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Kevin Gallagher: Chinese investment in resources creating lopsided economy in Latin America

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to the Real News Network. I’m Paul Jay. We’re at Tufts University in Boston. For decades, Latin America has looked to the north, the United States, as the plunderer of their natural resources and the exploiter of their cheap labor. And in recent years, China’s been seen as a kind of savior. China’s been buying natural resources, making investments in infrastructure. Is China’s rise raising all boats in Latin America or not? Kevin Gallagher, in his new book The Dragon in the Room, argues that China may have had a positive effect on Latin America in the short term, but in the long run might actually be undermining Latin America’s industrialization. Now joining us to talk about all of this is Kevin Gallagher. Thanks for joining us, Kevin.


JAY: So just once again, Kevin teaches at Tufts University at the Global Development and Environment Institute, and he’s an associate professor of international relations at Boston University. Okay. So what’s the basic concept here?

GALLAGHER: The basic concept is that the Latin Americans have been bending over backwards to do everything they can to get the Chinese to invest in their economies and to purchase their goods, and they’ve been very successful at it for the past 10 years. Chinese have been purchasing oil, copper, soybeans, all sorts of primary commodities from the Latin Americans, and it’s actually helped them grow. Latin America, like you said, used to just focus on the United States, Europe, for a primary market. Now they have this new market in China and they’re really excited about the fact that they can sell all this stuff to China.

JAY: And China’s also been helping build refineries, building some infrastructure [inaudible] you know, all connected with getting commodities out of Latin America.

GALLAGHER: Absolutely. In addition to just purchasing or importing goods from Latin America, they’re pouring [in] foreign investment. They’ve got a stock of foreign investment of $25 billion, $30 billion, and it’s in oil, oil refineries, copper mines, iron mines, and infrastructure to get the natural resources to Pacific ports and to ship them to China.

JAY: Okay. But you’re arguing that in the long term this might actually weaken at least the manufacturing sector, and sort of make Latin America—what is it?—a hewer of wood and a drawer of water.

GALLAGHER: Yeah, in the longer run it could shift Latin America back to the 19th century, when it was a primary-commodities exporter and had very little growth. Yeah, we have real concerns about that. And I should say I’ve written this book with my friend and colleague, a Uruguayan economist named Roberto Porzecanski, and we say that the dragon in the room about the Chinese–Latin American relationship is the fact that the two are so excited about their bilateral relationship that they’re forgetting about the importance to have a diversified economy. With all this incentive toward selling commodities to the Chinese, the Latin Americans are forgetting that the Chinese are actually beating the pants off of the Latin American exporters and world markets, like in the United States, like in Europe, and at home in Latin America, where Chinese imports are outcompeting Latin American manufacturers.

JAY: Now, 30, 40 years ago, Latin America was ahead of China in terms of gross domestic product, in terms of exports. So why in 30, 40 years has China more or less surpassed Latin America? The Chinese and Latin American economies are kind of around the same size—at least they were.

GALLAGHER: Yeah, they weren’t, but they are now. China’s economy has leapfrogged over, and it is now larger than the entire sum of all the Latin American economies. What’s fascinating is that both Latin America and China had the same goal in the late ’70s, early ’80s. They had these inward strategies, and they wanted to integrate with the world economy and, quote-unquote, “globalize”, and they took two totally different paths. The Latin Americans took what’s called the Washington consensus: they liberalized trade, liberalized investment, pulled the government out of economic affairs, and thought that foreign investment would flow in and it would help them grow their economies.

JAY: So a whole wave of privatization of publicly-owned companies. The government gets out of the way, supposedly deregulates, allows free flow of capital, and so on.

GALLAGHER: That was the idea, and the hope was that that would grow your economy and take you to the next level. Latin American economies grew at a little over 1 percent per year in per capita terms since that whole strategy started. Go to China, their economies have been growing 6, 7 percent in per capita terms, and they’ve approached globalization in a totally different way. They always quote Deng Xiaoping, who said that our approach to integration and reform is going to be like crossing the river by touching each stone. They take it very carefully. They’re gradual. They support some industries so the industries are strong enough and innovative enough to be able to export, and then they liberalize trade. I say that the Latin Americans sort of dove into the river and didn’t know how to swim.

JAY: So in other words, not a planned economy but a lot of government-industrial strategy.

GALLAGHER: Absolutely. There’s a real mix in China. They have industrial policy, but they’re also fostering private enterprise. One example of a public-private partnership is Huawei. Huawei is a global telecommunications firm, a private firm, in China. But its development bank, the Chinese state-owned Development Bank, extended a $10 billion line of credit for Huawei to go into global markets. You don’t see any Latin American countries supporting their industries in such a manner.

JAY: And now the—somewhat similar in the banking system, too, if I understand it correctly, the banking system in Latin America, and for that matter United States, completely private, very little public mandate, you can say, or planned government strategy, where in China there’s a lot of lending going on right now because so much of the banking sector is still in either—if not straightforwardly government-owned, government owns major shares of the banks.

GALLAGHER: Sure. Most Latin American countries privatized their banks in the ’80s and the ’90s, and they’re owned by foreign companies, usually by Spanish banks, Canadian banks, or US banks. And so to get a loan, if you’re a company, you have to get a loan on globally determined interest rates, which have traditionally been relatively high, which has eroded some of the industrial base in the region for a long time—if you can’t borrow money internationally, you can’t expand—whereas in China they have a development bank that’s primary goal is to foster the development of small and medium-size enterprises and to get their big companies out of the country, penetrating markets across the globe.

JAY: Now, one of the critiques of what’s going on in China is that there’s so much lending going on as a form of stimulus that it’s actually going to create overcapacity, and someday they’re going to pay a price for this.

GALLAGHER: Sure, there’s a lot of money washing around in China. They just raised the interest rate recently. They’ve raised the level of capital requirements that banks have to have. I’d never be able to afford a house—I’d be able to afford a house there, but I wouldn’t be able to buy one, because the down payment is well over 20 percent that you have to put down, ’cause they’re just trying to control all this money. One of the things that they’re doing is encouraging getting that money out of the country. So they’re encouraging their companies to go and invest in Latin America, in Africa, and other places. And now you see Chinese car companies in Mexico soon to sell cars into the United States, Chinese steel companies in places like Brazil, and Chinese copper companies in Chile and Peru.

JAY: Well, your book’s about Latin America and China, but what does this tell—what’s the lesson of this for Americans and the American economy?

GALLAGHER: Well, a lesson for all economies is that you can’t just retreat the state out of economic affairs, regardless of your level of development. For developing economies, it’s really shown that you just can’t—especially with China in the world economy right now, you can’t just let markets determine your long-run development path. The government has to play a role, has to put together a strategy, and has to think about where you want to be and how you want to get there. But the same can be said about the United States and the developed economies. We’ve been sitting around letting markets determine how things work, and we’ve created these huge bubbles that have blown up the world economy.

JAY: And so far right now it seems to be how can we create another bubble and make some more cash out of another bubble while the world economy continues to blow up. Great strategy. Thanks for joining us.

GALLAGHER: Thanks for having me.

JAY: Thank you for joining us on Real News Network.

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Kevin P. Gallagher is Associate Professor of International Relations at Boston University and a Faculty Fellow at the Pardee Center. He also serves as Senior Researcher at the Global Development and Environment Institute at Tufts University. This policy brief is an update
and expansion of his forthcoming book with Roberto Porzecanski, "The Dragon in the Room: China and the Future of Latin American Industrialization""."