China's Foreign Policy on Peru: Blessing or a Curse?

CHINA’S FOREIGN POLICY ON PERU:

BLESSING OR A CURSE?

A

CASE STUDY ON HOW A RESOURCE

-

RICH DEVELOPING COUNTRY

DEALT ECONOMICALLY WITH THE RISE OF

C

HINA

RUUD VAN DER KANT

LEIDEN UNIVERSITY Supervisor: Prof. Dr. E. Amann

C

ONTENTS

4.2 Theories of economic development ... 4

4.2.1 A classical model of development ... 4

4.2.2 World-Systems theory ... 5

China as an imperialist power ... 8

Case study: China’s increased relations with Peru ... 10

6.1 Trade and FDI ... 10

6.2 GDP ... 15

6.3 Industrialization ... 16

6.3.1 Terms of trade ... 19

6.4 Poverty and inequality ... 20

Concluding chapter... 23

7.1 Conclusion ... 23

7.2 What goes beyond this study ... 24

References ... 25

A

BSTRACT

Since China’s Go Global Policy became operational in 2002, it started many new relations with resource-rich developing countries. This paper has as a goal to build on literature about Chinese foreign policy towards resource-rich developing countries, and whether it may be defined as economic imperialist. The bilateral relationship with Peru is taken as a case study, as the country is endowed with mainly copper. Economic figures and statistics reveal that Peru has economically benefited enormously from increased trade and FDI, in terms of GDP growth and poverty reduction. However, the benefits for Peru are stagnating because the basis for industrialization is not present, and does not get developed through the relationship with China. Increase of economic ties by developing countries with China can be beneficial, but do not improve the long-term prospects for reaching the core in the World-System.

I

NTRODUCTION

The rise of China in the international scene has been called an ‘economic miracle’. Since its economic reforms in 1978, the country has achieved average growth numbers of over 9% (Yuan & Yu, 2014). At this moment, China has the second biggest economy worldwide, and it is projected to take over the United States soon. This has been the result of state-guided policies that led to incredible industrialization, turning China into the ‘factory of the world’. Not only rich classes have benefited from this growth, because according to the World Bank, more than 500 million people have been lifted out of extreme poverty. Whereas in 1981 88% of the Chinese population had to live from less than US$1.90 a day, in 2012 only 6.5% lived below this standard. When considering the international consequences for this economic miracle, we can identify two major milestones in China’s foreign policy. In 1978, president Deng introduced the Open Door Policy, by creating special economic zones that opened up for foreign investment. Then in 1999, the Go Global Policy was initiated, to promote Chinese investors to exploit opportunities abroad. After being accepted for the World Trade Organization at the end of 2001, China finally implemented the Go Global Policy in 2003, which meant the start of incredible foreign activity in the form of trade and FDI. Through the Open Door Policy China achieved to become the manufacturing capital of the world. This meant that its demand for raw materials skyrocketed, and that economic relations with resource-endowed countries had to be strengthened to assure itself of enough supplies, like oil, metals and other minerals.

One of the countries that China increased its ties with is Peru, mainly because of the vast amount of copper reserves that the big country had in its ground. Until 2000, Peru was considered the second poorest Latin American country after the socialist Bolivia (World Bank, 2018). In the beginning of the 21st _{century, Peru started to develop rapidly, and by now the World Bank regards it as an upper-middle} income country.

It seems to be no coincidence that the two developments described in the previous paragraphs run almost parallel. China’s role in a resource-rich country like Peru is clearly present, but can be regarded as dubious. Especially in developing countries, their role is not undebated, as the capitalist system allows them to freely do business all over the world (Martinez, 2018). This study wants to identify the consequences that increased relations of China with developing countries since the implementation of its Go Global Policy has had for the development of these countries. Therefore, we have defined the main research question as follows:

- To what extent can we characterize increased Sino-Peruvian relations since 2003 as a type of economic imperialism?

To answer this question, we need to answer the following two sub-questions:

- How can we characterize China’s foreign policy towards resource-rich developing countries since China’s Go Global Policy in 2003?

- In what way provides the increased relationship between Peru and China opportunities or threats to the long-term economic growth of Peru?

In the next chapter, we introduce two theories that guide this study. First, a theory of economic imperialism is discussed to find out what economic imperialism consists of. After that, we discuss a theory that has to do with the other side of the Peru-China relationship. We discuss World-Systems Theory in order to better understand the position of developing countries in the contemporary

capitalist world-system. Chapter 4 will globally discuss how Chinese activity in developing countries all around the world since its opening up has been received, to answer the first sub-question. Thereafter we turn to the case of Peru, so we can go deeper into details, and answer the second sub-question. Based on both quantitative and qualitative data we sketch an image of how the relationship between the two countries has increased (by measuring development of trade and FDI), and what the consequences are for Peru (by measuring the development of GDP, industrialization, poverty and inequality).

T

HEORY

This part will discuss two theories. First, we will treat economic imperialism as a theoretical framework to place China’s actions towards developing countries, which is Peru in this case. Consequently, we will discuss a theory of economic development as a theory frame in which we can place the current situation and prospects of Peru towards the world economy.

4.1 E

The concept of economic imperialism, or capitalist imperialism, was opted by Lenin in 1917 in his book ‘Imperialism, the Highest Stage of Capitalism (Lenin, 1939). Like the title of the book says, he regarded imperialism from an economic perspective, basing his work mainly on the theories of Marx’ Das Kapital. Lenin argues that imperialism is the highest state of capitalism, where capitalism has reached the state of a monopoly; ‘If it were necessary to give the briefest possible definition of imperialism, we should have to say that imperialism is the monopoly stage of capitalism’ (Chapter 7, P.1). Lenin observed that small-scale industry was forced out by competition of large-scale industry, leading to the inevitable situation where production is concentrated more and more until in practice a monopoly exists. More elaborate than the previous definition given of economic imperialism, Lenin defines five basic features of the concept:

‘(1) the concentration of production and capital has developed to such a high stage that it has created monopolies which play a decisive role in economic life; (2) the merging of bank capital with industrial capital, and the creation, on the basis of this “finance capital”, of a financial oligarchy; (3) the export of capital as distinguished from the export of commodities acquires exceptional importance; (4) the formation of international monopolist capitalist associations which share the world among themselves, and (5) the territorial division of the whole world among the biggest capitalist powers is completed.’ (Chapter 7, P.2)

However, Lenin’s description of imperialism, with the monopoly as highest stage of capitalism has received substantial criticism over the years. For example, Lindsey (1982) criticizes Lenin’s attempt to interweave imperialism with monopoly, by saying that they are two different theories instead of one. Lindsey agrees with the assumption that monopoly is a stage of capitalist development, but argues that the concept of imperialism should be de-attached from it.

In the 1960’s, Kwame Nkrumah coined the term neo-colonialism, based on Lenin’s imperialism. In a direct reference to Lenin, he wrote the book ‘Neo-Colonialism, the Last Stage of Imperialism’. As Nkrumah was the president of Ghana, the concept of neo-colonialism mainly describes a type of imperialism in Africa (Nkrumah, 1971). ‘The essence of neo-colonialism is that the State which is subject to it is, in theory, independent and has all the outward trappings of international sovereignty.

In reality its economic system and thus its political policy is directed from outside.’ (P.1?) Important within the concept of colonialism, is to what extent enforcement is used as part of the neo-colonialist policy, because there does not really seem to exist a consensus about this. Therefore, we can distinguish between a ‘hard’ and a ‘soft’ notion of neo-colonialism. Nkrumah, in his time, observed a type of ‘hard’ neo-colonialism, regarding his language: ‘The neo-colonial State may be obliged to take the manufactured products of the imperialist power to the exclusion of competing products from elsewhere.’ Nkrumah did not only regard neo-colonialism as a way for developed countries to even enrich themselves: ‘The struggle against neo-colonialism is not aimed at excluding the capital of the developed world from operating in less developed countries. It is aimed at preventing the financial power of the developed countries being used in such a way as to impoverish the less developed.’ (P.1?) Besides, he argues that neo-colonialism is even the worst type of imperialism, because it means power without taking any responsibility for the ‘neo-colonized’ country.

More contemporary views of economic imperialism describe the concept different than Lenin did at the time. ‘There are two increasingly divergent forms of imperialism: military driven intervention, occupation and domination; and economic expansion and exploitation of resources, markets and labour by invitation of the ‘host country’ (Petras & Veltmeyer, 2016, P.101). In this definition of imperialism, the political and the economic dimensions are separated, while others argue that they are interrelated, like the following: ‘I define it as a collection of thoughts and principles whose advocates critically examine the current social, political and economic implications that structurally result in uneven power relationships in international relations within distinct categories of winners versus losers in a capitalist world economy’ (Lumumba-Kasongo, 2011, P. 245).

The distinction between neo-imperialism and neo-colonialism is not so clear in literature. A difference according to Lumubma-Kasongo (2011) is that ‘neo-colonialism implies some new forms of physical and institutional control, while neo-imperialism is about domination without necessary having physical control’ (P.247). Besides, Lumumba-Kasongo (2011) does not even see a difference between colonialism in former times, and neo-colonialism as Nkrumah developed the concept, other than there is a difference in time and space.

After discussing various types of (neo) -colonialism and -imperialism in existing literature, we can conclude that they are majorly overlapping concepts, that aim to describe how rich countries exploit poor countries and their resources, which is enabled through the capitalist world order. Both concepts imply control and domination, whereas from a liberal view in the same capitalist world order countries are regarded free and enabled to acquire new goods, services and ideas. A liberal view also says that relatively poor countries have plenty of space and opportunities to grow within the system, whereas colonialists and imperialists refute this contention.

4.2 T

When discussing theories of economic development, it is first useful to briefly mention models that are considered classical or ‘most-used’, because others are in many cases a direct critique on these. One such classical model is Rostow’s stages of growth theory, which can be classified as the most classical type of ‘modernization’ theory. The theory argues that there are five stages every national society goes through in their process of economic development (Rostow, 1991). - The fact that he

argues that every society passes the same process of development would become a rather contestable notion, later in the debate of economic development. - The five stages are as follows: (1) The traditional society, (2) The preconditions for take-off, (3) The take-off, (4) The drive to maturity and (5) The age of high mass-consumption. A limitation for the use of Rostow’s work with respect to the cases he mentions, is that his work is from 1953; this means that his classification of countries to the stages are not relevant anymore. However, this does not mean that the stages itself lack relevance.

4.2.2 World-Systems theory

World-systems theory origins from Dependency theory, which was developed by economists working at the United Nations’ Economic Commission for Latin America (ECLA) (Lancaster & van de Walle, 2018). It was established as a critique on the more widely accepted classical model of development, saying that it does not see the world as an interrelated system in which the actions and policies of one player influences the potential of development in another. Dependency scholars argued that ‘the development of poor countries is strongly conditioned by their relationship to wealthy countries and their positioning within the global capitalist economy’ (P. 23). Therefore, the theory divides all countries in the world into two classes: the core and the periphery.

The presumed way to escape the periphery was developed by Dependency scholar Raúl Prebisch, and was called Import Substitution Industrialization (ISI). It involved the ‘establishment of domestic production facilities to manufacture goods which were formerly imported’ (Baer, 1972, P.95). Because of the decreasing terms of trade for developing countries, it was generally assumed that industrialization was the only way to escape the periphery and reach the core. Until the 1950’s, Latin America’s affiliation with the international market was mostly being the supplier of food and raw materials for the industrial centre (So, 1990). In return, Latin American countries imported finished goods from this centre. In the two decades after World War II, ISI policies got into practice in many Latin American countries, as a consequence of ECLA’s analyses. The war even had a stimulating effect on these ISI policies; ‘shortages of foreign manufactured goods led to full utilization of industrial capacity’ (Baer, 1972, p.97). The main reason for ISI was increased rates of economic growth. Baer also notes that it was assumed that ISI would increase the independence of Latin America with regard to the world economy; something that Prebisch, Furtado and other researchers assumed to be the main argument for ISI.

Dependency theory started to lose its empirical validity because of the rapid development of the Asian Tigers (South-Korea, Taiwan, Hong Kong and Singapore), also referred to as the Newly Industrialized Economies (NIE’s) (Liu, 1994). From 1960 until 1990, these economies noted average annual growth rates of 6 to 9 percent, exceeding most advanced and other Least Developed Countries (LDC’s). Even though there have been recorded countries that experienced a period of rapid growth in the 20th century, the Asian tigers are unique in sustaining these growth rates for more than three decades. The development of the NIE’s was one of the reasons why Dependency theory became less and less valid in empirical studies from the 70’s (So, 1990). The second argument for the demise of Dependency theory was the crisis that dominated the socialist states. ‘The Sino-Soviet split, the failure of the Cultural Revolution, the economic stagnation in the socialist states, and the gradual opening of the socialist states to capitalist investment have signalled the bankruptcy of revolutionary Marxism’ (P. 170). The previously assumed notion that detachment from the capitalist system was inevitable, became more and more contested in Third World countries. The third argument involved the crisis in capitalism in the United States. ‘The Vietnam War, the Watergate crisis, the oil embargo in 1975, and

the combination of stagnation and inflation in the late 1970s, as well as the rising sentiment of protectionism, the unprecedented government deficit, and the widening of the trade gap in the 1980s – all signal the demise of American hegemony in the capitalist world-economy’ (P.170). All three arguments prove that the world system is not so static as Dependency theory leads to believe. Therefore, Immanuel Wallerstein adjusted the static theory, which was named World-systems theory. After criticizing the conception of a bimodal system, Wallerstein argued that the world is too complicated to classify it in only two groups (Wallerstein, 1974). Therefore, he added a group between the core and the periphery, called the semi-periphery, arguing that there are too many in-between nations that cannot be placed in either the core or the periphery. In fact, it seems to be in line with studies that already criticized the limits of only two groups, so that new terms were created like “sub-imperial states” and “go-between nations” (Córdova, Marini & Cordova, 1971; Galtung, 1971).

Wallerstein explains that the concept of “unequal exchange” lies at the basis of the world-system (Wallerstein, 1974, P.5). Workers in peripheral countries need to work various hours to obtain the funds to acquire products that are produced in one hour by a worker from a core country; an unequal exchange. This unequal system is necessary for the expansion of the world economy where profit is the primary consideration. Without this inequality, there is no incentive to involve other countries in one’s economy and thus increase the division of labour across borders. In this situation, it is highly unlikely that a capitalist world economy would even exist. Technology, and the development of it, plays a key role in the definition of which products are subject to the unequal exchange. The composition of the goods that are produced in the core and those that are mainly produced in the periphery changes along with this technological development, because it defines the wage patterns and margins of profit of certain products at certain moments in time.

Then what is this semi-periphery in a system where it can be found in between the core and periphery? The first, quite straightforward, feature of a semi-peripheral country is that stands in between the core and the periphery in terms of the kind of products it exports and the wage levels and profit margins that the country knows. The second feature of a semi-peripheral country is less straightforward than the first one; ‘the direct and immediate interest of the state as a political machinery in the control of the market (internal and international) is greater than in either the core or the peripheral states, since the semi-peripheral states can never depend on the market to maximize, in the short run, their profit margin’ (P.6). In other words, semi-peripheral countries are those in which the government uses its agency power to break the status quo that the market system imposes by its nature, which would put the country in the periphery group. The NIE’s have successfully used this agency power and have reached the core through this.

Besides, Wallerstein dismisses the notion that there is barely any fluidity among the nations belonging to one of the three groups:

‘This is not to say that there are no changes in position. Quite the contrary. There is constant and patterned movement between groups of economic actors as to who shall occupy various positions in the hierarchy of production, profit, and consumption. And there are secular developments in the structure of the capitalist world system such that we can envisage that its internal contradictions as a system will bring it to an end in the first or twenty-second century’ (P.1-2).

Despite his disagreement with Dependency theory, Wallerstein does agree with the notion that there exists a world system that is intertwined, disagreeing with classical models of development. He judges the model of “classic capitalism” to be wrong, because ‘the core and the periphery of the world economy were not two separate “economies” with two separate “laws” but one capitalist economic system with different sectors performing different functions’ (P.2). Within this system, he identifies two concepts: roles and rewards. Every country has a role in the system (core, semi-periphery and periphery) , and their economic growth is the reward. Over the history, the reallocation of roles and rewards have mainly led to decrease of rewards for one party and increase for another, while they were justified with redistribution rhetoric. Wallerstein does not see practical evidence and even not a possibility for redistribution within the capitalist world system: ‘One fundamental explanation is that the framework of the capitalist world system limits critically the possibilities of transformation of the reward system within it, since disparity of reward is the fundamental motivating force of the operation of the system as it is constructed’ (P. 7). In line with Dependency theory and opposing Modernization, Wallerstein sees that growing inequality is inherent to the system: ‘The so-called “widening gap” is not an anomaly but a continuing basic mechanism of the operation of the world economy. Of course, some countries can “develop”. But the some that rise are at the expense of others that decline’ (P.7). The second part of this citation of Wallerstein points out the most salient difference with Dependency theory; that mobility between the classes is possible, but hard. Even though it seems like a small change to the theory, it makes the functionality of the theory very different.

Whether a country is able to work itself up the system in terms of periphery -> semi periphery and semi periphery -> core, has been a subject of discussion for many writers. The first step is to acknowledge that every peripheral country is in a different situation, and that not all of them are in the possibility of escaping the periphery (Green, 1970). To escape the periphery, a country requires some kind of favourable position, like an existing industrial base, low wages or another competitive advantage. With the condition that a country meets these requirements, Wallerstein (1974) argues that there are two strategies to move up the system: (1) seizing the chance and (2) promotion by invitation.

Seizing the chance means that a periphery country would take import substitution measures at moments of contraction of the world-market. In such a situation, primary materials’ prices typically drop, which leaves peripheral countries with balance-of-payment problems, so less state income and a significant rise in unemployment. ‘It is a matter of seizing the chance because it involves aggressive state action that takes advantage of the weakened political position of core countries and the weakened economic position of domestic opponents of such policies (P.10).

Promotion by invitation is a consequence of direct investment across borders by multinational corporations that are based in core countries. However, because of the competition between peripheral countries to capture investments of the multinationals, surplus that is generated by economic activity is limited. Still, Wallerstein’s empirical evidence shows that this can be a valid model for development, but the question remains whether it might actually enable a nation to climb up the system. This strategy is remarkable in the light of this study, because we saw that Petras & Veltmeyer (2016) described economic imperialism as ‘economic expansion and exploitation of resources, markets and labour by invitation of the ‘host country” (P.101). So whereas Wallerstein regards this ‘invitation’ as a possibility to move up the world system, others regard it as a possible form of imperialism.

C

HINA AS AN IMPERIALIST POWER

Considering the fact that China’s one and only political party, and thus the ruling party, calls itself the ‘communist party’, it seems highly contradictory to regard the country as an imperialist power like Lenin described. However, like said before, the world economy is nothing else but capitalist, even if a state itself would be ruled in a socialist or communist way. Taylor (2011) describes it as ‘communism using capitalist globalization to create modern imperialism’. Therefore, this chapter will investigate how China has behaved within this capitalist world economy towards peripheral countries, since it opened up to the world economy in 2003. We will consider if China’s increasing presence in these countries have benefited of its presence, or that it was harmful for their economies and societies. It is slightly ironic to investigate whether China has behaved as an imperialist power, because in the 20th _{century, China never belonged to the countries that subjugated poorer countries as a colony to} themselves. In contrary, they were colonized, or occupied, themselves by Japan from roughly 1930 to 1945. Lumumba-Kasongo (2011) wrote: ‘Persistent international inequality following the end of colonial rule has been the foundation of interminable economic dependence by the colonized countries’ (P.245), making it impossible to see China as an imperialist power from Lumumba-Kasongo’s definition. Also even in 2009, Lotta (2009) wrote that China was still dominated by imperialists and that ‘imperialism had deeply penetrated Chinese society and economy through (i) investments by transnational corporations, (ii) the activities of global finance, (iii) the influence of imperialist-controlled institutions like the World Bank and World Trade Organisation, and (iv) the channels of culture and ideology’ (P.29). However, Wallerstein would probably say that through China’s miraculous development from the 90’s they left the periphery, and joined the semi-periphery. That way it can be theoretically justified that China is subject to imperialism by the core, but exercises imperialist policies in peripheral countries as well.

About China’s foreign policies towards peripheral countries has been written a lot for the last two decades. This is not surprising, regarding China’s Go Global Policy, that was initiated in 2000, and their accession to the WTO in 2001. The Go Global Policy was a national initiative aimed to promote local enterprises to invest abroad (Bellabona & Spigarelli, 2007). At that time, it was regarded as the logical next step in China’s economic development, with the goal of capturing new outlet markets for its local productions, but also to acquire

sophisticated skills, advanced technologies and intangible assets, like patents, trademarks and copyrights. Besides, the outgoing capital by foreign investment had to contribute to the reduction of the trade surplus, that was putting pressure on the exchange rate. Also, the Go Global Policy had everything to do with the industrialization of the country, as the demand for minerals, fuels and other primary materials increased skyrocketed. Therefore, these materials were increasingly imported from commodity-rich but less-developed areas; Africa and South-America. As can be seen in Figure 1, FDI

Figure 1. China’s FDI inflow and outflow from 1990 to 2014. From “China's FDI inflow-outflow from 1990 to 2014”. Retrieved from

outflow really started to flourish from 2003. Therefore, we will regard if China’s actions in peripheral countries from 2003 can be categorized as imperialistic.

In 2009, China came up with a new diplomatic strategy that identified its relations with developing countries, which had two aspects: ‘first, China gives top priority to its relations with developing states in its external policy; second, China views the developing states as its allies, particularly in the international political arena, and making common cause with these states as an important element in its global power and influence’ (Yu, 2015, P.1047). Whereas China’s relationships with African countries are rather intimate on a political level, it seems that its relationships with Latin American countries are more focused on the economic and commercial level.

‘China’s foreign direct investment increased from $1.8 billion in 2003 to $16.1 billion in 2006. About half of this is in natural resource industries’ (Lotta, 2009, P.32).

Carmody (2010) observes how globalization in Africa has risen quickly since 2000 in combination with the rise of China and the global technological revolution. Only in 2008, Chinese trade with Africa grew with 45.1 percent, to $107 billion. This rapid increase of growth of trade with China alone accounted for significant economic growth among the resource-endowed countries; ‘as many African economies are natural-resource based, the continent hosted eight of the world’s top twenty fastest growing economies in the world in 2007 (P.4).

Despite the economic prosperity that China is recorded to bring to peripheral countries by their investment and trade, the vast majority of literature points out the downsides of their undertakings in poor countries. In the first place, Thomas Piketty (2014, P.86-91) states in his book ‘Capital in the 21st century’ that no developing country has really benefitted from free flows of capital. The Asian countries that have recently gone through rapid economic development by opening up to the world market, like Japan, Taiwan, Singapore and most recently China, did not do so because of free flows of capital, but rather despite it. The reason for that, is that when a wealthy country invests in a poor country, it means that people from the wealthy country remain owner of the capital and activities in the poor country. So even when national output per person in poor countries would converge with the output per person of wealthy countries, it doesn’t mean that income per person would also converge with that of wealthy countries. The reason is that remuneration for capital investment is generally way higher than remuneration for labour. Piketty notes that in Africa the foreign-owned share of their manufacturing capital seems to exceed 40-50 percent, meaning that a lot of income from capitals flows out of the country. Of course this does not immediately mean that the presence of China is worse than the presence of other core countries, but the increase of China’s investments in Africa are so significant that China represents a major instigator for this problem.

Lee (2015) describes more specific impacts of Chinese outward investment for developing countries in her study that examines Chinese investment in oil worldwide. She observes that since the entrance of China’s Go Global Policy in 2003, both energy demand and FDI has skyrocketed. Besides, projections for the future show that China is expected to take over world’s leading oil consuming country in the early 2030’s. Whereas theory says that FDI may bring economic growth to countries where it is invested, Lee argues that the oil industry may not be as helpful, due to the nature of the oil industry; benefits for society are limited because the oil industry is capital-intensive, large-scale, and highly concentrated in ownership. Therefore, the oil industry may not be as beneficial for the economy of a whole country than FDI in sectors that are labour-intensive. Nevertheless, Lee found in her quantitative

study that countries in which the Chinese National Petroleum Company (CNPC) has been operating, economies tend to grow faster. The downside of the quantitative study of Lee is that it only measures the rate of economic growth along the whole country, whereas we know that this does not mean that poverty or inequality are being tackled. Besides a quantitative study, Lee also investigated with a qualitative study how Chinese oil investment affected Chad and Sudan, economically as well as politically. Both cases show an incredible increase in economic growth, but also negative political effects, like corruption and authoritarianism. For example in Chad, oil revenues were largely spent on the army of President Idriss Déby, strengthening his power and weakening democracy.

Another drawback of Chinese presence that has been recorded by various sources, is the deficient quality of work they produce and lack of adherence to moral and ethical rules (De Morais, 2011); ‘[The Chinese] are virtually unsupervised in their expansion throughout the countryside and have access to natural resources unknown to Angolans. Many trucks conducting such illegal business prominently display free pass credentials issued by Casa Militar, with the official logo of the presidency’ (P.74). In this case with Angola, the reason why China carries out these projects is quite simple: Angola possesses an incredible amount of oil, and took over the position as leading supplier of China’s oil. By constructing -deficient or not- infrastructure in resource endowed countries, China tries and succeeds to get a foothold of the countries’ resources.

In this chapter, we’ve attempted to define Chinese foreign policy all over the world and whether it can be considered rather a threat or an opportunity for peripheral states. Clearly, the situation is not so easy that the answer to this question can be unambiguous. On the one hand we have seen that it can promote economic growth in peripheral states, but on the other hand it also seems that Chinese presence has brought mainly political problems along with economic growth. Unfortunately, it would take too much time and effort to closely investigate every single case of Chinese presence in developing countries. Therefore, the next chapter will discuss the case of Peru, which will function as a representation of China’s relation with a developing country in general.

C

ASE STUDY

:

C

HINA

’

S INCREASED RELATIONS WITH

P

ERU

This chapter will discuss how the relationship between Peru and China has developed for the last decades. If we consult the figures on their relationship, we see that from 1996, economic relations between China and Latin America increased incredibly (Zhang, 2018). Obviously, this was the result of China’s Go Global Policy; FDI was highly encouraged and because of the fact that China became the ‘factory of the world’, the country acquired resources and in turn sold manufactured products back. The goal of this chapter is do determine whether the relationship between Peru and China since 2003 can be regarded as beneficial or malignant for the development of Peru, on the hand of four parameters.

6.1 T

FDI

The basis of the relationship of China with Peru is constituted on the enormous amount of copper that China imports from Peru. If we regard the composition of the trade from Peru to China, we see in Figure 2 and 3 that in 2017 it was made up for 85.9% out of primary materials, of which mainly copper. This is clearly in line with what we discussed in the previous chapter, that is, China’s interest lies in primary commodities that are necessary for China being the manufacturing centre of the world.

On the other side of the spectrum, these goods that are manufactured in China, have increasingly been exported since the introduction of China’s Go Global Policy to Peru, as we can see in Figure 4 and 5. The blue line in Figure 5 represents the increase of import of machinery, while the other groups mainly exist of simple manufactured products.

Figure 1. Composition of Peru's exports to China in 2017. From “The Observatory of Economic Complexity”. Retrieved from

https://atlas.media.mit.edu/en/visualize/tree_map/hs92/export/per/chn/show/2017/. Copyright (2018) by OEC

Figure 2: Peruvian exports to China by product category. From “What does Peru export to China? (1995-2017)” Retrieved

Figure 3: Composition of Peru's imports from China in 2017. From “What does Peru import from China? (2017)”. Retrieved

from https://atlas.media.mit.edu/en/visualize/tree_map/hs92/import/per/chn/show/2017/. Copyright (2018) by OEC.

Figure 4: Development of Peru's imports from China. From ”What does Peru import from China? (1995-2017)”. Retrieved

from https://atlas.media.mit.edu/en/visualize/line/hs92/import/per/chn/show/1995.2017/. Copyright (2018) by OEC.

Besides, in Figure 6a, 6b and Figure 7a, 7b we can see how the share of Peruvian imports from and exports to China have drastically increased relative to trade relations with European countries, the United States and neighbouring Latin American countries. Both the figures for imports and for exports show the same picture; the only country that has significantly increased in the share of imports/exports is China. Whereas China accounted in 2003 for only 7.2% of Peruvian imports, in 2017 they accounted for more than a quarter of the total exports (26.0%) and while in only 7.5% of Peru’s imports came from China, in 2017 it has increased to 23%. Figure 6 shows that the only South Korea has taken up a larger part of Peru’s exports (from 2.0% to 4.9%), while Figure 7 shows that only India has significantly increased its share of being a supplier of Peru next to China (from 0,7% to 2.2).

Figure 5a: Peru's export destinations in 2003. From “Where does Peru export to? (2003)” Retrieved from: https://atlas.media.mit.edu/en/visualize/tree_map/hs92/export/per/show/all/2003/. Copyright (2018) by OEC.

Figure 6b: Peru's export destinations in 2017. From “Where does Peru export to? (2017)” Retrieved from: https://atlas.media.mit.edu/en/visualize/tree_map/hs92/export/per/show/all/2017/. Copyright (2018) by OEC.

Figure 7a: Countries of origin of Peru's imports in 2003. From “Where does Peru import from? (2003)” Retrieved from: https://atlas.media.mit.edu/en/visualize/tree_map/hs92/import/per/show/all/2003/. Copyright (2018) by OEC.

Figure 7b: Countries of origin of Peru's imports in 2017. From “Where does Peru import from? (2017)” Retrieved from: https://atlas.media.mit.edu/en/visualize/tree_map/hs92/import/per/show/all/2017/. Copyright (2018) by OEC.

What we can also conclude from this if we assume that China has done this with many more developing countries, is that China is taking up a core role in the world economy, and leaving its status as a (semi) peripheral country behind.

It seems logical that the trade of minerals has enormous benefits for the economy of Peru. Without mentioning technical details of mining, we will explain here how exactly Chinese companies acquire the resources that are stored in Peruvian

ground. This is necessary so we can understand why Chinese companies do what they do, and how the Peruvian people benefit from the export of mined resources. The Peruvian government gives out concessions to mining companies that are interested, so the companies acquire the right to exploit a certain area and become owner of the mined raw materials (Monografias, 2018). The proceeds of these concessions can be used to invest in sectors like healthcare, education and technological development. In Peru, these concessions may have a duration of up to 20 years. The areas that are given a concession for are spread all across the country (Figure 10), which means that in many cases the infrastructure to access such an area is of poor quality or not even present. Consequently, to transport the raw materials overseas, ports need to be constructed from north to south on the coast. This has had as a consequence that Chinese companies have not only invested in the mining-sector, but also in infrastructure (Sanborn & Ching, 2017). This is the second way of how Peru benefits from the presence of Chinese companies. However, the question is

Figure 6: Location of mines in Peru. From “Mapa de Cartera Estimada de Inversión de Proyectos Mineros en Perú”. Retrieved from

http://www.geographos.com/mapas/?p=882. Copyright by Ministry of Energy and Mines of Peru.

to what extend the Peruvian population really benefit from the improvement of roads to and from mines, and ports.

In contrary to trade, FDI is not such a clear parameter to measure activity between China and Peru. It is not possible to show clearly with a graph how FDI has ‘increased’ because the flow of it is not as continuous as other parameters like trade, GDP, poverty and inequality are. Besides, the presence of tax havens makes it also difficult to trace the total amount of FDI coming from China (Sanborn & Ching, 2017). However, ‘Peru ranked second only to Brazil in overall Chinese FDI in Latin America from 1990 to 2012, and in 2014 Peru had captured nearly half of all projected Chinese investment in the region. For 2014 alone, the Peru-China Chamber of Commerce predicted as much as US$12 billion in new Chinese investment’ (P.10).

6.2 GDP

The most basic indicator to judge whether an economy is doing well, is the national GDP. From Figure 11 we can see that Peru has achieved positive growth numbers since 1998. When regarding the GDP for the period of our interest, there are clearly two years that prevent the figure from being parabolic. The relapse of the year 2009 is obviously the result of the financial crisis, but even in this year Peru managed as one of the few countries in the world to remain positive growth numbers. The other munch from the graph in 2014 is the result of a drop in worldwide demand for oil, also leading to less mining activity in Peru (Perú21, 2015). However, also in 2014, Peru managed to note positive numbers thanks to its sound macroeconomic policy. Without these two occurrence, it seems that the figure would represent a smooth parabola, meaning that the increased relations with China were increasingly beneficial until around 2010, after which the growth slowed down.

However, GDP does not show whether an economy has potential, nor does it show how the wealth is divided within a country. Therefore we will regard factors that zoom in deeper on how the prospects of the Peruvian economy are, like industrialization, poverty and inequality.

Figure 7: GDP growth in Peru. From “GDP growth (annual %) Peru”. Retrieved from:

https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=PE&start=1995. Copyright (2019) by The World Bank

6.3 I

A parameter that shows the potential that an economy has is the rate of industrialization. According to both the classical economic theory and World Systems theory, the rate of industrialization of a country determines in large part whether an economy has potential to keep growing. There are only a handful of examples of countries that have succeeded to reach Wallerstein’s ‘core’ without a solid industrial base. The few examples that actually succeeded in this have done this by maintaining an incredible amount of inequality, meaning that only people from a high class benefit from the improved national situation (Parcero & Papyrakis, 2016). Industrialization creates economic growth and job opportunities for people that do not belong to the elite, giving them an opportunity to benefit from this growth.

Figure 12 shows the change in manufacturing output since 2000. We can clearly see how 2003 seems to be the year where significant growth was initiated. This growth endured, except from one year of recession by the worldwide financial crisis, until 2012, after which it started diminishing again. Tello (2012) recorded for the years 2002-2007 that the growth of Total Factor Productivity (TFP) was low and that it did not contribute to the manufacturing firms’ real production value. So even in the period that manufacturing output grew, it did not do so because of improved conditions, which should have been worrying for the potential of the manufacturing industry. This led to the inevitable stagnation of growth of the manufacturing sector from 2012. The logic is that the same products would be cheaper to import from countries where productivity is higher, and for the same reason there is no incentive for other countries to import manufactures from Peru. Besides, the monetary appreciation that is caused by the ‘Resource Curse’ makes it cheaper for Peru to import goods, and more expensive for other countries to import Peruvian goods. Figure 13 makes even clearer how the manufacturing sector increased in value as a share of GDP initially, but started diminishing from 2008.

Figure 8: Annual variation in manufacturing output, measured in %. From “Manufacturing in Peru”. Retrieved from https://www.focus-economics.com/country-indicator/peru/manufacturing. Copyright (2017) by FocusEconomics

Figure 9: Manufacturing sector in Peru as a % of GDP. From “Manufacturing, value added (% of GDP) Peru”. Retrieved from: https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=PE&start=1995. Copyright (2019) by The World Bank Group.

TFP is narrowly connected to technical innovation and knowledge. The OECD recently published a report that showed how the diffusion of knowledge and technology could help Latin American countries to boost productivity and promote inclusive growth (OECD, CAF & ECLAC, 2019). Compared

to the richest 17 OECD countries, Peru’s labour productivity lacks a shocking 80 percentage points. Besides, like Figure 14 shows, most people are employed in the least productive sectors (retail and restaurants and agriculture), and the productive sectors (mining, finance, energy and water) account for only 4% of total employment. ‘The differences in output per worker between Peru and the United States can be accounted for mainly by human capital and TFP. TFP alone explains 49% of the labour productivity gap, while years of schooling and quality of education account for 27% and 22% respectively’ (P.127).

Figure 10: Labor productivity by sector in Peru. From “Labour productivity by sector, 2013”. Reprinted from “The Global Competitiveness Report 2018”, by K. Schwab, 2018, P.459. Copyright (2019) by World Economic Forum

The Global Competitiveness report assesses how competitive a country is in the world economy. Figure 15 shows how Peru improved its relative position from 86 in 2008 to 61 in 2013. However, since that year the relative competitiveness did not improve anymore, as Peru finds itself now on position 63. Figure 16 gives a more detailed description of how Peru performed in 2018. The factors that catch the eye are, in a positive sense, its economic stability and national health. Concerning macro-economic stability, Peru is even awarded with the first place, while it takes the 32nd _{place when it} comes to health. On the negative side, Peru scores lower than the worldwide 80th _{place on institutions,} infrastructure, ICT adoption, Skills, Business dynamism and Innovation capability. Relative performance on these measures is important because of the same reason as mentioned before. If a country is relatively competitive, it means that it can produce cheaper, better or more technology-intensive goods than when it scores low on this index. However, the mentioned competitiveness factors symbolize that Peru is still far removed from a position of competitive advantage.

Figure 11: Competitiveness rank of Peru since 2007. From “Peru competitiveness rank”. Retrieved from: https://tradingeconomics.com/peru/competitiveness-rank. Copyright (2019) by TRADINGECONOMICS.

Figure 12: Peru's performance in the Global Competitiveness report. Reprinted from “The Global Competitiveness Report 2018”, by K. Schwab, 2018, P.459. Copyright (2019) by World Economic Forum

6.3.1 Terms of trade

Another factor that is important for economic prospects and ability to compete with other countries, is how the terms of trade on the world market are. We can define these terms of trade for Peru if we regard the prices for commodities on the world market. Like we mentioned in the chapter 3, the Prebisch-Singer thesis poses that the terms of trade for primary commodities in the long-run are worse than those for manufactured goods. Gallagher & Porzecanski (2010) provide with Figure 17 prove for this thesis. Even though sometimes an external shock can alter the world market price suddenly, the

general trend for most commodities seems to be a slightly decrease in price. This means that commodities become less and less worth compared to manufactured products. In a growing economy, demand for manufactured products usually increases, which would mean for a country with a poorly developed manufacturing sector that it would have to import a lot of these goods. On the long run, this has devastating effects for a national economy, as it will not be able to sustain the same scheme of importing manufactures and exporting resources.

On the other side, China has also been the reason why the terms of trade drastically improved from 2003, simply because China’s increased demand led to higher prices for commodities on the world market. However, the increase of this demand stagnated the last years, due to the China’s ‘new normal’. This ‘new normal’ was introduced by President Xi Jinping in 2014 and implies that China aims to sustain growth rates of 6-7% instead of the 12% that it was used to before. Because of the uncertainty of commodity prices in the short run and the tendency to slightly decline in the long run, it is nearly impossible to achieve sustained economic growth without industrializing.

Figure 13: Terms of trade for the region of Latin America and Caribbean. Reprinted from “The dragon in the room: China and the future of Latin American industrialization”, by K. Gallagher and R. Porzecanski, 2010, Stanford University Press. Copyright

(2010) by Gallagher & Porzecanski.

6.4 P

At last, we want to investigate whether Peru’s increased economic relationship with China has been beneficial or harmful for the population of Peru. GDP only measures what is produced in a country within a year, and does not show where the goods or the capital that is earned with it ends up. If we want to see how the big masses of Peru has thrived under the increased relations with China, it is more useful to use poverty and inequality rates as a parameter.

Figure 18 clearly shows how poverty rates in Peru have diminished incredibly since 2005, two years after the increased relations between Peru and China began. Whereas in 2005 still 25% of the Peruvians had to live from less than $5,50 a day, in 2014 less than 10% was living under this poverty threshold. Whereas in many countries poverty is eliminated by urbanization, i.e. people moving to the capital to benefit from increased industrialization, it is recorded that in Peru this was not the main reason (Morley, 2017). Between 2004 and 2012, almost three million people got out of poverty. 62% of this three million that got out of poverty stayed in the rural areas, which means that almost two thirds of poverty reduction was more the result of increases in rural family income instead of urban migration. ‘For the most part poverty reduction in the countryside was not because people left to go to the towns and cities, but rather because incomes rose for those who remained’ (P.12). Morley therefore states overall growth and education did more to reduce poverty than targeted poverty programs.

Despite the enormous successes that Peru has achieved in exterminating poverty, the graph in Figure 18 also clearly shows that rate of decrease of poverty is flattening very gradually. In fact, it is recorded that, despite the still growing GDP, poverty is on the rise again (Choy, 2018). Reuters found that Peru’s poverty rate increased with one percentage point over 2017, after 15 years of poverty reduction. It seems that the current economic policies are especially benefitting the rich classes instead of the middle- and poor classes.

Figure 14: Rate of people living from less than $5,50 a day. From “Poverty gap at $5.50 a day (2011 PPP) (%)”. Retrieved from: https://data.worldbank.org/indicator/SI.POV.UMIC.GP?locations=PE. Copyright (2019) by The World Bank.

National income inequality can be measured by various instruments, but the GINI-index is one of the most used in international economics (McKay, 2002). The amount of income inequality within a country is relevant for several reasons, from which we highlight the most important ones: It matters for (1) poverty, (2) growth, and (3) crime, social unrest and violent conflict. (1) ‘For a given level of average income, education, land ownership etc., increased inequality of these characteristics will

almost always imply higher levels of both absolute and relative deprivation in these dimensions’ (P.1). (2) Countries with a high level of inequality generally achieve lower economic growth rates than those with a low level of inequality. Besides, when these incomes are more equally distributed they have a larger poverty reducing impact than with high levels of inequality. (3) The more income inequality within a country exists, the stronger feelings of injustice are among the lower classes. This leads in many cases to higher crime rates, social unrest and violent conflicts.

If we regard the Gini-index of Peru that is displayed in Figure 19, we see that also on this parameter the country has significantly improved since 2003. Even though it is not as clear to be seen as with the poverty rates, we can still recognize a decrease of Gini-coefficient from 2003 until 2014 that can be ascribed to the increased economic relations with China. Also with this parameter it seems that it stagnates the recent years, considering the fact that in 2014 the Gini-coefficient was the same as it was in 2017.

Figure 15: Gini-index of Peru. From “GINI index (World Bank estimate)”. Retrieved from

https://data.worldbank.org/indicator/SI.POV.GINI?locations=PE. Copyright (2019) by The World Bank.

What is also relevant to discuss when considering inequality in Peru, is that the whole region of Latin America is infamous for its high levels of inequality when comparing it with the world level, and even when comparing with countries that note similar levels of GDP (Castells-Quintana, 2018). According to Castells-Quintana this is the result of a precarious tax system; Whereas OECD countries impose on average 35% of tax burden, this number is as low as 20% for the Latin American average. Redistribution is a concept that is completely absent for many Latin Americans, and taxes are seen as a synonymous for stagnation, inefficiency and waste. This already explains partially why GDP growth does not immediately lead to a decline of income inequality.

C

ONCLUDING CHAPTER

7.1 C

This chapter will provide answers to the research questions. In chapter 4 we discussed China’s behaviour towards resource-rich developing countries since 2003. The literature shows that the advantage of increased Chinese presence for developing countries is that it brings economic prosperity in terms of GDP growth. However, qualitative sources highlight the flaws that the statistic ‘GDP growth’ has, and that Chinese presence has brought various societal problems along with their hunger for resources. Chapter 5 goes more into detail about Chinese presence in a resource-rich country, and the figures prove that the increased economic relationship with China is the main reason of Peru’s economic boom. Peru has been able to achieve economic growth and along with it alleviate millions out of poverty, for a major part thanks to the increased trade with China and its FDI. However, all of these indicators show that this improvement is limited to quite a short term. Besides, because of China’s ‘new normal’, it seems that annual trade will not increase anymore either. It seems that if Peru’s economic policy continues in the same way, it has reached a ceiling in which GDP growth may still slightly grow, but this may only benefit the rich classes. Therefore, to achieve sustainable growth, Peru urgently needs to diversify its economy away from the extractive industry. Unfortunately, the deteriorating manufacturing sector already indicates that this is going to be a major challenge, and that efforts to diversify should have been taken already.

It seems that Peru has made the step in Wallerstein’s model, from peripheral to semi-peripheral country. Wage levels and profit margins have risen significantly since 2003.The unequal exchange is still clearly present between Peru and the core countries, as is shown that the level of industrialization is still low and technologically advanced products are barely produced in the country. Unlike the NIE’s, Peru has not been able to significantly diffuse the type of products that are produced in the country, but are still mainly dependent on the export of commodities as a driver of economic growth. It does not seem that Peru can quickly escape the semi-periphery and reach the core, because the three requirements needed for this that are mentioned in paragraph 3.2.2 (industrial base, low wages or another competitive advantage) are not clearly present. To improve economic prospects, it is necessary that Peru invests mining proceeds into education and technological innovation. Besides, a progressive tax system would help dividing the national wealth more evenly and reduce the enormous income gap that is still present in Peru, which would probably be beneficial for growth prospects as well.

The scope of the use of quantitative data, involving figures and statistics for one single case study account for a deep knowledge on trade relations with China that has not been done before. However, the various indicators for prosperity have something in common. During Peru’s increased (economic) ties with China, most of these indicators, like GDP, industrialization and poverty, changed for the better. Therefore, to state that the Chinese Go Global Policy is a form of economic imperialism, portrays the effects that it had for at least Peru unfairly negatively. It cannot be disregarded that China’s foreign activity has not only improved the situation of Chinese people, but also from the people in countries on the other side of the relationship. It is impossible to generalize this and say that increased trade with China accounts automatically for a reduction of national poverty, but the case of Peru proves that through a solid macroeconomic policy, the increase of commodity trade with China can benefit the whole country. Therefore, even if China operates merely from its motives of economic

expansion and the exploitation of resources, the case of Peru proves that this kind of economic imperialism is not harmful by definition.

7.2 W

In chapter 4 we have seen that an important critique on Chinese activities in various cases has involved their ignorance of environmental factors. Unfortunately, the scope of this study does not allow us to explore the whole story this issue. Although this study has limited itself to mainly economic parameters, it doesn’t mean that environmental issues are not relevant for a people’s or countries’ well-being. Hopefully future research will also include this, so that an even completer image from Chinese activity in developing countries can be sketched.

Even though we have tried to give the most accurate description of Peru’s economy with the necessary data, there is no guarantee that all data is 100% correct. Even though we think that the sources used for this study contain information as reliable as possible, the fact that in Peru, as well as in whole Latin America, exists such a big informal sector, makes it extremely difficult to correctly estimate domestic economic statistics, like GDP, poverty and labour force participation (CEPLAN, 2016). Figure 20 shows by the rate of labor force participation that the informal sector shrunk until around 2007, but that it afterwards stagnated or even declined. These numbers are established by the best estimates, but the size of the informal sector makes it hard to document these numbers correctly.

Figure 20: Labor force participation in Peru. From “Peru: Labor force participation”. Retrieved from https://www.theglobaleconomy.com/Peru/Labor_force_participation/. Copyright (2019) by theglobaleconomy.com

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