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Author: Remus Tan, Takyeon Kwon
Research Director: Keeven Cheong Aik Wei
Abstract
Latin America has long been a region full of promise and possibility. The continent’s natural resource endowment extends from most metals and minerals across the world, to all sources of energy, as well as agriculture. As a result, Latin America has been particularly attractive to investors, and the optimism for the region is aptly reflected in the stark increase in venture capital flows in recent years (Temkin, 2021). However, despite the abundance of natural resources and opportunities for financing regional development, Latin America’s GDP per capita has stagnated for several decades (The World Bank, 2020). This article will examine the recent initiatives by China and the U.S., namely the Belt and Road Initiative (BRI) and the Build Back Better World (B3W), and how Latin America can leverage both opportunities to effectively target critical sectors that spur economic development.
Current Problems in Latin America
The urgent need to provide additional and better-quality infrastructure is one of the main challenges Latin America faces (Serebrisky et al., 2017). Currently, investment in the infrastructural sector accounts for roughly 2.8% of GDP, however, several international studies have indicated that an additional 4% to 7% of total GDP is required over a period to sustain development and social well-being (We Build Value, 2020). Insufficient investment in infrastructure stocks will cost Latin American countries roughly 15% in forgone growth if the gaps persist over 10 years. When amplified to the entire region, the cost of foregone growth is the equivalent of approximately US$750 billion based on 2021 GDP levels (O’Neill, 2021). Ultimately, Latin America’s prevalent infrastructure gap has hindered its economic development due to reduced attractiveness to foreign investment (lower FDI levels), disrupted supply chains, and the inefficient movement of goods and services across their borders.
Climate change affects every country around the world; the difference, however, lies in the intensity of the impacts. In Latin America, almost half of the region’s GDP is generated from countries that face “high” or “extreme” climate change vulnerability risks (Mapplecroft, 2014). Climate-related disasters account for a loss of around 1.7% of GDP annually and the impact of such disasters is increasingly severe, further disrupting a country’s economic activity and livelihoods (Wellenstein & Hickey, 2021). For instance, due to worsening climate change conditions, vulnerable sectors like food and nutrition security could be severely affected, with projections of a roughly 20% reduction of crop yields for beans and maize by 2050. Countries like Argentina and Brazil which are highly reliant on the exportation of agriculture for their GDP are bound to experience a prolonged period of economic downturn (World Bank Group, 2021). Despite the prevalence and adverse effects of climate change, the region spends a higher proportion of its budget on unsustainable sectors (US$7.4 billion) like fossil energy infrastructures, than on environmentally sustainable ventures ($1.5 billion), which is expected to lead to an increase in carbon emissions (University of Oxford, 2021). By shunning climate change initiatives and not enforcing sufficient environmental standards, the region is closing itself off to opportunities that enable the reduction of trade barriers such as tariffs, that are imposed on firms operating under less climate-friendly practices.
China’s Introduction of the BRI, and what it entails
Figure 1: Breakdown of the BRI
Source: Wang, 2022
China’s Belt and Road Initiative (BRI) is a diplomatic strategy that seeks to connect Asia with Africa, Europe, and Latin America via land (belt) and maritime networks (road) to promote integration amongst member countries, increase trade, and stimulate economic growth in the region (refer to figure 1). Currently, a total of 20 Latin American countries are a part of the BRI (Wang, 2022). This segment of the article will seek to explicate the effects of the BRI on Latin America.
Positive effects:
The centrepiece of the BRI is the construction and financing of infrastructure; which includes roads, railways, ports, oil and gas pipelines, power grids, optical cables, and other communication networks. Latin America may look to the BRI as a means to finance its infrastructure and establish global connections. Just a few months into the BRI, Argentina’s President, Alberto Fernández, mentioned “Our country will obtain more than $23 billion from Chinese investments for works and projects.” Although China has made no formal financial commitment to Argentina as of yet, President Xi pledged to complete existing hydropower and railway projects, as well as deepen cooperation with Argentina in trade and anti-epidemic efforts (Wilson, 2022). A few other Latin American countries like Peru and Panama have already leveraged the BRI. The construction of Peru’s US$60 billion bi-oceanic railway corridor backed by Chinese firms and the 2 major terminals at both ends of the Panama Canal is already underway (Dettoni, 2020). Latin America has emerged as the new frontier of the BRI. Across the regions, Chinese engineers and technicians are already at work to bridge the infrastructure gap hindering the region’s competitiveness.
Negative effects:
BRI is causing significant environmental risks and degradation, and is a major contributor to climate change, according to a report by the International Forum for Rights and Security (IFFRAS) (Kaul, 2021). For instance, although the San José 1 and 2 hydropower plants in Bolivia drastically reduced the country’s CO2 emissions by saving a total of 7.81 billion cubic feet of CO2, the environmental impact caused in the surrounding area outweighed the reduction in carbon emissions. The two projects saw large amounts of deforestation near valuable water sources, potentially destroying ecosystems (refer to Figure 2)
Figure 2a: San José 1; before and after
Figure 2b: San José 2; before and after
Source: Crittenden et al., 2021
Several Chinese state-owned enterprises are unable to meet the standards and safeguards required for projects in their host country. More often than not, these companies fail to provide accurate environmental impact analyses or none at all. In Ecuador, a Chinese state-owned hydropower engineering and construction company failed to complete a geological examination of the landscape, which eventually led to the dam being constructed on a fault line (Klemm, 2019). As a result of BRI’s high intake of projects, several indicators are loosely regulated and instead of developing a country’s economy and achieving a win-win situation for both partners, the BRI may cause more harm than good.
U.S.’ Introduction of the B3W, and how it complements the BRI
In June of 2021, at the G7 summit, the leaders of the seven countries announced the Build Back Better Initiative (B3W) (CNBC,2021). The White House (2021) announced that the four focus areas of B3W are Climate, Health and Health Security, Digital Technology, and Gender Equity and Equality with six principles including 1) Values-Driven, 2) Good Governance and Strong Standards, 3) Climate-Friendly, 4) Strong Strategic Partnerships, 5) Mobilize Private Capital Through Development Finance, and 6) Enhancing the Impact of Multilateral Public Finance.
Looking at the focus areas and principles, it is noticeable that they are differentiated from how BRI is being run nowadays. For instance, while BRI is being criticised for its negative impact on the natural environment, B3W gives heavy emphasis on the sustainability of economic development. In addition, as mentioned in the previous paragraphs, BRI now encounters followed frictions with the host countries. However, B3W highlights the importance of partnerships with the host countries. Also, BRI is heavily financed by the Chinese government or the entities controlled or owned by the public sector of China (OECD), while B3W seeks the participation of the private sector in funding its projects. Even the main investment area of the two initiatives varies. BRI’s investment is centred on traditional infrastructure projects (Osborne et al, 2021) unlike that of B3W. The difference between the two initiatives indicates that they are likely to complement each other in economic development in Central and Latin America.
Furthermore, the recent scaling back of BRI with the increased gap in infrastructure investment provides B3W with an opportunity to easily expand its influence in the region.
Figure 3a: China’s Overseas Lending (Kynge & Wheatley, 2020)
Figure 3b: Total Lending by China Development Banks (Wilson, 2022)
As noted in Figures 3a and 3b, China’s overseas lending has continually decreased since 2015. Kynge and Wheatly (2020) have identified the change in the economic strategy of China to focus on the domestic market with greater amounts of resources as one reason why its BRI project has declined. The US-China tension and COVID-19 give the decision of China a good justification. Politically, as BRI has been recognized as leverage of China to expand its influence overseas, the US and the West have determined BRI as a possible threat to their hegemony and national security.. Russel and Locklear (2020) claimed that China is weaponizing BRI and demanded the US counter the expansion of China by enhancing the military and diplomatic ties with its allies. Meanwhile, the Chinese government found it burdensome to continue the BRI and transformed its economic development programmes via international organizations such as AIIB (Kynge and Wheatly, 2021). In addition, the damage to the Chinese economy during the trade war and the zero COVID policy forces the government to focus on its domestic economy (Wilson, 2020).
COVID and the disruption of the supply chain reveal the need for infrastructure investment in the region. However, the increased use of digital technology during COVID and the urgent need to protect the natural environment poses the necessity for infrastructure development with a focus on digital technology and climate change (OECD, 2021). In addition, the need to stimulate the economy through infrastructure investment now demands that governments in the region spend more on infrastructure (World Economic Forum, 2022). However, the damaged fiscal sustainability due to COVID weakened the capability of the governments to do so severely (OECD, 2020)
As the B3W initiative is yet to be fully implemented and start infrastructure projects in Central and Latin America, it is too early to judge whether B3W could successfully rival BRI. However, the current economic circumstances and the need for different types of infrastructure investment imply the likelihood of B3W’s success.
Navigating the treacherous waters of US-China tensions
Central and Latin America have been under strong influence from the US traditionally. However, the economic development of China and China’s position as the greatest importer of raw materials have advanced the economic ties between China and the region (EIU, 2018). Therefore, countries in the region are now stuck between the traditional influence of the US and the rising economic ties with China.
Figure 4: Trade between Central and Latin America and China
Comparison with the Asia Pacific (APAC) countries will provide a good insight into the current circumstances of the region. Like the region, APAC countries encounter a growing dilemma between their growing economic dependence on China and the dependence on the US for their national security. However, when forced to choose between America and China, the countries have always stood on the side of America. For instance, during the THAAD system crisis, South Korea decided to deploy the system despite economic retaliation by China. The recent friction between Australia and China also reveals that APAC countries will be under the influence of the US despite their economic ties with China.
However, the countries in the region are under different circumstances. First, compared to APAC, one of the most developed countries, the countries in Central and Latin America are in urgent need of economic development. Second, unlike APAC which is directly exposed to the increasing military power of China, the region is relatively freer from the national security crisis posed by China. The two differences mean the region would freely swing between the two powers unlike their APAC equivalent restricted by national security issues.
Conclusion
The US-China tension is rising in every part of the world and the rivalry between B3W and BRI resembles the competition between USSR and the US during the cold war to attract the countries in the third world under their influence. Countries in the region will need to manage ties with the two powers to enhance their economic development. Furthermore, with the reappearance of the left-wing in the region and the reopening of the economies due to the end of COVID, we await to see the mixed influence of the two powers in the region with complex political and economic circumstances.
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