Massive flows of investment from China have failed to stimulate sustainable growth in Latin America as the narrow focus on developing the region’s oil and mining sectors has left it vulnerable to plunging commodity prices, which have suffered as a result of the former's slowing demand.
While Latin America’s struggling economies welcome foreign investment, there is an urgent need to redress the existing trade imbalance with China, according to Enrique Iglesias, former president of the Inter-American Development Bank (IDB).
For its part, China must better adapt to market conditions if it is to protect its interests in Latin America as close partners Venezuela and Argentina look set to open up to international markets, experts said at a conference organised by the London School of Economics (LSE) and the Latin American Development Bank (CAF in the Spanish acronym).
China has invested more than US$120 billion in Latin America – the bulk of which has gone to big natural resource exporters Venezuela, Argentina, Ecuador and Brazil – and now plays a major role in the region’s development. But according to Iglesias, China must invest more in Latin America’s services and manufactures.
Iglesias told Diálogo Chino; “We need to have more reciprocity in the sense that we don't want to have China only importing commodities.”
China’s trade with Latin America has been dominated by the export of raw materials from Latin America in exchange for the import of value-added goods from China. Now, Iglesias said; “we are simply aiming to have a new balance, equality… and this is something we have to work for. Investment from China is very important in Latin America.”
Loans with strings
Colombia’s former finance minister Guillermo Perry expressed dissatisfaction with China’s lending to Latin America. Chinese loans to Latin America to develop sectors such as infrastructure have often been conditional on the use of Chinese contractors, workers and construction materials such as steel and cement, of which China has a huge surplus. Industry representatives in Latin America claim that this is leading to job losses and creating a dependency on natural resource extraction.
Yet these lending conditions also run contrary to China’s own interests since its investors now find themselves exposed to struggling commodity export-dependent economies, such as Venezuela, which have few options but to accept them, according to Perry.
“They have basically limited themselves to working with three or four countries,” he said, referring to Venezuela, Argentina, Ecuador and Brazil.
Some of China’s closest partners in the region are now on the brink of economic collapse and are undergoing seismic political changes. According to official figures, China has lent US$56 billion to Venezuela, which is struggling with a 141% rate of inflation and widespread shortages of consumer goods . The majority of Chinese loans have served to prop up the country’s oil sector which has been hit hard by the crash in global oil prices. As a consequence of its mismanagement of the economy, the ruling United Socialist Party of Venezuela (PSUV) suffered a bruising defeat in recent legislative elections at the hands of the main opposition Democratic Unity Party (MUD), which claimed a two-thirds ‘supermajority’.
Perry admitted that his Chinese counterparts were concerned that their short-term self-interest in acquiring commodities had now increased their exposure to high-risk countries, but stressed that they were not as uncommunicative about the problem as people think.
New politics, new approach
While Iglesias played down the implications for China of political changes in countries such as Venezuela, Latin America expert Wu Guoping emphasised that more market-friendly policymaking environments would mean Chinese companies having to better understand the rules of international finance. Many big loan agreements have been signed between Chinese and Latin American political elites with little information disclosed about the particulars of the deals.
“Argentina is going to change. Venezuela is already changing, Brazil too,” said Wu, who is director of Southwest University’s Institute of Latin America and Caribbean Studies. “From now on, the market is going to play an important role, so Chinese companies need to ask themselves if they are prepared,” he said.
Perry, a self-proclaimed ‘admirer of China’ who played an active role in Colombia establishing diplomatic relations with the Asian country, said that this wouldn’t happen overnight. “I think that China, if they want to play a major role abroad, is going to have to learn to behave as a very modern global citizen, and there is still some way to go.”
Khalid Malik, former head of the UN Development Program, argued that the Chinese cause wasn’t helped by misleading media coverage of China’s overseas investment activities, which have included exaggerated reports of land acquisitions in Africa and Latin America.
Recalling the oft-cited words of China’s former leader Deng Xiaoping, Malik said that in an era of uncertainty the country was cautiously learning by doing; “crossing the river by feeling the stones”.