Prospects and Challenges for Africa-Asia Trade and Investment World Bank Group Flagship Study for Singapore 2006 Bank-IMF Annual Meetings Abstract The rapid growth of South-South trade and investment is one of the most significant features of recent developments in the global economy. One of the hallmarks of this trend is the rapid increase in trade and investment flows between Africa and Asia. While Europe remains the traditional trading partner of Africa, the flows of trade between Asia and Africa, although still at a relatively low level (of Africa’s total exports, 15 percent goes to Asia), are rising rapidly. Indeed, Africa’s exports to Asia have been growing at an annual rate of 10 percent, higher than African exports to other areas of the world. Perhaps the most notable feature of the recent increase in African-Asian trade is Africa’s increasing trade with China and India relative to the rest of Asia. Flows of foreign direct investment between Asia and Africa are more modest. This is especially true for African FDI in Asia. On the other hand, Asian FDI in Africa is becoming significant, especially investment from China and India. Chinese FDI in Africa actually dates back decades, with most of the early investments made in infrastructure sectors, such as railways. India, too, has a long history of FDI in Africa, particularly in East Africa, where there are significant expatriate Indian communities. Against this backdrop, there is significant—and rapidly growing—interest among policy makers, development partners and businesses in Africa-Asian trade and investment relations. This monograph will identify: not only what are the patterns of trade and investment relations between Africa and Asia, but also why such patterns are evident and how to strengthen Asian-African trade and investment flows so as to enhance Africa’s economic development prospects. In focusing on these questions the study will examine three categories of factors that affect trade and investment between Africa and Asia: Role of formal trade and investment policies both in Asian and African countries, e.g., trade and market access policies including tariff and non-tariff barriers; FDI policies; and bilateral-regional trade and investment agreements. ‘Between-the-border’ logistical and informational factors that affect Africa-Asia trade and investment flows, e.g., trade facilitation infrastructure and institutions (whether publicly or privately provided); the level and quality of information about market opportunities (including through expatriates and the diaspora), the state of transportation services, the availability of trade finance, and migration/remittances. ‘Behind-the-border’ conditions in both Asian and African countries, e.g., domestic supply constraints (such as infrastructure development); quality of domestic business environment; competitiveness of market structures; stringency of business regulations; quality of governance conditions. While the first set of factors is often perceived as the major bottleneck affecting trade and investment flows for Africa, the study explores the notion that the effects of formal trade and investment policies are likely to be of secondary importance compared to the latter two sets of factors. Thus the research posits that between-the-border and behind-the-border conditions in both African and Asian countries significantly affect trade and investment patterns and performance between the two regions and that these are the areas where the priority for policy reforms should be. The methodological approach of the study consists of analysis of trade and investment aspects of existing firm-level micro data from Investment Climate Assessments (ICA) in African and Asian countries, with special emphasis given to China and India. There also are new firm-level survey data being collected from a select group of African countries (South Africa, Tanzania, Senegal and Ghana) where Asian trade and investment activity (again, especially involving China and India) is relatively significant. To complement these survey data, a number of qualitative business case studies are being carried out in the same group of African countries involving Chinese and Indian investors. Draft Table of Contents 1. Trade and Investment Flows between Africa and Asia: Patterns and Performance 2. What Challenges Lie at “The Border”? Role of Formal Trade and FDI Policies 3. Challenges “Between the Border”: Logistical and Informational Impediments to Africa-Asia Trade and Investment; Reduce Them and They Will Come? 4. Behind-the-Border Factors in Africa-Asia Trade and Investment 5. Inter-Linkages between Trade and Investment 6. Policy Recommendations 2