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From issue: China's Global Rise: Implications for the Americas (Winter 2012)

AQ Feature

Exporting Corruption

Ariel Armony

Power to the people? Members of Brazil's native Caiapo tribe protest the construction of the Belo Monte hydroelectric dam. (Evaristo SA/AFP/Getty)

China’s informal business culture finds a too-familiar environment in Latin America.

In 2008, when I was a Fulbright professor at Nankai University in Tianjin, China, the international school my children attended hired a local contractor to build a new classroom wing. As the building reached completion, the relationship went sour: the construction did not meet the criteria originally agreed upon.

As the parties began to fight about termination of the contract, the builder disclosed to the school that some municipal permits had not yet been approved and that he would use his personal contacts to block those permits. It soon became evident to the school’s authorities that the problem could not be solved by legal means.

It came down to a basic scenario: whoever had more influence with municipal authorities would win the scuffle over the new wing. There was no formal procedure to settle the dispute. After two years of wrangling to make connections with city officials, the school finally obtained the required permits.

Having grown up in Argentina, in a culture in which informal rules governed everyday life, this was nothing new to me. As a political scientist, I recognized that people in China, as in most of Latin America, move in a deep sea of informality, in which unwritten rules, bribery and/or personal connections are the gatekeepers to resources controlled by individuals in positions of power.

Informal rules exist everywhere. People know them, know that everyone else knows them, and understand that there are incentives to comply with the rules as well as sanctions for not following them. This knowledge helps individuals understand how the system works and strategically navigate their environment.

But the prevalence and relative weight of informality vary across nations. Informality is notably high in both China and Latin America. Though the two regions have different values and attitudes, both have traditionally lacked transparency in government. They operate according to informal business dealings which, in turn, undermine or further weaken the rule of law and may institutionalize corrupt practices.

This increasingly matters to the Americas.

Given China’s increasing business operations and growing investment in Latin America, corruption at home is likely to have a significant impact on societies at the receiving end of Chinese expansionism. The relationship between China and Latin America is an “encounter of informalities.” Latin America has for decades struggled with corruption and a feeble rule of law, and China’s expanding presence may only serve to entrench this feature of the domestic landscape.

Show Me the Money

China’s involvement in Latin America is part of a more general government policy known as zou chuqu (“Going Out”), which refers to official encouragement of Chinese enterprises searching for greater investment opportunities around the world. The notion of “Going Out” applies to a wide range of actors, from large, state-owned enterprises to individual and family entrepreneurs seeking business deals overseas.

There is a dark side of zou chuqu—the side linked to informal practices and involving illicit or opaque transactions. This dark side is manifest in various dimensions of Chinese engagement in Latin America, from large-scale projects related to public-sector contracts, to small-scale trade (such as textile smuggling) and outright criminal networks engaged in human trafficking or other illegal activities. It also pops up in China’s foreign aid programs.

Transparency International (TI) has developed a Bribe Payers Index, which ranks countries according to the likelihood that their companies will engage in bribery when conducting business abroad (countries with the greatest likelihood score the lowest). Along with Russia, China ranks at the bottom of a list of 28 economies from the developed and developing world.

According to thousands of businesspeople interviewed for the TI survey, companies prone to paying bribes tend to come from countries whose governments are perceived as having little regard for the rule of law.

Public-sector contracts are most affected by bribery. Usually large and requiring arrays of subcontractors, these projects offer opportunities for bulky, multiple kickbacks. Corruption of this sort is most common in the mining, oil and gas sectors, as well as in major infrastructure projects.

Many of the investments have come from Chinese state-owned or state-supported companies that have sought participation in megaprojects in various Latin American countries. Media outlets have already exposed examples of bribery, irregularities in bidding processes, and overall lack of transparency in awarding contracts.

The Coca Codo Sinclair hydroelectric project in Ecuador is a case in point. Only two companies bid for the project—both Chinese and state-owned. Sinohydro got the deal, negotiated at $1.7 billion, to be financed largely by China’s Export-Import Bank. Set to be the country’s largest hydroelectric power plant, the project has been challenged by subcontractors, opposition leaders and environmentalists. Critics point to deficient feasibility studies, environmental problems and corruption. Experts have raised concerns that the plant would not be able to generate the expected power output, which would make it difficult for Ecuador to repay the loan China’s Export-Import Bank extended to secure the project.

In recent years, reports of corruption, lack of transparency and violations of labor and environmental regulations within Chinese mining ventures (Peru), petroleum refineries (Costa Rica), oil deals (Venezuela), and other large-scale investment projects have emerged. There is also some evidence of ties between ethnic Chinese networks and smuggling operations—mafia-like groups that provide “protection” to compatriots, human traffickers and other illegal activities.

Recent reports have linked Chinese organizations and Latin American public officials with operations to bring undocumented immigrants to Argentina, Bolivia and Peru, and from those countries to Canada and the United States. Earlier this year, Peruvian authorities disbanded the Red Dragon gang, composed mainly of Chinese and Peruvian-Chinese citizens, which was responsible for the illegal smuggling of Chinese nationals. An investigation uncovered links to a corrupt network inside RENIEC, Peru’s national registration authority.

In addition to promoting business activity abroad, Beijing’s “Going Out” policy involves foreign aid. China’s foreign assistance has been driven mainly by its demand for natural resources, especially energy, and diplomatic goals—chiefly, the effort to politically isolate Taiwan, which is diplomatically recognized by a number of nations in Central America and the Caribbean.

China has delivered assistance without following bureaucratic procedures and with an aura of secrecy, and has given preference to public works with high visibility. The new San José National Football Stadium in Costa Rica is an example. The $140 million China invested in building or revamping cricket stadiums in the Caribbean for the 2007 World Cup is another. The official Chinese position is that foreign aid responds to South-South solidarity and follows the principles articulated by Zhou Enlai, China’s first premier, in the 1960s, which established that assistance to other countries should promote mutual benefit, avoid any form of dependence, establish a partnership between equals, and have no strings attached.

But Western observers say that China’s foreign aid program lacks transparency and accountability in the decision-making process, and they also criticize the non-conditionality of China’s economic assistance...

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