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Chinese infrastructure in Latin America: A new frontier

Authors of a new book on Chinese investment in the continent predict economic prosperity with an environmental price tag 

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Chinese billionaire Wang Jing was granted authority to build a canal through Nicaragua but the project has been met with opposition. (Image: MRS Movimiento Renovador Sandinista)

Over the past decade, China has become a leading lender and builder of infrastructure projects in the developing world. With extraordinarily high savings and a slowdown in investment at home, China has reached out to invest in a diverse array of infrastructure projects from West Africa to the Amazon.

One of the major drivers of this investment is the Belt and Road Initiative (BRI). Launched in 2013 by President Xi Jinping, funding for the initiative has increased over time (it’s aiming for US$1 trillion), and its scope spans projects in over 70 nations. This investment abroad constitutes an ambitious foreign policy with deep geopolitical implications.

The spread of China-backed infrastructure has been the focus of fueling debate among experts, governments and the media. From a contentious process over the control of a strategic Sri Lankan seaport to the controversial China-Pakistan Economic Corridor (CPEC), a major BRI-sponsored partnership, China’s global role is raising difficult questions.

Infrastructure provider

At the heart of the matter is China’s role as a main provider of public infrastructure in many Latin American and Caribbean (LAC) countries. Earlier in 2018, China invited LAC to join the BRI. With more than 100 Chinese-backed civil engineering projects already in design or construction, totalling US$60 billion, the region seems to have found in China a supplier that can fill its long-standing gap in energy and transportation infrastructure.

Our new book, Building Development for A New Era: China’s Infrastructure Projects in Latin America and the Caribbean, analyses this phenomenon’s central trends and associated challenges. The research builds on a truly global and multidisciplinary partnership between institutions and scholars, including political scientists, economists, anthropologists, and development practitioners from Asia, Europe, Latin America and the United States. With a focus on a diverse sample of LAC countries, our book is the first to take stock of what has been happening in the field of Chinese infrastructure investment.

China’s role is expanding

Thanks to Beijing’s loans, Chinese corporations are building dams and hydroelectric power plants in the Amazon and Patagonia. They are laying thousands of kilometres of rail track to reduce freight transportation costs and connect populations in Brazil, Peru and Venezuela. China’s development banks are even financing a state-of-the-art nuclear energy plant in Argentina.

In what has become the most ambitious civil engineering project in recent decades (although one plagued with challenges and uncertainties), a Hong Kong-based billionaire has been granted the authority to build a canal through Nicaragua, connecting the Pacific and Atlantic oceans to compete against the Panama Canal, as a transcontinental trade route.

Our analysis of Chinese infrastructure investment shows that it advances the Chinese government’s interest in strengthening bilateral relationships with countries it already have high levels of trade with. It also furthers the financial interests of Chinese firms seeking to expand their overseas activities.

This level of Chinese activity would have been unthinkable just three decades ago. Different (although not mutually exclusive) phases have structured the recent history of China-LAC relations. Beginning in the 1990s, the relationship experienced rapid growth in commercial terms. With the financial crisis of 2008, China funnelled a large volume of outward foreign direct investment (OFDI) finance to LAC. Since 2013, China has become significantly involved in major infrastructure projects on the continent.

A rocky road

Due to the novelty of the ventures, investing in infrastructure in LAC poses an important learning opportunity for Chinese firms, which have not always responded adequately to local regulations and cultural concerns.

We find that most projects in LAC have faced local backlash because of environmental concerns around pollution and harm to residents' livelihoods. For example, there have been concerns about the environmental impact of Sinopec’s oil refineries in Moin, Costa Rica (the National Secretary of the Environment objected to the first evaluation of the project's emissions); and in the Yasuní National Park, Ecuador (800,000 people signed a petition before the national government to stop the works.)

In Argentina, construction of the Condor Cliff and La Barrancosa hydroelectric dams in Santa Cruz, began without an environmental impact assessment, which led the Supreme Court to halt the project. In other cases local courts have intervened, undermining the viability of projects and the economic standing of the firms.

Labour issues have also arisen, as firms have tended to hire Chinese nationals rather than local workers, especially in management and highly-skilled roles. Companies should increase the share of local-born workers, technicians and executives to plan, design, build, and manage projects.

For the host countries, concerns about the lack of transparency and surrender of sovereignty have permeated public debates. Nevertheless, the evidence we have gathered leads us to conclude that China’s lending and operations are not detrimental to the economic or political development of Latin America. The investment fills a crucial gap in infrastructure needs for the region, while establishing a new ally that will help further their economies and standing on the global stage.

Learning from mistakes

We find that if China wants to have more local success with the projects, they must embed them within local communities and increase communication and feedback with local civil society (rather than a top-down approach based on state-to-state negotiations). These firms could improve their financial forecasts to minimise divergence between estimated costs and final costs. Chinese firms should minimise the impact of obstacles typical of “latecomer” suppliers of complex capital goods: poorly developed systems of innovation; underdeveloped local supply chains; and a lack of experience in coordinating industry networks. By doing so, they can overcome the vertical integration model, characterised by a company’s control of the whole supply chain that privileges local partners and suppliers in China.

The environmental and labour concerns will most likely continue. To address these, host nations need to provide more transparency, competition and a stronger rule of law. In turn, China can improve and increase funding, planning and management in the region by partnering with institutions such as the Inter-American Development Bank and CAF (Latin America’s Development Bank). Chinese firms can do a better job at complying with labour and environmental standards.

A beneficial partnership

China is filling a vacuum as a source of much needed investment. There is no evidence that building roads, railways and ports in LAC poses a threat to regional integration or traditional international alliances with the US and Europe. Chinese firms have the opportunity to draw valuable experience by operating in LAC, a region with relatively better legal standards than other places where China operates, such as Africa.

The strategic partnerships between China and LAC are not based on ideological affinity, as continued relations with Argentina’s Mauricio Macri, Brazil’s Michel Temer and Chile’s Sebastián Piñera illustrate. These countries, and others that we examine, have not jeopardised their macroeconomic situation as a result of receiving Chinese financing and investment (we do not cover the case of Venezuela’s oil-for-loan deals in the book).

The importance of BRI cannot be underestimated. Its vast reach – linking countries across Asia, Africa, Europe, and Oceania – has momentous implications for trade, energy, transportation, and infrastructure. As we gather more systematic evidence of China’s involvement in infrastructure development in LAC, we can improve our knowledge of its broader impact throughout the region. This is important in order to avoid superficial and biased assessments that bring little value to our understanding of what has become a vital relationship.

 

A free download of Building Development for A New Era: China’s Infrastructure Projects in Latin America and the Caribbean by Enrique Dussel Peters, Arial C Armony and Shoujun Cui is available here

This is an edited version of an article published on Diálogo Chino

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