Source: Leon Neal, PA Media
Earlier this summer, leaders of the Group of Seven (G7) advanced, industrialized economies (consisting of the United States, the United Kingdom, France, Germany, Italy, Canada, and Japan) launched the Build Back Better World (B3W) partnership, promising to develop high-quality, sustainable, and transparent infrastructure around the world. The U.S. has framed the B3W as a form of “strategic competition with China” and an answer to China’s infamous Belt and Road Initiative (BRI).
Despite Latin America and the Caribbean’s geographic distance from China, the BRI has already gained significant ground in the region: currently, 19 Latin American and Caribbean countries are BRI signatories. As Latin America and the Caribbean has traditionally depended on the U.S. for trade, investment, and finance, it seems poised to emerge as a key strategic battleground between these two initiatives.
Notably, however, the B3W does not claim to compete with the BRI on all fronts. Unlike the BRI—which encompasses investment, finance, trade, policy coordination, and people-to-people cooperation—the B3W focuses more narrowly on infrastructural development. Rather than mobilizing public money from G7 countries, the initiative aims to harness private foreign direct investment (FDI) to fund major infrastructure projects.
While relying on private FDI can bring innovation and much-needed capital, it also brings with it its own risks. Whether the prospective benefits outweigh such risks will depend on a host of still-undetermined details. The following five steps, however, could help G7 governments ensure that the B3W benefits citizens of countries throughout Latin America and the Caribbean, investors from G7 countries, and the planet.
First, before individual projects are planned, the B3W can help bridge the gap between Latin America and the Caribbean’s green ambitions and the region’s capacity to develop infrastructure investment opportunities. If pursued collaboratively, the B3W could provide much-needed support to Latin America and the Caribbean’s National Sustainable Development Strategies, enabling countries in the region to reach the United Nation’s Sustainable Development Goals (SDGs) and their Nationally Determined Contributions to the Paris Agreement. Latin American and Caribbean leaders have shown strong interest in this arena: 33 countries in the region have produced NDCs, while 28 have produced voluntary national reviews of their progress toward the SDGs. However, realizing these goals requires institutional capacity in relatively young government agencies that still require further resources and expertise.
The U.S. has a solid history of this type of international, inter-agency cooperation—for example, through the Environmental Protection Agency and the Bureau of International Labor Affairs (BILA)—but these programs are relatively small. For example, BILA gives out less than USD $100 million annually in total overseas technical assistance grants. An increase in funding for this type of cooperation would yield significant benefits in developing a pipeline of high-quality infrastructure investment projects in Latin America and the Caribbean.
Second, once ground has been broken on B3W projects, G7 investors should be incentivized to remain in the region for the long haul, in spite of inevitable economic ebbs and flows. Footloose investment may bring short-term growth, but also result in longer-term instability. Investors’ flight to safety early in the COVID-19 pandemic is a clear case in point. From January to March 2020, capital flows to Brazil, Chile, Colombia, and Mexico swung from a positive USD $18.6 billion to a negative USD $15.6 billion, putting a severe strain on exchange rates of the Brazilian real and the Chilean, Colombian, and Mexican pesos. Mexico alone recorded capital flight totaling USD $12.6 billion in 2020. If the investment brought by the B3W is to benefit Latin American and Caribbean economies as well as G7 investors, it must contribute to economic stability, not volatility.
Even before the COVID-19 pandemic, Western investors had begun to sell off Latin American infrastructure assets amid lagging regional growth prospects, which triggered a buying spree by Chinese infrastructure giants. Notably, these Chinese investors—often state-owned enterprises with longer-term decision-making horizons—were willing to buy into the region despite sluggish prospects for growth. If the B3W is to provide healthy competition through private investment, it will have to incentivize investors to match Chinese companies’ willingness to ride out economic slumps.
Third, the values undergirding the B3W initiative need to be made public and visible. The B3W promises, laudably, to bring “values-driven” infrastructure development to Latin American and the Caribbean while prioritizing social, environmental, and financial sustainability. To have tangible benefits, it will need to complement these promises with reforms to the investor-state dispute settlement (ISDS) clauses of bilateral investment treaties (BITs) with between G7 economies and nations in Latin America and the Caribbean. ISDS clauses permit private investors to sue host-country governments when policy changes hurt their ability to continue operating profitably—even when those policy changes are “value-driven” reforms, such as strengthening labor protections and environmental regulations or phasing out fossil fuels. For the B3W’s values to become tangible, G7 countries must protect human, environmental, and labor rights from investor-state disputes. While renegotiating BITs may be daunting, G7 governments could facilitate this process by agreeing to “interpretive statements,” which clarify that ISDS clauses may not be used in cases of increased environmental or labor protections.
Fourth, private investment—crucial as it is—must be complemented with development finance. Some infrastructure projects are best served by public investment, either alone or in partnership with private sector investors. This is often true for emerging sectors that are not yet attractive to lone private investors (as is the case for renewable energy in several Latin American and Caribbean countries), or for which cost-free access is vital for public health, such as wastewater treatment facilities. For these sectors, multilateral development finance remains a crucial tool to support Latin American governments as they invest in these sectors or pursue public-private partnerships. The U.S. can ensure that these sectors are not left behind by unconditionally approving the Inter-American Development Bank (IDB) capital increase.
Finally, leaders need to recognize that healthy competition means sharing the market. Latin American and Caribbean economies benefit from negotiation with multiple investment partners, so any attempt to directly limit Chinese investment in the region is unrealistic. For example, the region’s vaccine purchase deals reflect a strong interest in diversification of partners, widely distributed as they are among vaccine producers from the U.S. (approximately 500 million doses), Western Europe (400 million doses), and Russia and China (approximately 350 million doses each). In fact, every Latin American country has relied on at least two different regional partners for vaccine supplies.
Just like the vast vaccine gap, the Latin American and Caribbean infrastructure gap is big enough for multiple players, and the region stands to benefit from diversification in its investment partnerships. The IDB estimates a regional infrastructure gap of about USD $150 billion per year. Closing that gap will require increasing investment in that sector by about 70 percent. The B3W can provide healthy competition to the BRI by simply focusing on its core mission of providing high-quality, sustainable infrastructure.
Rebecca Ray is a Senior Academic Researcher at the Boston University Global Development Policy Center. She holds a PhD in Economics from the University of Massachusetts-Amherst and an MA in International Development from the Elliott School of International Affairs at the George Washington University. Her research focuses on the nexus of international development finance, particularly China’s role in reshaping the global financial landscape, and sustainable development, principally in Latin America.