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. Jorge Heine is a research professor at the Frederick S. Pardee School of Global Studies at Boston University and a former Chilean ambassador to China. His latest book is “Latin American Foreign Policies in the New World Order: The Active Non-Alignment Option.”