has increased from less than 1% of SA's foreign direct investment .... The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done. About It.
CHINA IN SOUTH AMERICA (SA): Development or Curse?....an Institutional Issue? By Giovanny Bastidas
In the long term, the chain’s success depends on the institutional capacity in each country. This capacity is built upon rules, norms and informed citizens.
C.- The Decision Chain Applied to SA Resources
PERCENTILE RANK (0-100)
50.00
SA Reality: • Lack of transparency in public investments in many SA countries. • The public and private sector in BRA, CHIL, COL & PER are investing in infrastructure and technology. • CHI is leading these investments.
B OL
1996 2011 1996 2011
Δ Ra nk
-
Rule o f La w
Vo ice & Δ Δ Rank Acco unta bility Ra nk
-
2011
-
-
-
-
+
+
+
-
+
+
Percentile Rank (75-100%)
Medium
CHI
1996 2011
10.00
C OL
2011
(25-50%)
+
+
+
+
-
-
-
+
+
-
-
Bottom
ECU
PER
V EN
1996 2011 1996 2011 1996 2011
So ur c e : Wo rld Ba nk D a ta b a se
Bottom - Level = B
0.00
BOL
BRA
CHIL
COL
ECU
PER
VEN Graph No. 1
In contrast, BRA, COL & PER, show important improvements in their institutional capacity, and CHI leads the ranking with a governance structure that compares to other developed countries.
E.- Conclusions CHIL
PER COL
BRA
ARG ECU BOL VEN 20%
40%
60%
80%
Graph No. 2
The positive correlation between the countries’ “Institutional Capacity” and the effectiveness of the “Decision Chain” explains why the chain’s success relies upon altering the institutional capacity. The stronger the institutional scenario the higher the opportunities for development.
(50-75 %)
Low
1996
YEAR 2011
20.00
Although it is too early to predict the real effects of Chinese mining investments in SA development, the evidence of this study suggests that the natural resource curse may not be repeated again in the case of BRA, CHI, COL & PER.
High
B RA
1996
Low - Level = L
30.00
Institutional Capacity (Percentile Ranking)
WO RLD GOVERNA NCE INDICA TORS M INING CO UN TRIES IN SO UTH A M ER ICA (19 96 & 20 11) Go v ernm e nt E fe ctive ne ss
YEAR 1996
40.00
SOUTH AMERICA MINING COUNTRIES
D.- Institutional Capacity Year
Medium- Level = M
60.00
0%
❶ Discovery of Mining Resources SA Reality: • CHI, BRA & PER have updated geological mapping. • VEN is contracting a Chinese state-owned company to do their mapping (2013). • Other SA countries have incomplete geological surveys or none.
70.00
ARG
❺ Investing in Sustainable Development
A RG
Ideal Public investment in geological information: Reduces the barrier for investing in prospective activities Facilitates writing contracts that are in the best interests of the country
SA Reality: • ECU, PER and BOL are facing local community protests. • Chinese mining companies are not complying with international standards (e.g., EITI standard).
Ideal SA Reality: A saving policy (≥ 30%) that • CHI has had the Copper Wealth considers natural resources Fund since 2007 and PER plans to depletion. implement one in 2013. A saving policy that • Saving funds in SA countries are anticipates price volatility. still far below the 30% rate.
C OUNTRY
High- Level = H
80.00
❹ Consumption vs. Future Savings
Ideal Efficiency and transparency of public investments Public and private investments in capital goods (e.g., machinery, equipment, infrastructure)
OVERALL INSTITUTIONAL CAPACITY RANKING 90.00
5
This chain focuses on five key decisions: Managing the discovery of natural resources Capturing the value of natural resources Managing local communities and the physical process of resource extraction Balancing current consumption and future savings Building up capital stock for sustainable development
Ideal Benefits need to be spread across all citizens. Environmental costs need to be fully absorbed by investors and reduced to a minimum.
According to these governance indexes, ARG, BOL, ECU and VEN show a weak institutional capacity (e.g., low quality of public service, low levels of law enforcement, etc.)
4
One way to overcome this plunder problem is by implementing a decision chain to effectively manage the country’s natural resources (Collier).
❸ Revenue Transparency
The institutional capacity influences the effectiveness of “the decision chain” in managing natural resources. This capacity is reflected in the governance indicators shown in Table 1.
3
B.- “The Decision Chain” Framework*
SA Reality • SA countries still rely heavily on taxation of profits. • COL and ECU are implementing aggressive royalty systems (6-8%). • CHI and PER have a royalty taxation based on operating profits.
2
Unfortunately, SA history reveals that most of the foreign natural resource investments have been synonymous with plunder. Therefore, it is not clear whether Chinese investments are going to hinder or foster development.
Ideal Three taxation systems for capturing mining rent: Minority equity stake Taxation of profits Royalties (considered to be the most effective)
Decision Chain (Rank Scale 1-5)
In recent years, China has become the fastest growing investor in South America (SA). China’s investment has increased from less than 1% of SA’s foreign direct investment (FDI) fifteen years ago to 10% in 2011. (The Economist Intelligence Unit) Today, more than 60% of Chinese FDI in SA is concentrated in the mining sector.
❷ System of Mining Taxation
1
A.- Introduction
(0-25%)
Ta ble No. 1
In contrast, ARG, BOL, ECU & VEN exhibit a fragile institutional setting, which is affecting the governments’ capacity to invest Chinese financial resources in sustainable development. Hence, the decision chain is prone to be disrupted in the long term. References: * Collier, P. 2007. The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It Sinnott, E., Nash, J., De la Torre, A. 2010. Natural Resources in Latin America and the Caribbean: Beyond booms and busts? World Bank Publication
