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 N’Zue, 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 • 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.

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). • 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.

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 • 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.

11. 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

12. 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.

13. 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%).

14. 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%).

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. • 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 favourablebilateral 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 d’Ivoire, Mali, South Africa, Sudan, Tanzania, Zambia and Zimbabwe • Logs and timber exporters : Congo, Cote d’Ivoire, 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 d’Ivoire 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, 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.

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 FDIsas 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, govtbuildings and sport stadiums (Angola, Congo, Cameroon, Cote d’Ivoire, Ethiopia, Nigeria, Uganda and Namibia).

28. Key Features – Investment • Manufacturing investment primarily in labour intensive activities – garments dominateand 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 • 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.

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 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

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 China’s 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.