South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
As Western-backed development banks and the private sector are on the retreat from Latin America, China’s development banks are coming to the rescue, at least for now.
China’s two development banks, the China Development Bank and the Export-Import Bank of China, provided upwards of $29bn 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 was more than the World Bank, Inter-American Development Bank, and the Development Bank of Latin America combined.
The majority of the loans went to Venezuela, Ecuador and Brazil, countries facing the harshest downturns in the region. Barbados, Costa Rica, and Bolivia also join the list— with the majority of all Chinese finance in Latin America going into infrastructure and manufacturing.
In addition to $29bn in bilateral loans, China also set up $35bn in multilateral finance platforms for Latin America. The $20bn China-LAC Industrial Cooperation Investment Fund and the $10bn China-Latin America Infrastructure Fund are two new entities established in 2015, and China pumped another $5bn into the China-Latin America Cooperation fund that was set up in 2014.
Chinese development bank finance couldn’t come at a better time for Latin America— as the region is experiencing a significant downturn and other sources of finance are drying up. Thanks to Chinese demand and a boost in commodities prices, Latin American economies experienced a China boom from 2003 to 2013, a decade of economic growth unrivaled since the 1970s.
However, Latin American economies contracted in 2015 and are projected to grow 0.1 per cent in 2016, according to the World Bank. And now the private sector is retreating from the region at an alarming rate, with net capital flows to Latin America negative for the first time since 1998.
Most economists would agree that such downturns more than justify an uptick in development bank finance but both the World Bank and Inter-American Development Bank cut lending in 2015 by 5 per cent and 14 per cent respectively.
So it is Chinese finance to the rescue. The fact that the majority of the finance is in infrastructure and manufacturing is conducive to development — and is hardly what the Western-backed banks would have on offer if they were to increase lending. Latin Americaneeds $170bn to $260bn per year in infrastructure finance. The IMF says infrastructure spending has the biggest multiplier effect for the buck — for every one US dollar in infrastructure spending there is a corresponding 1.6 dollars in economic growth.
Investing in industry is key as well, as many countries in the region lost manufacturing competitiveness during the China boom as exchange rates shot up and investment in productivity declined — hollowing out Latin American industry and threatening the region with a‘resource curse’.
Of course, Chinese development bank finance is not without risk on both sides of the Pacific. Some countries such as Venezuela and Ecuador are overly exposed to debt in general and Chinese finance and particular. Second, if Latin American governments and Chinese banks turn a blind eye to the need to mitigate the social and environmental impacts of large infrastructure projects they will end up hurting the bottom line for governments, Chinese banks, people, and the environment.
In the absence of reform at the Western-backed development banks and a new source optimism in the private sector, Latin American governments have to be thankful that Chinese finance is on offer. That said, the onus is on Latin American governments to make this new finance work for economic growth that is socially inclusive and environmentally sustainable. If they don’t they will be left with ever more debt to the Chinese, their own people, and future generations.