South African President Jacob Zuma’s warning to Western corporations to change their neocolonial attitudes toward Africa or risk losing out to China and other developing economies resonated powerfully last month, as South Africa hosted Brazil, Russia, India and China at the fifth BRICS summit. But Zuma’s stance reflects the rise of cross-border “macroinvestment”, a phenomenon that is more remarkable than the developing world’s declining reliance on the West.
Business investment is usually project-based, with the factory to be built or the land to be cultivated forming the investment boundary. A larger deal – for example, a concession to mine iron ore in Mongolia – would include more complex investment boundaries, establishing details like the project’s timing and the anticipated benefits to the host country.
For example, beyond building the mine itself, the deal could include investments in transport systems to market the mined product, energy generation and accommodations and other facilities for workers in the surrounding communities. In some cases, the deal might even include features aimed at boosting domestic added value by localising the mine’s procurement or creating the capacity to process the mine’s output.
The advent of macroinvestment is rendering even such extended deals obsolete. Macroinvestment involves government-to-government agreements that pre-allocate large lines of cross-border public financing. (This should not to be confused with the equity-based private investment strategy of the same name, which attempts to anticipate and profit from global trends.)
Unlike comparable financing that Western governments provide, these pre-designated lines of credit are tied to agreements concerning market or natural-resource access, and provide additional funding for the host government to invest according to its own priorities. Angola’s government, for example, arranged with China’s Exim Bank for several lines of credit totalling several billion dollars, some directly in exchange for oil, and others more broadly linked to enhancing Chinese companies’ ability to secure oil concessions.
Western commentators have largely dismissed such investment as a means for China to build vanity infrastructure, such as public administration buildings, oversized airports and underused highways. But, while such follies exist, the reality is far more interesting – and its impact far more significant.
Developing countries – and, increasingly, advanced countries as well – need massive infrastructure investment to drive their economic development. China is now enabling its developing partners to mirror its own strategy of infrastructure-led development by providing the needed investment at low cost. In these mutually beneficial macroinvestment deals, Chinese contractors deliver the needed infrastructure. Host governments receive financing not only for the agreed projects, but also to pursue other priorities that they have identified for their countries.
Shifting approach to investment governance
Critics argue that China’s macroinvestment strategy encourages rent-seeking by partner governments, providing slush funds that serve the political elite and well-connected businesses. They highlight China’s unwillingness to embrace initiatives such as the Extractive Industries Transparency Initiative, or to establish an equivalent of America’s Foreign Corrupt Practices Act or the OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
To be sure, such concerns are not unwarranted; China and its partners would benefit from robust anti-corruption legislation regulating Chinese companies’ international operations. But the critics ignore China’s promotion of national environmental and social oversight over outward investment, including the “green credit guidelines” that the China Banking Regulatory Commission issued last month, and the just-released Guidelines on Environmental Protection in Foreign Investment and Cooperation. Indeed, China is rewriting the rules for cross-border investment governance, just as it is reshaping public and private investment strategies for the twenty-first century.
Macroinvestment need not be exclusive to China, though competing against China’s unique combination of low-cost operations, abundant cheap finance, and powerful state-owned enterprises will not be easy. But, as major emerging economies like Brazil and India rapidly increase their outward investment, they are in a prime position to establish similarly constructive arrangements with developing countries.
Western countries, too, can meet growing demand for broader long-term investment deals. But they must adopt a new mindset, treating host countries as equals. Lecturing developing-country governments, while limiting investment to resource extraction, is no longer tenable.
Global investment markets are changing fast. And the cost of falling behind – erosion of long-term competitiveness – could not be higher.
Copyright: Project Syndicate, 2013.