Leon Kayanda 10400815 23/10/2022

Will China’s investment in Africaassist regional economic integrationof African economiesin the near future?

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Leon Kayanda 10400815 23/10/2022

Word count: 1,998 words

Abstract (100 words)

Christensen (2010) highlights the economic importance of Africa to China in terms of providing much needed resources toenable its ever growing economy. Recently, China has dramatically expanded its financing and foreign direct investment to Africa. This expansion has served the political and economic interests of China while providing Africa with much-needed technology and financial resources (Broadman, 2006; Chan, 2006). The main conclusion is that China, as an emerging global player and one of Africa’s largest trading andfinancial partners, can no longer ignore the macroeconomic impact of its operations on African economies (Alden and Alves, 2010). African governments also needs proactive development policies and strategies to maximize private Chinese investment for the benefit of their own economies by overcoming most of their internal limiting factors, as suggested by Shen (2013) in his paper: Chinese investment in Africa.

Introduction

Africa is a continent with 54 countries, a population of nearly a billion people, and an abundant array of natural resources. This portrays a potentially vast market with great potential for development. Suffering from a long period of colonization, exploitation and regional conflict and turmoil, Africa still struggles in economic terms, lacking proper capital, technology and experience for economic development (Wang, 2007). After 30 years of reform and opening-up to the world, China has witnessed impeccable growthin its economic scale and strength. However it also faces new problems, quite notably the fierce competition in domestic

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market. It would therefore be of importance to discuss a strategic attempt regarding the win-win philosophy they adapt (Shen, 2013), aiming to ascertain whether Africa and China canlearn from each other, draw on each other’s merit and establish cooperation in fields like resources, market and capital, and technology and experience in order to mutually benefit each other.

Theory

The scale of the rapidly growing engagement between China and Africa has generated debate around two issues: what motivates this engagement and what are its implications for Africa’s sustainable development? (Broadman, 2006; Chan, 2006; Goldstein et al, 2006; Review of African Political Economy, 2008; World Development Special Issue,2008, Chistensen, 2010).Chinese firms and companies primarily went to Africa for threemain reasons. One of these reasons is to start up development projects, citing possibilities of market access 1. Incumbent firms were able to gain a good insight into the African marketand hence enable them to use this knowledge to make subsequent1 Over half of the firms interviewed, mostly manufacturers, cited market access as the main motivation driving them to Africa. Nigeria, with a population of 170 million people, and Ethiopia, with 83 million people, clearly attracts Chinese firms with their sizable domestic markets.

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investments. Secondly, it was done with an aim of circumventing the trade restrictions imposed on Chinese goods in the US and European markets. Through Africa, they were now in a position to change the country-of-origin factor, enablingthem to gain access to these markets under preferential trade agreements with Africa (Gang, 2008). Thirdly, their investments involved the search of oil and gas as well as other resources to export to mainland China2. This was during atime when China had a rapidly growing economy and needed to ease off the pressure in an overseas market. Africa's rising population also promises a huge consumption market for Chineseproducts including textiles and electric devices.

Methodology and data (empirical work)

The study was based on extensive field research conducted in investment countries in Africa such as Ghana, Nigeria and Sudan. Most of the data was split between quantitative and 2 Despite being among the major oil producers (with a 4.8% share of world production) and being second only to the US in refinery capacity and output(8.5% and 8.7%, respectively), China is only able to provide for less than half of its domestic oil needs.

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social interpretive means, collected from around 80 Chinese firms and 30 designated senior government officials. Data was collected and analysed from three main papers which form the core of the argument: Christensen (2010), Alden and Alves (2010), Shen (2013). China is now the world’s largest energy consumer of oil, with a third of its oil coming from Africa (UNCTAD, 2012). In regional terms, Africa possesses the third largest oil reserves in the world with an estimated 9.5% of global deposits, only trailing USA (11.6%) and the Middle East(61%) (Li, 2007; Wild, 2009; Ball, 2010) amidst a wealth of natural resources that include hydrocarbons, natural gas and timber. Trade is also a beneficial component for both parties.Although trade with Africa still makes up a relatively small share of China’s total external trade, it is growing rapidly and is concentrated in commodities that are essential for China’s own development and growth.

Years

Fig 1.1: China and Africa’s growing trade relationship. Sourced from China Customs data: Frontier Advisory analysis, 2011. Accessed 12/03/14

China is now Africa's largest trading partner with commercial ties between the two regions exploding since 2000, from $10bn (£6.3bn) to over $100bn in the last 10 years (Xiao et al, 2008). This can also be compared to the rest of the world as illustrated in the table below:

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Fig 1.2: sourced from UNCTAD (2012): World Investment Report: http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/WIR2012_WebFlyer.aspx accessed on 17/03/2014

More interestingly, during the late 20th century, imports from China which used to consist of textiles, garments and food, have been transformed into high value added products like machinery, automobiles and telecommunications equipment (Brautigam, 2008) which now account for more than 50% of Africa’s imports from china (IMF, 2010) as seen below:

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Fig 1.3: China and Africa: Largest trading partners between 2000- 2009 sourced from website and accessed on 17/03/2014

Fig 1.3 and 1.4 sourced from Alden and Alves: China and Africa’s Natural Resources: The Challenges and Implications for Development and Governance (accessed 12/03/14)

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Fig 1.4 above shows the amount of foreign investment that comes to Africa, broken down into loans, aid and debt relief. This includes massive tariff cuts and debt exemptions for 48/50 of African nations (Gu, 2008; UNCTAD, 2012; UNCTAD, 2012). While the largest flows are estimated to come from state owned entities, an increasing number of SMEs are now being seen to operate virtually everywhere in Africa (Gu, 2008). That’s by far not the only thing that China has helped Africa with. By August 2011, China had already built more than 3000km of road,2000km of railway lines, 100 schools and around 60 new state-of-the-art hospitals in African countries. In addition to this, China has trained more than 30,000 African technical personnel since 2006. Chinese engagement overall is seen to have helped boost Africa's economic growth, given the fragility of the global economy which has helped improve people's livelihood. Also, infrastructure co-operation has notonly helped bring Africa's goods to China, but also transferred China's technology to Africa and created more jobsfor local people.

Results and findings

Firstly, it would be ideal to discuss the main reason why Africa is still lagging behind in terms of economic recovery, even at a time when most of their finance came from the Western powers3 (including China in recent times). What it seems to have cause instead is a huge unsustainable debt that would take generations to pay off with inadequate ‘’up and running’’ investments so far. One of the main issues behind the large accumulation of unsustainable debt is that majority of the investment was not used to finance productive projects that generated substantial economic returns, with selection ofprojects not based on sound economic criteria. In addition to this, the fiscal state of many African economies remains very

3 Even with the recent increase in aid, China still accounts for only one third of that of the United States ($7.2 billion in 2008 (OECD, 2010)), andless aid than provided by France ($3.4 billion) and by the United Kingdom and Germany ($2.6-2.7 billion).

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poor with respective governments lacking adequate governance and financing capabilities to support the debt financing associated with investment projects. As a result, many viable opportunities fell in disrepair. As China is becoming a large financier of Africa, debt sustainability could be a problem inthe future if it does not take the countries’ macro capabilities into account. Moreover, most of the investment that ‘’Africa’’ gets is only concentrated in a few countries (South Africa, Angola, Sudan and Nigeria) making up over 70% of capital inflows in Africa (UNCTAD, 2013). This is a significant disparity as China only seems to take interest in countries that have something to offer to China, citing irregularities in the power sector as the main limitation behind this disparity4. In other words, the lower the resourcesin a country, the less engagement it has with China, at least in economic terms anyway5.

4 The World Bank estimates that Africa lags behind all other regions of developing countries in infrastructure endowment (except in infrastructure in communications and technology). The largest gaps are in the power sectorwith access to power much lower than in South Asia. The World Bank also estimates that the two largest recipient sectors for Chinese investments are power (mainly hydropower) and transport (railroads).5 Significant investments have also been made in manufacturing, fisheries electric power, ports, tourism, agribusiness, water systems, and waste management in southern Africa. This is due to the fact that the Southern Africa region is considered Africa’s hotbed with enormous grounds laden with gold, diamond, cobalt and oil, making it a favourable starting place for China to expand its various investment opportunities from.

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Fig 3.3: China’s top five trading partners in Africa. Sourced from Brautigam (2008): Chinese business and African development accessed on 14/03/14

It is also seen that as a result of the large inflows of foreign capital whether from China or elsewhere, it does have an impact on the macroeconomic stance of the country in question. Such inflows are seen to influence the exchange rateand hence the competitiveness of the country adversely, mainlydue to the fact that African countries have an underdeveloped economic framework. In most cases, if external financing to a country is increased substantially, the currency of that particular country will appreciate, making the trade sector less competitive i.e. the Dutch Disease6 effect. Overwhelming local investment plans compounded with the lack of accountability and financing components means that projects become expensive to implement in the long run. It is thus in China’s interest to coordinate with broader public investment and fiscal planning of the country. It is also imperative to note that China and African countries might have had completely contrasting situations when it comes to development. It is imperative to note that China’s revolution was largely financed by domestic savings, not external borrowing as what’s going on in Africa (UNCTAD, 2007). The tworegions also differ in terms of their ability to carry out investment projects, different fiscal as well as security situation. This means that the profitability or viability of each project can be affected by factors beyond the control of that project e.g. inadequate domestic financing (from a company or government) to carry out a project.

6 The Dutch disease is the relationship between the increase in exploitation of natural resources and a decline in the manufacturing or agricultural sector where an increase in revenues from natural resources will make a given nation's currency stronger compared to that of other nations via the exchange rate mechanism, resulting in the nation's other exports becoming more expensive for other countries to buy, making the manufacturing sector less competitive.

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Conclusions and recommendations

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China has indeed invested a lot in Africa. Going back to the disparity of how evenly spread its investment is between the 50 African countries it has financial ties with, a lot of ambiguity about this still exists. As highlighted earlier, there is no official data concerning the total amount of FDI and non-concessionary loans that it has invested to date7, not to mention the exact number of countries that receive Chinese aid (UNCTAD, 2012). I would suggest that the Chinese authorities consider improving the analytical content of China’s own data and information on economic aid and other official financing. This would help policy makers have enough information for policy making and enhanced project governance and increase accountability. The increase in the trade and financial relations between China and sub Saharan Africa coulddefinitely become a ‘win-win’8 situation for both parties, consistent with the One-China policy9. China benefits from the natural resources available in Africa as well as the potentially large market for their locally produced goods (Wang, 2007). Similarly African states have strengthened theirrespective economic policies in recent times, and are now in abetter situation than 20 years ago to take advantage of these opportunities. The African continent is also not homogeneous, 7 Available statistics do not justify the degree of attention China’s investment in Africa is receiving. Official data from the Ministry of Commerce (MOF) on Chinese overseas investment shows total Chinese outbound foreign direct investment (OFDI) in 2011 reached a record high of about US $74.65 billion, but only $1.7 billion, or a mere 2.2%, went to Africa.3 Compared against the global foreign direct investment (FDI) flowing to the continent that year, around $42.65 billion according to the United Nations Conference of Trade and Development (UNCTAD, 2012), China’s contribution was a mere 4%.8 Win-win in this case is used to refer to a case where china benefits fromextraction of African resources, while at the same time Africa benefits from China by having an economic trading partner and a guaranteed investment financier. 9 One-China policy refers to the policy by the People’s Republic of China (PRC) towards other countries to recognize the PRC government in Beijing asthe sole legitimate government of Mainland China and Taiwan. Countries seeking diplomatic relationship with the PRC must break official relations with Taiwan. By August 2010, all but four African countries (Burkina Faso, The Gambia, Sao Tome and Principe, and Swaziland) had established diplomatic relations with PRC rather than Taiwan.

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with countries ranging from emerging countries in Northern andSouthern Africa to low-income countries in sub- Saharan Africa, including several post-conflict countries. These countries have quite different institutional capacities to formulate and implement policies. Although improvements have been made over the last ten years, the administrative capacityis still limited in many cases. Therefore, ideally China’s engagement with Africa should take into account such differentcapacities. It is hence fair to say China has opened up new economic, diplomatic and strategic avenues for African states,but it is ultimately down to Africans, both the statesmen and the common man, to negotiate terms, identify priorities, and ultimately leverage opportunities to further their own interests. If there is one thing African states can learn through China, it is how to imagine their own future, explore new possibilities, and engage with the rest of the world whileretaining control over the conditions of those engagements.

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Alden, C. and Alves, C. (2009). China and Africa’s Natural Resources: The Challenges and Implications for Development andGovernance.Governance of Africa’s Resources Programme. 41 (10), p1-24.

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Brautigam, D (2008). Chinese business and African development. 6th ed. London : Christopher Hurst. p2-12

Broadman, H.G. (2006). China and India’s New Economic Frontier. In: Broadman, H.G. and Peters, D Africa’s Silk Road. Washington D.C.: World Bank Publication . p34-56.

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Xiao, W and Chen, Y. (2008). A Study on the Influencing Factors and Pattern Choice of the Internationalisation of Chinese Private-Owned Firms. In: Xiao, W and Chen, Y Macroeconomic Development and Endowment Factors in Third World Countries. 2nd ed. ZheJiang: ZheJiang University Press. p22-34

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Shinn, D.H. and Eisenman, J. (2012). China and Africa: A Century of Engagement. Feeding the Dragon: China in Africa. n/a (n/a), p1-7

UNCTAD 2007, Global Players from Emerging Markets: Strengthening Enterprise Competitiveness through Outward Investment (United Nations Conference on Trade and Development, New York and Geneva)

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