Costs and Benefits of Chinese Investment in Latin American Extractive Industry

Summary of a 2015 Original Research Essay

Extractive industries (minerals, oil, and gas) have been the focus of the investment relationship between Latin America and China for over ten years, resulting in a mixed bag of political, economic, social, and environmental consequences for the region.  If Latin American leaders determine that the costs of extraction outweigh the benefits, they may want to slow or stall investment to minimize negative effects.

The millennium’s first decade exploded with mining claims and operations throughout Latin America. Kevin Gallagher, in a NACLA Report on the Americas, noted “Latin America is now the second largest destination for Chinese outward FDI, which comes mostly from state-owned companies and focuses on primary resources,” partially because of the “Going Out Strategy” to increase the competitiveness of Chinese businesses abroad.[1]  The China Daily noted that, in a shift from a mineral to gas and oil focus, Chinese companies have been transitioning “from the investment stage to the sustainable development stage…”[2] which could have major economic and political benefits for Latin America.  The growth in FDI in extractive industry has paralleled general trade growth and strengthened diplomatic ties.  Significantly, the Chinese government released its first policy paper on Latin America in 2009, promising that “China will, on the basis of mutual benefit and win-win cooperation, give positive consideration to concluding free trade agreements with Latin American and Caribbean countries or regional integration organizations.”[3]

Politicians, scholars, and local organizations have positive and negative views of extraction industry’s net impact in Latin America, and specifically Chinese operations.  Foreign companies inject capital into national and local governments, build large infrastructure projects, solidify trade relations between the two nations, and encourage the development of regulatory institutions and tax regimes which many Latin American countries may lack.  By the same token, extraction operations’ rural incursion can galvanize local political organization and enfranchisement. Revenues can neutralize some of the negative economic and environmental effects. The attention of a highly connected and growing nation like China elevates the political and economic status of Latin American countries generally.  The companies themselves offer employment, training programs, and knowledge sharing opportunities that benefit the relatively less skilled Latin American workforce and corporations.

On the other hand, some claim that this relationship reflects Latin America’s exploitative, extractive colonial past.  The political, economic, and environmental costs of mining may be too much for Latin American systems to bear.  Barrington and Bury refer not just to environmental degradation but “unprecedented forms of landscape transformation.”[4]  Poor labor and environmental standards records plague some of the invested companies, and even among those with good records rarely contribute long term to local job growth or retail opportunities.  The lifespan of most mines is decades at best, so most locals only work unskilled jobs and have littler opportunity to learn any trade skills.  Infrastructure is built around and for the extraction site, and may be of little use for communities once closed.  Whole communities may be displaced or have their ways of life destroyed by deforestation, acid mine drainage, and other environmental damage.  A weak tax regime, extreme concentrations of funding and political power, an impoverished and sometimes isolated and disenfranchised populace, and a vulnerable ecosystem, the mating of Latin American countries with Chinese extraction investment has fallen short of perfect.

Latin American leaders may need to consider the broader picture of what extraction investment means to their countries.  Used correctly, extraction funds can be used to stabilize political and economic upheaval, protect the environment, and serve communities most impacted by the negative effects of extraction.  However, given institutional weakness, governments may not be able to control how their land is used, or protect their citizens.

[1] Bebbington, Anthony T. 2009. “The New Extraction: Rewriting the Political Ecology of the Andes?” NACLA Report on the Americas 12-40. Accessed 2013.

[2] China Daily Latin America. 2014. “China’s mining investment to pay off: Latin American output expected to surge as production gets underway.” USA.chinadaily.com. July 14. Accessed April 20, 2015.

[3] USC US-China Institute. 2009. “China’s Policy Paper on Latin America and the Caribbean: The first ever policy paper on Latin America and the Caribbean region launched by the Chinese government.” china.usc.edu. April 20. Accessed April 20, 2015.

[4] Bebbington, Anthony J, and Jeffery T Bury. 2009. “Institutional Challenges for Mining and Sustainability in Peru.” Page 165. Edited by B.L. Turner II. PNAS (pnas.org) 106 (41). Accessed 2014.

Bibliography

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Note: picture is of a not yet fallen tree in Rock Creek Park, Washington, DC.

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