China's role in realizing 'Latin America decade'
| Cambridge, Mass.
Brazilian President Dilma Rousseff landed in China today to shore up trade and business ties, just a month after President Obama traveled to South America to lobby on behalf of US businesses.
The presidential hopscotch underscores the growing competition between the US and China for a foothold in Latin America. While the United States is an important partner, says the chief of the Organization for Economic Cooperation and Development (OECD), China is “the perfect fit” as Latin America looks to boost infrastructure, technology, and overall economic growth.
“There is no limit,” says OECD Secretary-General Angel Guerria, referring to Chinese investment opportunities in Latin America. Average economic growth regionally was 5.5 percent in 2010, he says, with a slightly lower projection for this year. Millions of jobs are being created, he adds, and with the region's vast natural resources future economic growth “potential is enormous.”
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China is making big moves to unlock that potential. The Asian tiger is investing heavily in the region, edging out the US and boosting ties with leaders such as Brazil's new president. Ms. Rousseff, on her first foreign trip since taking office in January, is reportedly accompanied by some 300 business leaders on a visit that will include meeting with President Hu Jintao and participating in a summit of BRICS (Brazil, Russia, India, China, and South Africa).
Investments amid apprehensions
With new investments of nearly $30 billion in Brazil focused in the energy and mining sectors, China last year surpassed the US as the South American giant's biggest trading partner. The Monitor has tallied at least $65 billion in Chinese deals throughout the region since 2010.
To be sure, there is much apprehension over China's aims. "We don't want to be China's next Africa," a Mexican official told a US embassy economics officer, according to a February 2009 cable published by WikiLeaks, referring to the criticism that China has taken advantage of Africa's natural resources without developing the continent. Another cable two months later quoted the Brazilian consul general in Shanghai saying that "China's strategy in Latin America is clear: it wants to 'control the supply of commodities.' "
But Mr. Guerria is more optimistic. With the help of Chinese investment in infrastructure projects throughout the region, “Latin America is tapping into global markets,” says Guerria, who formerly headed Mexico's Finance Ministry and Foreign Affairs Ministry. Integration with the global economy "is absolutely integral," he says, and it will be key toward realizing a “Latin America decade."
The first transcontinental highway is to open later this year. It will connect Brazil to Peru's Pacific ports for the first time and bring it closer to the economies of China, South Korea, and Japan. Only about 25 percent of the region's roads are currently paved, compared to the 80 percent average among OECD nations, says Guerria.
Region must boost education, equality
But Chinese investment won't alone guarantee success. "I'd like to inject some caution into our discussions,” Guerria said in an April 2 speech at a business conference on Latin America at the Massachusetts Institute of Technology (MIT) in Cambridge, Mass. “This will not be Latin America's decade if Latin American countries continue to top global rankings of inequality.”
The region must boost educational standards and social programs while tackling income inequality, lax tax collection, and weak rule of law, he said.
Guerria called it unacceptable that the region's richest 10 percent earn 40 percent of all income, while the bottom 10 percent earn 1 percent of all income. This inequality is exacerbated by problems with taxation and social programs, he said. “Before taxes and transfers for social security, inequality is not much different between United States, Europe, and Latin America.”
Public services, especially education, need improvement, he added. The OECD's benchmark Program for International Student Assessment (PISA) measures Latin America in the bottom third of performers worldwide.
“A poor family will produce children that perform poorly in school. The breakup of that relationship is absolutely critical,” he said. Students in Shanghai test one to two years ahead of their 15-year-old peers in Latin America, according to PISA.
Are security risks overhyped?
In addition to educational gaps, significant security risks remain throughout the region, said officials attending the MIT business conference. Sergio Cabral Filho, governor of the State of Rio de Janeiro, told attendees that “fighting crime is important to economic development" and said Rio police are attempting to reclaim the state's favelas (slums) from drug gangs. Meanwhile in Mexico, the government is facing off against drug traffickers that control large swaths of the country.
Diego Serebrisky, managing director in Mexico for the private equity fund Advent International said that investment opportunities still outweigh the security risks. Last year the company raised $1.65 billion for a Latin American fund.
"The publicity that the crime levels and the drug war have, it's higher than the real impact on the country and it's localized in a number of regions,” he says.
Indeed, although Mexico's murder rate in 2010 was 18.4 homicides per 100,000 people, the rate in the capital was about half that. The rate in the violent border city of Ciudad Juárez exceeded 230 deaths per 100,000 people.
Yet the perception of violence, along with still-weak democracies and corruption in the region, have analysts warning that the “Latin America decade” will not always be smooth sailing.
“I strongly believe the volatility is not over,” Enrique Bascur, the managing director and Latin American Department head of Citigroup Venture Capital International, warning during the MIT conference. “We're going to continue to see problems. Don't be discouraged if you see Latin America running into troubles in the short to medium term.”
'Latin American decade'
Still, the OECD chief is not the only one predicting this is Latin America's time to shine. On a recent tour of the region, Obama said this is “a region on the move, proud of its progress and ready to assume a greater role in world affairs.” Alberto Moreno, president of the Inter-American Development Bank, forecast in a Financial Times column that "we stand poised to see the 2010s become the decade of Latin America."
"The foundations for sustained development – particularly in the area of political stability and fiscal reform – have been laid in much of the region. Having weathered the financial crisis, Latin America now has the opportunity to join Asia in leading a global economic recovery," Moreno wrote.
Washington had best not ignore Latin America, reiterated Colombian President Juan Manuel Santos while on a state visit to the US last week that included discussions on a pending US-Colombia free trade agreement. “There is so much potential on our continent,” he said.
Mr. Santos is reportedly considering a Chinese proposal for a $7.6 billion dry canal through Colombia. The OECD's Guerria says the proposal is an example of how Latin America's leaders are thinking creatively with China about ways to increase economic growth.
“It's very bold. This shows [Colombian President Juan Manuel] Santos is thinking about the future,” says Guerria, whose five-year term as OECD chief ends in June. He and other top regional business leaders repeated during the MIT business conference this month that China must be a partner and not a competitor.
Some cooperation is already taking place. China recently invested $10 billion in Brazilian oil giant Petrobras for offshore exploration, says the company's supply director Paulo Roberto Costa. “The Chinese can participate with us like a partner, not a competitor," Mr. Costa said. "Certainly, we need to work more in this direction."
