China and the death of Latin America

WASHINGTON (MarketWatch) � More than 40 years ago, I first read Eduardo Galeano�s classic, �Open Veins of Latin America.� Yes, it�s the same book that snarky Hugo Chavez presented to President Barack Obama in 2009.

The first sentences of Galeanos�s book remain as starkly comprehensive, and controversial, as ever: �The division of labor among nations is that some specialize in winning and others in losing. Our part of the world, known today as Latin America, was precocious. It has specialized in losing ever since those remote times when Renaissance Europeans ventured across the ocean and buried their teeth in the throats of the Indian civilizations.�

What is most incisive about those comments today, however, is not what they say about the past, most recently about U.S. policies, but how accurately they describe China�s current rapacious interest and plans for Latin America at the beginning of its investment curve. In 2009 some 17% of total Chinese foreign direct investment went to Latin America, 90% in raw materials.

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The growing influx of Chinese wealth has been credited with helping Latin American nations weather the recent financial crisis and expand access to global markets. China has proclaimed its trade and investment policy as an alternate strategy to alleviate poverty in the region.

In fact, China�s policies in Latin America are driven by its own industrial base, whose design is to produce more than its domestic economy can consume, so that the nation can flood the rest of the world with hard-currency-earning exports. In order to accomplish this goal, China must import raw materials.

It is the crudest of beggar-thy-neighbor mercantilism. China buys raw materials and sends them back as competitively manufactured goods. The value-added production from the raw materials extraction process, true to Galeano, is done in China.

Venezuela, Brazil, and Ecuador are positioned to export progressively more oil to China. With respect to minerals, Latin America has an estimated 25% of the world�s reserves of silver, 30% of its tin reserves, and 45% of its copper reserves. Soy, associated vegetable oils, and fishmeal exports to China are booming.

Aside from access to raw materials, China�s interest in the region appears directly to try to take advantage of the spending power of Latin America�s emerging middle class by flooding markets with cheap manufactured goods. Latin America also appears to be a wide-open market for contraband products. Pirated music, CDs, DVDs, and imitations of design clothing and footwear are notable examples.

But if we think of development as a process of diversifying an economy from concentrated assets based on primary products to a diverse set of assets based on knowledge, then China�s easy, unconditional access to Latin America�s raw materials needs to be carefully reconsidered by both the region�s leaders and its citizens.

It�s dangerous enough for Latin America�s economic development that the long-term boom in raw materials usually rewards those who own the land and the capital. This is not a good sign for trying to increase income equality.

Nor is it a healthy sign that China�s raw materials focus, when combined with the flood of cheap manufactured goods, poses other negatives. Commodity markets are notoriously volatile, and the long-term trend for prices is negative. But, most significant, Latin American industries are increasingly being out-competed by China in both Latin American export markets, as well as in Latin American regional markets.

This is the core conclusion of the vast research in �The Dragon in the Room: China and the Future of Latin American Industrialization,� by Kevin Gallagher and Roberto Porzecanski, who argue that market-by-market China�s penetration of world manufacturing markets is exceptionally faster and deeper than Latin America�s on almost any count. Latin American countries are also losing foothold in their own regions and are being all but left behind in high-tech trade in the world economy, they write.

Those trends could accentuate a pattern of specialization in Latin America that holds back the region�s longer-term prospects for any notion of balanced economic development. China�s trade and investment policy, as opposed to its own domestic policies, makes no claims to promote broad-based development. Restraints on corruption are non-existent. Chinese business practices are famous for ignoring discussions of local labor laws or sourcing locally available products.

By design, China will not contribute to knowledge-based, value-added innovation and production in Latin America. Chinese investors are perfectly happy with low levels of education among workers in raw materials industries. Liberalization of labor codes will lag. And investment in extractive industry research and development will be kept in China.

It is difficult not to believe that the Chinese have worked hard to study Chinese-language versions of Galeano�s �Open Veins.� For them the book is not commentary, but rather a �how-to� manual.