ChinaAfrica Economic Relations: Insights from AERC Scoping Studies

1
China-Africa Economic Relations Insights from
AERC Scoping Studies

• By
• Olu Ajakaiye, AERC, Nairobi, Ademola Oyejide,
  University Of Ibadan, Francis Mwega, University
  of Nairobi, Mike Morris, University of Cape Town,
  Raphael Kaplinsky, Open University, UK, Felix
  NZue, ACET, Accra and Damiano Manda, AERC,
  Nairobi
• A presentation at the African Economic
  Conference, UNECA Addis Ababa, Nov. 11-14, 2009

2
Outline

• Introduction
• China Africa Trade Relations
• China -Africa Investment Relations
• China-Africa Aid Relations

3
Introduction

• China has become a major driver of the global
  economy on several accounts.
• phenomenal growth over 10 GDP growth rates for 2
  decades
• With 2008 GDP (PPP) of 7.8 trillion is second
  largest economy in the world
• First country to show signs of recovery from
  current global financial and economic crisis with
  7.9 growth by second quarter of 2009.
• Manufacturing sector the main driver of growth
• economic growth accompanied by structural
  transformation (Table 1) contributions of
  services to GDP suggests China is transiting to a
  knowledge economy.

4
Introduction

• Has become a global production platform
• The growth also accompanied by social
  transformation poverty rate fell from 53 in
  1981 to 2.3 in 2005 HDI improved ( 0.53 in 1975
  to 0.78 by 2005)
• Is still a lower middle income country with GDP
  per capita of 3,180 and considerable inequality.

5
Introduction

• In contrast, SSA with approximately 1 billion
  people record low and unstable growth rates.
• 1990-2000 growth 2.5 2000-2007 growth 5.2.
• SSA growth not accompanied by structural
  transformation
• SSA export dominated by crude material minerals
  (oil and other minerals) no export
  diversification but increased concentration SSA
  imports dominated by manufactures.

6
Introduction

• SA imports final goods while China imports
  manufactured components, add value locally and
  export manufactured finished goods.
• SSA attracts mainly resource seeking FDI tend to
  be enclaves, no skills and technology transfers
• Relatively high growth of 2000-2007 not been
  accompanied by social transformation poverty
  rates have not declined implying that SSA will
  not meet the MDG-1 by 2015.

7
Introduction

• Africas overriding development challenge remains
  how to
• Secure rapid (high), sustained and pro-poor
  growth with structural and social transformations
  and technological upgrading.
• Successfully pursue export led growth taking
  advantage of market access provided through
  preferential trade arrangements
• Eliminate supply constraints through increased
  investment in infrastructure and the people.
• Escape from commodity trap deepened by the
  aborted natural resource boom that compromised
  economic diversification, and increased
  vulnerability to various shocks.
• Escape from of lack of technological
  modernization necessary to meet stringent global
  production standards and remain competitive.

8
Introduction

• China, hence, presents opportunities and
  challenges to the development prospects of SSA
  countries.
• SSA countries should carefully and continuously
  identify and analyze key features of China-Africa
  economic relations if they are to maximize
  advantages of the opportunities and ameliorate
  impacts of challenges.
• Strategies proposed should take account of
  changing circumstances of individual SSA
  countries and the changing nature of China.

9
Key Features - Trade

• Bilateral Africa-China trade fairly balanced in
  recent times Africa enjoyed a small trade
  surplus with China 2004-2006 (2 billion per yr).
  
• Africas TOT in relation to China improved by 80
  to 90 b/w 2001-2006, due to rising world prices
  for oil and minerals exported to China in the
  face of stagnant or falling prices of
  manufactured goods imported from China.

10
Key Features - Trade

• Trade flows between Africa and China growing
  rapidly acceleration from 2000 onwards.
• Total merchandise exports to China increased
  about 6-fold from 4.5 billion in 2000 to 28.8
  billion in 2006
• African exports to China increased faster than to
  the ROW
• Africas share in Chinas total imports remains
  small (3.6 in 2006).
• China now Africas 3rd largest export market,
  after the US and EU. Accounting for 16 percent of
  Africas total exports in 2006
• Africas aggregate imports from China increased
  four-fold from 6.5 billion in 2000 to 26.7
  billion in 2006.

11
Key Features Trade

• Chinas imports from Africa dominated by fuels
  and mineral products In 2006, fuels (73.3)
• Africas import from China dominated by
  manufactures accounting for 93.4 in 2006

12
Key Features Trade

• The structure of Africas exports to China is
  similar to that of its exports to other major
  trading partners (US EU) indicating
• Mutually beneficial Complementarity arguments
  that reflects comparative advantage of each
  partner and not any unilateral interest by China
  in exploiting natural resources.
• These arguments Ignore need for SSA to diversify
  trade, avoid commodity traps and use trade to
  promote growth and structural transformation.
• Most analyses are at aggregate level which do
  not reveal significant African country-level
  differences which may have significant
  implications for policy response.
• To remedy this defect, data generated by the AERC
  scoping studies in 21 SSA countries are used to
  fill the gaps.

13
Key Features - Trade

• The foot-print of China in terms of trade
  relations varies among these countries.
• Chinas export share in 2006 varies from less
  than 1 (Cameroon , Uganda, Mauritius, Kenya,
  Ghana) to over 10 (Zambia , Ethiopia and over
  30 ( Angola, Congo) and Sudan (75).
• Chinas share of particular export categories
  substantial in several cases. oil exports in
  Congo (28), Angola (30.9) and Sudan (82.3).
• China has dominant share of the total export of
  crude raw materials, except food and fuels, in
  Madagascar (25.7), Cameroon (38.4), Ethiopia
  (44.6), Tanzania (48.4), and Kenya (68.7).

14
Key Features Trade

• Chinas chare of total imports has been
  significant in Sudan (20.8), Madagascar (17.8),
  Guinea (15.3), Nigeria (13.0), Cameroon
  (11.1), South Africa (11.0), and Zimbabwe
  (10.8).
• At the commodity level, Chinas share of total
  imports of manufactured products has been
  dominant
• China dominates import markets for machinery and
  transport equipment (97.9) in Ethiopia.
• supplies substantial proportions of imported
  manufactures in Mauritius (20), Ghana 24.9),
  Sudan (29.3), Madagascar (39.2), and the Gambia
  (59), Tanzania (21.8), Nigeria (30.6) and
  Cameroon (35.5).

15
Key Features Trade

• National level analysis of the trade relations
  between China and African countries reveals
  several important features not obvious from the
  earlier Africa-wide focus.
• Chinas imports from Africa are concentrated in
  few resource rich countries especially oil and
  mineral exporters like Sudan, Congo, Angola,
  Zambia and South Africa.
• By comparison, Chinas exports of manufactured
  products reach virtually all African countries.
• Resource rich SSA countries maintain favourable
  bilateral trade balances with China most others
  have bilateral trade deficits.

16
Gains and Loses - Trade

• export related gainers
• Oil exporters Angola, Chad, Congo, Cameroon,
  Nigeria and Sudan
• minerals and metals exporters Angola, Cameroon,
  Ethiopia, Ghana, South Africa, Tanzania, Zambia
  and Zimbabwe
• Cotton exporters Cameroon, Chad, Cote
  dIvoire, Mali, South Africa, Sudan, Tanzania,
  Zambia and Zimbabwe
• Logs and timber exporters Congo, Cote dIvoire,
  Nigeria, and South Africa.

17
Gains and Loses - Trade

• import related gainers
• Transport equipment importers South Africa,
  Kenya, Mauritius, Ethiopia, and Nigeria
• Automobile parts importers South Africa,
  Nigeria, Kenya, and Ghana
• Textiles and clothing importers South Africa,
  Sudan, Mauritius, Nigeria and Gambia
• Construction and mining machinery and equipment
  importers South Africa, Sudan, Kenya, Zambia,
  and Ghana
• Rice importers Nigeria, South Africa, Cote
  dIvoire and Kenya.

18
Gains and Loses - Trade

• Dilema of Gainers include
• Improved consumers welfare due to lower import
  prices vs displacement of local production
  resulting in loss of industrial output and
  employment South Africa, Kenya, Mauritius and
  Nigeria more severely affected.

19
Gains and Loses - Trade

• Export-related losses
• African exporters of labour-intensive
  manufactures also exported by China (textiles and
  clothing, furniture, footwear and other household
  goods) Mauritius, South Africa, Madagascar,
  Zimbabwe, Lesotho, Kenya, Swaziland, Ghana,
  Cameroon and Nigeria.
• These losses arise from displacement effects in
  domestic and third-country markets by cheaper
  Chinese products.

20
Gains and Loses - Trade

• import-related losses are not significant in
  virtually all SSA countries who export primary
  products and import industrial goods as none of
  them has established production platforms similar
  to those of China.

21
Opportunities and Challenges - Trade

• Opportunities for resource rich SSA countries
• Resource rich SSA countries should deploy
  increased foreign exchange earnings to create
  necessary conditions for high and sustained
  economic growth accompanied by structural
  transformation of the economic base and generate
  remunerative jobs.
• invest in physical infrastructure to connect
  internal markets and link them up with regional
  and global markets.
• Develop integrated transport system to reduce
  production costs and enhanced competitiveness
  thereby relaxing export supply response capacity
  constraints
• invest in social infrastructure encompassing
  health, education, water and sanitation thereby
  developing high quality human resources to
  support development efforts.

22
Opportunities and Challenges - Trade

• Challenges presented to resource rich SSA
  countries
• Undesirable exchange rate appreciation and Dutch
  disease by resource rich SSA countries
• Sterilize forex inflows to maintain macroeconomic
  stability and competitiveness
• implement export promotion policies and
  programmes to retain competitiveness of
  manufactured exports.
• Falling forex inflow because of early exhaustion
  of natural resources or reduction in demand for
  natural resources as China transits to knowledge
  economy include speedy, effective and efficient
  implementation of a development agenda to
• diversify the economic base and exports and
• reduce dependence on natural resource exports for
  resources

23
Opportunities and Challenges - Trade

• Opportunities for resource poor SSA countries
• Resource poor countries should take advantage of
  eventual graduation of China out of labour
  intensive manufacturing as wages eventually rise
  by
• building capacity of local manpower to attract
  Chinese manufacturers seeking to take advantage
  of a lower wage and competent labor force outside
  China.
• supporting local entrepreneurs to develop
  capacity for participating in the Chinese
  production sharing networks and partner with the
  Chinese.

24
Opportunities and Challenges - Trade

• Challenges for resource poor SSA countries
• Risk of de-industrialization posed by invasion of
  cheap Chinese imports
• negotiate structured partnerships between Chinese
  and local entrepreneurs.
• Develop and support local entrepreneurs capable
  of partnering with the Chinese on mutually
  beneficial terms.
• Challenges of small size economies and inability
  to host the minimum size of modern industries
• Negotiate insertion into the Chinese production
  sharing network on a regional basis.

25
Opportunities and Challenges - Trade

• Trade deficit with China by resource poor SSA
  countries
• leverage Chinese support for establishing special
  trade and economic cooperation zones
• Incorporate establishment of structured
  partnerships by operators in these zones between
  African and Chinese firms to insert them into
  Chinese export production sharing network into
  the SEZ agreements
• Incorporate skills and technology transfer into
  SEZ agreements
• Negotiate local value addition to raw materials
  before exporting.

26
Key Features Investment

• Chinese FDI to SSA increasing but it remains
  small exceeding 5 only in 2000 for the period
  1991 to 2003
• Chinese FDI inflows to Africa are
• prominent in oil and minerals, construction,
  Agriculture, Manufacturing, services and retail
  (general trade).
• concentrated in resource rich countries like
  Nigeria, Angola, Cameroon, Ethiopia, South
  Africa, Sudan, Uganda and Zambia.
• In 2006 alone, Chinas investment in oil/gas in
  Angola was 2.4 billion 757 million in
  Sudanese oil and 2.7 billion in Nigerian oil
  fields.
• As usual, these are resource seeking FDI.

27
Key Features Investment

• Agricultural sector investments playing
  significant role in Chinese investment in Africa
  with
• 4.3million in Ghana in 2001 representing 71.3
  of all investment in that sector that year.
• Coffee growing (Kenya) rice, timber production
  and fishery (Cameroon) cotton farming (Mali,
  Uganda, Tanzania and Zambia).
• These are basically efficiency seeking FDIs as
  they produce inputs more efficiently for use by
  producers based in China
• Chinese investment in construction activities are
  market seeking being vehicles for delivering
  Chinese aid, majority of which are for
  construction of transport infrastructure, govt
  buildings and sport stadiums (Angola, Congo,
  Cameroon, Cote dIvoire, Ethiopia, Nigeria,
  Uganda and Namibia).

28
Key Features Investment

• Manufacturing investment primarily in labour
  intensive activities garments dominate and they
  are intended to take advantage AGOA scheme
  (Ethiopia, Ghana, Kenya, Madagascar and
  Mauritius).
• Chinese investment in manufacturing was
• Agro-food processing (Nigeria, Mali, Kenya,
  Uganda and Zambia)
• assembly plants (Kenya, Mali and South Africa),
• electronic goods (Kenya, South Africa and Mali).
• small scale manufacturing of candles, intravenous
  fluids, cigarettes, mosquito nets, optical
  lenses, TVs, DVDs, VCDs, glass, aluminium,
  electric machines etc (Kenya)
• electric bulbs, farm equipments (Mali).

29
Key Features Investment

• As the bulk of Chinese investments in
  manufacturing are intended to take advantage of
  AGOA, they are basically efficiency seeking FDI .
  
• The small scale manufacturers of consumer goods
  can be considered as market seeking as they
  produce for local and in some cases, regional
  markets.

30
Key Features Investment

•  
• Chinese investments in services sector include
• Financial services (South Africa, Madagascar and
  Uganda) Tourism (Ghana) Transport (Kenya)
  Telecom (Nigeria, Uganda, Angola, Congo, Ethiopia
  and South Africa)
• Chinese investment in services are market seeking
  they seek to serve local and regional market.

31
Gains and Loses - Investment

• Gains of FDI
• Close the savings-investment gap.
• Knowledge, management skills and technology
  transfer.
• Catalyst for domestic investment in the same or
  related fields which can promote upstream as well
  as downstream economic activities
• Enhance export performance and foreign exchange
  earnings if they are export oriented

32
Gains and Loses - Investment

• These benefits can be best realized if the FDI
  were to
• partner with local counterparts,
• out-sources some operations to local producers
• offers employment opportunity to the local
  populations.
• Neither of these attributes are observable in
  most of SSA with the possible exception of SA and
  Mauritius implying limited gains to SSA
  countries from Chinese FDI.

33
Gains and Loses - Investment

• Losses from Chinese FDI
• Introduction of inappropriate technology, esp.
  environmental damage
• Limited linkages with the local economy,
• evacuation of raw material without local value
  addition 
• Encourage sub-optimal extraction of scarce
  resources,
• Exploitation of local workers (discriminatory
  compensation and unfair treatment of workers)
• Doubtful quality of products.
• These complaints have been quite explicit in
  South Africa and Zambia but common in most SSA
• With possible exception of SA and Mauritius, no
  significant outward FDI from SSA countries to
  China
• SA investors in China had to partner with Chinese
  counterparts

34
Opportunities and Challenges - Investment

• Opportunities
• Use commodity power to leverage advantageous
  terms, following the example of DRC (the
  so-called Marshall Plan).
• Negotiate for initiating structured partnerships
  between Chinese and African firms thereby
  inserting African firms into Chinese production
  sharing networks and retaining a significant
  proportion of value additions within the African
  economies.

35
Opportunities and Challenges - Investment

• Enhance benefits of market and/or efficiency
  seeking Chinese FDI by negotiating
• outsourcing of their activities to local
  entrepreneurs
• increase local sourcing of inputs
• Employment local people under decent labour
  practices.
• Governments should develop and support local
  entrepreneurs that can partner with their Chinese
  counterparts develop qualified and employable
  human resources invest in health to secure
  healthy work force.

36
Opportunities and Challenges - Investment

• Challenges
• Challenge of environmental damage by resource
  seeking FDI
• develop capacity for formulating and provide
  incentives for enforcing appropriate
  environmental standards.
• Challenges of low quality of outputs by market
  and/or resource seeking Chinese FDI
• develop capacity for formulating and enforcing
  quality standards
• Challenges of displacing local entrepreneurs by
  small scale Chinese investors
• develop capacity to formulate and enforce
  suitable competition policy.

37
Key Features Aid

• Chinas share of overall development assistance
  to SSA countries is relatively small but it has
  been increasing in recent years
• Chinas aid to Africa is increasingly utilized to
  achieve Chinas strategic objectives and hence
  concentrated in resource rich African countries
  like Angola, Nigeria, Sudan and Zimbabwe.
• Data on Chinese aid not easily obtainable
• Some it is in the form of barter trade with
  countries such as Zimbabwe and Angola.
• Chinese foreign aid, trade and investment are
  closely coordinated.

38
Key Features Aid

• Chinese aid in form of debt cancellation is
  without any policy conditionality unlike those
  associated with HIPC Initiative.
• Chinese aid is largely project and almost no
  programme aid except for the debt cancellation
• The only conditionality is respect for One China
  Policy no Chinese aid for countries with
  diplomatic ties with Taiwan (Gambia and Chad)

39
Gains and Loses -Aid

• Gains from Chinese Aid
• Targeted at important infrastructure projects
  with long maturity
• less bureaucratic and low transaction costs
• Low cost
• No policy conditionality max. policy space

40
Gains and Loses -Aid

• Losses from Chinese Aid
• Low quality of construction projects by Chinese
  companies Angola road project and hiring of
  Germans as project supervisors
• Tied Aid and turn-key project Syndrome
• Possibility of a new debt build-up  
• no policy conditionality may undermine governance
  in SSA countries
• Promotes lack of transparency and accountability
  due to excessive secrecy and lack of data on key
  aspects of aid size, purpose, terms, etc

41
Gains and Loses -Aid

• Beneficiaries from Chinese aid include
• Households benefiting from cheap Chinese aid
  projects (construction of social and physical
  infrastructure) delivered timely.
• Chinese contractors and investors advantaged by
  bilateral agreements between China and the
  recipient country
• Few local labour involved in the construction of
  infrastructure
• Key losers from Chinese aid include
• Workers who are unfairly treated by Chinese aid
  delivery companies.
• Few local contractors due to bilateral agreement
  promoting tied aid

42
Opportunities and Challenges - Aid

• Opportunities SSA countries
• Multiple sources of and rising aid volume
  triggered by Chinas intervention should be used
  to
• Leverage negotiation for better terms
• Ensure development assistance is demand driven
  and consistent with recipient development agenda.
• Resources released by Chinas debt cancellation
  should be used for pro-poor strategic development
  programmes following the pathways set by the HIPC
  initiatives

43
Opportunities and Challenges - Aid

• Challenge of low cost and no policy
  conditionality of Chinese aid
• Subscribe to the APRM to
• Autonomously promote good and truly participatory
  governance, accountability and transparency
• avoid abuse of the policy space policies and
  practices including corruption.
• Challenge of Chinas progression to knowledge
  economy
• use aid to reduce dependence on continued
  assistance from China and others within the
  shortest possible time.

44
Opportunities and Challenges - Aid

• Challenge of Chinese debt cancellation
  encouraging excessive debt beyond sustainable
• constantly monitor the level of debt ensuring
  that it remains sustainable.
• Challenge of China extracting concessions far
  greater than the amount of aid it provides
• develop capacity for effective negotiation to
  ensure that concession and privileges provided to
  China are commensurate with the volume of aid
  offered.

45
Opportunities and Challenges - Aid

•  
• Challenge of tied aid
• negotiate terms of the aid delivery to
• promote partnership between Chinese companies
  and their domestic counterparts,
• increase local sourcing of inputs and
• enhance outsourcing arrangements including
  subcontracting with local entrepreneurs.
• When and where local capacity does not exist,
  China should be encouraged to incorporate
  initiatives to build local capacity as part of
  the aid package.