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Latin America needs China to help close infrastructure gap

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Note: TomanySouthAmericanleaders,ChinesePremierLiKeqiangsvisitthisweekcouldntcomeatabettertime,andfromabettercountry.Chinahasb
To many South American leaders, Chinese Premier Li Keqiang’s visit this week couldn’t come at a better time, and from a better country. China has been busy with Latin America, surpassing the United States as South America’s leading export destination outside of the region, according to the China-Latin America Economic Bulletin.

What is more, the ink is barely dry on big loan agreements to Venezuela and Ecuador, or a major China-Latin America cooperation plan signed in January that pledges to increase trade by $500bn and investment by $250bn and to cooperate on science and technology, trade, and environmental protection.

Now it’s the turn of Brazil, Peru, Chile, and Colombia, all destinations on Li’s itinerary. The Chinese are expected start implementing the cooperation plan with new agreements on science, trade, and currency swaps.

Expectations of considerable Chinese investments seem justified by Beijing’s track record of providing more than the World Bank and Inter-American Development Bank combined in loans for Latin American governments, according to the China-Latin America Finance database. There will likely be more of the same for infrastructure projects such as the Twin Ocean Railroad from Peru to Brazil.

According to the International Monetary Fund (IMF), Latin American growth is expected to dip below one per cent this year, after a disappointing 2014 of 1.4 per cent. That stands in stark contrast to the region’s “China Boom” from 2003 to 2013 when the region grew over 3 per cent per year thanks in large part to Chinese demand for Latin America’s commodities and the subsequent uptick in prices that came along with scarcity and speculation.

Those days are gone. China’s demand has slowed as it rebalances its economy, dampening commodity prices worldwide. With growth sliding, Latin Americans are realising that their governments did not invest much of the proceeds from the China boom. Gross fixed capital formation in the region was a paltry 19.6 per cent, far short of the 25 per cent recommended by the Growth Commission and other bodies for nations needing to develop their economies. Ecuador, Colombia, and Peru were above average though still nowhere near 25 per cent, while in Argentina, Brazil, and Venezuela the investment rates were anemic.

According to research by the IMF, although the China-led commodity boom was among the longest and most lucrative in the region’s history, most Latin American countries saved less of these windfalls than they have in past booms. This year’s annual report from the Economic Commission for Latin America and the Caribbean adds that Latin American governments also failed to bring in new tax revenue in proportion to the windfalls as well.

It is thus no surprise that the region did little to invest into export competitiveness in sectors other than commodities. Over 78 per cent of Latin American manufacturing exports have lost global market share to their counterparts since 2003.

The China boom also came at significant social and environmental cost that was not properly mitigated. A new study, China in Latin America: Lessons for South-South Cooperation and Sustainable Development, shows how primary commodity exploitation – such as petroleum, copper, iron ore, tin, soybeans and the like – are endemic to environmental degradation.

The recent China-boom thus put increased pressure on the region’s waterways, forests, and other areas that accentuated threats to human health, biodiversity, global climate change, and local livelihoods. According to the report Latin American exports to China – the fastest growing export destination over the past decade – were close to twice as greenhouse gas intensive and ten times as water intensive than overall economic activity in the region.

So currency swaps and trade talks, science and technology agreements, and finance for infrastructure will be very welcome. Indeed, Latin America faces an annualinfrastructure gap of 6.2 per cent of GDP and the IMF says that infrastructure investment has the highest multiplier impact on the rest of the economy.

China and Latin America would also do well to ensure that equal attention go to risks associated with their economic relationship. That means investing the proceeds of the relationship in competitiveness, as well as in social and environmental protections.

If Latin Americans don’t manage their natural resources correctly, however, their very source of comparative advantage will dwindle, translating into lost growth and elections. If China doesn’t also mitigate the negative impacts of its trade and investment in the region, it will lose its positive image in a region they are making long term bets on–and lose a lot of money as well.

Kevin P. Gallagher is a professor of global development policy at Boston University’s Pardee School of Global Studies where he co-directs the Global Economic Governance Initiative. His forthcoming book is The China Triangle: Latin America’s China Boom and the Fate of the Washington Consensus.

 
 
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