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 N’Zue, ACET, Accra
and Damiano Manda, AERC, Nairobi
A presentation at the African Economic Conference, UNECA Addis Ababa,
Nov. 11-14, 2009
1
Outline
 Introduction
 China Africa Trade Relations
 China -Africa Investment Relations
 China-Africa Aid Relations
2
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.
3
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.
4
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.
5
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.
6
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.
7
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.
8
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).
 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.
9
Key Features - Trade
• Trade flows between Africa and China growing rapidly
acceleration from 2000 onwards.
– Total merchandise exports to China increased about 6-fold
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–
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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.
10
Key Features– Trade
 China’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
11
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.
12
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%).
13
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%).
14
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.
15
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.
16
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.
17
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.
18
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.
19
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.
20
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.
21
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
22
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.
23
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.
24
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.
25
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.
26
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).
27
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
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–
–
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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).
28
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.
29
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.
30
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
31
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.
32
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
33
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.
34
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.
35
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.
36
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.
37
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)
38
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
39
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
40
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
41
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
42
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.
43
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.
44
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.
45