A Chinese scheme to build a railway across South America, crossing the Amazon rain forest, moves a step closer as Peru agrees to study the plan. Latin America needs to be more hard-headed with its big new partner
DUBBED “Mad Maria”, the Madeira-Mamoré railway was said, with only some exaggeration, to have cost a life for every sleeper laid. Built for booming rubber exports, the 367km (228-mile) line from Porto Velho in the heart of the Brazilian Amazon to the Bolivian border was rendered obsolete by new Asian plantations almost before it opened in 1912.
A century later a plan for a much longer railway across the Amazon, from Brazil’s Atlantic coast to Peru, is among a sheaf of infrastructure projects that China is offering to finance in Latin America. Li Keqiang, China’s prime minister, signed an agreement for a feasibility study for the railway during an eight-day trip through South America that began on May 18th in Brazil and will take him to Colombia, Peru and Chile.
Mr Li came armed with proposed investments and loans that could total up to $103 billion in Brazil alone (see article). His destinations and the projects both point to a maturing of China’s relationship with Latin America. This saw explosive growth in trade, as China gobbled up Latin America’s minerals, oil and soyabeans while exporting its manufactures.
Now economies are slowing on both sides of the Pacific. China’s slowdown has prompted a steep fall in commodity prices, and thus the value of Latin America’s exports. Brazil’s exports to China slumped by a third in the first quarter of this year compared with the same period in 2014.
But Chinese investment and loans are set to carry on growing. In January President Xi Jinping said that Chinese companies would aim to invest $250 billion in Latin America over the next ten years, compared with a previous total stock of $99 billion. While early Chinese investment was almost wholly in oil, gas and mining, it is broadening out to involve more companies and industries, including food and agriculture, manufacturing and, above all, infrastructure.
The same goes for Chinese loans. The $22 billion lent last year outstripped credits from traditional multilateral development banks, according to China-Latin America Economic Bulletin, published by Boston University. Apart from Brazil, the money has mainly gone to Venezuela, Ecuador and Argentina, where it has helped to sustain left-wing governments. Mr Li’s trip suggests a new interest in the business-minded countries of the Pacific Alliance.
Many governments in Latin America have embraced the Chinese dragon as a welcome alternative to the United States and the conditions imposed by the IMF and the World Bank. For a region with huge shortcomings in infrastructure, China’s investment, like its trade, is potentially a boon. But both have pitfalls.
An obvious one is sweetheart deals. Last year Cristina Fernández de Kirchner, Argentina’s president, negotiated a currency swap with China, as an alternative to settling her dispute with foreign bondholders. The price is high: the money is tied to 15 infrastructure deals in which Chinese firms face no competition.
More broadly, China has served to reinforce Latin America’s specialisation in commodities. That may not be the route to sustained growth. In a report published this week, the World Bank finds that increases in Latin America’s trade with and investment from countries of the “South” (ie, the emerging world) were associated with a smaller boost to growth and productivity than equivalents from the “North” (ie, the developed world).
China’s interest in developing Latin America’s infrastructure is not altruistic. It wants to lower the transport costs of its imports, such as soya from Mato Grosso state. Its railway and other infrastructure companies have spare capacity because consumption is replacing investment as the main source of Chinese growth.
Because of the concentration in commodities, Chinese trade and investment in Latin America have been “a major driver of environmental degradation”, according to the team at Boston University. The transcontinental railway is a new concern. Peruvian officials favour a northern route through virgin forests rich in biodiversity. Environmentalists prefer a southern route, to Matarani, beside a new road linking Brazil to Peru opened in 2012. But as with Mad Maria, traffic along this highway has been lower than forecast.
It would be wrong to blame China for these risks. Most of its companies in the region have a reasonable record of complying with environmental standards. Rather, it is up to Latin America to become as effective as its new partner in defending its interests in the relationship. Those interests include protecting the environment and avoiding one-sided deals struck for short-term political convenience.
the Economist |