China and India: What

1
China and India Whats in it for Africa?
Andrea Goldstein, Nicolas Pinaud, Helmut
Reisen, and Michael-Xiaobao Chen
Paris ? 16/17 March 2006 ? OECD
2
Why this project?

• In a context of rising commodity prices,
  Sub-Saharan Africa growth performance is
  improving
• What is the role of China and India?
• Anything new in terms of trade and investment
  linkages, as well as politics?
• Is there a risk of reversal of progress in
  production/export diversification? what about
  governance?
• Should policies be adapted?

3
Identifying conduits
Africa's growth
?

Governance standards debt sustainability issues
Africa's terms of trade
?


?

Declining prices of manufacturing goods
increased competition by Asian producers on
local third markets
?
FDI in SSA
SSA exports redirection twds the Asian Drivers






Global interest rates
Direct demand
-
4
China and Indias contribution to global growth
Global growth rate Chinas / Indias
contribution
Source Authors own calculation based on IMF
World Economic Outlook Database, September
2005 N.B GDP based on purchasing-power-parity
(PPP) valuation of country GDP.
5
Sources of Chinas Income and Output Growth,
1998-2003-Percentage points-
Avg. 1998-2003 2003

Employment Contribution 0.3 0.4
Capital Contribution 4.9 5.5
Residual Factors 2.8 3.1
- Sectoral change, 0.5 0.7
- Education, 1.1 0.8
- Multi factor productivity 1.3 1.6

• Thanks to capital accumulation (investment
  growth), potential growth in 2005 has reached 9.5
  per cent. Unlikely to be sustained forever.
• One future source of growth will be domestic
  consumption.
• For raw materials, this may imply less demand for
  metals, more for soft commodities.

6
China and Indias rising energy and steel use
Year-on-year growth rates, percent
China China India India
Annual average, 1996-1999 2000-2003 1996-1999 2000-2003
Industrial production 9.90 10.07 4.97 5.84
Energy consumption 1.16 6.16 3.35 2.41
Energy production 0.15 6.16 1.49 2.51
Crude steel consumption 7.78 17.74 3.56 4.04
Crude steel production 6.78 15.70 2.60 7.01
Sources Authors own calculation based on World
Development Indicators (2005), International
Energy Agency Data Service, Steel Statistical
Yearbook (2004), International Iron and Steel
Institute.
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The Asian BidLower Interest Rates Support
Commodity Prices- end 2005 -
FX Reserves bn US , of which UST US Treasury Holdings bn US of sum
China Hong Kong 980 30.2 296 13.6
India 145 9.7 14 0.7
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Commodity prices on the rise, but volatile
Source AfDB/OECD (2005), African Economic
Outlook.
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Africa Back to the Raw Material Corner?

• The benefits of Asias rising global demand (net
  imports) for Africa-relevant commodities may be
  attenuated by the volatility of demand of the
  Asian giants.
• Mono-economies are volatile.
• Raw material dependence less skill formation,
  more corruption, damaged environment?

10
Leamer Triangle and Resource Boom
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Chinas industry and Africas exports
Source UN Comtrade, World Bank Commodity Price
Data (Pink Sheet) and World Development
Indicators
12
China and India as net importers of commodities
relevant to Africa
Africa
Asia
Source UN Comtrade database
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Indias and Chinas shares in world imports of
selected primary commodities
Source UN Comtrade database
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Declining world manufacturing export price
Source IMF World Economic Outlook Database
(September 2005)
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High terms of trade variability
Source Authors own computations based on UNCTAD
Handbook of statistics (2005)
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Increasing African purchasing power of exports
improving terms of trade
Source UNCTAD Handbook of Statistics (2005)
17
Rising Africas trade with China and India ...
Source IMF Direction of Trade Statistics
18
... inducing a trade reorientation away from OECD
countries
Source IMF Direction of Trade (DOTS)
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... inducing a trade reorientation towards the
Asian Drivers
Source IMF Direction of Trade (DOTS)
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... while not changing the African export mix
Share of China in Angolas Exports 23.2
Chinas share 25
1
1
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... while not changing the African export mix
Share of China in Sudans Exports 41
Chinas share 81
1
1
22
... while not changing the African export mix
Share of China in Cameroons Exports 4.4
Chinas share 17.5
1
1
2
2
3
3
23
... while not changing the African export mix
Share of China in Ghanas Exports 1.6
Chinas share 13.2
1
2
2
7
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... while not changing the African export mix
Share of China in Kenyas Exports 0.3
Chinas share 8.6
Chinas share 2.5
1
2
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9
25
China greatly contributes to demand growth for
African commodities
Source Authors own calculations based on ITC
Trademap (UNCTAD)
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Foreign Direct Investment

• Low degree of direct competition for projects
• Textiles an exception (but note MFA, AGOA, EBA)
• Low degree of production complementarities
  (different from Asia, more similar to Latin
  America)
• Asian FDI to Africa
• Oil
• African companies in China and India (diaspora
  investors, South African MNCs)

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Chinese and Indian FDI in Africa
SSA in total China OFDI SSA in total India OFDI China India in total SSA IFDI
1991 0.4 n. a. n. a.
1992 3.9 n. a. n. a.
1993 15.0 n. a. n. a.
1994 39.7 n. a. n. a.
1995 16.6 n. a. 4.13
1996 19.1 10.03 4.24
1997 48.3 10.03 2.62
1998 34.1 10.03 3.46
1999 16.1 10.03 2.59
2000 38.9 10.03 5.49
2001 10.2 41.1 4.68
2002 6.4 41.1 7.65
2003 5.1 7.9 3.11
2004 n. a. 13.6 n. a.
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Chinese and Indian FDI in Africa the case of
natural resources

• Sudan
• CNPC owns 40 of the Greater Nile Petroleum
  Operating Company.
• ONGC is building a 720km pipeline to the Red Sea,
  as well as a stadium.
• Nigeria
• CNOOC acquired a 45 working interest in an
  offshore oil mining licence OML 130 for
  US2.268b cash CNPC invested in the Port
  Harcourt refinery PetroChina is interested in
  the Kaduna refinery.
• ONGC Mittal Energy Ltd (OMEL), the joint venture
  between Oil and Natural Gas Corporation and L. N.
  Mittal Group, will invest US6b in railways, oil
  refining and power in exchange for oil drilling
  rights.
• Gabon
• Sinopec and Unipec have a joint venture with
  Total. PanOcean exploits the Tsiengui on-shore
  basin and is associated with Shell to explore
  Awokou-1
• An Indian consortium signed an exploration and
  production sharing contract in November 2005.

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Chinese and Indian FDI in Africa the case of
telecommunications

• ZTE, a Chinese vendor, runs a joint venture
  mobile operation in the Republic of Congo with
  the local operator and bought a 51 percent stake
  in Niger Telecommunications when the company was
  privatized.
• Distacom of Hong Kong became the strategic
  investor in Telecom Malagasy (Telma) in
  Madagascar, paying 12.6 million for a 68 percent
  stake and committing 165 million in additional
  investments over five years.
• In August 2005 Mahanagar Telephone Nigam (in
  which the Govt. of India currently holds a 56.25
  stake) launched a wholly owned subsidiary in
  Mauritius, the first competitor to the
  state-owned incumbent

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Dutch Disease?
Real Effective Exchange Rates ( 2000 100)
1977-2001 2002 2003 2004
Sub-Saharan Africa 102.7 93.5 102.5 104.8
Excluding Nigeria and South Africa 98.8 105.1 103.3 100.1
CFA franc zone 104.7 107.3 112.3 112.7
WAEMU 104.9 106.5 110.6 110.6
CEMAC 104.5 108.4 114.6 115.5
SADC 98.2 86.3 102.6 107.8
SACU 103.1 75.9 98.0 107.0
COMESA 93.2 111.0 102.4 96.0

Oil-producing countries 115.4 110.5 109.9 114.6
Non-oil-producing countries 100.4 89.1 100.3 101.9
HIPC Initiative (completion point countries) 105.2 96.2 93.4 90.7
Fixed exchange rate regime 101.9 127.7 132.1 125.0
Floating exchange rate regime 103.0 85.8 95.3 99.3
Source IMF, Regional Economic Outlook
Sub-Saharan Africa, Supplement, September 2005
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Africa still stuck in the raw material corner?

(Herfindahl-Hirschman-Index)
Sources African Economic Outlook 2004/2005
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Other, Softer Economic Ties

• ODA and IFIs leverage (direct and indirect
  effects)
• Foreign policy priorities and bilateral
  diplomatic relations
• Governance
• Standards Codes in extractive industries
• Procurement
• CSR
• Others
• Quality of imports
• Functioning of world commodity markets
• Case studies on
• Angola
• Senegal
• Benin, Burkina, Ghana
• Morocco/Tunisia

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Economic Ties with China and India and
Governance
Source Authors own computations based on
Transparency International (2004) and OECD
(2005), African Economic Outlook
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Summing up the evidence

• Positive impact on international commodity prices
• Positive impact on trade and FDI volume
• Diversification of geographical markets (although
  OECD and non-OECD business cycles are
  increasingly correlated)
• Limited changes in the African trade mix
• Risks
• Leamer triangle?
• Dutch disease?
• Resource course?

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Policy implications

• Reorient development strategies
• Avoid competition in labor-intensive manufactures
  (e.g clothing)
• Support diversification into sectors that are
  complementary to Asian growth (e.g. soft
  commodities and FFV)
• Maximize the potential benefits of PTAs and
  geographical proximity
• The raw material boom calls for a policy mix that
  
• restrains public consumption
• leans against nominal appreciation (including
  through at least partial foreign investments of
  the surplus).
• Donor policies
• Caution in emphasis on governance
• Less bureaucracy and more practical action
• Capacity-building in rural and agricultural areas
• Despite PSD, government-to-government linkages
  remain crucial