Kevin P. Gallagher
The Dragon’s Gift in Latin America
Between 2003 and 2013, Latin America experienced a “China Boom.” As luck would have it, Latin America had just the natural resources that China needed to feed and fuel the Chinese growth miracle that started in the late 1970s and reached a fever pitch in the early 2000s. During the China Boom, Latin America’s economies grew by 3.6 percent per year, the fastest period of growth since the region’s “state-led industrialization” period that stretched from the 1930s until 1982. The China Boom couldn’t have come at a better time, as the region’s economies sought to escape the slow growth and financial instability corresponded with two decades of the so-called “Washington Consensus”—a cluster of policies that remove the state from economic affairs. Similarly, the China Boom also helped many Latin American economies recover from the global financial crisis of 2008-2009. As the United States and Europe struggled to recover from the crisis, Latin American trade and investment with those partners waned, but Chinese trade helped the region pull through relatively unscathed.
However, at the time of this article’s writing, Latin America’s economic prospects appear to be taking a turn. On the one hand, China’s voracious appetite for Latin American natural resources has begun to decline as the country balances its economic model from one of export-led industrial growth toward a more consumer-based economy. Moreover, the United States has shown signs of finally recovering from its financial crisis. During the China Boom, Latin American trade with China spurred lots of foreign investment into the region. As China’s demand for Latin America products decreases, so too will that foreign investment, given the slowdown in growth n the Americas and the attractiveness of a U.S. economy gathering steam.
Latin America’s China Boom
Into this vacuum entered China, particularly in many South American countries. Like Latin America during the Washington Consensus, China has been opening its economy to global market forces since the late 1970s and early 1980s. Unlike Latin America however, China was able to do so on its own terms. That is to say, China did not reform in reaction to a major external crisis in the way that Latin America did, nor did it have Washington-based experts dictating what the reforms should look like. Rather, China’s was a globalization centered around the saying of its great reformer, Deng Xiaoping—crossing the river by touching each stone. Instead of diving in head first into globalization, as Latin America did, China sequenced the liberalization of some sectors of its economy while protecting others until they were ready to compete globally.
As a result of these reforms, China grew at over 10 percent per year for over thirty years, the fastest and strongest growth ever recorded on earth. In 2001, China entered the World Trade Organization (WTO) and soon began purchasing and selling with the rest of the world at a breakneck pace as well. Latin America was no exception. As China’s economic power has grown, it has been guzzling oil from Venezuela, Ecuador, and Mexico to fuel its expanding fleet of cars, trucks, and container ships. China has wired more than half the world’s consumer electronics products with copper mined from Chile and Peru. Many of China’s new cities have iron ore from Brazil at their core. As standards of living have risen, the Chinese eat more beef from cattle that are fed soya beans harvested from Argentina and Brazil. And as result, Chinese companies have flocked to the Americas to invest in these commodities, backed by China’s state-run development banks.
The numbers tell this story well. At the turn of the 20th century, Latin American trade with China represented only one percent of total Latin American trade, at $12 billion USD. By 2013, Latin American trade with China had grown to $289 billion USD, and China stood as the single most important trading partner for many of Latin America’s biggest economies, such as Brazil, Peru, and Chile, among others.
In fact, China’s demand for Latin American commodities doubled China’s economic impact in the region. Because of China’s consumption of these goods, commodities became more scarce and the prices of such goods experienced a steady increase in the global marketplace. The combined impact of rising demand and rising prices allowed the region to enjoy a massive commodity boom, and this subsequently triggered investment in the region’s commodity sector by Chinese companies and other global firms. Perhaps most remarkable is that China has provided massive amounts of finance to Latin American governments for infrastructure, mining, and energy projects. According to the “China-Latin America Finance Database,” which I publish with the Washington-based think tank the Inter-American Dialogue, China has provided upwards of $125 billion in loans and lines of credit to Latin American governments between 2005 and 2016.
In many ways, China’s appetite for Latin American commodities has been an economic savior for the Americas, especially in the wake of the global financial crisis of 2008 and 2009, a period when trade and finance from the Europe and the United States largely dried up. During these years, Latin America rode the coattails of economic growth in China, growing at an annual rate of 3.6 percent between 2003 and 2013. Moreover, during this period, Latin American governments started to reduce rising economic inequality for the first time in a century—an achievement that stands in stark contrast to the previous two decades of Washington Consensus policies, in which markets were opened and the role of the state in the economy was reduced.
Squandering the China Boom
Despite all of this, Latin Americans have squandered the China boom in many ways. As the infamous “resource curse” predicts, during commodity booms money pours into the commodity sector, creating huge windfalls for the commodity sector but very few jobs. Such booms typically cause the exchange rate of countries to appreciate, making non-commodity exports more expensive. And that is largely what happened in Latin America during the China boom. Money poured in and commodity producers got rich, but non-commodity exports became less competitive. Indeed, 92 percent of Latin American manufacturing lost market share to the China in world markets during the boom.
What is more, the infrastructure, energy, and mining projects that were the source of so much investment from the Chinese are endemic to environmental degradation and social conflict in Latin America. The World Bank estimates that the economic costs of environmental degradation during the China boom represented 8.6 percent of GDP annually. As Chinese, North American, and European firms have flocked to the region for its resources, they deforested the Amazon, polluted waterways, and often mistreated indigenous and local communities while Latin American governments, by and large, turned a blind eye.
To be sure, the “resource curse” has a cure. Nations such as Norway have navigated their way through the curse by parking windfall profits into special funds to be reinvested into export competitiveness, financial stability, environmental protection, and long-run growth. So far, however, this has not been the case in Latin America. As I cite in my new book, the International Monetary Fund (IMF) estimates that Latin Americans saved even less from this boom than during past ones. Moreover, recent United Nations calculations show that government fiscal revenue did not increase in proportion to the windfall either. It is thus no surprise that investment in the region has been so low overall. It is a general rule of thumb that nations need to invest 25 percent of their gross domestic product per year to achieve stable and strong growth—China, for instance, has invested well over 40 percent per year over the past 30 years—but Latin Americans averaged a paltry 20 percent—less than one percentage point more than during the Washington Consensus period.
The lack of investment in long-run growth and sustainable development will hurt the region as the headwinds that carried the Americas for a decade begin to turn. At the present moment, the Chinese economy is making a shaky transition toward a more consumer-based economy. First and foremost, this means much more modest levels of economic growth; whereas China was growing at 10 percent a year since the 1980s, that figure is now closer to 6 percent per year. Secondly, China will eventually be shifting toward more consumer-based products, rather than natural resources. It is not yet clear if Latin American manufacturing exports will be competitive enough to seize the opportunity to meet Chinese demand for such products. Finally, China’s transition will prove to be a tricky as they try to move from an export-led to a more consumer based economy and begin to allow market forces to govern the economy more. Slower Chinese growth, different growth, and increasing instability have put fear into the finance ministries of Latin America.
A Time for Reform
t would be foolish to replace the Washington Consensus with a Beijing Consensus, but there is still time for Latin America to put in place reforms in order to finally sustain stable growth and capitalize on China’s rise. Modern Latin American economic history has been characterized by periods in which there was arguably too much state involvement in the economy—the state-led industrialization period, for example—and far too little—most notably under the Washington Consensus. It is now time to embed the state in a way that enables a well functioning marketplace capable of delivering growth, employment, inclusion, and sustainable development. Key to doing so will be building on the region’s comparative advantage in primary commodities and strengthening institutions to capture more of the windfall during boom times. The proceeds will have to be invested into three areas: smart infrastructure, innovation and competitiveness, and people and the environment. It is not everyday that a country like China rises in a manner that just so happens to demand increasing amounts of Latin American resources. However, if Latin America wants to truly take advantage of this situation, in a manner that can help put the region on a long-term path for sustainable development, it is now on national governments in Latin America to put in place major reforms.
Kevin P. Gallagher is a professor of global development policy at Boston University’s Pardee School for Global Studies, where he co-directs the Global Economic Governance Initiative. This article is adapted from his new book, The China Triangle: Latin America’s China Boom and the Fate of the Washington Consensus (Oxford University Press, 2016).