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China-Africa Economic Relations: Insights from AERC Scoping Studies

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By Olu Ajakaiye, AERC, Nairobi, Ademola Oyejide, University Of Ibadan, Francis Mwega, University of Nairobi, Mike Morris, University of Cape Town, Raphael Kaplinsky ... – PowerPoint PPT presentation

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Title: China-Africa 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.
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