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ByOlu 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 N’Zue, ACET, Accra and Damiano Manda, AERC,

Nairobi

A presentation at the African Economic Conference, UNECA Addis Ababa, Nov. 11-14, 2009

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OutlineIntroductionChina Africa Trade RelationsChina -Africa Investment RelationsChina-Africa Aid Relations

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IntroductionChina 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 growtheconomic growth accompanied by structural

transformation; (Table 1); contributions of services to GDP suggests China is transiting to a knowledge economy.

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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.

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IntroductionIn 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

transformationSSA export dominated by crude material

minerals (oil and other minerals) no export diversification but increased concentration SSA imports dominated by manufactures.

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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.

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Introduction• Africa’s 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.

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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.

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Key Features - TradeBilateral Africa-China trade fairly balanced in

recent times: Africa enjoyed a small trade surplus with China 2004-2006 ($2 billion per yr).

Africa’s 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.

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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– Africa’s share in China’s total imports remains small

(3.6% in 2006). – China now Africa’s 3rd largest export market, after the

US and EU. Accounting for 16 percent of Africa’s total exports in 2006

– Africa’s aggregate imports from China increased four-fold from $6.5 billion in 2000 to $26.7 billion in 2006.

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Key Features– TradeChina’s imports from Africa dominated by fuels and mineral products: In 2006, fuels (73.3%);

Africa’s import from China dominated by manufactures accounting for 93.4% in 2006

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Key Features– Trade• The structure of Africa’s 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.

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Key Features - Trade• The “foot-print” of China in terms of trade

relations varies among these countries. – China’s 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%).

– China’s 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%).

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Key Features– Trade• China’s 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, China’s 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%).

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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. – China’s 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, China’s 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.

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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 d’Ivoire, Mali, South Africa, Sudan, Tanzania, Zambia and Zimbabwe

– Logs and timber exporters : Congo, Cote d’Ivoire, Nigeria, and South Africa.

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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 d’Ivoire and Kenya.

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Gains and Loses - TradeDilema 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.

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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.

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Gains and Loses - Tradeimport-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.

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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.

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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

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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.

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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.

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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.

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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, China’s 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.

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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 d’Ivoire, Ethiopia, Nigeria, Uganda and Namibia).

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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).

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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.

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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.

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Gains and Loses - InvestmentGains 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

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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.

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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

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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.

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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.

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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.

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Key Features – Aid China’s share of overall development assistance

to SSA countries is relatively small but it has been increasing in recent years

China’s aid to Africa is increasingly utilized to achieve China’s 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.

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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)

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Gains and Loses -AidGains 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

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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

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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

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Opportunities and Challenges - Aid• Opportunities SSA countries• Multiple sources of and rising aid volume

triggered by China’s 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 China’s debt cancellation should be used for pro-poor strategic development programmes following the pathways set by the HIPC initiatives

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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 China’s progression to knowledge

economy:– use aid to reduce dependence on continued

assistance from China and others within the shortest possible time.

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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.

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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.