Chinese equipment, and sometimes sign oil sale agreements
that require nations to send oil to China in exchange for the loans
instead of local currency.
Chinese investment accentuates the deindustrialisation of Latin America.
Large scale, capital intensive commodities production is not very
employment-intensive, nor does it link well with other sectors of an
economy. Dependence on commodities can cause a "resource curse" where
the exchange rate appreciates such that exporters of manufacturing and
services industries can't compete in world markets ï¿½ and thus contribute
to deindustrialisation and economic vulnerability.
Producing natural resource-based commodities also brings major
environmental risk. Many of China's iron, soy and copper projects are
found in Latin America's most environmentally sensitive areas. In areas
such as the Amazon and the Andean highlands, conflict over natural
resources, property rights and sustainable livelihoods have been rife
In our report, we find that Chinese banks actually operate under a set
of environmental guidelines that surpass those of their western
counterparts when at China's stage of development. Nevertheless, those
guidelines are not on par with 21st century standards for development
banking ï¿½ exist at a time when environmental concerns are at an all-time
With every opportunity comes a challenge. Latin Americans have access to
a new source of finance that gives them more leeway to meet their own
development goals. If Latin America doesn't channel some of the finance
to support macroeconomic stability, economic diversification, equality
and environmental protection, this new source of finance could bring
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