During Latin America’s China-led commodity boom, governments turned a blind eye to the inherent flaws in the region’s economic policy. Now that the commodity boom is coming to an end, those flaws cannot be ignored. High on the list of shortcomings is the fact that Latin American governmentsand Chinese investorslargely fell short of mitigating the social and environmental impacts of commodity-led growth.
The recent commodity boom exacerbated pressure on the region’s waterways and forests, accentuating threats to human health, biodiversity, global climate change and local livelihoods. China and Sustainable Development in Latin America documents the social and environmental impact of the China-led commodity boom in the region. It also highlights important areas of innovation, like Chile’s solar energy sector, in which governments, communities and investors worked together to harness the commodity boom for the benefit of the people and the planet.
About the Author
Rebecca Ray is a research fellow at Boston University’s Global Economic Governance Initiative and a PhD student in economics at the University of Massachusetts Amherst.
Kevin Gallagher is Professor of Global Development Studies at Boston University’s Frederick S. Pardee School of Global Studies, and Co-director of BU's Global Economic Governance Initiative.
Andrés López is a full professor of development economics and head of the economics department at the University of Buenos Aires as well as the executive director of the Red Sudamericana de Economía Aplicada.
Cynthia Sanborn is Professor of Political Science and Vice President for Research at the Universidad del Pacifico.
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China and Sustainable Development in Latin America
The Social and Environmental Dimension
By Rebecca Ray, Kevin Gallagher, Andrés López, Cynthia Sanborn
Wimbledon Publishing CompanyCopyright © 2017 Boston University, Centro de Investigación para la Transformación, Universidad del Pacífico and Tufts University
All rights reserved.
CHINA IN LATIN AMERICA: LESSONS FOR SOUTH–SOUTH COOPERATION AND SUSTAINABLE DEVELOPMENT
Rebecca Ray, Kevin Gallagher, Andrés López and Cynthia Sanborn
Latin America's recent commodity boom was associated with a sharp increase in social and environmental risks. The boom was largely driven by trade and investment with China and concentrated in the petroleum, mineral extraction and agricultural sectors – sectors strongly linked to environmental degradation and social conflict. With some notable exceptions, Latin American governments have fallen short of mitigating these risks and costs of the boom. While China should not be blamed for the bulk of Latin America's environmental and social problems, it would be wise to mitigate the impacts of its overseas activities to maintain good relations with host countries and to reduce the risks of international investment. Some Chinese firms have demonstrated an ability to adhere to best practices in these arenas, but overall, thus far, they lack the experience or policies to manage their impacts in the region. As the boom tapers off and Latin American economies slow down, there is increasing pressure on governments to streamline approvals for new export and investment projects, and to ignore civil society organizations working to hold governments and foreign firms accountable. It is in the interests of the Latin American and Chinese governments, as well as Chinese firms, to put in place adequate social and environmental policies to maximize the benefits and mitigate the risks of China's economic activity in Latin America.
In this context, the present study asks two research questions. First, to what extent has China independently driven environmental and social change in Latin America? Second, to what extent do Chinese firms perform differently from their domestic and foreign counterparts when they invest in Latin America? We and our colleagues have explored these questions through a series of eight country-level case studies – in Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico and Peru – laid out in the chapters that follow.
2. China as a Driver of Social and Environmental Change in Latin America
China has recently grown into a major export destination for the Latin America and Caribbean region (LAC), second only to the United States. In 1993, China consumed less than 2 percent of LAC exports, but by 2013 it accounted for 9 percent. However, that importance was quite uneven across different export sectors. As Figure 1.1 shows, over the last decade China has nearly tripled its market share of total LAC exports, more than tripled its share of extractive exports and nearly doubled its share of agricultural exports. But its demand for manufactured LAC exports has barely moved, staying at about 2 percent.
In fact, China has been an important driver in the expansion of LAC export agriculture and extraction. As Figure 1.2 shows, while agricultural and extractive exports to China from LAC have been rising as a share of gross domestic product (GDP), for the last decade those exports to the rest of the world have been stagnant or even falling overall. Not only did Latin America's extractive and agricultural sectors boom due to China's demand, but Chinese demand also played a role in increasing the general price level of major commodities during this period, significantly increasing the terms of trade across the Americas.
As a result, LAC exports to China have become increasingly concentrated in extraction and agriculture. As Figure 1.3 shows, from 1999 to 2003 LAC exports to China were fairly balanced among the three major sectors, but a decade later they were dramatically different, with extraction accounting for over half of all LAC–China exports. Nor do they reflect the composition of China's imports overall, which are predominantly manufactured goods. But this increasing concentration in extractive goods does reflect China's increasing thirst for minerals, which rose from 8 percent to 22 percent of its imports over the same time period.
Chinese investment in LAC has been similarly concentrated in primary sectors. Figures 1.4 and 1.5 show the sector distribution of FDI inflows from mergers and acquisitions (M&As) and greenfield projects, respectively. Most Chinese direct investment into LAC has been through M&As, and over two-thirds of this investment has been in the oil and gas sector. In contrast, only 15 percent of overall M&A inflows to the region have been in that sector. Among greenfield FDI (GFDI) projects, China's difference is most visible in agriculture. Food and tobacco comprise a quarter of Chinese GFDI into LAC, but only 2 percent of overall GFDI inflows.
2.1 Employment creation
Because the LAC–China export basket is so different from overall LAC exports, the employment impact of LAC–China exports is also different. Specifically, because of the heavy concentration in extractive industries, LAC exports to China support fewer jobs per US$1 million. Figure 1.5 shows the labor intensity of LAC overall economic activity, exports and, specifically, LAC exports to China. Over the last decade, total economic activity has supported far more jobs than exports. This is largely due to the extremely labor-intensive nature of peasant agriculture, which is pervasive in the region but absent from production for export. Total exports support fewer jobs, but the labor intensity has remained fairly stable – falling from 59 to 56 jobs per US$1 million. Exports to China, however, have fallen by over a third in the number of jobs they support for every US$1 million – from nearly 70 in 2002 to fewer than 45 in 2012.
2.2 Environmental impacts
The disproportionate, and growing, concentration in extractive and agricultural products of LAC exports to China give them a distinctly different environmental footprint than other exports. This section looks more closely at two environmental impacts, one global (greenhouse gas (GHG) emission) and one local (water use). As Figure 1.6 shows, LAC–China exports cause more greenhouse gas emissions and use more water per dollar of output than other exports, and much more than overall economic activity.
The data in Figure 1.6 are from 2004, the last year of directly measured data on each indicator. However, as Figure 1.2 shows, LAC exports to China have continued to become more and more concentrated in a few sectors since that time. Figure 1.7 applies the 2004 intensities to the changing trade-basket composition to create a water "balance of payments" between China and LAC. It shows a positive balance of 100.4 billion cubic meters of water in 2012, meaning that LAC sent China much more water in its exports than what was embedded in imports. For reference, the volume of Lake Nicaragua is approximately 108 billion cubic meters. In other words, if LAC had not traded with China in 2012 (by producing domestically everything it imported from China and consuming locally everything it exported to China), it would have saved roughly 90 percent of the volume of Lake Nicaragua. This has major ramifications, not only environmentally, but also socially, as the case studies in this book show that competition for water is a frequent source of conflict between communities practicing peasant agriculture or small-scale ranching and large-scale plantations and mines.
Figure 1.8 shows a similar environmental "balance of payments," but for GHG emissions. LAC exports to China are responsible for far fewer GHG emissions than Chinese exports to LAC. Of course, the impacts of GHG emissions are global rather than local. It makes little difference to climate change whether those emissions originate from LAC or from China. However, the scale is still very interesting. As much as LAC exports to China (and their embedded GHG emission) have risen in the last decade, the GHG emissions embedded in LAC imports from China have risen at an even faster pace.
Figures 1.6 and 1.8 measure GHG emissions in COequivalency, including the effects of land-use change. In LAC, land-use change is one of the most important factors in net GHG emissions changes. According to the FAO, LAC deforestation accounted for 1.7 megatons of CO2 equivalence in GHG emissions in 2010, or about 41 percent of the region's total for that year. Our case study of China's relationship with Brazil shows that exports to China are a statistically significant driver of deforestation in the Brazilian Amazon, together with the total soybean-planted area. In turn, China has been an important driver in the expansion of the soy area: in 2013 China accounted for three-fourths of Brazil's oilseed exports (see Chapter 7 for more information).
In terms of deforestation, Figures 1.6 and 1.8 actually understate the GHG emissions from LAC's relationship with China, because while they account for deforestation directly linked to exports, they do not account for the most important cause of deforestation: roads, canals and railroads to get those products to ports. Research by Philip Fearnside (one of the authors of Chapter 7, on Brazil) and others (2013) show that access roads are the most important cause of Amazonian deforestation, as they open the forest to human settlements and interrupt animal migration patterns. Thus, in order to adequately account for the GHG impact of the "China boom" in Latin America, it is important to include not just exports to China but also Chinese-financed roads, canals and railroads designed to get those products to ports, as well as dams to provide power to mines and oilfields.
Figure 1.9 shows South America's most biodiverse areas and indigenous territories, with Chinese-financed infrastructure and Chinese FDI projects added. The biodiversity of these areas is reflected in the various shades of grey: the darkest grey patches (present only in eastern Ecuador and the northern extreme of Peru) represent areas with the highest biodiversity in four different groups of species: mammals, birds, amphibians and plants. The second-darkest shade, present near the border of Peru and Brazil, indicates areas with the highest biodiversity in three of the four species groups, and so forth. Indigenous territories are reflected in stripes.
As Figure 1.9 shows, two major Chinese investments may pose serious risks to highly biodiverse areas and indigenous territories: the western half of the transcontinental railway and oilfields in eastern Ecuador. The transcontinental railway is still in the planning stage, so it does not yet have a finalized path. Two possibilities exist for the route of its western end: one through Piura in northern Peru and another through Puno in southern Peru. The northern route crosses into Brazil through an area with extremely high biodiversity in three out of the four species groups shown here in the darkest shade in Figure 1.9. The southern route largely avoids this environmentally sensitive region. The final choice of route for this railway will be crucial in determining its environmental impact.
The other major Chinese investment in a highly biodiverse area is oil development in eastern Ecuador, much of which also occupies traditional indigenous territory. The southernmost two Chinese oil concessions in Ecuador are new, and their contracts have not yet been finalized. If these concessions do in fact go through, the terms of their contracts will be extremely important for both their social and environmental impacts.
2.3 Rising to the challenge: Social and environmental safeguard innovations
In the face of this tremendous growth in sectors intrinsically linked to high environmental impacts and risks for social conflicts, we find that several Latin American countries have developed important policy responses to minimize the risks. Three of the most innovative of these responses are Brazil's new environmental oversight measures, Ecuador's new labor standards and Peru's transparency measures and indigenous protections.
Brazil (Chapter 7) dramatically enhanced the enforcement power of its environmental regulations in 2008 without changing the current environmental laws themselves. Instead, Brazil's Central Bank changed its rules to no longer allow public bank loans to operations with unpaid fines for environmental irregularities reported by government agencies. Public-agency fines for environmental violations can be postponed through appeals, but this more proactive approach has immediate effect.
Ecuador (Chapter 4), in 2008 and 2010, enacted a series of labor protections for its petroleum sector – enactments that form one of the most progressive packages of labor protection in the LAC region. In 2008, Ecuador strictly curtailed the use of subcontracted labor, limiting it to "complementary" work such as security and custodial services. The 2010 Hydrocarbon Law further boosted labor protections in the oil and gas sector by requiring foreign investors to hire Ecuadorian workers for 95 percent of unskilled and 90 percent of skilled jobs. Moreover, this law required profit-sharing with all employees, including contract workers. Taken together, these laws eliminated two of the most important sources of labor conflicts facing Chinese (and other international) investment projects across the LAC region: the use of foreign laborers and differences in the labor conditions between directly hired and subcontracted employees working at the same project.
Peru (Chapter 6) has made important strides in transparency and indigenous rights over the last decade. Peru joined the Extractive Industries Transparency Initiative (EITI) in 2007 and in 2011 became the first country in the Americas to be declared compliant within that framework. Also in 2011, it became the first LAC country to enact legislation to implement International Labour Organization (ILO) Convention 169, which grants indigenous communities the right to prior consultation on any state policies that directly affect them, including concessions and permits for extractive projects within their traditional territories. To comply with its EITI commitments, the Peruvian government and participating companies publish detailed reports of revenue flows related to the extractive industries, available online for concerned citizens and civil society. Furthermore, the Peruvian government assigned staff from the Ministry of Energy and Mining to the EITI process, including working with non-participating companies to encourage participation. Starting in 2014, three Chinese companies confirmed their involvement in the process: Shougang, China MinMetals and China National Petroleum Corporation (CNPC). These two measures put Peru in a leadership position regionally for public participation in the resource boom.
2.4 Progress under fire: Challenges to existing protections
The LAC–China export boom has been supported by high world prices for the commodities involved, which has boosted the value of minerals reserves and increased bargaining power for countries interested in enacting social and environmental standards for their use. However, the same phenomenon has boosted the power of sectors associated with the boom that have incentives to resist these standards.
Within governments, the extractive boom has prioritized mining and hydrocarbons ministries, as executive branches face pressure to speed up the process of beginning new investment projects. To that end, Peru has recently curtailed the authority of the Environment Ministry over the approval and supervision of extractive projects. The objective is to streamline the process of getting new extractive investments under way and accelerate production in the face of flagging world prices, but this change has not incorporated safeguards to prevent conflicts of interest from corrupting the process and diminishing the power of environmental oversight (see Chapter 6 for more on Peru).
In Brazil, the China boom has also had major impact on the agricultural sector. There, Chinese demand has enriched and empowered the "ruralist" voting block, representing large landholders in Congress. This newly strengthened voting block has exerted powerful influence on the current administration's environmental stances (Santilli, 2014; Smeraldi, 2014). For example, it has mounted an effort to roll back the new Central Bank rules cited above, which have proven useful in strengthening enforcement of environmental safeguards.
3. The Performance – and Incentives – of Chinese Investors in Latin America
Our research shows that Chinese firms do not perform significantly worse relative to domestic or other international firms. In fact, despite relatively weaker levels of regulation at home in China, and a fledgling set of guidelines for overseas companies, our case studies found some instances of Chinese firms outperforming their competitors, especially with proper incentives from governments and civil society. This section explores lessons from each of these case studies. Overall, they show that Chinese firms are flexible, able to adapt to new environments and perform up to local standards. However, several of the cases show that as these investments continue to expand, major challenges still lie ahead.
Excerpted from China and Sustainable Development in Latin America by Rebecca Ray, Kevin Gallagher, Andrés López, Cynthia Sanborn. Copyright © 2017 Boston University, Centro de Investigación para la Transformación, Universidad del Pacífico and Tufts University. Excerpted by permission of Wimbledon Publishing Company.
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Table of Contents
Part I. Introduction and Regional Overview ; 1.China in Latin America: Lessons for South-South Cooperation and Sustainable Development Rebecca Ray, Kevin P. Gallagher, Andres Lopez, and Cynthia Sanborn; Part II. China and Latin America’s Hydrocarbons Sector; 2. FDI and Trade: is China Relevant for the Future of our Environment? The Case of Argentina Julian Donaubauer, Andrés López, and Daniela Ramos; 3. Colombia and China: Social and Environmental Impact of Trade and Foreign Direct Investment Guillermo Rudas Lleras and Mauricio Cabrera Leal; 4. A Line in the Equatorial Forests: Chinese Investment and the Environmental and Social Impacts of Extractive Industries in Ecuador Rebecca Ray and Adam Chimienti; Part III. China and Latin America’s Mining Sector; 5. An Assessment of the Environmental and Social Impacts of Chinese Trade and FDI in Bolivia Alejandra Saravia López and Adam Rua Quiroga; 6. Chinese Investment in Peru’s Mining Industry: Blessing or Curse? Cynthia Sanborn and Victoria Chonn; Part IV. China and Latin America’s Agricultural Sector; 7. China’s Influence on Deforestation in Brazilian Amazonia: A Growing Force in the State of Mato Grosso Philip M. Fearnside and Adriano M.R. Figueiredo; Part V. China and Latin America’s Manufacturing Sector; 8. Chinese Incidence on the Chilean Solar Power Sector Nicola Borregaard, Annie Dufey, Maria Teresa Ruiz-Tagle, and Santiago Sinclair; 9. China in Mexico: Some Environmental and Employment Dimensions Claudia Schatan and Diana Piloyan
What People are Saying About This
“This book is one of the most important and recent efforts to analyze the social and environmental impacts of the deepening relationship between China and the Latin American countries over the past few decades. The increasing volume of goods traded between the Asian giant and the region, the traces left by their extractive companies and the lessons learned from their investment projects along the continent, provide the current picture – and possible future path – of this growing bond.” –César Leonidas Gamboa Balbin, Professor, National University of San Marcos, Peru
“This work provides stakeholders on both sides of the world with much-needed analysis and data to start a conversation that can’t wait any longer: how are we going to address and prevent the unwanted environmental and social impacts of Chinese investments in Latin America?” –Paulina Garzón, Director, China-Latin America Sustainable Investments Initiative, USA