Chinese investment in the Northeast region of Brazil: an analysis about the renewable energy sector.
| Autor | Nascimento, Ademir M. |
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Introduction
Brazil has been trying to develop its economy over the last decade, however achieving results below expectations for emerging countries. Meanwhile, the political relationship between the federal and state governments has indicated serious divergences about how to conduct the economy in the region, which resulted in the organization of state governments as regional consortiums.
The institutional design that emerged from the Federal Constitution of 1988 led the states to deal with difficulties and with the need to adapt their governance capacities, whether economic-fiscal or political-institutional. Since then, issues such as regional disparities and inequalities have entered the agenda of public debate (Arretche, 2004; Vergolino, 2013). Furtado (1992) had already indicated economic and social differences among Brazilian regions, noting that less developed regions (i.e. Northeast) need stronger economic planning.
In this scenario, the Northeast Consortium was created to bring together all nine governors of the region, which has currently a population of over 56 million and a gross domestic product of 183 million dollars. This consortium has sought to create partnerships with other countries (i.e. China) to promote economic development and to help one other in global issues. One of these issues is the use of renewable energy, which addresses international agreements on the environment without threatening the region's energy security (Clementino, 2019).
It is worth highlighting China as one of the main trading partners with Brazil, especially the Northeast region. Although there is a strong influence of the agricultural sector in this relationship, other types of investments and partnerships have been developed, such as those related to renewable energy (Gelvez Rubio & Gachuz Maya, 2020).
In addition to the importance of the theme in global climate agreements, renewable energies have gained special prominence more recently because of the COVID-19 pandemic. In a comparison between the beginning of 2019 and 2020, renewable energies were the only source that did not have its demand suppressed, while there was a significant drop in oil, coal, and natural gas (IEA, 2020a, b).
Thereby, this paper seeks to analyze the relationship between China and Northeast Brazil, aiming to identify how the renewable energy sector is being developed.
In this sense, in addition to this introduction, the article is divided into other sections: (1) the context of Sino-Brazilian cooperation based on China's international action strategies; (2) an overview of the energy sector as strategic area of regional development in the Sino-Brazilian relationship; (3) methodology; (4) analysis and discussion of results; and (5) final considerations.
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International development cooperation between China and Brazil
Before analyzing the Chinese presence in the Brazilian energy sector, especially in the Northeast region, it is important to understand how China has been making investments around the world within the One Belt One Road strategy.
Fueled by market-oriented reforms and capital accumulation since 1979, China has experienced unprecedented economic growth. The past decades have witnessed a substantive influx of foreign direct investment (FDI) in China, contributing to the country's domestic economic growth. Despite the uncertain global political and economic environment, China's outbound direct investment (ODI) has been booming and overtook FDI in 2015 (Huang & Xia, 2018). With its increasing capacity, China has gradually shifted its roles from an international aid recipient to a donor in areas of overseas investment and technology transfer.
China has considered itself as a firm advocate of South-South Cooperation (SSC), an antithesis of the North-South Cooperation, allowing that developing countries work together to find solutions to common development challenges. China's engagement in South-South cooperation grew out of the Bandung Conference in 1955; later, the country expanded its policy from Asia to the African continent. However, in the 1970s and 1980s, the Cold War, oil crisis, debt crisis, and the follow-up de-industrialization, particularly in Africa and Latin America, led to a temporary collapse of South-south Cooperation (Kragelund, 2019).
With the globalization, the development of new emerging economies, i.e. BRICS (Brazil, Russia, India, China and South Africa) has rebalanced the global governance and come to strengthen South-South Cooperation since the mid-2000s. Arguably, one of the most ambitious strategies in international development is the Belt and Road Initiative (BRI), which was launched by China in 2013 and involved infrastructure development and investments in nearly 70 countries and international organizations, covering 65% of the world's population and 40% of the global gross domestic product as of 2017. The initial plan of the BRI by the Chinese government was to enhance regional connectivity and create a unified large market. The initiative is believed to have extended China's global influence; however, it also creates unsustainable debt burdens to China since eight BRI countries are vulnerable to debt crises as that of 2018 (Chatzky & McBride, 2020).
China's ambition in promoting international development is perceived through its tangible involvement in the increase of the outbound direct investment (ODI) in developing countries, especially in Africa. In August 2017, China's National Development and Reform Commission (NDRC) has formalized the ODI transaction regulation to classify outbound investment into three groups: encouraged, restricted, and prohibited transactions. The share of investment to BRI countries has increased to 12% of total ODI in 2017, in contrast to only 8% in 2016, covering 65 countries (Huang & Xia, 2018).
Even though China's "going out" policy has gained prominence over the last decade with its myriad development projects under the banner of the Belt and Road Initiative, its economic ties to South America have become crucial for both regions. In March 2020, 19 countries in Latin America and the Caribbean (LAC) have joined the Belt and Road Initiative by signing policy cooperation partnerships with China.
To illustrate the sheer scale of these economic ties, an analysis conducted by Boston University's Global Development Center estimates that imports from China were equivalent to 3.1% of the GDP in Latin America and the Caribbean (LAC) (Ray & Barbosa, 2020).
Moreover, China has been the region's largest single source of sovereign finance in five out of the last ten years. According to a 2019 brief by the Atlantic Council, "Bilateral trade grew twenty-five times, from $12 billion in 1999 to $306 billion in 2018, placing China as Latin America's second-largest trade partner, after the United States" (Zhang, 2019).
Since 1993, leaders from China and Brazil have started to discuss the possibility of strategic partnerships. Both countries share the identity of major developing states and realize the importance of developing longstanding, stable, and strategic bilateral relationships (Niu, 2010). In 2009, China surpassed the US and the EU, becoming Brazil's largest trade partner and has remained in this position since then. Likewise, Brazil has been on China's Top 10 partner list for years (7th in 2018) and is one of the key destinations of Chinese foreign direct investment (FDI). Although Brazil is not a member country covered by the BRI, it is a signatory state of the Asian Infrastructure Investment Bank and regarded as a prospective BRI member.
In addition to the fast-growing commercial ties that have marked the China-Brazil partnership, China has also played a substantial role in supplying loans and investment to Brazil for over a decade. China's two main policy banks, China Development Bank (CDB) and the Export-Import Bank of China, have provided over $28 billion in loans to Brazil since 2007, making it the second largest borrower in Latin America. Remarkably, roughly 90% of this sum was directed at the energy sector (Gallagher & Myers, 2020).
Regarding the energy sector, China is currently one of the world leaders in both the production and installation of renewable energy technologies. The renewable energy's shares in generation and consumption have been growing over the years. In 2017, renewable energy comprised 36.6% of China's total installed electric power capacity, and 26.4% of total power generation (Dong & Qi, 2018). According to China's 13th Five Year Plan, 31% of total electric power generation was planned to be from non-fossil energy sources by 2020 (State Council, 2016). This has been a significant achievement since the colossal energy demand in China has been historically dominated by fossil fuels. The upgrade of China's renewable energy technologies provides an opportunity for many developing countries to learn from this experience and transfer appropriate catch-up technologies, which can be used to help these countries to overcome regulatory, technical, institutional and financial barriers.
According to Li, Gallagher & Mauzerall (2020), in addition to foreign direct investment, other forms of cross-border activities have fueled the development of the power sector beyond China, including development finance from Chinese national development banks, import of power equipment from China, and foreign utilization of engineering, procurement, and construction (EPC) services from China. Between 2000 and 2017, Chinese firms invested approximately $115 billion in 462 overseas power plants, with a total generation capacity of 81 GW. Among the 81 GW of capacity, the net capacity owned by Chinese companies is 59 GW (Li, Gallagher & Mauzerall, 2020).
Despite maintaining its global leadership in investments, manufacturing, and deployment of solar and wind energy since 2008, its two policy banks are charged with promoting the global expansion of the Chinese renewable...
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