Over the past decade, the U.S. has lost influence in Latin America. One of the reasons for declining U.S. weight in the region is infrastructure. Latin American countries want to build large infrastructure and energy projects, and China is willing to finance them.
From the Andes to the Amazon, a Latin American construction boom of mega-dams, roads, transmission lines, mines, and oil rigs has defined the past decade. While the building spree responds to genuine economic and political needs, it has also generated large amounts of environmental degradation and conflict between governments, corporations, and local communities.
Upgrading road, energy, water, and communications systems can drastically improve the lives of millions living in poverty while ensuring a more sustainable path to development in the future. China’s desire to fund these kinds of projects should be cautiously viewed as a positive; Latin American countries finally have access to the capital needed to jumpstart long-desired infrastructure development. However, proper design and implementation of these projects is still insufficient.
The World Bank and IDB (the U.S. has the largest voting share in both organizations) should not follow the example of the China Development Bank (CDB) and China Export-Import Bank (CHEXIM). Chinese projects in Latin America are often environmentally unsound and have proven to be enormous debt traps. Increased U.S. investment in the “softer” side of infrastructure, especially social-environmental safeguards (SES) and planning education, can help ensure that the countries of the region are able to upgrade infrastructure and energy systems while also protecting citizens and the environment.
Doing so will complement China’s desire to fund infrastructure development and address the dangerous side effects of China and the region’s massive push to upgrade infrastructure. In addition, it would reinforce the U.S.’s positive influence relative to China in the region.
Partner up
China has taken huge strides to fill the void in Latin America for cooperation on much-needed large-scale lending and investment. The pseudo-Cold War rhetoric often used to describe contemporary Sino-Latin American relations in the U.S. will only be useful for Latin American development if it spurs positive action by the United States. In these terms, China should be viewed as a potential partner for infrastructure provision rather than a political threat.
After a decade of large-scale lending and investment, China has solidified itself as the primary go-to for hard infrastructure in Latin America. Data from the Inter-American Dialogue show that Chinese state policy banks—CDB and CHEXIM—have lent $135 billion to Latin American governments for energy, infrastructure, and mining projects since 2006. That figure surpasses the lending totals of the World Bank, Inter-American Development Bank (IDB), and Andean Development Bank (CAF) combined.
The scale of Chinese infrastructure investments is particularly striking, with 92 percent of Chinese projects in Latin America worth more than $1 billion devoted to infrastructure investment. Comparable international infrastructure investment from other donors such as the World Bank (20 percent), IDB (11 percent) and U.S. Export-Import Bank (8 percent) are miniscule in comparison. For financing and construction, China is now the place to turn for Latin American countries looking to develop large amounts of infrastructure quickly.
However, researchers at the Center for Global Development have found that recipients of Chinese infrastructure finance are often at risk of serious debt distress that can hamstring fiscal sovereignty. It is precisely these economic mechanisms that allow China to build political partnerships based on the need to continue financing for their debt obligations.
Matt Ferchen, nonresident scholar at the Carnegie-Tsinghua Center for Global Policy, has written that “the gap between the potential and the reality of infrastructure cooperation between China and Latin America remains significant.” Financing and political goodwill are not enough to ensure sustainable development. Infrastructure systems are complex and multifaceted entities, requiring measured and comprehensive understanding of all the various inputs and potential consequences.
The kinds of projects CDB and CHEXIM have facilitated are exactly the kinds that the World Bank, IDB, and Latin American governments have struggled over concerns of environmental degradation and displacement. Mega hydropower is particularly detrimental in terms of displacing local population; the construction of Brazil’s Sobradinho Dam forced 72,000 residents to flee their homes.
Large dams also sink public budgets. In a sample of 245 large dams, Oxford economists found that “the capital sunk into building nearly half of the dams could not be recovered.” They find “overwhelming evidence that budgets are systematically biased below actual costs of large hydropower dams—excluding inflation, substantial debt servicing, environmental, and social costs.”
In addition, South American dams are far from “clean,” despite World Bank rhetoric that lauds Latin America for having “the world’s cleanest electricity.” In a 2016 study, leading reservoir emissions scientist Phillip Fearnside found that emissions from “18 dams that are planned or under construction in the Brazilian Amazon would exceed those from electricity generation based on fossil fuels.” Finally, researchers at Boston University found that dam and road development has caused “large-scale deforestation” in the Amazon.
The attraction for these projects stems from visions of modernization and the kind of infrastructure-led growth promoted by China domestically—a development model that led Oxford economists to warn that “poorly managed infrastructure investments are a main explanation of surfacing economic and financial problems in China.” They continued, “Unless China shifts to a lower level of higher-quality infrastructure investments the country is headed for infrastructure led financial and economic crisis, which is likely also to be a crisis for the international economy.”
A recent IDB attempt to finance an infrastructure project at a similar scale as CDB and CHEXIM was particularly disastrous. A new spinoff lender, co-financed by Chinese banks and called IDB Invest, blended public and private capital to finance what would be Colombia’s largest hydropower project, the Hidroituango dam. Unfortunately, the project was implemented despite significant opposition from communities living near the site and a lack of prior environmental assessment. Later, a portion of the dam failed, displacing 25,000 and endangering many more communities downstream.
Hidroituango shows that even if World Bank President Jim Kim’s vision for the future of the Bank’s lending projects—attracting significant amounts of private capital to pool with public funds—enables Western lenders to start to compete with China, unless properly prepared and monitored the projects can become poor investments and irresponsible examples of governance.
The best way for the U.S. to complement China in Latin American infrastructure development, therefore, is to help beef up the “soft” side of infrastructure. In this, U.S. assistance can ensure that projects are well conceived (both economically and socially) and built responsibly.
A significant part of why Chinese financing is so attractive to Latin American governments is that it doesn’t contain the expensive and time-consuming social and environmental evaluation processes that usually define World Bank and IDB projects in the region. Chinese banks offer Latin American governments the opportunity to break ground quickly, but the speed involved in implementing mega-projects means that SES are often shortchanged.
Here’s how the U.S. can help
To start, the U.S. can help by assuming cost requirements often passed onto Latin American governments that receive funding from the World Bank and IDB for infrastructure projects. These include contracting third parties to conduct comprehensive community consultation and environmental assessment processes. It could also create an expert task force (such as the G20’s Task Force on Climate-Related Financial Disclosures) to propose SES revisions for co-financed projects to help mitigate negative consequences during construction.
While the desire to develop quickly and the time to ensure genuine social and environmental assessments seem to be contradictory, increased financial and technical support from the U.S. would help to smooth the tensions between the two in the short term. A stronger U.S. role in SES provision would allow Latin American states to develop infrastructure at a speed closer to their needs without sacrificing social equity and environmental conservation. There is no excuse for poor outcomes in these regards if the bottlenecks are financial or technical.
This capital could come from the World Bank and IDB, as well as through the establishment of a regional infrastructure development fund, following China’s lead. Such moves could catalyze monumental shifts in regional power dynamics, as well as locally led sustainable development. In addition, responsible and sensible infrastructure can prove to be an investment boon for developing countries, especially if it means that dams aren’t exploding or local communities aren’t (justifiably) protesting.
In the longer-term, the World Bank and IDB (and a potential regional development fund) should invest heavily in the Latin American higher education, government, and professional development institutions responsible for producing policymakers and planners responsible for drawing up infrastructure policy. Higher education programs in urban and regional planning in Latin America are chronically underfunded and understaffed. The vast majority of planners are educated in the U.S. and Western Europe, where they are largely taught the same kind of infrastructural design that the Bank and IDB (not to mention Chinese planners, many of whom are taught the same Western planning theory) cite when writing development plans heavy on problematic megaprojects.
Clara Irazábal, Professor at the University of Missouri-Kansas City, wrote in a seminal UN-Habitat report on Latin American planning that “one reason behind the perpetuation of outdated [Latin American] planning modes…is that planners continue to be trained in curricula that have not been revised for decades.”
Upgrading planning education in Latin America can help build a critical mass of Latin American policymakers to plan infrastructure policy that is specific to the needs of individual countries in the region, instead of reiterating imported planning theory. It is the ultimate example of investing in endogenous Latin American development, allowing for homegrown experts to assume more agency when drawing up planning strategies.
Latin American infrastructure development will continue to define regional planning in coming years, as it should, given need and demand. Looming on the horizon is the “Twin Oceanic Railway,” a proposed series of railroads, highways, and industrial waterways, financed in part by Chinese banks, that will traverse the continent between Brazil and Peru. Officials involved in negotiations expect that the mega-project is expected to cost in the range of $90 billion and will fundamentally redefine South American commercial corridors when completed.
What is clear, however, is that the current “soft” underbelly of the infrastructure boom, namely social-environmental safeguards and planning processes, are ill equipped to deal with such a massive, and rapid, rise in construction. The United States, through a change of strategy, could simultaneously aide Latin American development while curbing the rise of detrimental mega-projects in the region.
Max Nathanson is Founder and Organizational Development Director of the Oxford Urbanists and a researcher at University College London’s Bartlett Development Planning Unit. He was named a Global Shaper by the World Economic Forum in 2017.
