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China investment in developing countries: Is it a cause or consequence of weak rule of law?

February 14, 2018

A few days ago, I attended a panel organized by a NGO in Washington DC, in which several panelists were explaining their perspectives about Chinese foreign investment influence in the world. This is a very timely topic, not because China is new in its efforts for participating as investor in other countries (those attempts can be traced more than a decade ago, at least), but mainly because that decision is filling a void of other investors, that were traditionally present in developing countries, such as United States or United Kingdom corporations, among others.

 

In this brief post, I would not analyze how good or bad this investment has been for the development of the regions (it is undeniable that Latin America or Africa lacked and still lack good quality infrastructure , that is one of the areas where Chinese investment has focused). My focus will be in trying to know whether a) this investment has been attracted in spite of or due to the weak rule of law that developing countries have; and b) to see how this intervention through investment has helped to improve or deteriorate rule of law in the recipient countries. For the purpose of this note, I will assimilate “promoting rule of law” to “absence of corrupt practices”, which is in practice a subcategory of the main concept.

 

Let’s analyze rule of law indexes and countries where china has heavily invested. IISD reports that almost 85% of Chinese investment has been directed to developing and transition economies. Why has China investment chosen such countries? Scholars have not agreed on the reasons, but options go from securing energy and minerals supply to establishing long-term political alliances. Probably those are both true, as well as many other that foreign policy scholars would determine (Let's not forget that Chinese diplomacy has deployed many tools around the world, including pandas loans, lovely animals pictured at the beginning of this note). Without regard to those facts, the reality is that Chinese investment has poured by USD billions in the last 10-15 years in developing countries, and the corporations that have served as vehicle of such investments have become major players in several sectors, such as oil, telecommunications, electricity, infrastructure and mining.

 

Has rule of law improved or deteriorated over time in the destination countries? Brazil, United Arab Emirates, Nigeria, Indonesia, Argentina, Australia, United States, United Kingdom, Venezuela, Pakistan and Kazakhstan are among the most important recipients of Chinese investment. So, let’s check how the have performed in the Rule of Law Index of the World Justice Project, a reputable indicator for these matters. 

 

 

 *General ranking is an average of factors’ rankings included in the Index

 

What seems evident is that some of the countries that received Chinese investment had poor rule of law evaluations before such investment arrived, and continued to have similar negative reports after. Similar stability can be reported with countries that had positive qualifications in the Rule of Law Index. It could be said then, that Chinese investment did not deteriorate rule of law, and it did nothing to improve it either. If these investments complied with local regulations, there is no room to questions their moral or ethical practices from a legal perspective. In the panel referred in my first paragraph, Mrs. Sun Yun, Senior Associate with the East Asia Program of the Stimson Center, defined it very precisely: Chinese investors are going to behave as required by locals, and adapt to such demands, whatever they are. That bring room for every possible conduct. I cannot help but say that I regret such approach, for the reasons expressed below. 

Beyond what the information shows, wouldn’t it be the role of Chinese (or any other foreign) corporations to try raising the behavior standards in the investment destination countries? This meaning that, instead of simply playing “by the local demands”, they could try making businesses following international standards, such as the ones included in the United Nations Convention Against Corruption?

 

The concept of good global citizenship has been explored for several years now and, at the beginning, it was mostly related to corporate social responsibility (CSR) activities. Being still evidently a fluid concept, global citizenship analysis includes commitments from corporations to prevent climate change, promote human rights, protect the environment, among others. Usually, entities are excluded from such rankings when there is a big incident that shows lack of real commitment to their shareholders wellbeing.

 

In these rankings and analysis, I did not find a category considering practices weakening rule of law in the evaluation. It might be included in the human rights topic, since corruption kills, and in consequence is a direct threat to humans, however the sensation is that rule of law compliance is not as visible as other aspects of corporate actions, yet its importance is paramount.

 

I guess that the process of converting any foreign investment or contractor in a “good citizen” is going to still take a few decades, and lots of public pressure. In the meantime, it seems that the improvement of national legal regimes would be a stronger tool to compel corporations to avoid corrupt actions overseas as they do in their local markets. Also, the strengthening of local rules in the recipient country, as well as real enforcement, would quickly change the behavior toward corruption of national and foreign investors alike. However, that has proven to be a far cry from what we can really expect.

 

 

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