How to Respond to Chinese Investment in Latin America

Over the past several years, China has managed to turn itself into Latin America’s largest creditor, mostly by funding large-scale infrastructure projects. In doing so, Beijing has managed to grow quite close to some of the region’s capitals. Argentine President Mauricio Macri has sought to “deepen” ties with China. In Colombia, President Iván Duque hosted Chinese Transport Minister Li Xiaopeng as an honored guest at his inauguration ceremony over the summer. And the incoming Mexican president, Andrés Manuel López Obrador, is considering joining China’s Belt and Road Initiative, which he has said will open a new chapter in the countries’ relations.

For the Trump administration, though, China’s presence in the United States’ backyard is worrying. Although National Security Advisor John Bolton did not mention China by name in his recent “Troika of Tyranny” speech, his thorough condemnation of two key Chinese allies in the region, Cuba and Venezuela, made the point. In February, then-Secretary of State Rex Tillerson was even more explicit when he said, “Today China is getting a foothold in Latin America. It is using economic statecraft to pull the region into its orbit; the question is at what price.”

One cost has been to the environment and to indigenous communities. Infrastructure development, although necessary, has often been carried out irresponsibly, with enormous social, political, economic, and environmental consequences. Another consequence has been a significant loss of U.S. influence in Latin America. In 2017, for example, Venezuela published its oil prices in yuan for the first time. The move was welcomed by other countries, including Russia, which cheered the pushback against dollar dominance. In addition, three Latin American countries, El Salvador, Panama, and the Dominican Republic, have broken off ties with Taiwan, a longtime U.S. ally, in the last two years.

There is a way for the United States to help address both problems at once. Increased U.S. investment in the softer side of infrastructure, especially in social and environmental safeguards for new projects and in urban planning programs, can help ensure that these countries are able to upgrade their infrastructure and energy systems in a responsible and equitable manner. And if the United States, the U.S. Agency for International Development, the new U.S. International Development Finance Corporation, and multilateral organs such as the World Bank and the Inter-American Development Bank (IDB) are seen as genuinely contributing to Latin American development in a way that puts the long-term interests of the region above (or at least on par with) U.S. commercial interests, Washington’s reputation as a trustworthy partner will grow.

The scale of Latin America’s borrowing from China in the past decade is astounding: Venezuela has received $62 billion; Brazil, $42 billion; Argentina, $18 billion; and Ecuador, $17 billion. Those deeply in arrears to China have sometimes had to take on more loans from the superpower to stay afloat. The example of Ecuador is telling. President Rafael Correa’s administration borrowed an additional $3.5 billion between 2011 and 2015 to bridge the budgetary gaps that resulted from Chinese-financed development projects.

Some have suggested that the United States try to regain its standing in Latin America by, essentially, copying China and funding infrastructure at a large scale.

The United Nations Economic Commission for Latin America and the Caribbean, the World Bank, and the IDB have suggested that the United States try to regain its standing in Latin America by, essentially, copying China and funding infrastructure at a large scale. That is a trap. For one, Western investors have struggled to do megaprojects well and have often passed on projects that have gone on to be funded by Chinese banks. Further, although the Latin American infrastructure gap is real, the last thing the region needs is yet another round of megaproject building driven more by foreign desires than local needs.

Hydropower is a good example. Chinese state firms are the largest financiers and builders of dams in the world, having raised over 330 in 74 countries. In Latin America, the list of countries working with China on dams includes Argentina, Belize, Bolivia, Brazil, Colombia, Costa Rica, Ecuador, Guyana, Honduras, Peru, and Venezuela. These dams, and others financed by regional lenders, have displaced hundreds of thousands and have caused untold environmental harm. In all, over 400 dams have been built, are under construction, or are being planned in the Amazon basin alone, for example, and a team of international researchers writing for Nature argued that “the accumulated negative environmental effects of existing dams and proposed dams, if constructed … [will be] severe, disruptive and characteristically irreversible.”

Another result of all this construction is that the region has become overly reliant on hydropower. In fact, data from the International Hydropower Association show that nearly two-thirds of South American electricity is generated via hydropower projects. But as the hydrologist Philip Fearnside has argued, much of that doesn’t even reach the people who need it most. “The amount of electricity devoted to rural electrification is miniscule compared to other uses,” wrote last fall, continuing that “hydropower is already unreliable and is projected to become much more so in light of climate change and projected shifts in rainfall patterns.”

Large hydropower projects are also consistently poor investments. University of Oxford economists have demonstrated that actual costs of hydropower construction average 96 percent over what initial models predicted. “Even before taking into account negative impacts on human society and the environment, on average the actual construction costs of large dams tend to be too high to yield a positive financial return on investment,” the researchers said.

Yet Western lenders have long supported hydropower development in Latin America. The World Bank’s online hydropower resource states that 62 percent of Latin America and the Caribbean’s potential hydropower remains “unexploited.” And, in fact, the IDB has made attempts to match such Chinese megaproject lending in the sector. Its most recent gambit, the Ituango Dam (commonly known as Hidroituango), was an unmitigated disaster. Co-financed by an IDB spinoff, IDB Invest, and the China Co-Financing Fund for Latin America and the Caribbean, it was Colombia’s largest such project to date and was rushed to the construction phase despite vigorous local opposition. The dam ultimately burst during construction, displacing 25,000 people and threatening many more downstream.

Rather than trying to compete with China by forgoing such evaluations themselves, though, the United States and other lenders might more usefully focus on helping make environmental and social safeguards less burdensome. They could do so by footing the bill for meeting the community consultation requirements that might come with a World Bank project, for example, or by funding the environmental assessments that the IDB might want. Such aid could make Western-driven projects nimbler and also better investments for Latin America in the long run. And in theory, because China typically defers to local regulations where it does business, such a system could even help ensure the safety of Chinese projects by helping Latin American nations enforce their own rules.

Beyond footing the bill for impact assessments, the West could also do a lot of good by investing in higher education and public sector and professional development in Latin America. Urban planning education across the region is severely underfunded. Upgrades to planning programs will help Latin American officials and researchers endogenously craft better infrastructure development policies down the line.

And the slew of recent elections—in Mexico, Brazil, and Colombia—doesn’t seem like it will change anything. “Latin American countries are still looking to China as a critical partner and creditor,” Margaret Myers, the director of the Asia and Latin America Program at the Inter-American Dialogue, told me. “The ways countries are engaging with China might change slightly, but the fundamentals of their bilateral relations with China will withstand political changes.” In Brazil, for example, President-elect Jair Bolsonaro has already walked back his negative campaign rhetoric about China and has proposed railroad construction that is intended to facilitate growth in the soy trade, Myers told me. And under López Obrador in Mexico, Eugenio Anguiano Roch, a professor at the National Autonomous University of Mexico and former Mexican ambassador to China, recently wrote, “Mexico’s international business … is currently poised for a fundamental reorientation,” with China set to play a key role.

It would be a mistake, however, for the United States to approach this reality antagonistically. Staggering inequality is Latin America’s defining issue, and Washington would be prudent to recognize that gearing its investments toward combating this complex set of problems will reap enormous benefits in the long term. Instead of admonishing China for its growing role in the region, the United States needs to see the opportunities present for strengthening the soft side of infrastructure development and realize that pursuing them could reap vast goodwill, solidarity, and cooperation.

At the moment, Latin America lacks the safeguards and planning capacities to ensure that megaprojects have the best possible fiscal, social, and environmental outcomes. The United States, by playing a supporting role in development, could help to lay the groundwork for increased economic connectivity, regional political integration, an approach to growth mindful of and respectful to indigenous communities and the environment, and substantial reductions in poverty and inequality across the region.