The “China Factor” in Africa’s rise

China’s rise in Africa

China’s economic presence in Africa has attracted vast attention. From a modest role in a region whose economic and political fortunes had remained largely connected to its erstwhile colonial metropoles, China is now prominent, feeding intense competition in a “new scramble for Africa”.

The rise of China in Africa is evidenced by data. In 2012, trade between them reached US$200 billion from a mere $10 billion in 2000. In 2003, Africa accounted for only 3% of total Chinese FDI, compared to 53% in Asia. Chinese FDI stock in Africa was a paltry $56 million in 1996. By the end of 2011, it stood at $16 billion. According to the Chinese Ministry of Commerce, the country’s FDI in Africa rose by a staggering 46% per year over the last decade.

In parallel to trade and investment, China has massively increased its presence, notably through bilateral aid and project finance. Its total aid would have been about $75 billion between 2000 and 2011 – as much as provided by the US. But China’s aid is difficult to account for, because of the way it is structured. Some say the total figure may be significantly higher, others point to double accounting.

This lack of transparency is symptomatic of Africa’s role in China’s economic rise and transition to world powerhouse. China’s spectacular rise in Africa has been an orchestrated move primarily intended to secure the supply of critical primary commodities. In this, short-term commercial considerations have often been eclipsed by long-term thinking, even though profit making has not been eschewed. But the complex web of state, parastatal and commercial interests that intermingle makes for a murky landscape.

The “strategic supplier” function of Africa predominantly explains why and how China has developed a unique approach to securing long-term supplies by mixing diplomacy, aid, trade and investment. This approach, which has neo-mercantilist intonations, mobilises vast resources around establishing diplomatic relations, providing preferential financial intermediation, supplying infrastructure that can support exports and securing the commodities themselves through ownership and purchases. China has utilised bartering on a grand scale, notably trading infrastructure against natural resources assets. These infrastructure projects have in turn beneficiated Chinese construction companies, often using Chinese labour. It has also extensively loaned capital to governments, without any of the economic management or governance conditions that accompany Western support – to the frustration of governments.

Unsurprisingly, the bulk of Chinese investment has been directed into mining and oil & gas. Between 2005 and 2010, FDI in mining amounted to about $14 billion, and $19 billion in oil & gas. Resource-rich countries such as South Africa, Nigeria, the DRC and Sudan have received the bulk of this. Enabling sectors such as infrastructure and finance have also received significant investment. Manufacturing, on the other hand, only received 4% of Chinese FDI in Africa in 2006. The majority of infrastructure funding has also gone to resource-rich countries, including Angola, the DRC, Nigeria and Sudan. The same applies with aid.

Africa’s new growth trajectory

While many have questioned the intent and method of China and the benefits for Africa, data and reality clearly show a remarkable convergence between China’s rise and Africa’s new economic fortunes.

This is not mere chance: at about the same time as it was infamously called the hopeless continent, Africa was embarking on a new growth trajectory that would considerably change its face and position in the world. This closely corresponds to China’s arrival.

Contrary to popular belief, African countries long featured amongst the world’s fastest growing. Somalia grew an incredible 30% in 1975, and Equatorial Guinea at a dizzying 62% in 2000. But few countries managed to grow consistently. Until about 2000, booms and busts occurred with great regularity. Between 1970 and 1995, year-on-year variations in GDP growth of +/-200% were commonplace. The result was low average growth: a meagre 2.8% during the period. Africa lagged behind.

The year 2000 signalled a remarkable break: for nine consecutive years, economic growth stood at more than 3%. While growth collapsed in 2008 and 2009 as a result of the global economic crisis, it swiftly recovered in 2010. Two features of the 2000s stand out: i) for five consecutive years growth was at or more than 5%; and, ii) since 2001, the region’s growth has surpassed world growth every single year, including during the 2008-2009 recession.

Predictably, Africa’s GDP increased significantly between 2000 and 2010: it was multiplied by 1.6 times, a great achievement that only South Asia surpassed.

It is that high growth, sustained over more than a decade, that has begun lifting Africa out of poverty and making it an attractive investment and trading partner between commodities.

Measuring the “China Factor”: the natural resources link

Juxtaposition of the GDP growth of Africa with that of China and the European Union dramatically illustrates how deep the connection between China and Africa has become.

From about 1997 there is an obvious convergence of growth trajectories. Negative between 1970 and 2000, correlation between the two has become clearer while the growth trajectories of Africa and Europe have remained the same over time.

An even more telling link exists between Africa’s mineral rent (the overall value created by mining) and China’s imports of ores and metals. From negative in the 1990s it became nearly perfect in the 2000s.

This spectacularly demonstrates how important to Africa China has become, and confirms the relative loss of importance of once-dominant Europe. Indeed, Africa’s capacity to withstand the lasting European recession has shown that its economic fortune is now much less dependent on that continent.

The opportunity, and its risk

China has changed Africa’s game. This in return has benefitted all of the region’s economic partners: growth in demand for commodities has fuelled economic expansion, and with it opportunities across the board – from mining and oil & gas themselves, to commodity-connected sectors such as infrastructure and equipment, and consumer-connected sectors such as telecoms, financial services and durable goods. Western capital markets and businesses have greatly gained from this. Chinese demand has, in a large though not exclusive part, underwritten the rise of Africa.

But that relationship also highlights the growing vulnerability of Africa to changes in economic conditions in China. This vulnerability was illustrated in the sudden economic collapse of 2009, which disproportionally affected resource-rich countries. The dramatic 2010-2011 recovery was largely fuelled by China’s US$500 billion stimulus, and fed unrealistic expectations of unending high commodities prices.

The severe economic restructuring China has begun will profoundly impact Africa’s prospects. While China’s long-term interests will ensure that it mitigates some of the negatives, notably through aid and infrastructure projects, commodity prices are set to remain lower than they were during the super cycle. This has already led to a significant fall in capital and investments throughout Africa. From a strategy of hoarding resources, most mining companies are now seeking value, focusing on dependable and cost-effective resources.

Here, Africa is now at a disadvantage relative to more mature, resource-rich regions. Africa’s governments have not fully taken the measure of the risks they now face. Having made insufficient effort to leverage the boom’s revenues to diversify their economies toward agriculture and manufacturing (whose shares of overall GDP are declining), they have also underinvested in power, water, transport infrastructure and skills. Courted for more than a decade for access to resources, they have failed to develop efficient and transparent governance that decreases uncertainty and lowers costs.

Yet, Africa’s resources remain comparatively untapped and the region provides a large market. Now is the time for its governments to meaningfully improve attractiveness and competitiveness through judicious investment in infrastructure, human resources and clearer and more transparent rules. 

By Claude Baissac, Eunomix

Claude Baissac is Managing Director of Eunomix, a consultancy focused on de-risking resources and infrastructure projects and supporting economic growth.

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