The PRC’s Economic Diplomacy in Latin America: Unmaking a Region

Image source: WEF

The Latin American economies have been characterised as lackadaisical, lacklustre and prone to recessions. The overbearing hand of the Caudillos, coupled with unhealthy economic policies never allowed these economies to mature. Indeed, it is hard to forget the lost decades and the high inflation rates that grounded most of the economies while the frequent restructuring of these economies and piling debt made matters even worse. Whereas recently manufacturing is on the rise, traditionally these economies have been characterised as inward looking with special emphasis on the production and export of raw materials at the mercy of global prices. For instance, the Central American economies focus primarily on coffee, fruits and other agro-based products and to some extent small scale manufacturing and notably tourism in Costa Rica. Overt American interference and political instability coupled with massive levels of corruption never allowed these economies to take off.

Image source: REUTERS/Claudia Daut

Enter the Dragon

Armed with the Monroe Doctrine, the United States treated Latin America as its own backyard and especially during the era of the Cold War, it considered any other power approaching this area as blasphemous. The end of the Cold War, however, offered the Latin American states some breathing space and the PRC was quick to take note of the opportunities to invest in the region. The PRC’s isolation did not help it either, isolated at the end of the Cold War and the requirement for raw materials and a potential market along with its desire to diplomatically isolate the Republic of China, the PRC decided to set its foot on Latin America.

A Benign Relationship?

Foreign investments, while a sure way of exploring markets and accessibility options in addition to generating income and employment can also be a source of dependency. As reported earlier the Latin American economies are overly dependent on external economies and due to their constant political instability, more prone to exploitation. Chinese investments and loans are often opaque in nature and lucrative for cash and capital-starved states who would rather risk obtaining cheap loans for infrastructure developments than take a longer approach from other international lending agencies. In addition to that, the PRC also ekes out concessions that would be inimical in the longer run.

Additionally, it would be a fallacy to call the PRC’s economic adventures as benign. Being a communist state, its economic assistance is marked with gaining political concessions. From shaping public opinion and perceptions about the PRC to eking out concessions regarding its ‘One China’ policy and recognising the PRC instead of the Republic of China (Taiwan) the PRC has placed a huge amount of conditions in exchange of cheap loans. Unfortunately, the Latin American economies are not only in need of loans and economic support, but also look forward to newer markets and how could the PRC with the world’s largest population not be just what the doctor ordered? So entrenched are the economic relations that not only in Costa Rica where the estadio nacional (national stadium) was constructed by the PRC in exchange for switching recognition from the Republic of China to the PRC the same has been repeated in El Salvador. Other states where the Chinese have made strong economic overtures are Brazil, Peru, Ecuador, Bolivia and even Argentina.

While national corporates and companies do require state backing to engage in business initiatives in foreign states, the PRC has a unique approach, as it encourages its state companies and certain private players to take forward the message of the PRC along with its economic engagements. Such unprecedented levels of corporate diplomacy is previously unheard of. Both state-owned enterprises and private players are making strong headways into Latin America where 53 percent of exports from Latin America from the extractive industries and a small amount from manufacturing and agro-based industries account for the main exports. Additionally, Chinese loans offer relief to the general people of Latin America in terms of energy, infrastructure and other requirements. The PRC’s sudden jump in investments accounting a total of 480 percent rise from 2008 to 2018 including the U.S. $ 150 billion in lending from 2007 to 2017 speaks volumes.

For many Latin American states, the PRC is a knight in shining armour which offers loans without specific conditions and economic aid. Its policy of financing institutions and infrastructure development is crucial for these states in the longer run. Devoid of territorial disputes and political squabbles unlike the states in Southeast Asia, the Latin American states are indeed the perfect partners to the PRC in these economic avenues. No wonder, Chinese investments have also extended to the development of science and research under the ‘science silk road’ initiative which has led to the construction of a Space Station in Argentina and other scientific innovation programmes.

While the United States has no less been a bully and has also been involved in organising coups and castigating many regimes, the PRC has been a rescuer on many occasions since 2008. Dipping oil prices in 2011 coupled with a reduction in commodity prices gave the PRC the right opportunity to draw similarities between it and the Latin American countries to provide economic aid as well as a voracious market, thus staving off the region from an impending economic disaster. It must be remembered that the Latin American states do not regard their past economic misadventures too fondly, and are sceptical about the global market, but the association with the PRC has bought them time which is crucial. No wonder, Beijing is now the largest trading partner of many such states and continues to grow exponentially while the influence of the United States diminishes at an alarming rate.

The PRC also made offers to the Latin American states to enter the Belt and Road Initiative and 19 states starting with Panama joined it while the others still engage with it on infrastructure and other economic projects. This explains the diminishing American influence in the region, a gap that the PRC has exploited well. The inability to finance large scale infrastructure projects obviously created room for the PRC to encash and hence quite a lot of these projects are now in Chinese hands. For instance, the fallout of the Operation Lava Jato (Car Wash Investigations) exposed a dirty underlying corruption scandal in Brazil which made many incumbent companies stay off infrastructure projects leading to the PRC march in as a rescuer. In this context, the PRC understand that cash strapped Latin America would be the perfect host to Chinese investments without batting an eyelid.

Image source: AP

A Surprise in Making

However, Chinese loans and economic aid is not fraught without dangers. It is believed that in the post-COVID scenario the PRC may not be the best bet for the Latin American economies. Already it need not be emphasised that these states are overly dependent on Chinese markets and investments and even in the past many Chinese investments have come under scrutiny. Previously the same pattern was played by overt American intervention and interference in the economies while in the present state the Chinese are engaging in the same. These, of course, raises concerns within the continent that the PRC may not be able to bail out these states from the economic downturn that they have faced due to the pandemic. The truth is that Chinese assistance to the Latin American states has already reached their point of saturation, and in any case questions raised on the origin of the pandemic is not helping them either. China’s latest causes or worries are rather in its own neighbourhood with a resilient India and other states staring back at the Chinese impudence in the region. In these testing times, the PRC can no longer be the safety valve to many Latin American economies. For instance, the pandemic has dried up the markets in the PRC in addition to its production capabilities. While it replaced the United States and the European Union as the most favoured destination of raw and finished products, in the current scenario much of the sheen has been lost. Chinese loans dipped to a meagre U.S.$ 1.1 billion from U.S.$ 35 billion in 2015, what is more, alarming is that Venezuela which was close to the PRC received no newer loans and saw an end of grace period of debt servicing, a clear sign that the PRC is exhausted in Latin America.

Unfortunately, the Latin American states have still not developed a concrete strategy to engage in economic development in the region without depending on external powers. Some suggest that it was the cyclic economic structure of the region which depended on the export of raw materials and the infamous ‘Dutch disease’. As in the rest of the developing world, Chinese investments may have brought in much-required finances and development projects but the net beneficiaries are not the general population of the region. In fact, cheap Chinese goods have already destroyed many fragile Latin American industries, which again, in turn, makes these states more dependent on the PRC. Although it would be too early to write off the PRC, it would be better for the Latin American economies to stop relying on external forces and instead focus on long term interests and holistic development on their own accord.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of The Kootneeti Team

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Arnab Chakrabarty

Arnab Chakrabarty is a Guest Lecturer at Sikkim University, Department of International Relations and a former PhD Scholar from the Centre of Latin American Studies at Jawaharlal Nehru University, New Delhi

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