Blog 3. China and Africa by Dr. Berhanu Abegaz (2013)

China and Africa: Axis of the Unloved or Exemplar South-South Partnership? 

China’s determined economic engagement with Africa has raised concerns about human rights being submerged under non-interference, and the tenuous movements toward transparency of public-sector contracts being undermined by secrecy and corruption. A closer look at the involvement of China in Africa so far suggests, however, that the Chinese approach of pursuing narrow geo-economic interests, despite some novelties, hardly differs from that of the “democratic” West, India, or Japan.

Let me begin with the observation that those low income countries which have succeeded in eradicating abject poverty since 1950, most notably in East Asia, have pursued a strategic framework with three props. The first leg is government-led capacity building, human as well as infrastructural, to enhance productivity at home and competitiveness abroad. The second leg is discovery of profitable opportunities at home and abroad by focusing on wealth creation rather than its redistribution. The third prop is sensible development policies, both by national governments and their international partners, that synchronized what a country’s businesses can do (their capabilities) with what they will want to do (the profitable opportunities open to them).

Commonsense tells us that capability without opportunity is a waste of valuable potential—this was the plight of inward-looking China prior to 1978. By the same token, opportunity without capability remains unexploited—this was Africa until 1990 when the openness pushed by the West brought few economic gains. African businesses clearly were not readied to compete globally outside of tropical beverages and minerals.

If we look at the China-Africa relationship through this prism of capability and incentives, we will be in a better position to understand why the two parties and the African public are quite approving of the Dragon on a Safari. China is viewed not as a savior or a predator, but as a self-interested valuable partner.

Africa, with one billion people and a GDP of some $2 trillion, and growing at an annual rate of 5%-6% into the foreseeable future, is economically as big as Brazil or Russia. Economic growth has been robust in 27 of the 30 largest African economies. Just as importantly, it has encompassed myriad sectors, including wholesale and retail, agriculture, transportation, telecommunications, and manufacturing. It is widely believed that real income per person increased 30% in the past decade after shrinking some 10% in the previous twenty years.

This growth momentum is not just a story about natural resources. McKinsey Global Institute persuasively argues that it is broad-based. Only one-third of the economic growth since 2000 is attributable to booming commodity prices. The remaining two-thirds came from productivity enhancing, market-friendly reforms. The provision of more and better public services made up for the remainder.

Bitter memories of crash-landing and two decades of stagnation that followed the commodity price boom of the 1970s do linger. Encouraged by the counterfactual that growth was robust during the post-2007 global financial crisis, serious analysts are now suggesting that Africa has strong long-term growth prospects. They are propelled by external trends in the global economy complemented by notable institutional and policy reforms.

The external factors include buoyant global demand for liquid fuels and minerals which is expected to accelerate. Much of this came from the emerging economies of East Asia which have now matched EU’s share of African trade at 30 percent each. On the supply side, Africa boasts a growing abundance of nature’s riches: 10 percent of the world’s known oil reserves, 40 percent of its gold, and 80+ percent of chromium and platinum.

Africa’s diversification of its financing sources and export destinations is dramatized by the multiple long-term deals with China. India, Turkey, Brazil, and Middle Eastern economies are also forging new broad-based investment partnerships in Africa showing a greater willingness to offer up-front payments, royalties, and to reluctantly share management skills and technology. Cotton exporters like Benin and Mali now have preferential access to the Chinese market.

At the same time, Africa is gaining more access to international capital. The annual flow of foreign direct investment into Africa increased from $15 billion in 2002 to $42 billion in 2012—relative to GDP, almost as large as the flow into China. While Africa’s resource sectors have drawn the most new foreign capital, money has also flowed into tourism, textiles, construction, banking, and telecommunications, as well as a broad range of countries. Parenthetically, political insecurity has induced an estimated $1 trillion dollars of clean and dirty African money to remain stashed away in Western banks. China may be more corrupt and investment-oriented, but African corruption seems to be myopically consumption-oriented and more pernicious.

Domestic factors have also mattered for growth. Africa is urbanizing fast (projected at 50% by 2030--comparable to China and India) and thereby stands to benefit from industrial and knowledge clusters. This depends crucially on closing the investment gap for infrastructure, currently estimated by the World Bank at $50 billion per year. About three-quarters of Africa’s growth in the past came from an expanding workforce which comprises some 40% of Africa’s one billion people. Sustained growth needed to eradicate poverty calls for boosting the one-third share of productivity-driven growth by investing in appropriate education and skills. Unit labor cost in African manufacturing is still more than double that of South Asia and Indo-China because of lower labor productivity rather high wages.

You may also be interested to know that, by the end of this year, the number of “non-poor” households with an annual disposable income of $5,000—above which they start spending roughly half of it on nonfood items—will reach some 100 million. Africa already has more middle-class households (defined as those with incomes of $20,000 or above) and a higher educational attainment than India.

It should then be clear that African policymakers face two strategic challenges. One is creating a smooth path of economic diversification away from subsistence agriculture, low value-added cash crops, and unprocessed minerals toward high-value added manufacturing and modern services. Egypt, Morocco, Tunisia, Mauritius and S. Africa are exemplar on this front. The other prong is boosting export diversity to ensure a high and steady flow of foreign exchange and deeper interactions with foreign partners.

So, what are Africa’s development needs and what can Africa offer to its development partners? Brazil, Russia, India and China (aka BRIC countries) currently account for 30% of the foreign direct investment in Africa. The statistics are notoriously unreliable but China alone is said to boast an FDI stock of over $100 billion in 2011 with annual inflows accelerating to over $15 billion (or $40 billion if portfolio investments are included). Intriguing is the forecast that these four emerging economies are growing fast enough to overtake the world leaders by 2030 in the size of their home economies: China will surpass the U.S., Russia will be bigger than France, India equal to Japan, and Brazil catching up with Germany. Unhappy with their voice in existing international financial institutions, the BRICS countries (including S. Africa) are contemplating founding their own development bank to rival the World Bank. They think they have the money, the development know-how, and the empathy to serve as more relevantly engaged role models for Africa and S. Asia.

It is clear that China has rediscovered the world since 1980. China has much to offer Africa. It has an invaluable experience in kick-starting a vigorous state-led industrialization drive first through import substitution and then through foreign direct investment in the special economic zones and the coastal cities. As the world’s factory, China has amassed the world’s largest foreign exchange reserves ($3 trillion) and has just matched the United States as the world’s biggest trader at $4 trillion each.

China’s post-socialist model of developmental (commanding-heights) capitalism, dubbed by some as Neo-Mercantilism, is built around government-led partnership with the fledgling private sector. Understandably, this strategy favors investment over consumption which explains why foreign exchange is valuable for importing capital goods. The self-serving criticism of China that it discourages imports of consumer goods overlooks the needs of a rapidly diversifying middle-income economy and hence misses some of the key reasons for East Asia’s brilliant success. China is unlikely to maintain its current growth pace. Its surplus labor has been exhausted, it has prematurely ageing population of 1.35 billion (a peculiarity for a still poor country of just $6000 (or $9000 in PPP) that is induced in large part by its one-child policy. Pressure is intensifying in Europe and North America to bring the higher-paying industrial jobs home.

If China is to avoid the proverbial “middle-income trap,” it will have to upgrade its technology fast, expand its domestic consumer sector, and export its most polluting and labor-intensive manufacturing—precisely the way the Japanese did much earlier. These tasks are also complicated by an inevitable political transition as the growing middle class predictably asserts itself as it did previously in Japan, South Korea, and Taiwan.

Chinese reintegration into the world economy has taken several strategic forms. Its economic engagement has focused in agriculture (in Latin America), minerals (in Africa, Asia, Canada, and Australia), and portfolio investment (in the U.S.). Chinese investment is distributed in both well-governed states as well as in politically risky (in terms of stability) but temptingly resource-rich countries. While state-owned enterprises have been prominent, a growing number of Chinese private enterprises with little international experience are joining the foray as are individual freelancers. Estimates are that about a million Chinese now work in Africa (excluded from competing with local in small-scale activities in countries such as Ethiopia, Uganda, Zimbabwe and Zambia) while over 5000 African students study in China along with tens of thousands of legal and illegal African fortune seekers in the eastern seaboard. 

Africa certainly cannot offer the high-technology China seeks, but it can help satisfy some of its needs for fuel and fiber. Secondarily, it offers markets for Chinese trinkets, electronics, and cellphones—3 out of 4 households already own cellphones, a penetration rate equal to China and India. Its construction boom also offers business opportunities which is why China is an important player in mineral-poor Ethiopia—FDI in the productive sectors (about $100 million), building roads, rails, power lines, cement factories, hydropower projects, and telecom (financed by both loans-for-contracts deals and by the host government itself). Lacking soft power, China relies on leveraging its huge financial resources, its enviable record as a developmental state, its longstanding support for African independence, and its consistent upholding of the principles of non-interference and multilateralism when intervention becomes necessary to restore order. Like Japan, it also tends to use aid for trade.

Can a rhino and a dragon make love? And does the grass always get trampled in the process? Yes, to both—and the grass is more resilient than is often assumed. Suggestive data shows that China has been the leading trading partner for of SSA since 2009 with the trade turnover rising from $25 billion in 2004 to $166 billion in 2011 and a projected $300 billion by 2015. Angola, South Africa, Sudan, DRC, Equatorial Guinea, Gabon and Nigeria are the biggest partners.

Inadequate transportation, telecom and power networks are among the leading constraints on African development. Cecil Rhodes’ vision of connecting the Cape to Cairo and the Muslim pilgrim’s prayer of taking a bus or a train from Dakar to Port Sudan have yet to be answered.

Here is how The Economist (2/16/2013) sums up the challenge: “Transport is a perpetual problem in Africa. Potholed roads and missing rail links get in the way of economic growth. Intra-regional trade accounts for just 15% of total commerce, compared with 53% in emerging Asia. Landlocked countries suffer the most. Transport costs can make up 50-75% of the retail price of goods in Malawi, Rwanda and Uganda. Shipping a car from China to Tanzania on the Indian Ocean costs $4000, but getting it from there to nearby Uganda can cost another $5,000 ... Subsistence farmers who sell surplus crops typically receive less than 20% of the market price. The rest is eaten up by transport and transaction costs.”

The Chinese appear to be hard-nosed businessmen and tend to insist on commercial terms. Creative deals involving access to mining investments and construction contracts in exchange for loans and FDI ($46 billion in 2012), the so-called

Angolan Model, have netted large sums for some countries: $14 billion for Angola (oil); 8.5 billion for DRC (iron, cobalt and copper); 8 billion for Guinea (iron ore), $6 billion for Ghana (highways)—and many more for Sudan, Zimbabwe, Nigeria, Algeria, Libya. The major Chinese institutional financier is the Ex-Im Bank which provides more credit than the G-7 countries combined, followed by the Development Bank, and the National Petroleum Corporation. Managerial capacity rather than money seems to have become the most binding constraint in China on the expansion of its foreign investment.

As noted earlier, and contrary to conventional wisdom, China’s investment is highly diversified encompassing mining, construction, banking, telecommunications, and more recently manufacturing. In 2009, for example, the $100 billion in FDI was distributed as follows: 30% in mining, 22% in manufacturing, 15% in construction and 14% in finance. However, the U.S. still dwarfs China in (resource-seeking) FDI flows to Africa by a factor of 4.

Data on Chinese aid is even less reliable than data on investment. Chinese development assistance is currently small, comprising $3 billion out of $20 billion total annual aid flow. Although we do not know whether it was fully disbursed, China had promised $10 billion in concessional loans and preferential export credits per year for 2009-12—a figure expected to rise to $20 billion annually by 2015. In contrast, World Bank commitments amount to $7 billion per year and U.S. commitments are about $9 billion, including food aid.

Where do we go from here? If the ‘small-government is beautiful’ mantra of the Washington Consensus failed us in the 1980s and the 1990s, the ‘authoritarian developmentalism’ of the Beijing Consensus is too sharp-edged, will a softer government- private partnership (the so-called Barcelona Consensus) be a good sell for emerging Africa? The jury is still out.

I would like to conclude by speculating about potential complementarities between Western preferred forms of economic engagement with that of China. As we have learned from the various programs of preferential access by African firms to EU and U.S. markets, these opportunities cannot be meaningfully exploited unless African firms are nurtured to become globally competitive. In this respect, Chinese investment in infrastructure and now in manufacturing (but not in mega farms) is a huge differentiator. China does raise the probability of Africa successfully matching built-up capability with the opportunity coming from constructive global engagement.

We also know that social protection is important for turning smallholders and micro-enterprises into more productive citizens. Western aid, which has recently focused on the social sectors (basic education, health, gender equality, and food security), also nicely complements the investment from the BRIC countries in the riskier productive sectors historically shunned by Western and Japanese multinationals.

Furthermore, there is much to be gained, in terms of better focus on development, from cooperative multilateralization of development aid. Finally, competition among external partners and greater integration into the world economy provides African policymakers with more “policy space” for pragmatic experiments.

The Commission on Growth has identified five attributes of successful recent developers: macroeconomic stability, openness, commitment to a market-led allocation, investment in the future, and good governance or leadership. Ethiopia typifies the concern with the sustainability of respectable growth due to lingering domestic problems in embracing these attributes. As the Economist (March 2, 2013) aptly puts it: “About 80% of supposedly private business belongs to conglomerates controlled by state loyalists. The late prime minister’s wife runs the main one, EFFORT, which dabbles in everything from banking and shipping to metals, travel and cement, all without public scrutiny. Foreign investors are showing interest, seeing Ethiopia as potentially Africa’s fourth biggest economy after South Africa, Nigeria and Angola.”

Africa’s Achilles Heel is then ultimately political. Escape from the “low-income trap” calls for solving deeper problems: building quality institutions to support indigenous entrepreneurship and to discourage the kind of pernicious corruption that has hobbled Nigeria (having lost some $380 billion so far), restoring law and order in central Africa, reinvesting in human capital especially in the polarized societies of southern Africa, and mounting a successful industrialization drive everywhere. In the final analysis, any African government that does not respect its own private sector and that is not accountable to its civil society cannot spearhead sustained economic success. In the final analysis, Africans are primarily responsible for shaping their own destiny.