Kevin Gallagher's The China Triangle

Daily: Daily Times
Date: 08.02.17

China has not only outdone Latin America in exporting commodities, but it has also become
the main importer of Latin America’s natural resources: China has reduced Latin America
from exporting commodities to the world to exporting natural resources to China. This is the
central idea of Kevin P. Gallagher’s book,
The China Triangle: Latin America’s China boom
and the fate of the Washington Consensus
, published by Oxford University Press in 2016.
Gallagher is Professor of Global Development at Boston University. This opinion piece
intends to discuss Gallagher’s certain ideas expressed in the book.

Three points are writ large upon the book. Firstly, it mostly focuses on China-Latin America
economic relationship. Secondly, many ideas are repeated to banality. Thirdly, its
presentation needs rearrangement. Regarding the last, five phases can be used to present
the book in a better way. The first phase spanned from the nineteenth century (1870) to
the Great Depression (1929). During this phase, Latin America was a winner of ‘commodity
lottery’,as Western Europe needed Latin America’s vital natural resourcessuch as copper,
gold, silver and iron ore and commoditiessuch as coffee, cocoa, tobacco, sugar, beef,
hides, wool, and bananasto support its industrial revolution. These commodities not only
substituted European agriculture produce to spare peasantry to be utilised as industrial
workforce, but these commodities also prompted European and the US companies to invest
heavily in Latin America’s infrastructure to hasten the provision of commodities. During this
phase, Latin America’s economies grew by 3.4 percent per year (i.e. GDP growth).

The second phase continued from the Great Depression (the 1930s) until the early 1980s.
During this phase, the state took over the role of laying infrastructure and boosting
industries to make Latin America produce consumer goods for consumption and export.
This state-led industrialisation remained the best phase in terms of growth at almost 5
percent per year. However, this phasealso witnessed accentuated economic inequalities,
besides the absence of democracy. Unfortunately, macroeconomic mismanagement during
this phaseultimately led to a regional financial crisis in the 1980s.

The third phase covered from the 1980s to 2002. During this phase, the state-led economic
management was replaced with the Washington Consensus, the basictenet of which was a
package of reforms having ten economic policy solutions for crisis-ridden developing
countries. The reforms encompassed macroeconomic stabilisation, liberalisation of trade
and investment, reduced role of the state in economic affairs, and the adoption of a market-
based approach called neoliberalism. The International Monetary Fund (IMF) and World
Bank (WB) introduced these reforms (privatisation, liberalisation, and deregulation). During
this phase, the growth plummeted to the slowest at just 2.4 percent per year, with inequality
getting accentuated more than in the state-led industrialisation era. However, the phase
ushered in return to democracy — the region’s hallmark achievement of the late twentieth
century. The Washington Consensus was a dominant economic paradigm that ended with a
major financial crisis in Argentina in 2002.

The fourth phase sustained from 2003 to 2013, and it was called the China Boom. During
this phase, the economic inequality that accrued during the Washington Consensus phase
lessened. Latin America’s economies grew by 3.6 percent per year, the best surge since
the region’s state-led industrialisation era. This periodalso helped many Latin American
economies recover from the global financial crisis of 2008-2009.In December 2001, China
became 143rd member of the World Trade Organization (WTO). Since 2003, China
enhanced its trade relations with Latin America. China was already enjoying trade ties with
Latin America. About the consequent triangle, called the China triangle, Gallagher writes on
page 3: “At the top of the triangle tip is the United States, while China and Latin America
form a new base of cooperation from left to right.”

China-Latin America trade ties did not begin in 2003. Since the late 1970s, the Chinese
growth miracle had been feeding on Latin America’s natural resources, but there were
other competitors such as Europe and the US. On page 66, Gallagher writes: “As early as
1998, then Chinese President Jiang Zemin championed the globalisation of Chinese
investment and lending. He argued that ‘regions like Africa, the Middle East, Central Asia,
and South America with large developing countries have huge markets and abundant
resources; we should take advantage of the opportunity to get in’.” There are two
implications. First, Gallagher mentions on page 65: “[Compared to Dollar diplomacy, Yuan
Diplomacy (named after Chen Yuan, Chairman of the China Development Bank, in 1998) is
that] China’s development banks started financing foreign governments to help them
support energy, mining and infrastructure investment... Chinese loans do not come with the
harsh strings attached.” Second, Gallagher writes on page 74: “All of China’s commodity-
backed loans to Latin America are secured in oil [i.e. the loans-for-oil policy].” Two
developments are the hallmark of this phase. First, Latin America’s export industry could
not compete with China’s low-priced but high-qualityexport products. Resultantly, Latin
America smarted financially. Second, China came to Latin America with banks and
investment to import natural resources. Resultantly, Latin America profited.

To get entrenched in Latin America, China adopted two soft approaches. First, edging out
competitors from Latin America, as Gallagher writes on page 75: “Chinese loans often
come with a tacit understanding that Chinese companies will be doing a significant amount
of the work related to the project or that the project will involve Chinese imports.” Second,
offering an alternative to the Washington consensus, as Gallagher writes on page 82:
“Chinese lending follows the nation’s Five Principles of Peaceful Coexistence, which prohibit
meddling in other countries’ domestic affairs [i.e. not to impose political conditions].”
Consequently, during this phase, China got oil to run its transport; copper to manufacture
electronics products; iron ore to construct buildings, bridges, and automobiles; and soya
beans to feed its cattle. On page 7, Gallagher writes: “Chinese companies have flocked to
the Americas to invest in these commodities, backed by China’s state-run development
banks”. However, on page 92, Gallagher call it Latin America’s “resource curse,” which
attracts one country or the other to exploit these resources to create wealth for itself. On
page 93, Gallagher writes that this will keep on happening unless Latin America “invest the
windfalls into industry, innovation and education,” besides managing the currency
exchange-rate.

The fifth phase continued from 2014 to date. China has reduced import of Latin America’s
natural resources and is turning into a consumer-based economy. Resultantly, the
economic growth of both China and Latin America has slowed down.

This discussion surfaces two main possibilities. First, loans for development may be
available to developing countries from other than the IMF and WB. Second, the provision of
commodity-based loans is a viable option.

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