China’s footprint in Latin America is large and growing. It is the region’s second-largest trading partner after the United States and the largest sovereign lender to Latin American governments. Indeed, as a lender, China is overtaking long-standing multilateral financial institutions in the region such as the World Bank and the Inter-American Development Bank. Between 2008 and 2019, the two organizations just surpassed the $131 billion in credit China extended in Latin America. All indications are that China will soon become the largest debt holder in the region.
That should worry policymakers in Latin America and the United States. The COVID-19 pandemic, low commodity prices such as copper and soybeans, rising borrowing costs and a stagnant global economy mean that Latin America is entering a period of low economic growth. In this environment, Chinese investment will be hard to resist. But the money comes with strings attached. China is using its economic might to advance its foreign policy agenda, including persuading countries to stop recognizing Taiwan as sovereign. It borrows on terms that often undermine democratic norms. This is especially dangerous in parts of the world where institutions and democratic practices are often fragile.
The best way for Western governments to respond to rising Chinese influence is to invest in Latin American human capital. Specifically, the U.S. and European countries should provide more scholarships for Latinos to study and research abroad, and they should use digital technologies such as online courses to reach young leaders in the region. Competing with China primarily over who pours more money into Latin America is a losing battle. On the one hand, the West cannot compete with China’s financial leverage. Furthermore, the assumption that economic growth leads to democracy is flawed. At the end of the day, lasting democracy depends on values and ideas—a level at which China is at a serious disadvantage. China invests in mines, and the West should invest in ideas.
Some analysts believe that investment in China may slow down in the next few years because its economic growth rate is declining. In fact, the reverse is also true. China has recently begun rebalancing its economy to boost productivity, shifting from manufacturing to services such as telecommunications, power distribution and banking. This effort is driving the expansion of Chinese direct investment abroad, especially in Latin America, where there is a significant gap between private and public services. Economic data confirmed the change in China’s focus. From 2005 to 2015, only 10% of Chinese investment went to services. After 2016, that number jumped to 64%.
There is another reason why China’s presence in Latin America is expected to be more active in the coming years: the region is headed toward an economic crisis, which China is poised to exploit. For the first time in 20 years, Latin America’s natural resource-based economy will no longer benefit from favorable external conditions of high commodity prices, low interest rates and strong global demand. This is especially troubling considering that about three-quarters of Latin America’s GDP depends on these factors. To make matters worse, the pandemic has ravaged Latin American economies. After adjusting for birth rates, the IMF’s forecast for regional GDP growth per capita falls to 1.5% in 2022 and zero in 2023.
Governments across Latin America need money, and fast. China is well-suited to meet this burgeoning demand: its government is adept at providing loan contracts, financing large public infrastructure projects and allocating direct investment. China’s institutional decision-making can skip the democratic process, which means that deals are usually completed within a short period of time. Furthermore, in stark contrast to the established practice of the World Bank and International Development Banks, China’s project approvals downplay economic fundamentals, borrowers’ ability to repay, and environmental factors.
Thus, over the next decade, China could become Latin America’s trump card, providing the fiscal stimulus needed to cushion the impact of economic turmoil. Unfortunately for Latin America, the greater its economic vulnerability, the less political leverage its political leaders have to resist keeping the economy afloat at all costs.
dark days ahead
China’s larger footprint in their countries should worry Latin Americans for several reasons. In addition to its commercial dependence on minerals and food, China has clear geopolitical interests in the region, most of which run counter to the values of liberal democracies. The authoritarian superpower is using its economic might to advance its foreign policy agenda, which ranges from forming alliances to bolster its political positions in multilateral settings to undermining democratic norms, institutions, and the rule of law in Latin America.A good example of the former is how four Latin American countries—the Dominican Republic, El Salvador, Nicaragua, and Panama—switched their diplomatic recognition from Taiwan to China China’s influence in these countries has peaked over the past five years.
A more troubling example of the latter is the conditions China imposes on its lending business. These harmful clauses include confidential debt contracts, In some cases, this prevents transactions from being disclosed. These loans also typically require Chinese leaders to be repaid before other creditors. The possibility of political interference also looms over the loans: China could terminate diplomatic ties and demand full debt repayment if the borrowing country adopts policies that run counter to China’s interests. These conditions are inconsistent with national rules, international agreements and democratic practices.
Since Latin America is concerned with democracy and national sovereignty, China should face serious obstacles in its bid to gain control of the region. Therefore, Western governments should try to ensure that the fight for Latin America is more about principles than economic necessity. Ultimately, principles and shared values determine the future of the nation. The key pillars of sustainable human development – effective governance institutions and the rule of law – are first and foremost forged by ideas.
Unfortunately, non-democratic ideas are gaining popularity in Latin America, largely because of the poor performance of democratically elected governments. The region’s democratic elites have failed to implement much-needed political reforms, such as strengthening political parties and enforcing laws to address corruption in the electoral process. The lack of such reforms is one of the reasons why these governments are unable to achieve sustainable development, curb rising inequality and promote human rights. For the most part, Latin American leaders have not been good messengers of the message that democracy, despite its problems, is the best option for progress — which makes it all the more important for democrats in the region and beyond to start a campaign to educate Latin America The public movement of voters. Western governments should work with Latin American democratic organizations to explain the dangers of authoritarianism and strengthen civil society networks. All of this requires investing in people, not physical infrastructure—an area where the Western world has a distinct advantage over China.
All in all, building human capital is the best strategy to neutralize China’s physical capital approach. Leaders and citizens educated in the values of liberal democracy are more likely to adopt transparent, accountable, and corruption-free institutions and policies.
With their superior higher education systems, the US and Europe have a competitive advantage that no other country can match. Western governments can improve democratic awareness and moral leadership in Latin America through a variety of initiatives. Latinos are currently underrepresented on Western university campuses; new programs could bring international students, faculty and researchers to the United States. Recruiting women and those from marginalized socioeconomic groups can be particularly fruitful. Policymakers can also try to educate broader populations through digital technologies such as massive open online courses. The Partnership for Economic Prosperity in the Americas, an ambitious initiative launched by US President Joe Biden in 2022 to offset China’s presence in Latin America, presents a unique opportunity to fund such projects.
The future of democracy in Latin America remains precarious.
By investing in people, the Western world can leverage its connections to Latin America to help the region become more globally competitive. Latin America’s annual economic growth potential remains meager, largely because of low labor productivity. Investing in Latin America will lay the groundwork for a more dynamic and sustainable economy. Educational initiatives can help reduce the region’s historically high levels of inequality, a major cause of its anemic growth and democratic instability. In the process, Western governments stand to benefit from deeper engagement with the region. One benefit is that these relationships will be characterized more by partnership and mutuality than by the manipulation and authoritarianism that clientelism provides.
While some Latin American democracies have shaken off authoritarianism in recent months — just look at Luiz Inácio Lula da Silva’s defeat of Jair Bolsonaro in Brazil’s presidential election in November — the region’s democratic prospects remain precarious. Dictators in Nicaragua and Venezuela remain entrenched; Peru is in a deep constitutional crisis. Populism and political divisions continue to cast a shadow over the region’s political institutions.
In 2023 and 2024, Latin American countries will hold 11 presidential elections. If populism and authoritarianism continue to rise, freedom, human rights, checks and balances, and political accountability in Latin America will gradually weaken. Western governments would be at a disadvantage if they tried to offset China’s progress primarily by flooding Latin America with financial resources. Now is the time to accelerate development of what is most integral to a global economic takeoff: human capital.