Mwega ppt parallel 3

CHINA, INDIA AND AFRICA: PROSPECTS AND CHALLENGES: 

CHINA, INDIA AND AFRICA: PROSPECTS AND CHALLENGES

I Introduction: 

I Introduction Over the last decade or so, China and India have established themselves as increasingly influential players across Africa, which may turn out to be one of the most significant developments for the region in recent years. This paper looks at the opportunities and the challenges arising from this increased presence of China and India in Africa.

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… The paper is organized as follows. Section II: nature and scope of China’s recent engagement with Africa. Section III: brief comparison of China and India in their African engagement. Section IV: an overview of the opportunities offered to Africa as well as the challenges posed by these Asian drivers.

II. Nature and scope of China’s recent economic engagement with Africa: 

II. Nature and scope of China’s recent economic engagement with Africa Economic transactions provide the most powerful evidence of China’s increasing interaction with the continent. The impact of China on Africa operates mainly through four main channels: trade; foreign direct investment; foreign aid; and migration. We discuss these below, including the overall implications of these economic interactions on governance in Africa.

Trade: Exports to China : 

Trade: Exports to China Africa’s trade with China is currently small but has expanded rapidly in the last decade. As seen in Table 2.1 in the paper, exports to China grew by 1678% between 1996 and 2005, from US$ 1.1 billion to $18.8 billion, respectively. The share of Africa’s exports to China increased from 1.6% in 1996 to 10.4% in 2005.

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… By 2005, China had overtaken the UK as Africa’s third most important trading partner (after the US and France). However, Africa accounts for only 2% of China’s external trade (Tull 2006, WEF 2006). As seen in Table 2.2 in the paper, African exports to China are predominantly primary products, mainly oil and metal products.

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… Mineral fuels and lubricants, for example, accounted for 24.9% of total exports in 1996, rising to 70.9% in 2005. China’s share in the recent increased demand for some mineral resources such as aluminium, nickel and copper varies between 76 and 100% (Kaplinsky et al. 2006).

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… Africa’s contribution to China’s oil imports is already significant. Table 2.2 shows that Africa’s exports of mineral fuels and lubricants increased from US$ 278 million in 1996 to US$ 13.3 billion in 2005. In 2004, Africa’s share of China’s overall oil imports reached 28.7% up from 25.2% in 2003.

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… As seen in Table 2.3, at least eight out of ten of China’s most important African trading partners are resource-rich countries. There is no doubt that natural resources are the core of China’s economic interest in Africa, or perhaps even its overall interest in the region (Tull 2006). In 2004, China for example was reported to have oil stakes in as many as 11 African countries.

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… The bulk of China’s oil supplies are from Angola and Sudan. The Chinese oil imports from Angola have increased by 400% since 2001. Angola exported 117 million barrels to China in 2004, about 13% of China’s total oil imports. Sudan is also a non-negligible provider, and accounts for 6.9% of China’s total oil imports.

Trade: Imports from China: 

Trade: Imports from China There has also been a massive increase in African imports from China, which increased by 712%betweeen 1996 and 2005, from US$ 895 million to US$ 7.3 billion, respectively. China’s share of African imports increased from 2.5% in 1996 to 7.4% in 2005 (Table 2.4). Due to its cheap labour, China offers low–priced imports such as textiles and clothing, electronic devices, machinery, etc .

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… As seen in Table 2.5, manufactured imports (SITC 5-8) accounted for 92.1% in 1996, slightly increasing to 94.6% in 2005. These imports however undermine domestic firms that are unable to undercut Chinese production costs and prices, although some domestic producers benefit from the low-priced intermediate and capital imports.

Trade: Indirect Impacts of China on African trade: 

Trade: Indirect Impacts of China on African trade China is a large country and one has to take into account its indirect trade effects. These include, first, its impact in increasing commodity prices. This has favourable effects on African producers (barring Dutch disease effects) but adversely affect consumer countries (e.g. a global increase in the price of oil). The price of oil for example increased from $40 per barrel in 2004 to more than $70 per barrel in April 2006.

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… Second is the threat of crowding-out by Chinese exports in Africa’s third-country markets. China’s export share in the world expanded from 1.6% in 1987 to 7.2% in 2005 (while that of India has remained at 0.95%). World manufacturing export prices have declined substantially in the last two decades, partly due to the impact of India and China (Kaplinsky et al. 2006).

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… A good example of the crowding-out is the case of textiles and AGOA. When AGOA came into effect in 2000, a number of China’s textile firms established themselves in Africa, first to exploit the preferential market access to the US market and second, to circumvent the Multi-Fibre Agreement (MFA) agreement. There was an impressive expansion of the textile sector especially in ESA countries.

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… In Lesotho, for example, clothing and textiles accounted for 99% of exports and 50% of GDP in 2003. In Kenya, employment in EPZs export-oriented clothing enterprises accounted for nearly 20% of formal wage employment in 2003 (Kaplinsky and Morris 2006). When the agreement expired in January 2005, the textile boom witnessed a significant decline.

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… The value of African clothing exports to the US dropped by 16% in the first ten months after quota removals. As a consequence, employment in the sector fell very significantly in African countries economies: Kenya by 9.3%, Lesotho by 28.9%, South Africa by 12.2% and Swaziland by 56.2%. In contrast, China’s exports to the US rose by 58%((Kaplinsky and Morris 2006).

Foreign direct investment : 

Foreign direct investment While globally small (US$ 900 million versus US$ 15 billion in 2004), FDI from China to Africa has substantially increased in the last decade. Chinese enterprises invest about US$ 1 billion a year (WEF 2006). Much of FDI from the country has gone to the extraction industries, and is mainly extended to countries such as Sudan, DR Congo and Angola.

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… China’s growing influence is also a product of the strategies that Chinese companies pursue in their conquest of African markets (Tull 2006). Chinese firms appear to be significantly less risk averse than their Western counterparts, especially in post-conflict countries such as Angola, DR Congo and Sierra Leone where a ‘first mover advantage’ plays out in favour of risk-taking entrepreneurs.

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… The FDI is mainly from parastatals that have access to low-cost capital, so that the Chinese investors have long planning horizons. These firms view the challenging political and economic environment in such African countries as an economic opportunity. They are able to derive huge profits from rates of return to FDI that are said to be much higher in politically volatile African countries than elsewhere.

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… Chinese firms also focus on specific sectors. With government support, Chinese enterprises have become a major player in the field of infrastructure (transportation, telecommunications, water conservancy, electricity and so on). Many of the projects are not commercial and are financed by ‘tied aid’. Others are not profitable because the Chinese tend to set costs below market rates, although the projects may be profitable in the long run.

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… Finally, Chinese firms target countries suffering from Western imposed sanctions, making China an alternative partner for countries such as Sudan and Zimbabwe. An indirect influence is the extent to which FDI flows to China crowd-out FDI flows to African countries. Empirical evidence however does not seem to support the FDI crowding-out hypothesis (Geda 2006).

Foreign aid: 

Foreign aid In the last two decades, China has moved to increase its assistance to developing countries 'to the best of its ability' (China 2006), a large component of it to African countries. In 2002, for example, some 44% of China’s overall assistance to developing countries of $ 1.8 billion went to Africa. China has also cancelled bilateral debts for 21 African countries totaling $1.27 billion.

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… As a share of the overall development support to African countries (about US$ 25 billion), the amount given by China is small and the assistance is usually ‘tied’. The impact is however enhanced by political considerations as it comes with little political conditionality. The only conditionality is on the issue of Taiwan, under the 'One China Policy'.

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… Chinese aid also tends to benefit governments of receiving countries more directly than policies of Western donors who are pre-occupied with poverty reduction. China finances grandiose and prestigious buildings (presidential palaces, police headquarters, political party offices, and football stadiums) that African leaders highly appreciate for their own political reasons.

Migration : 

Migration There has been a relatively large migration of the Chinese to the continent recently. According to some estimates, some 80,000 migrant workers from China have recently moved to Africa, creating a new Chinese diaspora. In Angola, for example, some 2,500 Chinese workers have recently arrived to work for the Chinese companies, with some 30,000 Chinese workers eventually expected.

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… Local retailers too are faced with rapidly increasing business competition from expatriate Chinese traders. A cursory perusal of local press reports indicates that the diaspora alongside the competition from cheap imports from China have stirred significant local resentments in some countries. Some 3,000 Chinese for example live in Cameroon, 5,000 in Lesotho, 50,000 in Nigeria and 300,000 in South Africa.

Some implications of China’s economic interactions with Africa on governance: 

Some implications of China’s economic interactions with Africa on governance According to some analysts (e.g. Tull 2006), China’s increased presence in Africa is a political development that may not contribute to the promotion of peace, prosperity and democracy on the continent. There are various ways that China’s economic interaction with China with Africa may undermine governance. First, promotion of democracy, for example, is not an objective of China’s foreign policy.

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… Second, in the light of its rapidly growing dependence on mineral imports, it is unlikely that China will support recent initiatives (e.g. EITI) to transform mineral wealth from a ‘curse’ to a 'blessing'. Finally, China’s support for peacekeeping in Africa is a positive development. However, the support may be undermined by the country’s other policies which contribute to the eruption or extension of violent conflicts.

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… China has for example provided a large contingent of peacekeeping troops to Liberia, but perpetuated the rule of Taylor by buying timber from the country for a long time. China’s increasing involvement as a supplier of arms to Africa is also a source of concern. According to Glimeet (2004), China ranked second in arms transfer agreements with African countries between 2000 and 2003.

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… However, according to other analysts (e.g. Nwukwe 2006), the views that China’s rising profile in Africa will erode human right gains are wrong for several reasons. First, such views assume that Africans have no intrinsic demand for human rights and good governance. Second, these views assume that even if Africans have this demand, they have no power or agencies to push for it.

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… The arguments further pre-suppose that the one-way interference in the internal affairs of African countries by Western countries and institutions have improved governance, which may not be the case; and that Western governments and institutions have always been advocates of good governance, which is not the case as the past support for unsavoury regimes attest.

III. China versus India in their impact on Africa: 

III. China versus India in their impact on Africa Growth in China has been sustained at a high level, averaging 9.7% over the last two decades. Growth in India has been lower, averaging 5.8%. China’s contribution to global output is much higher than that of India by almost three times. African exports to India only about doubled over 1997-2005 (vs. China’s more than 9-fold increase) and are dominated by SITC 9 products (about 40% in 2005).

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… On the other hand, as seen in Table 3.2, imports from India have increased about three-fold over the same period (vs. China’s almost 7-fold increase), and mainly comprised of manufactured products (SITC 5-8), and to a lesser extent, food products (SITC 0). There is need to understand the drivers behind the growth of China and India and the reforms undertaken by the two countries.

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… The rapid growth in China has been brought about by the liberalization in the country since 1978. China accession to the WTO in 2001 has further accelerated this process. In India, it has been brought about by the recent emergence of the service sector as a driving force of economic growth in the country, following the reforms since 1991.

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… One of the most abundant resources available to China and India is their large populations, comprising two-fifths of the world’s total, at 1.3 billion and 1.2 billion respectively. The work force of the two countries comprises 40% of the global labour supply. While the share of the working population is about 22.4% in China and 16.6%in India, it is only 12% in Africa, 11.5% in Europe and 4.9% in the USA.

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… Under external sector reforms, the weighted average tariff for example China has declined from 32.2% in the early 1990s to about 4.9% in 2005. In India, the trade weighted import tariffs fell from 27.9% in 1992 to around 13.4% in 2005, so that the country did not open its economy as much as China.

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… China’s reforms resulted in massive inflow of FDI. The FDI plus China’s high saving rate have allowed investment in infrastructure and fixed investment. In contrast to China, India’s development has been characterized by a lower saving rate, limited inflows of FDI and poor infrastructure. This has limited India’s ability to compete in the export market for the manufactured goods. One of the key differences in India’s growth process has been the failure of industry to draw workers out of agriculture into industry.

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… India’s entrepreneurs have in turn excelled in those sectors where these constraints and regulations have been less binding, giving rise to a boom in the service sector, especially IT and business outsourcing. Indian firms have two thirds of the global market in offshore IT services and nearly half of business outsourcing (The Economist, June 4-13, 2006).

IV. China, India and Africa: An overview of the opportunities and the challenges: 

IV. China, India and Africa: An overview of the opportunities and the challenges From the above discussion, we have identified the opportunities offered by the rapid growth of China and India. The associated threats include: The undermining of domestic firms that are unable to undercut Chinese production costs and prices, leading to de-industrialization. Increase in global commodity prices, which adversely affect consumer countries (e.g. a global increase in the price of oil).

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… The crowding-out of African countries in third-country markets; Reduced effectiveness of foreign aid to Africa, due to worsening governance; and Increased migration undermining African labour markets. The challenge then is for Africa to develop a 'coherent approach to the two Asian economic giants' (WEF 2006).

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… According to O’Connell (2006), the Asian model suggests that growth strategies in coastal resource-poor African countries should continue to focus on building low-cost export platforms in areas of manufacturing, services or agro-processing. It is now generally agreed that it is high transaction costs (rather than endowments) due to a poor policy environment that have caused Africa’s comparative disadvantage in manufactured exports, at least in the medium-term(Collier 1998).

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… In this case, public infrastructure investments are important and should be evaluated as a package, with a view to bring African non-labour costs for selected exports down to world’s levels. Some evidence shows that countries such as Kenya and Madagascar have wage costs that are comparable to those in Asia in the textile and clothing industries (Table 4.1), so that it is non-labour costs that disadvantage them.

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… In addition, if Africa is to succeed as an exporter of manufactures, preferential trade arrangements would have to be expanded in scope, through more generous rules of origin, and in the case of AGOA, a longer time window beyond the current three years (recently extended to 2012). Finally, foreign aid should also be managed with a view to its direct and indirect impacts on export diversification, avoiding its Dutch disease effects (O’Connell 2006).

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… For mineral-rich countries to maximize returns from the surging demand for minerals by China and India, the overriding requirement is the orderly spending of resource rents on public goods (O’Connell 2006). Botswana is an often-cited good example of prudent management of mineral wealth by maintaining transparency and accountability in the use of these resources.

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