The Next Chinese Threat

By Sebastian Mallaby
Monday, August 8, 2005

Last week congressional bullying drove China to abandon its bid for Unocal, a small California-based oil company. Anyone inclined to celebrate should focus on the likely sequel: China will redouble its efforts to buy energy and other resources in shaky developing countries. This will undermine Western efforts to promote transparency and fight corruption there, damaging U.S. interests and values far more than a Unocal takeover.

To see why this is so, begin with China's motives. China wants to control supplies of oil and other commodities because it's scared of price shocks; owning oil or other mineral reserves provides anti-shock insurance. As Chinese economists argue, their economy is extremely vulnerable to external shocks because it's extremely open. The Unocal defeat is not going to stanch China's drive to buy foreign resources.

China has two ways to do that. It can buy Western resource companies: That was the Unocal strategy. Or it can do deals in resource-rich developing countries, which tend to be plagued with corruption, human rights abuses and other unsavory practices. To cite just two of many examples, China has invested in Sudan and Zimbabwe, propping up both countries' unspeakable dictatorships.

As far as Western interests are concerned, these Chinese resource investments may sound like a marginal threat. But they go to the heart of the most promising growth area in development policy. Old development was based on aid and trade, but there's a limit to how much aid poor countries can absorb, and trade isn't a panacea. New development adds a third tool: a focus on governance and transparency in poor countries and also, crucially, among the outside governments and firms that deal with them.

Why are outsiders so important? Because the insiders -- the poor countries themselves -- face a sort of Catch-22. You can urge a corrupt government to reform itself, but its own corruption constitutes an obstacle. You can dream up development projects to promote better governance: training for judges, civil service reform, budget transparency laws and so on. But how do you administer a project to improve public administration when administration itself is the problem?

Because of this Catch-22, outsiders have to begin by overhauling their own practices and institutions. In the past five years or so, there's been remarkable progress in this field -- much of it driven by newcomers to the development scene such as Global Witness, a terrific activist group in London. Global Witness and its allies are on the brink of persuading the development establishment to give their agenda the priority it deserves. But their momentum may be wrecked by China's post-Unocal resource strategy.

Global Witness's successes range from oil to timber to diamonds and from Indonesia to Angola. On oil, the group has argued that while you can't wish away oil corruption in a country such as Angola, you can require Western oil companies to publish what they pay to the Angolan government so that citizens have at least a theoretical chance to complain if it gets looted. This argument has fathered something called the Extractive Industries Transparency Initiative, a voluntary disclosure code sponsored by the British government.

Global Witness has also pushed a good idea on diamonds. You can't always stop limb-chopping rebels from capturing African diamond mines, the group has argued, but you can at least try to prevent Westerners from buying their gems and hence financing their butchery. This argument is at the heart of the Kimberley Process, a scheme to track diamonds as they move from legitimate mines to sorting centers in Antwerp to your local jeweler; the aim is to ensure that the next earring you buy won't finance gangs of killers. This activist idea has also won the eager support of several Western governments.

Most recently, Global Witness has been going after firms that make payments to dubious security forces. Again, you can't realistically expect to turn Indonesia's army into a temple of enlightenment, but you can at least hope that Western companies don't pay for its corruption and brutality. Global Witness claims that the Indonesian operation of Freeport-McMoRan Copper & Gold, a U.S. mining firm, has paid large sums to individual police and military officers, including $247,705 to a general with an uncertain human rights record. The group argues that international accounting standards should in the future require multinational companies to publish the details of their payments to security forces.

So the field of internationally driven anti-corruption disclosure is buzzing. But the weakness of these schemes is that they require everyone's cooperation. If American and European companies reform their behavior, this isn't going to be enough. Corrupt thugs in the poor world will just do deals instead with companies that don't care about development or human rights -- such as companies from China.

Hence the big post-Unocal danger. China is going to be even hungrier for resource deals than it was before, and the attempt to force higher standards of transparency in poor countries is going to suffer. On a recent trip to China, I asked several Westernized professors about their country's support for Sudan's genocidal rulers. Not only did they betray no sympathy for Global Witness's world view, they weren't even aware that Chinese involvement in Sudan might be an international issue.

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