Curse of Friendship; Do China and India represent a new kind of player in emerging markets? They say so. But outsiders doubt it.

Byline: Silvia Spring

It's not wise to go into business with old friends, or so the saying goes. Yet one of the arguments from investors pouring out of China, India and other rising economies is that they are natural friends to other emerging markets. China, in particular, has pitched itself as a different kind of superpower, out to cooperate with rather than dominate other countries. But critics have begun to argue that the investing practices of these new players fall short of the promises. "I don't see it as being a type of social solidarity," says Josephine Osikena, program manager for International Development and Good Governance at the Foreign Policy Centre in London. "It's an economic relationship. It's about the availability of investment opportunities."

Indeed, although total south-south investment has been increasing steadily over the past 15 years, that may not be a win-win for everyone involved. According to a recent report from the United Nations, foreign direct investment (FDI) from developing countries reached a record of $120 billion in 2005, up from just around $18 billion in 1990. Total south-south trade shot up from $2 billion in 1985 to $60 billion in 2004; last year 70 percent flowed from Asia alone via new trade routes that bypassed traditional Western economic powers. In the race to feed their rapidly modernizing industries and burgeoning middle classes, countries like Brazil, China and India are increasingly willing to invest in poorer, riskier and more remote locales. Last week Beijing hosted a two-day summit of leaders from 48 African countries, which was designed to cement Chinese influence in this process. "China will forever be a good friend, good partner, good brother of Africa," said Chinese President Hu Jintao as he opened the summit.

Some Western countries have been angered by the consequences of this new trade, as when China threatened to veto a 2004 U.N. Security Council resolution against Sudan in order to protect its oil interests there. Civil-society groups inside some of these nations, too, have criticized China and India for putting their thirst for natural resources and energy ahead of good governance and human rights. In an Oct. 19 interview with a French newspaper, World Bank president Paul Wolfowitz raised a new concern--that China, along with India and Venezuela, were not only disregarding human-rights and environmental standards but lending irresponsibly, threatening to burden the poorest African countries with mountains of debt. "There is a real danger," said Wolfowitz, "that those countries could become highly indebted poor countries all over again very quickly."

He has a point. World Bank and International Monetary Fund (IMF) loan agreements require African states to promote economic reform, as well as keep interest rates moderate and inflation down. Debt cancellations depend on how well such measures are followed and require the support of the international community. With Beijing offering lots of money and few questions, countries have little incentive to stick to their promises. Last year Robert Mugabe's autocratic regime in Zimbabwe launched a slum-clearance project that destroyed 700,000 homes and businesses, and was condemned by human-rights groups and the United Nations. Beijing issued not a peep.

The World Bank estimates that Chinese loans to African countries, mainly for power, telecom, transport and other infrastructure projects, totaled $12.6 billion between 2002 and mid-2006, and continues to grow. At last week's summit, Hu offered $5 billion more in preferential loans and export credits, and a doubling of ...