It was a heady time in Latin America from 2003 to 2013—with economies across the region growing at an average rate faster than any decade since the 1970s. Driven largely by China’s growth and appetite for natural resources, even in the midst of the boom, a number of presidents and observers expressed concern that the region’s dependence on its resource-led growth could throw the it back to the 19th century and the famed “resource curse.”
There are clearly signs that there is a curse in the region. Latin American economies contracted in 2015 and are projected to grow one tenth of one percent in 2016, according to the World Bank. At the same time, the private sector is retreating from the region at an alarming rate, with negative net capital flows to Latin America for the first time since 1998. Development banks that are supposed to be there to help during downturns are also on the retreat; the World Bank and Inter-American Development Bank cut lending in 2015 by 5 percent and 14 percent respectively.
China, however, is not turning its back on Latin America, despite its own economic slow down. China has pledged to increase exports to $500 billion and foreign investment to $250 billion by 2025. And, to show they mean it, China’s two development banks, the China Development Bank and the Export-Import Bank of China, provided upwards of $29 billion in loans to Latin American governments in 2015—according to new estimates published by Boston University’s Global Economic Governance Initiative and the Washington-based think tank The Inter-American Dialogue. A three-fold increase from 2014, China’s 2015 finance to Latin America is more than the World Bank, Inter-American Development Bank, and the Development Bank of Latin America combined.
In addition to the $29 billion in bilateral loans in 2015, China also set up $35 billion in multilateral finance platforms for Latin America, including a $20 billion China-LAC Industrial Cooperation Investment Fund and a $10 billion China-Latin America Infrastructure Fund. In addition, China pumped another $5 billion into the China-Latin America Cooperation Fund that was set up in 2014. Finally, to coordinate this relationship, in 2015 China teamed up with the Community of Latin American and Caribbean States (CELAC) and put together a cooperation plan to allocate these funds and discuss broader issues such as industrialization, infrastructure and sustainable development.
China has a clear Latin America strategy: invest and trade with Latin America to gain access to strategic natural resources and strategic markets for national champion firms and policy banks—and make lots of friends along the way.
The problem is, the countries of Latin America don’t have a plan for China.
Lots of countries have ‘shovel ready’ projects for development banks, but they are too often just roads to mines or presidential pet projects, rather than regional plans for smart infrastructure and logistics that spur innovation and inter-regional trade.
CELAC needs to be credited with having the promise of a regional institutional body set up to address these issues and have a unified approach to China, but it lacks any significant staffing and, as the political trends in the region change, it may soon lack presidential level backing as well. Regional blocs in Latin America come and go as political and economic winds change, with each new set of governments creating their own short-lived initiatives. As I discuss in my new book, The China Triangle: Latin America’s China Boom and the Fate of the Washington Consensus, this has to change.
CELAC should become part of a tripartite body to formulate and implement a regional China plan—along with the Development Bank of Latin America (CAF) and the The United Nations Commission for Latin America and the Caribbean (ECLAC). The CAF is a regional development bank, without the United States and Canada at the helm, that now rivals the Inter-American Development Bank for total financing to Latin American governments—and is the leader in terms of infrastructure finance. ECLAC has been providing sound economic advice for decades from a LAC regional perspective.
ECLAC has the facilities and convening power for regional discussion on economic issues and CAF has proven itself to be a legitimate regional development financier of the region that can rise above economic and political swings. A tripartite body with these three organizations would be able to administer and perhaps even match funds (through the CAF) the boon of funds coming in from China. At the same time, the collective group could serve as a knowledge leader regarding the most productive and regional use of such funds by leveraging the intellectual resources of ECLAC at the same time that it could and establish CELAC as a regional platform to engage China.
In the absence of reform at the Western-backed development banks or a new source of optimism in the private sector, Latin American governments have to be thankful that Chinese finance is available. That said, the onus is on Latin American governments to make this new finance work for long-term economic growth that is socially inclusive and environmentally sustainable. The region can’t afford not to put together a regional plan to deal with China, but CELAC can’t do it on its own. It will need to team up with the CAF and ECLAC, and come up with a plan to manage the $500 billion in trade and $250 billion in finance on offer.
Kevin P. Gallagher (@KevinPGallagher) is Professor of Global Development Policy at Boston University’s Pardee School for Global Studies, where he co-directs the Global Economic Governance Initiative (GEGI). His forthcoming book is The China Triangle: Latin America’s China Boom and the Fate of the Washington Consensus. With the Inter-American Dialogue, GEGI publishes the China-Latin America Finance Database.