China comes to Latin America

Another world power has come to feast on the bounty of Latin America.  China has been investing billions in the extraction of raw materials to drive its relentless pace of construction and is purchasing millions of tons of soy and grain to feed an urbanizing population.  Is China merely extending a history of resource exploitation or will Latin America capitalize on this most recent resource boom?   Though the results will vary for each country, China’s gradual pace of urbanization and Latin America’s more efficient increase in social spending may work to extend and improve this most recent bonanza.

Latin America’s economic history has followed a pattern.  Powerful countries saw the region as an opportunity to extract vast amounts of resources at a low cost.  Labor was cheap; land was abundant and fertile; natural resources were plentiful.  Moreover, the existing social structure was such that a few elites were able to control a large and mostly landless peasantry.  These conditions often contrasted with those of more developed countries, where the growing middle classes, dwindling availability of land and nearly exhausted raw materials strained their supplies of resources and increased the cost of labor.  Furthermore, the rising middle class increased demand in the economies of these foreign powers, while the production of manufactured goods shifted the focus away from agriculture as the primary engine of economic growth.

The first to arrive in the Americas were the rising powers of Europe.  Spain and Portugal came as colonizers, then later Britain, France and Germany as investors and consumers of Latin American grain, cattle, wool and metals among many other agricultural products and natural resources.  Later, the United States extended its reach, desiring many of the same goods and practicing a similar strategy of economic exchange.  In this exchange, the developed power would purchase agricultural products and then invest – either directly or through loans – in mining.  The developed country would then sell its manufactured products to the region, which fetched much higher prices compared with the primary products produced in Latin American countries.  The result left the region with high debts, towering trade deficits and little control over their extractive industries.  When global demand for a specific resource collapsed or the local supply ran out, the short-lived boom would turn into a prolonged bust, creating political and social instability in the Latin American country involved.

In 2004, China invested $285mn in Latin America.  By 2010, that number had risen to $15bn, accounting for 9% of all foreign direct investment (FDI) in the region, and the third largest of any other country in Latin America.  However, 90% of Chinese FDI was directed towards the extraction of natural resources.

The Chinese government and private Chinese financiers tend to take a large equity stake in competitive up-and-coming Latin American companies.  Rather than investing in the largest players, they seek out smaller partners, otherwise overlooked.

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