HUMPHREY PUBLIC AFFAIRS REVIEW

China in Angola The Pros and Cons of China’s Aid Structure

Zachary Hylton

4/4/2014

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Introduction

Development is changing. Our previous understanding of who needs what, and how that

what should be provided, is decided through different types of discussions involving different

actors; thus, the results of these conversations have altered. In contrast to this belief, some may

refer to the persistence of the dependency theory and its recognition of the Global North’s

exploitation of the Global South, as established through colonialism (Escobar, 2011). This

theory’s relevance is not to be challenged; however, as more actors contribute to development

thinking and practice, the classification of the Global South and the Global North fluctuates. The

evolution of development is one of the many effects of a new organization of world power

structures. This essay critically analyzes China’s investment in Angola as it exemplifies the

rearrangement of power and the restructuring of development. It observes the role of context in

investments; China’s impact on Angolan development through China’s approaches to and

possible effects on governance, specifically with corruption and capacity; and aid distribution, in

terms project leadership through searcher and planner approaches. Through these lenses, the

analysis will illustrate the manner in which we consider development to be transforming, and

China’s lead in this change to demonstrate that the balance of world power is beginning to tip in

a different direction.

China’s Angola Investment

In 2002, after almost 30 years of a combined independence and civil war, Angola was

faced with the challenge of reconstruction. Unappeased by the International Monetary Fund’s

(IMF) conditional loan package, the Angolan government looked to China for funding. On

March 21, 2004, the China Export Import Bank (Exim) extended a $2 billion loan for public

infrastructure development (Corkin, 2008). This credit line was doubled in 2006, and in 2007

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the bank added another $500 million to the loan (Corkin, 2008). In 2010, China’s Exim Bank

extended another $6 billion to Angola, totaling the bank’s loans to $10.5 billion (Corkin, 2011a).

Along with the Exim Bank’s provisions, two other Chinese banks have invested a significant

amount of funding in Angola’s development. The China Development Bank (CDB) has agreed

to provide $1 billion in loans for development of Angola’s agricultural sector, while the China

International Fund Ltd. (CIF) granted a $2.9 billion loan for construction projects (Comarmond,

2011). In all, Angola has $14.5 billion of Chinese credit.

Apart from bank financing, China has taken a strong interest in Angola’s oil production.

In 2004, at the same time as the Exim Bank’s initial loan agreement, the China Petroleum and

Chemical Corporation (Sinopec) purchased a 50% stake in an oil block for $725 million

(Comarmond, 2011a). Later, in 2005, Sinopec acquired of another oil block and formed

Sinopec-Sonangol International (SSI), a joint venture with Sonangol, Angola’s national state run

oil company. With 75% of the partnership’s shares, Sinopec was able to take significant

ownership of three off shore oil blocks. Signature bonuses for these blocks added to $1.1 billion,

the highest offered in the history of Angola’s oil industry (Comarmond, 2011a). Due to

technology issues, however, this project has been suspended since 2006. Nonetheless, the

existing oil trade between the two countries, combined with the $14.5 billion credit line,

indicates China’s large investment in Angola’s development (Comarmond, 2011a).

Context

To view China’s investment in Angola through the context lens can imply a broadly

inclusive range of observation. For the purposes of this analysis, context focuses on the historic

relationship China has with Angola, the contextual considerations within loan structure, and

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China’s purpose and intentions behind their investments. These foci and their relevance to this

analysis will be explained throughout this critique.

Historic Relationship

China’s interest in Angola, and in Africa for that matter, has been recognized by many as

only a recent development. However, their relationship has a history that dates back to Angola’s

civil war. During the 1960s and 1970s, China provided support to all of the parties within the

Angolan conflict. The most relevant parties, the Popular Movement for the Liberation of Angola

(MPLA) and the National Union for the Total Independence of Angola (UNITA) received

weapons, training, and other resources from China. The MPLA and the UNITA were also

backed by the Soviet Union and United States respectively, two of China’s enemies (Ndlovu-

Gatsheni, 2010). Throughout the war, the MPLA took the position as the ruling government

body in Angola, and thus was very suspicious of their relationship with China. In the early

1980s China terminated their political relationship with Angola for an estimated six or seven

years. Some authors attribute this temporary termination to China’s embarrassment in

supporting its enemies’ initiatives (Corkin, 2008). Apartheid South Africa also intervened in

Angola’s civil war as an ally to China. This alliance was heavily criticized by even the closest of

China’s African partners and greatly weakened relations with Angola and the entire African

continent (Corkin, 2011a). Angola-China relations began to rebuild in the late 1980s with

MPLA purchases of Chinese weapons, but a noticeable level of distrust limited the scope of their

interactions. In such a paramount period in Angola’s history, China did not build a very positive

reputation. Today, the MPLA still holds absolute control over the government, and its president,

Jose Dos Santos, has maintained his position for over 30 years. Caught with the “wrong people”

at the “wrong time,” China’s actions have not been forgotten.

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Although relationships with the Global South have not always proved positive, China

shares a common experience as a developing nation. Critics of China’s expanding influence in

the developing world recognize this common experience as a tool to attain special consideration

in agreements and access to resources (Haan, 2011). These special considerations are believed to

allow China to exploit vulnerable nations and extract their wealth. However, through a historical

lens, it is difficult to discriminate between China and the Global North’s impacts on the

destruction, and displacement caused by war in the Global South. As exemplified through

Angola’s civil war and independence, both the US and China played a significant role in

sustaining their internal conflict. Thus, China’s reputation and standing cannot be used a

leverage tool in its relationship with Angola, or any other state in the Global South. Rather, it is

imperative that onlookers notice the structure of China’s loans as attractive to any nation in

Angola’s situation.

Loan Structure

After the death of the UNITA opposition party leader Jonas Savimbi, the conflict in

Angola came to an end in 2002. The MPLA took on the duty of rebuilding the country,

devastated in all aspects due to the destruction of 30 years of war. Financing for the war and for

reconstruction had already accumulated over $10 billion in debt to a multitude of different

creditors (Brautigam, 2009). With little capital or capacity to rebuild on its own, Angola was

forced to find additional funding. Before the end of the war, the IMF planned to provide loans

with conditions of market liberalization, transparency improvements and account inspections,

and that Angola terminate acceptance of oil collateral short term loans (Brautigam, 2009).

Although market liberalization policies were gradually implemented, there were insignificant

transparency improvements. Between September 2000 and October 2001 Angola agreed to seven

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different secretive loans from international banks totaling to $3.55 billion (Brautigam, 2009). In

the midst of Angola’s frivolous attempts to adjust to IMF demands, China arrived to present its

case. The Exim Bank proposed an oil collateral loan of $2 billion with a concessional interest

rate of 1.5% over London Inter-Bank Offered Rate (LIBOR), repayable over 17 years and a five

year grace period. In 2003, the loan was agreed upon and began distribution in 2004 (Kibble,

2006). As China’s Exim Bank funding later multiplied to $10.5 billion, the international

community’s disappointment grew. Angola turned its back on previously agreed upon structural

changes to accept financing from an outside party.

The international community’s disdain for the loan agreement fomented a spate of

diatribes toward China’s development strategy. Criticisms centered on the Exim Bank’s neglect

for conditionality and a lack of context consideration. Claims against the loan’s disregard of the

IMF’s structural adjustment planning (SAP) do have merit; however, this does not suggest that

the Exim Bank’s loan structure is devoid of conditions. In fact, China’s loans have strict

conditions different from most credit structures in the West. Firstly, China’s loans cannot be

restructured or cancelled, so they must be repaid in full (Carmody, 2011). Secondly, as a

Chinese official states, “…Chinese loans closely fit a country’s ability to repay” (Brautigam

2009, p. 185). If repayment in economic capital is not possible, China accepts natural resources

at market prices as a viable repayment solution (Carmody, 2011). For instance, Ethiopia was

able to pay back its Exim Bank loans in sesame seed exports (Brautigam, 2009). Similarly, with

Angola, its oil collateral can be directly utilized to finance its credit. As the second largest

exporter in Sub Saharan Africa, this could be seen as a reasonable solution for Angola’s credit

situation. Nonetheless, as 93-95% of Angola’s export economy, creating 80% of all government

revenue, and making up 40-60% of its GDP, the country relies on oil exports to drive its

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economy (Ovadia, 2012). If China took control of this sector, Angola’s economy would suffer

greatly. Unlike the IMF’s “static” credit systems, China’s “dynamic sustainability” approaches

to loan financing exercise a diverse range of options to support repayment (Brautigam, 2009).

These conditions recognize the context of recipients and prioritize repayment rather than creating

eternal debt.

To complement its concern for context, the processes behind the Exim Bank’s loan

agreement further support China’s attention to Angola’s situation. Initially the Exim Bank

required an annual 1% payment on top of the agreed upon interest rate to ensure profits.

However, the Chinese Ministry of Commerce intervened, stating the Exim Bank is a policy bank

that should follow policy initiatives rather than profit accumulation, (Corkin, 2011a). Although

the intervention removed this requirement, the World Bank continued to express concerns with

the loan agreement. They reported the loans were only ‘“marginally conditional, although

significantly less so than those associated with the official development assistance (ODA)

(Foster et al. 2008). However, the report later asserts that the Exim Bank loans offer two times

the grant element percent than that of ODA requirements (Foster et al., 2008; Corkin, 2011a).

The Ministry of Commerce’s involvement in the loan agreement represents not only the supreme

power of the Chinese government, but also the state’s investment in a long term positive

relationship. Prioritization of financial need and repayment ability encourages the inauguration

of a win-win partnership beyond the tenuous relationship promoted by a self-perpetuating debt

system.

Rather than China’s loan package excluding the context element, the IMF’s

conditionality seems to conflict more with Angola’s position. To request a country in the midst

of reconstruction to end its pursuit of funding is unreasonable. Simultaneous expectations to

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increase transparency and restructure the economy are equally lofty. As the Angolan Minister of

Finance exclaims, “the IMF did not have an accumulated knowledge of Angolan economics…

reason for years of failed tasks” (Kibble 2006, p. 537). Angola was initially borrowing from the

ODA at 2.5% over LIBOR and grace periods were either non-existent or short (Brautigam, 2009).

On the other hand, loans from China provide a structure without requirements for grueling and

insecure cultural shifts. Rather, they allow for feasible repayment strategies with a long enough

repayment period for Angola to utilize profits from the initial investments. To accept China’s

offer is more sustainable and manageable than IMF loans.

China’s Purpose

Many attacks on China’s Angola investment allude to its interest in the oil industry. The

2002 Exim Bank loans were accepted with a purchase of one of Angola’s oil blocks. Many

experts accept Sinopec’s securement of the 50% share of Block 18 to have been negotiated with

the $2 billion loan (Brautigam, 2009; Corkin, 2011a). Sinopec’s attainment of another oil block

a year later and the establishment of SSI lead many to believe China’s loans to include a

clandestine takeover of Angola’s oil production. These developments, along with the oil backing

of the Exim loan, could prove dangerous for the Angolan economy and give reason to support

accusations of China’s exploitive intent.

Angola has quickly become China’s largest African trading partner since these events

(Corkin, 2011a). By 2009, 39% of Angola’s oil exports were sent to China (Corkin, 2011a).

Now, there are frequent bilateral visits of state officials and direct air flights have been

established from Beijing to Luanda. Although relationships between the two countries have

strengthened, Angola has not allowed China to control its main source of revenue. After the

establishment of SSI, Sinopec planned to develop an oil refinery in Western Angola that would

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produce 200,000 barrels daily, but the deal was called off (Corkin, 2011a). The promising

offshore drilling blocks controlled by SSI were eventually abandoned due to China’s lack of

deep and ultra-deep drilling technology (Corkin, 2011a). Furthermore, in 2008 Sonangol

blocked Sinopec’s 1.8 billion purchase of 20% stake in another oil block because of Angola’s

intent for ownership (Corkin, 2011a).

China was definitely looking to secure resources to fuel their energy consumption in their

initial negotiations with Angola, and was very straightforward in this pursuit. Still, this did not

blindly lead China to exploit Angola. China is a relatively minor oil trade partner with Angola

(Corkin, 2011a). Moreover, Angola only ranked 18th

in China’s FDI stock and China represents

only 0.25% of Angola’s FDI stock (Corkin, 2011b). China has publicly announced that it does

not consider Angola to be a strategic investment, but rather has interest in relations with South

Africa (Corkin, 2011a). If this were the case, why would China invest $14.5 billion in the

country? One compelling argument would hypothesize China’s intent to gain access to the

Democratic Republic of Congo DRC, Angola’s neighbor. As the majority of loans for Angola

are for infrastructure, China could look to build the conditions necessary to extract resources. As

a landlocked country, one the biggest restraints for the DRC in the future could be its access to

the international market (Collier, 2007). A well planned road or rail system in Angola would

allow China to better reach the DRC’s resources.

Planner vs. Searcher

The planner seeker approach is a spectrum defining the current parameters of

development implementation strategies. At one end of the spectrum, the planner prepares

initiatives with overbearing goals that lead projects through a mass of administrative level

controlled resources. It does not prioritize the input of initiative recipients as its plans are

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preconceived by an outside body. At the other end of the spectrum, the searcher pursues

opportunities to solve problems and values feedback of the people affected by the problems. It

uses trial and error to find the most appropriate measures to deal with an issue. Although often

used to measure individual aid projects, this spectrum is applicable to any level of development

planning (Easterly, 2008).

In regards to its overall development strategy, China falls closer to the searcher end of the

spectrum. As a searcher, China does not set goals entering projects beyond repayment and

guaranteed project completion. Its loan policies consider almost every country on an equal

footing, as the same policies are presented to governments regardless of development levels in

the country, corruption issues, human rights violations, or financial rating, but take context into account

in securing feasible loan backing resources for repayment (Brautigam, 2009). As most of China’s

development work involves infrastructure, they focus on completing projects in a cost effective and

timely manner (Brautigam, 2009). As its most significant searcher attribute, China allows the recipient to

decide their projects, regardless of the apparent need or possible negative affects it may have on the

country’s society. For example, while in the middle of conflict Sierra Leone received a loan to build a

soccer stadium (Brautigam, 2009). Not long before, China already completed the construction of another

stadium in the country. As a Chinese ambassador to Sierra Leone reports, ‘“From our point of view, it is

not necessary to build another stadium…No African country has two [Chinese-built] stadiums. The

infrastructure in this country is bad. They need other things. But they insisted. So, finally we respected

their choice’” (Brautigam 2009, p. 138). As long as the country can repay its debts, and accepts the “One

China” policy, China accepts the demands of most countries (Brautigam, 2009). As a planner, China

requires the use of its own companies in infrastructure contracting. Although China conducts its own

evaluations of its programs, it does not input a trial and error system. Furthermore, China’s involvement

does not always prioritize a solution, but works to fulfill more political goals with recipients. Nonetheless,

overall, their development approach has more searcher than planner aspects to its design. In the case of

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Angola, China has held true to its development design. The Exim Bank $10.5 billion loan to

Angola awards 70% of the funds to Chinese enterprises and, as requested by the Angolan

government, appropriates the remaining 30% to Angola’s private sector (Corkin, 2011a). As this

loan, along with the CIF’s $2.9 billion loan, is to be allocated for infrastructure development,

Angola has full authority as to where and what the loans should be used for. With so much of

Angola’s infrastructure destroyed by war, its development is a major concern and widely

recognized as an eminent barrier to economic growth. As Brautigam writes,

“Bombs destroyed more than 200 bridges. Rural roads and farming fields were planted

with landmines. Urban infrastructure ‘dramatically deteriorated,’ streets were ‘in a state

of collapse.’ Raw sewage spilled out of the open gutters during heavy rains and ran

down the alleys of chaotic shanty towns. Angolans badly need infrastructure”

(Brautigam 2009, p. 275).

Infrastructure inhibits the potential of every development initiative in Angola. However, Angola

has concentrated much of its resources in a few large coastal cities, creating issues of

overpopulation and the isolation of its rural populations. In 2011, Luanda, its capital , was listed

as the most expensive city in the world, while 90% of its rural population lives under the poverty

line (Carmody, 2011). Furthermore, the government continues to focus its construction in those

areas, reinforcing many of the access issues that already exist. Chinese companies are building

homes, irrigation systems, sewage systems, roads, railways, hospitals, and are expanding the

Luanda International Airport (Brautigam, 2009; Carmody, 2011; Corkin, 2008; Corkin, 2011a).

Though many have suggested China’s infrastructure developments to build more access ways to

oil extraction areas, there is little evidence to support this claim. Projects are taking place on the

coast, far away from drilling sites (Brautigam, 2009). This observation may be comforting in

that Angola actively controls the decision making, but supports the government’s neglect for the

rural populations in the East.

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China’s dedication to compliance with recipient nations’ fund allocation strategies is an

extreme form of the searcher approach; however can be dangerous. If decision makers do not

accurately and strategically measure the needs of the greater population, they may bind their

nations to long term contracts that work against development. China’s searcher approach also

focuses more on the product than the process. Supplying Chinese labor ignores the local

capacity of the recipient nation. In the case of Angola, with a very high level of unemployment,

the labor force can only receive marginal benefits from such a large investment in the country.

Furthermore, this searcher model does not take into account sustainability as a lack of local labor

force utilization also qualifies maintenance capacities, imperative to upkeep of any infrastructure

project. Although China uses a searcher approach, its investment in Angola demonstrates its

limits.

Governance

Governance in Angola has taken a foremost position as a target for public scrutiny.

Many accept corruption to be one of the biggest inhibitors to the country’s overall development.

There are seven politicians and former politicians with a net worth $100 million or more each,

while the majority of the population lives in poverty (Carmody, 2011). The supermajority of the

MPLA party, its entanglement with the judiciary, the disappearance of oil revenues, and the 30

year reigning presidency of Jose Dos Santos also display the pervasiveness of corruption in

Angolan society. There is little transparency in the actions of the government and information

systems on all levels are either inconsistent or nonexistent. Coincidently, China’s transparency

is intentionally limited itself, further evoking protest to the loan arrangement. Without a value

for transparency by both parties and concomitantly China’s willingness to overlook corruption,

these issues are often speculated to intensify through China’s development assistance.

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However, although China is not accountable to the international community, it remains

accountable to itself. Chinese companies contracted to work on aid projects are individually

selected by the Ministry of Commerce and report directly the Exim Bank (Corkin, 2008). The

bank also directly pays its contractors to limit transactions within the Angolan financial system

(Corkin, 2011a). Comparing China’s corruption and transparency policies with those of the

Global North, it is revealed that few Western firms involved in development apply any general

democracy or human rights considerations to their investment decisions (Brautigam, 2009).

Moreover, Brautigam finds China’s investments to allow for comparably less opportunities to

support Angola’s corruption networks. She writes, “A second look reveals that it was Western

banks that gave loans without requiring transparency, and Western companies that exported

Angolan oil, providing cash flows for the ruling party” (Brautigam, 2009, p. 276). Rather than

Chinese investment supporting a problem, it may have indirectly worked to mitigate issues.

The China Exim Bank loans were not only large in amount, but also allowed Angola

authority in deciding its overall implementation. With corruption, transparency, and efficacy

concerns, some question the capacity of Angola’s government to positively affect its

development. Nonetheless, Angola has made great strides in developing its economy. Though

heavily dependent on natural resource rents, apart from the economic crisis in 2009, Angola’s

GDP growth rate has steadily increased every year (AFDB, et al.2013). Its Paris Club debt,

accumulated before the end of the war, has been largely paid off and the remainder is being

restructured by the IMF. Before China’s involvement with Angola, its credit rating was D or

highly risky (Brautigam, 2009). Now it has been upgraded to B+ and is attracting FDI and

international creditors alike (Corkin, 2011a). Furthermore, development creditors, including

Brazil, Canada, and Spain, have begun to emulate China’s model employing their own

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companies to implement initiatives (Corkin, 2011b). China’s dynamic sustainability created

long term and short term benefits for Angola’s economy. Rather than an inhibitor for Angola’s

development its loans have proven instrumental for economic development.

Though the economy has grown, many other aspects of Angola’s society remain

unaddressed. Corruption still runs rampant preventing freedom of press and even NGO work in

Angola. Access issues plague Angola’s rural populations and the CDB’s $1 billion loan has yet

to rebuild Angola’s once thriving agricultural center (Comarmond, 2011). Over 50% of all

children are malnourished and one in five children die before the age of five (Carmody, 2011).

While competent in expanding economic powers, China’s loans leave many developmental gaps

unfilled, and both its population as well as the rest of the world dubious of real change in Angola.

As the thinking behind development evolves, academics and practitioners alike have come to

recognize this process as a comprehensive societal movement beyond the limits of the economy.

In this regard, Angola’s economic advancement relies on a volatile natural resource market, and

its government has yet to demonstrate any effective reinvestment of its wealth in its population.

Without the growth of its society to support the growth of its economy, it is questionable if the

effects of China’s loans are sustainable.

Conclusion

The effect of China’s Angola investment has been both positive and negative. However,

as economic growth is most valued by international organizations and foreign investors,

Angola’s economic development has somewhat hidden its lack of development in other sectors.

Without the support of the international community, China’s involvement in Angola’s

development has more recently built a more positive reputation for China’s aid system. Their

interventions have not only affected the approaches to aid initiatives as more countries provide

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similar types of loan structures, but also demonstrate that economic development is not

comprehensive development. Until international organizations give more attention to this fact,

Angola will remain in its liminal and limited development status.

Works Cited

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