Wednesday, July 10, 2013

China's development banks need to clean up their act

China's development banks need to clean up their act
By Kevin Gallagher
The Guardian, Poverty Matters Blog, July 9, 2013

Chinese cash is a welcome option for developing countries from Burma to
Gabon, but projects must respect environmental and social concerns

China is redefining the global development agenda. While the west
preaches trade liberalisation and financial deregulation, China
orchestrates massive infrastructure and industrial policies under
regulated trade and financial markets. China transformed its economy and
brought more than 600 million people out of poverty. Western policies
led to financial crises, slow growth and relatively less poverty
alleviation across the globe.

China is now exporting its model across the world. The China Development
Bank (CDB) and the Export-Import Bank of China (EIBC) now provide more
financing to developing countries than the World Bank does. What is
more, China's finance doesn't come with the harsh conditions – such as
trade liberalisation and fiscal austerity – that western-backed finance
has. China's development banks are not only doing good across the world,
they are helping China's bottom line as they make a strong profit and
often provide opportunities for Chinese firms.

However, China's global stride may be jeopardised unless it begins to
incorporate environmental and social safeguards into its overseas
operations. In a policy memorandum (pdf) for the Paulson Institute, I
note how there is a growing backlash against China's development banks
on these grounds. By remedying these concerns China can become the
global leader in development finance.

There are a growing number of cases where Chinese financial institutions
may be losing ground over social and environmental concerns. The Belinga
iron ore deposit in Gabon was contracted in 2007 between the government
in Libreville and the China Machinery Energy Corporation, with financing
from EIBC. The project sparked significant local protest over its
environmental impact, and, as a result, has been perpetually
renegotiated and delayed, and may ultimately be denied.

Another example is CDB's multibillion-dollar China-Burma oil and gas
pipeline projects, which have received similar local scrutiny. The
"Shwe" gas project is co-ordinated by China National Petroleum
Corporation, which has contracted some operations to Sinohydro. Local
civil society organisations have mounted campaigns against land
confiscation with limited compensation, loss of livelihood, the role of
Burmese security forces in protecting the project, and environmental
degradation: deforestation, river dredging and chemical pollution.

A third example is the Patuca hydroelectric project in Honduras,
supported by EIBC and operated by Sinohydro. Approved by the Honduran
government in 2011, one of the projects is said to entail flooding 42km
of rainforest slated to be part of Patuca national park and the Tawahka
Asangni biosphere reserve. The project was denounced by local civil
society organisations, which cited the shaky foundations of the
project's environmental impact assessment. NGOs, including International
Rivers and The Nature Conservancy, have also sought to re-evaluate the
project. Such campaigns, uniting locally affected communities with
globally recognised NGOs that have access to media worldwide, have
slowed projects and tainted investor image.

Environment-related political risk can severely affect the bottom line
of the major Chinese development banks to the extent that local
scepticism and protests result in delays or even loss of projects. Doing
the right thing on the environment and human rights would help maintain
China's market access and help mitigate risks to China's development banks.

Adopting established international norms may help China's banks to
secure markets in more developed countries. Chinese banks clearly seek
to further penetrate markets such as the US and Europe, where an even
higher level of environmental and social standards exists. Establishing
a track record of good practice in emerging markets and developing
countries could help Chinese banks assimilate, adapt and ultimately
incorporate such practices into their daily operations, an experience
that could prove essential as they also seek to navigate markets in
Organisation for Economic Co-operation and Development countries.

For decades, developing countries have pined for a development bank that
provides finance for inclusive growth and sustainable development –
without draconian conditions. If China's development banks can add
substantial social and environmental safeguards, they can become the
beacon of 21st century development finance.

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