William Laraque, Managing Director at US-International Trade Services
22.07.2015 01:00 am
Part I: The Chinese R4I or Resources for Infrastructure Investment Model
The Path Between the Seas isillustrative of the need for imagination and concern for humanity in economic development. The U.S. took over from the French in building the Panama Canal. After appropriating the land from Gran Colombia, it was necessary to solve the problem of yellow fever before a canal could be successfully completed. The French, in order to preclude critters from crawling into patients' beds at field hospitals located along the canal route, placed the legs of beds in bowls of water where mosquitos bred. Yellow fever was caused by these mosquitos of course. Walter Reed and his U.S. Army colleague made the connection between mosquitos and yellow fever. Col. William Crawford Gorgas proceeded to provide clean, running water, to remove any static water, and created the sanitary conditions and treatment facilities that dealt with the disease. The similarity to the military reaction to the Ebola epidemic in West Africa is reminiscent of Panama. The resemblance to German armored columns enveloping the Maginot Line, by motoring in single file through the Ardennes is not coincidental. Foch's subsequent counterattack, using taxis and everything that moved to counterattack the overextended German flank, relates as well. The imagination trumps the static mind.
Military discipline and military-civilian cooperation are often an effective solution to intractable infrastructure problems. What does all this have to do with China and R4I? A lot! I will not bore the reader with a multitude of examples. As a former warrior and military history buff, I could write volumes on this issue. I will use Angola to make a telling point.
The R4I program began with Angola. It is often called the "Angola" model. After 50 years of civil war and devastation in the country, an effort was made to borrow funds from banks and capital markets in order to rebuild. This failed. The Angola authorities had no recourse but to try to borrow from China. The Angola model featured an initial "loan" of $2 billion in exchange for 10,000 barrels of oil a day. Angola has lots of oil and is a resource rich country. 1of every 6 children dies before the age of 5 in Angola. Resource wealth in the Angola model does not result in a better quality of life. Corruption and plutocracy are the culprits, the blockage in the functioning of the entanglements in Angolan society. In the process, the reputational risk of Angola is compromised.
In an impressive series of contracts, in "exchange" for oil and other resources, Chinese capital, capital goods, workers and retail goods dominated Angolan markets. Entrepreneurship by locals was suffocated.
The Chinese R4I model has been applied throughout Africa and is being increasingly used in Central and South America. Chinese capital, machinery, retail goods are seen in Argentina, Venezuela and Nicaragua. In Nicaragua, the Chinese are building a canal which rivals the Panama Canal. I was part of the team which financed the trans-Panamanian pipeline for Northville Industries in the 1980s and I recall that vessels of a certain size and draft cannot transit the Panama Canal. The Chinese built, Nicaraguan Canal will be large and deep enough to accommodate all vessels. This will of course make the Panama Canal obsolete. It will forever change the ecology, the infrastructure of Nicaragua.
The Chinese are little concerned about the "inconvenient truths" and "impediments" of corruption, plutocratic governments, environmental degradation, harm to aboriginal
populations, their culture, biodiversity. Most destructive of all from an economic development point of view is the lack of investment in the productive capacity of the Nicaraguan entrepreneur. Nor is there a concern for the fostering of entrepreneurship in Argentina, Brazil, Venezuela, etc.
The Chinese R4I economic model's entanglements suffer from a reputational risk defircit.
Part II. Highway to Hell
Voltaire said that the road to hell is paved with good intentions. I've already referred to the NY Times article When Food is not the Solution to Hunger as a fine example of NGOs screwing up the rice market in Haiti; replacing the native agriculture with donated U.S. rice. Why buy what you can get free?
Raging at the system
Voltaire was a "summer soldier and sunshine patriot."
When things got hot in France which he criticized brutally in Candide, he repaired to Switzerland. Candide is part of the French tradition of ridiculing and severely criticizing power, of speaking truth to power. Voltaire was part of the Enlightenment, the Age of Reason when it was no longer held that the poor were in their economic state by the will of God. The Enlightenment was a stage in Pierre Teilhard de Chardin's "noosphere," the ever evolving human stream of consciousness, the incessant human desire to achieve what Freud held was common to all of humanity, the desire for love and work, the pursuit of happiness.
This was common human aspiration for love and work is not achieved through R4I investment. This program provides jobs and growth to China. It provides neither love nor sustainable economic growth to either China or the "recipient"countries.
China: Out-Capitalizing the Capitalists
Business Insider announced that Amazon.com Inc. will launch its business loan program for small sellers later this year in eight more countries including China, where credit is becoming a key factor in competing for new vendors and grabbing market share.
E-retailers are providing working capital in order to stimulate and facilitate the global sale of their products. Here is a run-down of what is going on in this area:
Amazon Lending - hundreds of millions since 2012
EBay Inc's Paypal -$500 million since 9/2013
Alibaba -Ant Financial -$64.4 billion since 2011
China, a state-directed economy, is out-competing the U.S., a "free market" economy and the rest of the world by dealing effectively with what I coin "the logistics of financing." China has outsourced the global marketing of its capital goods and the logistics of financing these goods through Alibaba.
I have previously pointed out that once capital is provided at the bottom of the economic ladder to facilitate the sale of capital goods, economic growth will go on steroids. Before this can happen however, investors must see the benefit to their communities and the profitability that can be realized from such investment. In addition, the political and commercial risks associated with the selling of these goods overseas must be mitigated.
The requisite export credit insurances and ECA or Export Credit Agency guaranties will mitigate the political and commercial risks for enterprises and financial institutions in the process. The involvement of export credit underwriters, agencies and brokers as well as Export Credit Agencies will take place as soon as their leaders "get" what is going on. Needless to say, this democratization in the provision of capital will resurrect the U.S. Ex-Im Bank.