By All Means Necessary (12 page)

Technology transfer is another potential positive spillover from foreign investment, particularly when the technology gap between the host country and the foreign investor is small.
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One might hypothesize that China, which deploys a vast range of technologies at home that is often appropriate to developing economies, has the potential to be a particularly important player in raising technology levels through its investments in resource-rich developing countries.

Foreign investment in resource production also has the potential to generate significant government revenues that can then be spent so as to boost economic growth far more broadly. Here, however, much depends on whether the host government is transparent and efficient—encouraging effective use of resources and society-wide benefits—or corrupt and inefficient, which leads to narrower distribution of benefits and often produces widespread societal discontent.

Does Chinese investment in natural resources live up to the transformative potential that foreign investment in general can deliver? Or does it reflect the worst of what's possible? There is significant disagreement on this count. Media reports tend toward extremes: the Chinese are either singlehandedly
responsible for rejuvenating the resource-rich countries of the world or plundering the world's riches and undermining global standards in labor, environment, and governance in the process. Scholars also disagree among themselves. Economist Dambisa Moyo reflects one prominent camp when she argues that Chinese investment is a boon to Africa: “China's rush for resources has spawned much-needed trade and investment…a huge benefit for a continent seeking rapid economic growth.”
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Other experts share the sentiment of the well-known development economist Paul Collier, who advised in his 2007 bestseller
The Bottom Billion
, that “natural resources are not the royal road to growth unless governance is unusually good. In the bottom billion it is already unusually bad, and the Chinese are making it worse, for they are none too sensitive when it comes to matters of governance.”
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And a third group comes down somewhere in between: political scientist Deborah Brautigam, for example, has written (focusing on Africa) that “the deciding factor in each case is likely
not
to be China, but individual African countries and their governments.”
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The experience of a wide range of resource-rich countries with Chinese investment suggests there is an element of truth in each of the perspectives. The positive potential social and political benefits have yet to be fully realized, while at the same time the worst fears are overblown. Determining how Chinese investment in natural resources is shaping social, environmental, and political dynamics in resource-rich countries requires looking carefully both at how China behaves at home and at how resource-rich countries govern inward investment. Understanding how China's own political economy functions is essential to making sense of how its companies perform overseas. These firms and officials behave abroad in very much the same way they behave at home; changes at home are thus a central driver for changes abroad. The strength of the political and social institutions of the individual economies in which Chinese companies are investing is also critical in determining outcomes; the experience of one resource-rich country can differ radically from that of another.

In March 2013, Chinese President Xi Jinping traveled to Africa promising a new round of Chinese win-win investment, trade, and aid for the continent. This time Beijing pledged to deliver $20 billion in loans over the next three years and laid out a range of new projects in infrastructure and agriculture. At the time, China was already responsible for more than 15 percent of foreign direct investment in Africa. Such investment has earned accolades from many of the region's leaders. Former Senegalese president Abdoulaye Wade wrote in the
Financial Times,
“China's approach to our needs is simply better adapted than the slow and sometimes patronizing post-colonial approach of European investors, donor organizations and non-governmental organizations.”
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This is Chinese business doing what it does best, with top political leaders acting as diplomat deal makers for the country's largest banks, natural resource firms, and construction companies. As in China itself, many big deals involve the central government and include state-owned enterprises, banks, and (often) local officials. A coordinated (or at least somewhat coordinated) Chinese approach can enable Chinese leaders to put together packages that appeal to a range of decision makers in resource-rich countries in ways that other potential investors often cannot. Chinese lending terms are also attractive to many countries, where they are known for “the absence of political strings, competitive interest rates, and flexible repayment schedules.”
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China's ability to bring multiple tools to the table often leads people to conclude that it gets better deals. This isn't necessarily true. Chinese investments abroad turn a profit less often than others do; According to McKinsey, as many as 67 percent of overseas acquisitions have gone bankrupt or have failed to make a profit, surpassing the average global rate by 17 percentage points.
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Chinese companies, as relative newcomers to overseas resource investments, may be prone to overbidding and other mistakes that undermine profitability. This can actually help the countries where they invest, at least in the short run, since the firms may be willing to invest in projects that others consistently find economically unattractive. However, it
is not good for anyone over the long run, since economically unsustainable projects ultimately tend to collapse. Moreover, for Beijing, investments can sometimes be influenced by factors other than the immediate corporate bottom line; beliefs in the value of acquisitions for resource security, technology acquisition, and goodwill can all influence an investment's attractiveness.
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Goodwill in particular shapes relationships between China and countries in which Chinese companies invest. Doing business with China is also often a matter more of using informal relationships and personal ties than working through formal institutions or legal practices. One consequence of this is that other authoritarian states in particular find the Chinese state-centered but personalistic approach reassuring. Ties between China and leaders such as Zimbabwe's Robert Mugabe can date back decades, providing a long history of common understanding and shared interests. Alas, the willingness of Chinese firms to engage such regimes on their terms reduces incentives for those regimes to change.

China also works hard to make new friends. In Zambia, one observer commented that the Chinese are a full-service partner: they provide red-carpet trips for Zambian officials with limousines and five-star hotels, develop military ties through training of officers and weapons sales, support agricultural training and research centers, and build special projects such as stadiums and presidential palaces that attempt to serve as a constant reminder of Chinese friendship and largesse (though this sometimes backfires).
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As a senior oil official in Mozambique noted, “The Chinese like to know that they are your friends before they invest.”
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There are, however, real risks for China inherent in such an approach. Deals that rely mostly on personal relationships and are blessed only at the highest levels may also unravel when new leaders emerge. Gabon's President Omar Bongo, for example, strongly supported a Chinese bid to develop his country's Belinga mine, home to large deposits of iron ore. The resulting contract became known among some in Gabon as “a contract of shame” for the expansive perks it offered the Chinese partner, such as exemption from all taxes for twenty-five years. The Gabonese
government (still led by Bongo) then renegotiated the deal in 2008, requiring that the Chinese revisit the project's environmental and social impact assessments. In 2009, Bongo died, ushering in new Gabonese leadership. Eventually, the Chinese lost the deal to Australia's BHP Billiton (though as of this writing BHP's involvement is again uncertain).
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Part of China's appeal for some resource-rich developing countries, as well, is Beijing's willingness to set aside political considerations that other countries, multilateral institutions, and even business leaders often find unacceptable. As former ambassador to the United States and deputy foreign minister Zhou Wenzhong stated in reference to investment in the Sudan, a country largely shunned by Western companies, “Business is business. We try to separate politics from business.” He added: “I think the internal situation in the Sudan is an internal affair, and we are not in a position to impose upon them.”
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What does this mean? For one, Beijing largely rejects economic sanctions against particularly repressive states that would limit Chinese investment opportunities. Thus companies are free to invest where many others are barred or fear to tread. Chinese companies are, for example, the largest investors in Sudan, North Korea, and Iran's energy sector. Beijing's stated aversion to mixing business with politics also means it doesn't pressure countries to improve their governance practices before it lends to or invests in them. (This is, of course, also true of most Western multinationals not otherwise restricted by their home governments.) And as Xi Jinping reassured African leaders, “China will continue to offer, as always, necessary assistance to Africa with no political strings attached.”
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Unlike the World Bank or other public lenders, China does not qualify its loans with requirements for budget transparency in the distribution of resource revenues. Macky Sall, president of Senegal, reflected a common view of this approach in a 2013 interview with the journal
Foreign Affairs
:

The cooperation with China is much more direct and faster than the cooperation we have with Western countries—the United States, European countries, and other bilateral donors. There are a
lot of criteria on governance, on this and that, and a lot of procedures….That's one of the obstacles to effective cooperation: too many procedures. I'm not saying that what China is doing is better, but at least it's faster. And we need speed.
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This no-strings-attached approach does not win China friends everywhere, however. Some senior officials in resource-rich countries are less sanguine about the willingness to ignore conditionality. Former Zambian minister of trade, commerce, and industry Dipak Patel, for example, expressed appreciation for intervention from the outside: “The World Bank can't outbid the Chinese. They always wanted conditionalities. I oversaw the privatization of 9 of 10 major industries. We actually like the conditionalities because it allowed us to be pressured into doing things.”
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Moreover, although an integrated approach to resource investment has clear benefits to Chinese companies, it also creates challenges. The close ties between many Chinese natural resource companies and the Chinese state, for example, are occasionally a source of disquiet in resource-rich countries; officials and businesspeople express apprehension over the large number of SOEs involved in China's overseas foreign direct investment. In some cases, there is concern that trade and investment conflict with a state-owned firm might bleed into the broader political relationship, or vice versa. For example, in 2010, a political flare-up between Japan and China disrupted rare earths trade between the two countries.
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(Rare earths are a class of elements critical to a host of energy, defense, and other advanced technologies; as of 2014, their production was dominated by Chinese mines.) As China seeks rare earth investments outside its borders in countries such as Australia, such concerns are magnified as countries worry about rising Chinese control over an important market.

In other cases, however, conflict over Chinese overseas resource investment stems from little more than a popular unease that Beijing is using Chinese companies—whether SOEs or private—to siphon off valuable resources. Mongolia, for example, worries that China is “stealing” its coal.
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The relationship-based, often opaque nature of Chinese resource investments also raises the specter of corruption, and with it, significantly reduced value of resource investments to broader populations in resource-rich countries. Within China itself, corruption is viewed as both an essential element of doing business and a life-threatening disease. Xi Jinping, on taking office as Communist Party general secretary in November 2012, warned that if the Party could not rid the country of endemic corruption, it would lead to the death of not only the Party but perhaps also the Chinese state. The natural resource sector in particular offers many opportunities for corruption to flourish at home. A study by Chinese University of Hong Kong professor Zhan Jing revealed that within China itself, resource abundance—including oil, natural gas, coal, and other nonfuel minerals—breeds corruption through unclear property rights and heavy state intervention, which contributes to rent seeking. Bribery, embezzlement, and tax evasion are commonplace; even obtaining a job in the natural resource sector has a price tag attached.
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Zhan's findings are supported by a 2010 survey of almost 7, 000 Chinese officials, in which 62 percent believed the Department of Land and Resources to be the most corruption-prone of all the government bureaucracies.
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Corruption at home also appears to condition behavior abroad. According to economists Ivar Kolstad and Arne Wiig, Chinese foreign direct investment in resources has flowed primarily to two recipient types: OECD countries with large markets (which we explore in
chapter 7
) and non-OECD countries with a combination of large natural resources and weak institutions (which tends to go hand-in-hand with greater potential for corruption).
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