Winner Take All, China’s Race for Resources and What It Means for the Rest of the World
Dambisa Moyo, Harper Collins, 2002
This book is about supply and demand. Commodities, specifically arable land, water, energy and minerals are in demand as the global population grows and gets wealthier. More people living in cities and with middle class expectations means increased demand for goods and services – everywhere. One of these commodities, the global supply of arable land, is not entirely available to buy or rent easily. Property rights or freehold title, although common in the Western, developed countries, is not practiced in most developing countries. There, the land is owned by the state and only leased to citizens for whatever use. This is particularly the case in South America and Africa and it is there that China seeks to secure agricultural resources by making government-to-government deals.
‘Peak oil’ is a term first coined in 1956, referring to US oil production projected to decline after 1970. World ‘peak oil’ projections have varied from 2030 to 2050 but the ‘peak’ date isn’t the point. It’s what happens when we look at the relationship between supply and demand. “As it gets more difficult to extract oil from harder-to-reach places, the risks of cost inflation (go) higher. And this … limits global supply at a time when demand is certain to rise”. Oil sellers are in the driver’s seat which means control of production, whether by national governments or wealthy individuals (who then control governments) tends to look less and less democratic. Four-fifths of world petroleum reserves are in politically unstable or contested areas (Saudi Arabia, Russia, Iran, Iraq, Venezuela). It is in this context that China is accelerating its energy consumption. Right now oil consumption per person, per year, is as follows: America – 25 barrels; China – 2.2 barrels; India – 1 barrel.
How China acts to secure access to the commodities it needs is the theme of the rest of the book. Moyo describes a three-pronged approach – aid, trade and investment. Financial transfers are in the form of aid (mostly to Africa) or commercial loans. The trade approach is a familiar pattern, loan money to a targeted consumer who can only spend that money buying from the lender (the Marshall Plan is a good example of this). The US gives around US$20 billion in credit today, while China now gives US$250 billion to its clients. Investments in foreign companies by China really ramped up in 2005 (when Lenovo bought IBM’s PC unit for US$1.25 billion). Total investments prior to that were US$2 billion, while the 2005 total equaled US$12 billion, including the Lenovo deal. Over five years (up to 2010) the total Foreign Direct Investment (FDI) equaled US$400 billion (Australia – US$42.5 billion; United States US$28 billion; Brazil US$20 billion). In 2010 Chinese FDI in Canada equaled US$14.1 billion!
Vertical and horizontal alignment is part of China’s investment strategy. Shipping ports, like Greece’s port of Piraeus, are being upgraded as well as ports in Pakistan, Myanmar, and Sri Lanka. Moyo describes three investment strategies used by China to gain access to targeted resources: direct purchase, swaps (guaranteed purchase of all production of the asset for a specified period, like the FIPPA deal currently being done with Canada) and indirect access through buying stakes in a corporation and then controlling its investment decisions (like the Nexen deal). You can monitor these yourself at: http://www.heritage.org/research/reports/2012/01/china-global-investment-tracker-2012
China’s trade deals are notable for their win-win characteristics. Of course China needs the commodities but the host countries also have significant needs met by dealing with China. Infrastructure projects like road building (we saw plenty of evidence of Chinese engineers supervising road building in Kenya in May, 2012) provide much needed jobs.
A common argument put forth by Western officials is that China is over-paying for commodities, thus distorting the market. The Chinese see the role of government in trade deals as appropriate. Moyo explains the difference in approach (between free-market capitalism and state-led capitalism) as a difference in ‘utility function’. Utility function measures the satisfaction gained from consuming a good or service. All governments may have the same utility function, the betterment or improvement of their population, but they may differ in the scope and means of government to increase satisfaction. For China, bringing its large population closer to ‘satisfaction’ is paramount if it wants to avoid dissatisfaction and potential turmoil or uprisings. The price paid for commodities, seen in this context, is not too high.
The attention given to commodities by Western investors has changed in the last decade. Large financial investors (for example, pension funds and index funds) were more likely to invest in commodities than the market traders. The change in the last decade has produced an unanticipated result. Previously, market traders invested in cash-producing assets (equipment, companies, ideas or mines, and oil wells), something that would produce a stream of cash. Shifting to commodities investments means buying ‘consumption assets’ where the benefit is in the use of the purchase (like houses or other consumables). In the commodities market investors count on the price going higher in the future. We saw this in 2008 with the housing bubble, and in 2000 with the tech bubble.
Access to the key commodities like energy, is vital to security of any nation. It isn’t uncommon for sovereign states to control production of oil, for example. In fact, seventy percent of current oil production is state-owned. Not only that, oil is held in reserve by national governments in order to smooth out price fluctuations in times of supply crises. The US has capacity for 727 million barrels in reserve, enough for a hundred days, and has used this reserve as recently as June 2011, in face of the political uncertainty of the Arab Spring and Libya in particular. State intervention in the commodity market is not unique to oil. Both Europe and the US intervene in agriculture. National governments also manage access to resources by blocking company takeover bids that are deemed unsuitable. Between 1988 and 2008 the US government rejected nearly two thousand such bids. Moyo concludes, “state meddling in the commodity markets is endemic” whether through protectionism, subsidies, hoarding or posturing. The free-market interplay of supply and demand gives way to politics often.
Is China’s quest for resources a form of new colonialism? European colonialism was based on raw material extraction and used unequal power to control weaker states or indigenous populations. Sometimes motivations were altruistic such as missionary work or spreading modern science or European political systems (democracy). China doesn’t appear to be motivated by domination over sovereign states but over resources. It is actually disinterested in assuming responsibility for social or political affairs in the countries it deals with. Some Chinese labour is exported to work on projects funded by China but not to the extent some Western media have reported. Moyo cites the number of Chinese workers to local workers in various countries to support this. Where the numbers of Chinese workers is higher usually depends on levels of skill involved such as engineers. I saw a number of these engineers working on road building in Kenya, as I mentioned earlier. China has nearly completed the build-out of a nation-wide road network at home, much like the US did in the 1950’s, and now has a large pool of very experienced road builders available for foreign projects. One such project we witnessed is the primary road linking Mombassa, on the coast, to the interior of the continent, running across Kenya to Nairobi, into Uganda and Kampala and on to Rwanda.
Moyo concludes this book with a look at the ‘endgame’ of the commodity depletion using the shortage of food caused by waste, misallocation of food and bad food production policies as an example. One study showed forty percent waste in the US; thirty percent waste in the UK. This means more methane gas and bad greenhouse effects; loss of water used for producing the wasted food; wasted capital on transportation, packaging and retailing. Misallocation of food is ironically obvious when you match one billion starved bodies with one billion obese bodies. Food production is skewed by incentives and disincentives. The US and some Europeans, especially France, use subsidy and tariffs this way. Food protectionism mans lost potential food exports from countries in Africa and South America that could make a huge impact on employment and needed revenue.
See also: http://www.youtube.com/watch?v=EBRi90RdJDw