We are moving from a “relatively predictable” world, with interest rates close to zero, low inflation, where cooperation prevailed and rules limited conflicts, to a new era marked by growing fragility, high volatility and geopolitical conflicts.
These were the words of Kristalina Georgieva, managing director of the International Monetary Fund (IMF), in October 2022.
At the beginning of 2023, the future appears uncertain and this uncertainty acquires a radical character; without a doubt, we are living in critical times. Between 1990 and 2015, the increase in the level of carbon dioxide emissions was almost 60% (13.5 GtCO2eq). The climate crisis speaks to the need to act now, move towards a green transition and in a fair way.
The Covid-19 pandemic came to remind us of the urgency of change, as well as the neglect in which our society has placed vast sectors of work, whose tasks, although essential, ended up being denied.
Due to the rise of China as a world power and the consequent increase in the price of commodities, Latin American countries experienced an unprecedented boom in the price of raw materials. Thus, the Asian giant has become the main trading partner in the region, with important investments in several countries, while its capital has proved to be critical for the financing of numerous projects.
Regardless of social conflicts and the worsening of the environmental problem, the demand for natural resources led to the perpetuation of a development model based on extractivism. Faced with the price increase generated by the invasion of Ukraine, different Latin American governments went out in search of tenders for new exploration areas. The political orientation is indistinct, whether neoliberal as in Ecuador or neo-developmentalist as in Argentina, members of the government go to Houston in search of investors.
The global insertion model pursued so far by Latin America is in crisis as the world faces an unprecedented climate crisis. This requires modifying consumption and production habits and changing the energy model. Numerous studies demonstrate that the peak demand for oil and gas will occur in the current decade. If so, many of the investments currently in the portfolio will lose their value and become sunk assets.
China can be an alternative, either to deepen the model or to help with the transition. Up to this point, oil exports have played a prominent (in some cases, decisive) percentage of the region’s exports, as has the role of capital flows into the sector.
Based on data compiled by Boston University’s Global Development Policy Center (GDPC – BU), most of the funds that came in to finance energy projects in the region went to non-renewables.
When considering development loans, most funds are associated with the operation of two development banks: the Development Bank of China (CDB) and the Export-Import Bank of China (Chexim). Thus, in the last decade, the financing of the energy sector in the region has been basically associated with bilateral loans from China.
A Yuan & Gallagher study from 2018 suggests that just over 2/3 of loans granted to Latin America during the period 2003-2016 went to finance the oil industry, while the renewable energy sector benefited from 17% of the total. The region has also witnessed the arrival of Chinese oil companies and direct foreign investment associated with exploration and extraction tasks. Numerous bilateral loans were backed by barrels of oil, as evidenced by Ecuador.
However, in recent years, this trend appears to be reversing. According to data from the CFEF base, since 2020 neither CBD nor Chexim have financed new oil and gas projects. With regard to foreign direct investment (FDI), since 2015 the coal, oil and gas sector has been losing relevance, while the electricity sector is gaining importance as a destination for capital flows, both in terms of investments in plant (greenfield investment ) as well as in mergers and acquisitions.
When we look at renewable energy, China also appears as a global leader. The active policies implemented at the beginning of the millennium had an impact on the development of the photovoltaic and solar panel industry, industries where Chinese companies lead global markets. The same impulse has been given to electric mobility, with the electric car market being the most important in the world.
All of this explains the relevance of the environmental issue, as well as China’s growing influence on the decisions taken by its trading partners, including Latin American countries. This does not mean that government officials are limited when making decisions or that they are obliged to follow a certain insertion model.
These types of decisions are the sovereign’s prerogatives, even when they ultimately reflect the desires of the elites that inhabit each country. In this sense, it is up to local governments to adopt a strategic vision in relation to the type of investment that comes from abroad. Most countries in the region are still betting on a quantitative approach: “the more funds, the better”. But this is not beneficial, much less enough if the objective sought is to transform the insertion model.
If we compare investment flows, we see that 56% of the Chinese funds that arrived in Africa during the period 2010-2020 were allocated to renewable energies, a much higher percentage than that received by Latin America. Although the indirect benefits of this investment are small, at least African countries have less exposure to the problem of sunk assets than Latin American countries.
This should prompt Latin American leaders to review their agendas and think beyond the short term. Even when China buys oil and raw materials, it can also play a role as a supplier of equipment to produce clean energy and foster cooperation and know-how exchange, key to Latin America’s further development.
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