Below is a guest post by Isabella Bennett, assistant director of the International Institutions and Global Governance program.
Last weekend’s World Bank and International Monetary Fund (IMF) meetings took place under a flurry of questions about their new “competition:” the BRICS development bank and contingency fund. In July, the BRICS bloc (Brazil, Russia, India, China, and South Africa) established these new institutions as parallels to the World Bank and IMF.
While neither of the BRICS institutions is likely to be fully functional soon, the BRICS bank is more likely to launch in the near term, which is prompting concern that the “New Development Bank” (the BRICS bank’s official name) will undermine the World Bank’s longstanding efforts to foster good governance alongside economic development. Despite the inevitable challenges and moral conundrums of judging which countries and programs deserve financing, at least the World Bank attempts to protect human rights and the environment. With the BRICS bank, all bets are off. Or so the theory goes.
There are plenty of reasons to be cautious about the new BRICS bank. China is clearly the group’s economic powerhouse and will almost certainly wield disproportionate power over the institution’s decisions. Indeed, for precisely this reason, there was significant resistance within the other four BRICS countries to basing the bank in China. But China ultimately won the argument. The BRICS bank will be based in Shanghai. The episode suggests that, among the bank’s governors, China will be the first among equals.
And China’s investment record is far from spotless.
As Chinese activity in developing countries spanning the globe—from Myanmar to Sudan to Peru—has surged, so has criticism of Chinese investement practices. Though some of this condemnation is misleading or exaggerated, other charges are valid.
Chinese companies operating outside of China have been reported to hire primarily Chinese laborers, whom they abuse and pay next to nothing—forcing locals to work for a pittance or forego opportunities with Chinese firms—undercutting Beijing’s argument that the investment is “win-win.” For example, in their book, China’s Silent Conquest, Juan Pablo Cardenal and Heriberto Araujo document the callous response from the Chinese embassy in Gabon to two workers who had fled conditions akin to slavery at a Chinese company operating in the Central African nation. When the two laborers sought assistance, they were turned away and instructed not to talk to the media. A lawsuit in China failed to punish the company or the boss who had abused the workers.
Moreover, Chinese businesspeople, accustomed to operating in a national economy where corruption is pervasive, often have little compunction about behaving similarly abroad. Chinese companies are notoriously opaque, conduct business with some the world’s most brutal regimes (most famously with Omar al-Bashir of Sudan), and have been known to bribe authorities from oppressive governments. Indeed, officials from China National Petroleum Corporation (CNPC) told Cardenal and Araujo that they regard corruption as a price of doing business in places like Turkmenistan, one of the world’s most repressive countries. CNPC even includes these bribes on its balance sheets. Beyond feeding cycles of corruption, such practices can endanger human lives, both in China and abroad. In Sichuan province, cheap construction of schools contributed to the deaths of more than one thousand children. In Angola, a Chinese-built hospital that relied on shoddy materials and workmanship closed only months after it opened.
Even in Brazil, one of Beijing’s partners in the BRICS development bank, Chinese companies have engaged in questionable practices. Last year, while I was investigating Chinese investment in Brazil, several sources confirmed that a Brazilian subsidiary of Chongqing Grains, a Chinese state-owned company, had illegally bought two farms. It did so despite a Brazilian prohibition on foreign purchases of large farms, legislation passed specifically to prevent Chinese companies from doing so (according to lawmakers I interviewed). As I describe in Carta Internacional(in English), the China Development Bank likely funded the project, while then-President Hu Jintao and Dilma Rousseff personally signed the deal—but with the explicit provision that Chongqing Grains would rent the land, not buy it.
Western companies are not immune to corruption, of course. But thanks to civil society movements, as well as legislation like the Foreign Corrupt Business Practices Act, U.S. companies risk punishment for abuse abroad or under-the-table deals, both at the hands of consumers and the U.S. government. The same is generally true for corporations headquartered in members of the Organization for Economic Cooperation and Development (OECD), which has a Common Standard for Transparency. The World Bank, meanwhile, adheres to strict procurement and consultant guidelines, and maintains a detailed list of firms that have been known to violate laws. Thanks to such activism and oversight, U.S. and other Western corporations face potentially significant economic and legal sanctions for corrupt practices. And the effects, in terms of reduced abuses, have been real. In China, in contrast, publicly criticizing a major Chinese foreign investment can be downright dangerous.
Thus, it is reasonable that many are concerned about a development bank that China will lead in practice (if not in name).
Ironically, however, the New Development Bank may actually help improve China’s engagement with developing countries.
To begin with, Chinese authorities have begun to improve their investment practices. Their motives may be pure, or they may simply recognize that their country has a serious global image problem. Thanks to perceptions of corruption, China has become a convenient target around the world for protectionism and nationalist rhetoric. This threatens China’s “going-out strategy,” which aims to expand overseas investment to secure natural resources, promote Chinese exports, and help China’s multinational companies grow. On his tour of Africa last year, Xi Jinping’s speeches sought to confront the widespread perception that China is in Africa merely to rob resources by emphasizing partnership and cooperation with African partners.
Perhaps more importantly, setting up the BRICS bank will force China to debate development challenges with its cofounders. To be sure, Russia is unlikely to be in the vanguard of anti-corruption efforts, but it is also unlikely to regard the development practices as important enough to bother fighting them. But India, Brazil, and South Africa (to a lesser extent) are all inclusive democracies where citizens openly—and loudly—criticize the government, demand better governance, and press for sound development policies.
China’s experience in Brazil, in particular, shows that there is hope for improvement in Beijing’s development policies. Over the past five years, Brazil successfully reformed China’s investment approach. Local and federal authorities carefully negotiated with Chinese investors to ensure that projects hired local laborers under fair conditions—as well as strategically pushed China to focus more on investing in sectors outside natural resources. Lastly, Chinese investors have gradually grown accustomed to negotiating legitimate deals under local rules. In the BRICS bank, Brazil is likely to continue pushing China to improve its investment practices.
Finally, the New Development Bank will force the BRICS to address complaints from other developing countries. As the IMF and World Bank failed to pass reforms to integrate rising powers, it was easy for the BRICS to join the chorus of criticism against the West. But as leaders of a development bank themselves, the BRICS will increasingly become a target of criticism from borrowers, and feel pressure to improve development practices. Investment in developing countries from the BRICS—and especially from China—will continue growing at a fast clip. Perhaps a development bank that forces them to debate investment practices among one another—and opens them up to more criticism—is actually an opportunity.