CHINA, INDIA AND AFRICA: PROSPECTS AND CHALLENGES - PowerPoint PPT Presentation

1 / 46

About This Presentation

Title:

CHINA, INDIA AND AFRICA: PROSPECTS AND CHALLENGES

Description:

CHINA, INDIA AND AFRICA: PROSPECTS AND CHALLENGES On the other hand, as seen in Table 3.2, imports from India have increased about three-fold over the same period ... – PowerPoint PPT presentation

Number of Views:102

Avg rating:3.0/5.0

Slides: 47

Provided by: gdnetOrgC

Category:

more less

Transcript and Presenter's Notes

Title: CHINA, INDIA AND AFRICA: PROSPECTS AND CHALLENGES

1
CHINA, INDIA AND AFRICA PROSPECTS AND
CHALLENGES
2
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.

The paper is organized as follows.
Section II nature and scope of Chinas 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.

4
II. Nature and scope of Chinas recent economic
engagement with Africa

Economic transactions provide the most powerful
evidence of Chinas 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.

5
Trade Exports to China

Africas 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 Africas exports to China increased
from 1.6 in 1996 to 10.4 in 2005.

By 2005, China had overtaken the UK as Africas
third most important trading partner (after the
US and France).
However, Africa accounts for only 2 of Chinas
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.

Mineral fuels and lubricants, for example,
accounted for 24.9 of total exports in 1996,
rising to 70.9 in 2005.
Chinas 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).

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

As seen in Table 2.3, at least eight out of ten
of Chinas most important African trading
partners are resource-rich countries.
There is no doubt that natural resources are the
core of Chinas 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.

The bulk of Chinas 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
Chinas total oil imports.
Sudan is also a non-negligible provider, and
accounts for 6.9 of Chinas total oil imports.

11
Trade Imports from China

There has also been a massive increase in African
imports from China, which increased by
712betweeen 1996 and 2005, from US 895 million
to US 7.3 billion, respectively.
Chinas 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 lowpriced
imports such as textiles and clothing, electronic
devices, machinery, etc .

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.

13
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.

Second is the threat of crowding-out by Chinese
exports in Africas third-country markets.
Chinas 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).

A good example of the crowding-out is the case of
textiles and AGOA.
When AGOA came into effect in 2000, a number of
Chinas 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.

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.

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, Chinas exports to the US rose by
58((Kaplinsky and Morris 2006).

18
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.

Chinas 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.

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.

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.

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).

23
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 Chinas 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.

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.

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.

26
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.

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.

28
Some implications of Chinas economic
interactions with Africa on governance

According to some analysts (e.g. Tull 2006),
Chinas 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 Chinas economic
interaction with China with Africa may undermine
governance.
First, promotion of democracy, for example, is
not an objective of Chinas foreign policy.

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, Chinas support for peacekeeping in
Africa is a positive development. However, the
support may be undermined by the countrys other
policies which contribute to the eruption or
extension of violent conflicts.

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.
Chinas 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.

However, according to other analysts (e.g. Nwukwe
2006), the views that Chinas 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.

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.

33
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.
Chinas 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. Chinas more than 9-fold increase)
and are dominated by SITC 9 products (about 40
in 2005).

On the other hand, as seen in Table 3.2, imports
from India have increased about three-fold over
the same period (vs. Chinas 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.

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.

One of the most abundant resources available to
China and India is their large populations,
comprising two-fifths of the worlds 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 16.6in India, it is
only 12 in Africa, 11.5 in Europe and 4.9 in
the USA.

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.

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

Indias 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).

40
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).

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).

According to OConnell (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
Africas comparative disadvantage in manufactured
exports, at least in the medium-term(Collier
1998).

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 worlds
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.

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 (OConnell 2006).

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
(OConnell 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.