The Dubious Impact of Chinese Investment in Latin America
By Ian Gustafson, Research Associate at the Council on Hemispheric Affairs
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Much has been made of increased Chinese investment in Latin America, though it is still dwarfed by overall American and Spanish involvement in the region. The initiative China has shown in its efforts to develop the Americas has been admirable. However, as China’s recent foray into Nicaragua to explore constructing a vast new transoceanic canal exemplifies, Chinese projects have often been largely exploitative and unsustainable.
Chinese President Xi Jinping pledged in January 2015 that his country’s investment levels in Latin America would reach a whopping $250 billion USD within a decade.[1] Already, China is the region’s biggest creditor. Such a significant outlay of funds represents a commitment to the region that should be applauded. China’s interest in the region has been a relatively recent development. In 2005, Beijing’s lending to Latin America was just $231 million USD, but it skyrocketed to $22.1 billion USD by 2014. Even with China’s recent economic slowdown, many analysts foresee China becoming much more involved in the region in years to come.
South American countries that have struggled to acquire lending from global capital markets like the World Bank, or private capital markets, have often found a willing partner in China. China has heavily invested in countries like Venezuela, Argentina, and Ecuador, which some international institutions, private investors and the United States have spurned.[2] Some Western actors have refused to lend to these countries because of their authoritarianism or human rights violations, or more often due to concerns in capital markets about some countries’ respect for contracts or ability to repay. China’s almost indiscriminate lending in the region has at least funneled development funds to places that otherwise would be cash-strapped and stricken.
Beijing’s investments in Latin America have undoubtedly created jobs and increased growth, especially for countries that traditional institutions have refused to fund. Just last year, China doubled the amount of money it loaned to Latin American governments to $30 billion USD, more than the World Bank and the Inter-American Development Bank gave to the region combined.[3] At a time when U.S. government aid and private investment in Latin America has declined for three straight years, China has been lauded for serving as a balance against American interests in the region. However, many of China’s investments may not have had the best interests of the hosts in mind.
The IMF has consistently argued that China’s forays into Latin America have been largely geared toward short-sighted natural resource exploitation, in industries like copper or iron ore mining, and soybean cultivation.[4]Unfortunately, this has contributed to a so-called recommodification of the region’s exports as more and more attention has been lavished on the selling of unfinished products and natural resources. In the 1980s, Latin American exports were at least 52 percent natural resources, but significant inroads towards creating more diversified economies lowered this figure to 27 percent in the 1990s. Today, partially because of Chinese investments geared towards natural resource exploitation, natural resources once again make up more than half of Latin America’s export revenues.[5] Certainly the commodity boom of the mid-2000’s in which prices for raw materials like oil and metals skyrocketed played a huge role in the recommodification.
Yet this this phenomenon has also been spurred on by the underlying motives of Chinese foreign direct investment in the region. Many observers believe that the Chinese government encourages investment in Latin America as a vehicle for encouraging trade growth in the traditional Latin American model – namely, exchanging Chinese high value-added manufactures for commodities.[6] This model of trade creates trade deficits in many Latin American states.
Dangers of Reliance on Natural Resource Exports
Exporting natural resources on a grand scale is not necessarily an ideal recipe for Latin American development. A bevy of researchers have found that poorer nations rarely have the institutional capacity to ensure sustainable resource extraction, and this is often the case in Latin America.[7] Further, exporting natural resources on a large scale historically has been strongly correlated with corruption as authority figures capture rents from the sale of rights to lucrative resource deposits.[8] Development scholars have compiled mounds of empirical evidence showing that large endowments of non-renewable natural resources correlate with worse development outcomes, an idea known as the resource curse or the paradox of plenty.
One of the seminal theories of international development is Walter Rostow’s stages of growth model. Rostow theorizes that states must invest in technology, social overhead capital, and education as well as subsidize modern industries to advance in his hierarchical model of state development.[9] Moving away from traditional low-productivity methods and simple resource exports is a first step in attaining growth for Rostow. China’s influence in Latin America has served to entrench the low-productivity methods and resource extractions, and has hampered development of modern industries that were beginning to emerge in the 1990s. Rostow would decry Latin America’s failure to focus its economic efforts on building modern industry and technology development.
There is also concern that China’s investments in Latin America have a sinister motive, such as locking up the rich natural resource deposits there and subsequently raising prices.[10] Regardless of whether this is actually the case or not, China’s resource extraction is unsustainable and diverts Latin American resources that could be put to better use elsewhere.
In China’s defense, its government and companies invested $49.9 billion USD in 2014 in infrastructure projects, and in the past has made similar commitments to building transportation and power networks.[11] Inadequate infrastructure has been a limiting factor for development in the region, but China’s investments have often been designed merely to facilitate its own access to a particular natural resource deposit rather than the public good.[12]
Nicaraguan Canal Venture
A perfect example of the ambiguous effects of ostensibly benevolent Chinese investments in Latin America is the recent exploration of a transoceanic canal in Nicaragua. The Hong Kong development company HKND Group has plans to build a 170-mile long canal through the heart of Nicaragua that could cost as much as $70 billion USD.[13] Despite some lingering questions about whether the area even has enough water to make a canal project viable, construction is expected to start in August of this year on the Pacific coast.[14]
With the Panama Canal so close nearby, this new canal might seem redundant and pointless. However, HKND Group argues that the Nicaraguan canal will have a comparative advantage because it will have the capacity to accommodate a new, larger generation of cargo ships. This is of rather dubious logic considering The Wall Street Journal found that international shipping patterns are such that this new type of ship would only rarely have to pass through Central America, and Panama could build wider locks in its existing canal for a fraction of the cost.[15] A Panama Canal expansion is in the works already that will increase the maximum size of ships allowed in the canal and add a new lane for additional traffic. In fact, the Panama Canal will still provide a faster transoceanic transit, and no current American and few international ports can even handle ships of the size that the Nicaragua canal will cater to.[16]
The canal project would provide Nicaragua with a sizeable amount of job opportunities. Up to 50 percent of the 50,000-man crew needed to build the canal over several years would be Nicaraguan, according to HKND’s plans, but almost all of the skilled jobs would go to Chinese and other foreigners.[17] The canal would require over 200,000 workers to operate, which represents 10 percent of the Nicaraguan workforce.[18]
As for benefits that would accrue to Nicaragua as a whole, Chinese interests would control the canal for the first 10 years of its operation. Each decade after that, Nicaragua would receive a 10 percent increase in ownership of the canal until the 100-year land concession expires, at which point a select body of well-placed Nicaraguans would fully assume control.[19] This part of the plan bodes well for Nicaragua – it will build local expertise in running a project like a transoceanic canal.
On paper, the Nicaraguan canal in the long term seems to be an excellent job creator and revenue source for the home country. However, as with the overarching pattern of Chinese development initiatives in the region, there are downsides for Nicaragua that make the overall effect of the project ambiguous at best. For example, Nicaraguans complain that the project is one big state secret; transparency on the project’s proceedings has certainly been lacking.[20] Former Nicaraguan Vice President Sergio Ramirez circulated a memo that accused the project of being a white elephant and in violation of national sovereignty.[21]
Already, over 35 public marches have been staged in protest of the canal, because as many as 100,000 Nicaraguans would have to be relocated, and suspicions abound that the 50,000-strong labor force would be largely Chinese.[22] Critics of the deal know that Wang Jing, the head of HKND and the driving force behind the project, has very close ties to the Chinese political system and has already promised that Chinese firms will lead the construction.[23]
Geopolitical and Ecological Concerns
There remains the question of whether or not this canal will even have a comparative advantage over its Panamanian counterpart.“[This is] a giant canal [project] wide enough to handle new ultra-large container ships that won’t be able to fit through the Panama Canal even after a big expansion scheduled to be completed next year,” Justin Fox, former editorial director of the Harvard Business Review, told Bloomberg View.[24] “It isn’t certain that those ships are going to catch on, and even if they do the odds that such a canal could actually pay for itself seem slim,” Fox said. The Chinese interests behind the deal undoubtedly know that chances their project will be profitable are slim, yet they may see the new canal as an opportunity to help their firms get more product to market and more resources to China. As such, taking a loss on the canal could be a prudent move for the Chinese.
The fact that the canal venture is by no means a sure moneymaker suggests that Chinese geopolitical interests could be another motive for its intended construction. Control of a transoceanic canal in Central America would give China a powerful stake in a region that has long been largely under the United States’ sphere of influence. Further, the canal is projected to be 28 meters deep, which would allow Chinese submarines to pass through undetected.[25] Intelligence experts are concerned that this canal is as much about strategic advantage as anything else.
Bruce Carlton, the president and CEO of the National Industrial Transportation League, recently told CNBC “I sincerely believe we don’t need another canal. I don’t think there’s enough ship traffic to warrant the construction of another canal.”[26] Panama’s nine-year expansion of its canal is set to be completed in June, and the expanded canal there will be able to accommodate another lane of traffic in addition to the 35-40 ships that pass through daily already.[27]
Some have cited President Daniel Ortega’s anti-U.S. and revolutionary bend as a factor in the decision to build the canal that has no obvious route to profitability. The Bryan-Chamorro Treaty of 1914 with the U.S. forced Nicaragua to sign a promise that they would not build a canal for 99 years. Sandinista leaders, already incensed by a history of U.S. intervention in Nicaragua, may have allowed the Chinese to break ground partially for reasons of passionate animosity towards the Americans and the desire to spite them.
Unanswered questions about the canal’s potential impact on the environment and society caused the start of construction to be postponed from September of 2015 to March of 2016 at the Nicaraguan government’s behest – construction now is not expected to start until August.[28] Unbelievably, it is still not really known if there will be sufficient water to fill the canal, and what sort of seismic risks construction presents in this earthquake and volcano-prone region.
HKND earlier this year hired Environmental Resources Management (ERM), a British firm, to conduct an independent environmental impact study. The survey concluded that the project would be safe and feasible with a negligible environmental impact. However, the ERM study has not been made public, and a review of the study by 15 scientists in Miami excoriated ERM for bad science and sophomoric data collection techniques.[29]
Nicaragua did not conduct its own environmental impact study, trusting the judgment of HKND and ERM. The government may now be regretting its decision, as environmental groups suggest that 400,000 hectares of pristine rainforest and wetlands will be destroyed by the project, and the inconceivably enormous 28-meter-deep, 520-meter-wide canal will use enough water to endanger Lake Nicaragua, the region’s largest drinking water source.[30]
Even the HKND Group’s own plan for construction acknowledges the dangers of disrupting volcanoes and exacerbating watercourse flow issues that the project may engender.[31] The environmental impact for Nicaragua, which is widely regarded as possessing one of the world’s most unspoiled and awe-inspiring rainforests, is questionable at best and devastating at worst.
The Nicaraguan canal seems in principle to be a wonderful boon for the region and its people. However, like so many of China’s other endeavors in the region, a deeper analysis of the overall impact of the project displays a far less rosy picture, one that includes potential mass displacements, environmental degradation, and questionable profitability.
Both HKND and Nicaragua should ensure that this future development project in Latin America will have a discernable benefit for the host country as well as for the investors. Further, all parties involved should recognize that encouraging Latin America to return to its anachronistic livelihood of natural resource export discourages development and encourages corruption in the region. Hopefully China and its investors will be more cognizant of how important their investment is for Latin America’s development and tailor its projects accordingly.
By Ian Gustafson, Research Associate at the Council on Hemispheric Affairs
Please accept this article as a free contribution from COHA, but if re-posting, please afford authorial and institutional attribution. Exclusive rights can be negotiated. For additional news and analysis on Latin America, please go to: LatinNews.com and Rights Action.
Featured Photo: Chinese Currency. Taken from Google Images.
[1] China’s Pivot to Latin America.” Bloomberg View. May 25, 2015.
[2] Gallagher, Kevin P. and Margaret Myers (2014) “China-Latin America Finance Database,” Washington: Inter-American Dialogue– 1
[3] Gillepsie, Patrick. “Latin America: China’s Power Play Right Under the U.S.” CNN Money. February 11, 2016.
[4] Elson, Anthony. “Dragon among the Iguanas.” International Monetary Fund, December 2014, Vol. 51, No. 4
[5] Gallagher, Kevin P. and Margaret Myers (2014) “China-Latin America Finance Database,” Washington: Inter-American Dialogue– 1
[6] Kotschwar, Barbara. “China’s Economic Influence in Latin America.” Asian Economic Policy Review July 2014, Vol. 9, No. 2, pg. 212
[7] Clemes, Michael D. and Azmat, Gani. “Natural Resource Exports and Corruption”. International Advances in Economic Research, May 2015, Vol. 21, Issue 2, pg. 239.-2c
[8] Ibid.
[9] Rostow, W.W. The Stages of Economic Growth: A Non-Communist Manifesto. Cambridge University Press, 1960. Chapter 2, pages 4-16.
[10] Kotschwar, Barbara. “China’s Economic Influence in Latin America.” Asian Economic Policy Review, July 2014, Vol. 9, No. 2, pg. 213
[11] Gallagher, Kevin P. and Margaret Myers (2014) “China-Latin America Finance Database,” Washington: Inter-American Dialogue– 1
[12] Kotschwar, Barbara. “China’s Economic Influence in Latin America.” Asian Economic Policy Review, July 2014, Vol. 9, No. 2, pg. 215
[13] O’Grady, Mary Anastasia. “China Wants to Dig the Nicaragua Canal.” The Wall Street Journal. August 9, 2015.
[14] McDonald, Michael D. “China Slowdown not Holding back Nicaragua Canal, Contractor Says.” Bloomberg. March 17, 2016.
[15] O’Grady, Mary Anastasia. “China Wants to Dig the Nicaragua Canal.” The Wall Street Journal. August 9, 2015.
[16] Nelson, Robert. “China’s Fantasy Canal Doing Real Damage in Nicaragua.” The Diplomat. March 17, 2016.
[17] “Nicaragua Canal Project Description”. HKND Group, December 2014.
[18] Feinberg, Richard. “A Transoceanic Canal for Nicaragua?” The Brookings Institution, July 9, 2014.
[19] Runde, Daniel. “Should the U.S. Worry about China’s canal in Nicaragua?” Foreign Policy, May 26, 2015.
[20] O’Grady, Mary Anastasia. “China Wants to Dig the Nicaragua Canal.” The Wall Street Journal. August 9, 2015.
[21] Runde, Daniel. “Should the U.S. Worry about China’s canal in Nicaragua?” Foreign Policy, May 26, 2015.
[22] Feinberg, Richard. “A Transoceanic Canal for Nicaragua?” The Brookings Institution, July 9, 2014.
[23] Runde, Daniel. “Should the U.S. Worry about China’s canal in Nicaragua?” Foreign Policy, May 26, 2015.
[24] Lopez, Jaime. “Odds on the Nicaragua Canal and other political bets.” The Costa Rica Star, October 20, 2015.
[25] Runde, Daniel. “Should the U.S. Worry about China’s canal in Nicaragua?” Foreign Policy, May 26, 2015.
[26] Nelson, Robert. “China’s Fantasy Canal Doing Real Damage in Nicaragua.” The Diplomat. March 17, 2016.
[27] “Chinese Ship to be First Through Expanded Panama Canal”. IndustryWeek. April 29, 2016.
[28] Kraul, Chris. “Nicaragua canal raises questions that remain unanswered, says study.” The LA Times, October 1, 2015.
[29] Schneider, Keith. “Nicaragua Canal environmental assessment criticized as scientifically weak, technically inadequate.” Circle of Blue, June 5, 2015.
[30] Meyer, Axel. “Conservation: Nicaragua Canal could wreak environmental ruin.” Nature, February 19, 2014.
[31] “Nicaragua Canal Project Description”. HKND Group, December 2014.