A proposal to guard against China would hurt Latin America instead
The Hill, 9 August 2023
Kevin P. Gallagher and Jorge Heine
Latin America is struggling to build
back better after being struck by multiple shocks following the COVID-19
crisis. Development banks will have to play a key role in the region’s
recovery.
But rather than devising ways to
increase the amount of capital flowing to help address the region’s
woes, a bipartisan group of lawmakers has introduced the Inter-American
Development Bank Transparency Act. This bill would curtail the ability
of Chinese firms to bid on Inter-American Development Bank (IDB)
projects, as well as the ability of China to buy more IDB shares and
acquire more voting rights within it.
The U.S. deserves credit for enacting
robust competitive bidding processes at the IDB, where it holds an
outsized 30 percent voting share. But the fact that China, which has a
mere 0.1 percent of the vote at the IDB, wins more projects than U.S.
companies is a U.S. problem — not a China problem.
If the U.S. wants a greater share of
IDB projects to go to American firms, it should focus on creating
incentives for U.S. firms to successfully bid on projects and increase
the overall level of capital the bank has to work with. As it stands,
the proposed legislation risks hurting Latin American development and
U.S. standing in the region more than it would hurt Chinese firms.
Latin America has just passed through
some very difficult times. In 2020, the region had the steepest economic
downturn in 120 years, according to the United Nations Economic
Commission for Latin America and the Caribbean, with 6.8 percent
negative growth, in a year in which global GDP fell by 3.3 percent. No
other region in the world endured such an economic contraction. And with
8 percent of the world’s population, the region also suffered a
staggering 30 percent of the world’s fatalities from the COVID-19
pandemic, according to official figures — the highest share of any
region.
Latin America desperately needs to get
back on its feet. Yet, according to the latest International Monetary
Fund projections, 2023 growth in the region will be a meager 1.6
percent. Given the export orientation of many of its economies, better
infrastructure is a must to improve its competitiveness in world
markets.
Nonetheless, in the last few years,
Latin American investment in infrastructure has been among the lowest in
the world, with an annual average of 2.5 percent of GDP — only slightly
higher than sub-Saharan Africa’s spending, paling in comparison with
what is spent in East Asia (8 percent) and the Middle East and North
Africa (4 percent). The net result of this is a huge infrastructure
deficit. It leads to average transport and logistics costs between 13
and 18 percent per export unit, twice the OECD average of 8 percent.
The stated aim of the IDB is to
“achieve development in a sustainable, climate-friendly way.” Yet, the
group of senators is focused on the fact that the U.S. firms don’t bid
on IDB projects and, when they do, they lose to more competitive firms —
many of them from China. This was also the argument made by the
Trump-appointed and now ousted Mauricio Claver-Carone when he was the
head of the IDB.
Chinese companies win IDB bids for
construction projects because they take part in the bidding and offer
the best terms. U.S. firms generally do not participate in IDB bidding
because they consider the projects too small or too risky. Chile has led
the way in public-private partnerships in infrastructure over the past
30 years, leading several regional rankings on infrastructure quality.
In doing so, it has attracted $15 billion in foreign infrastructure
investment. But not a single U.S. company has been part of it.
Anecdotally, when the then-minister of
Public Works (and later Chilean president) Ricardo Lagos did a roadshow
in the United States in 1997, he told one of us the CEOs of U.S.
construction companies told him that the Chilean projects were too
small.
Given that U.S. companies are not
willing to bid, there is something slightly perverse in designing U.S.
legislation to hamper, if not directly block, badly needed foreign
investment, whether it comes from China or elsewhere. The net result of
this legislation will only be to further limit Latin America’s growth
and development.
If this is not how the U.S. wants to
be perceived in the region, Congress should focus on creating incentives
to make U.S. firms more competitive bidders on overseas projects. This
would expand the amount of financing available for Latin America’s
growth prospects, rather than constraining it.
Kevin P. Gallagher is the director
of the Boston University Global Development Policy Center and a
professor of Global Development Policy at the Frederick S. Pardee School
of Global Studies at Boston University.