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Chinese Businesses And Fdi Impact Africa Economics Essay

China, as one of the BRICS Brazil, Russia, India, China and South Africa, has known a rapid growth and development, which has made it become a developed country in only thirty years, and a global leading country in the field of exports and high technologies. This very fast growth aiming at the country’s development, has become a model for many developing countries, numerous in the African continent. It is a development model, as well as an economical model; but it also represents a real financial source for African economies to develop. If this Chinese presence on the African continent is not something new, the fact that it massively invest in this continent, is. And this increasing part of the investment from China, but also from others, like India or Brazil, is probably linked with the fact that other “old” developed countries like USA, or Europe, are still trying to cope with the financial crisis from 2008. A question which comes with this high level of foreign direct investments (FDI) coming from China, is to know if African countries really benefit from it, and what is the best way for African governments to benefit from it.

Evolution of the Chinese presence in Africa

Historical background of the Chinese-African relationship

The first commercial relations between Africa and China began in the 2nd Century BC, under the reign of Emperor Han. But this was almost an exception, as the next and real trade started from 1949 on, with the People’s Republic of China, and even more with the Bandung Conference (also known as Asian-African Conference), in 1955, where developing countries formed the Non-Aligned Movement, to face the two Cold War’s parties, which were Soviet Union and the United States. In the sixties, during the post-colonialist period, China helped some African countries by making economical and technical agreements with them, or by granting loans without interests. In the seventies, China changed the trading conditions with Africa, by making it easier to deal with it, and to have a competitive advantage compared to developed countries. By this time, China has also constructed lots of stadiums, hospitals as well as infrastructure constructions like roads, or railways in many countries of Sub-Saharan Africa. This is mostly seen as political investments to be considered as good-making by the African population. The arrival of Deng Xiaoping from 1978 to 1992, at the head of People’s Republic of China sounds like a new phase in the international presence of China in Africa, and in the international. His political view was the opening to the international and the conditions he set up did not change yet. The liberalization of China corresponds to the moment when exchanges between China and Africa boomed.

Current situation

Business

One of China’s current motivations for trading with Africa is its needs for energy. China’s political leaders are encouraging bilateral relations. Each of the countries it trade with, has also something to bring to them. The proportion of trade Africa does with China is following an increasing trend. On the contrary, exchanges with Europe are decreasing, even if they still represent the major part of China’s trade. But currently, only 4% of China’s imports and exports are made with Africa. China is more important for Africa, as it is counting for 10% of the global exchanges. Moreover, China does not trade with the whole Africa continent: only a few countries are concerned by it. For example, 60% of the exports have for destination one of these six countries: South Africa, Egypt, Nigeria, Algeria, Morocco and Benin. [1] Moreover, Chinese imports are mainly operating in African countries where raw materials like oil, are present. That is why we can find Angola, or Sudan, at the places of main exporters to China. The trade balance from Africa with China was about $ -10 billion in 2012. Thus, Africa is a very important place for China to trade with, even if the risk there is quite high sometimes. To protect Chinese firms from the risk of exporting their products to Africa, SINOSURE (China Export & Credit Insurance Corporation) was created in 2001. It is a state owned enterprise, providing export credit insurances, for Chinese firms who are exporting in many risky countries, and especially in Africa.

FDI

In 1994, the China Exim Bank (China Exports Imports Bank) has been created in order to promote FDI in African countries, which is more likely to finance some risky initiatives. The CDB (China Development Bank) also created the CADF (China Africa Development Found) to facilitate FDI in African countries. The Chinese Ministry of Trade is estimating the growth of FDI to Africa at about 50% per year in the last decade, passing from $50 million in 1996, to $5 billion in 2007. This amount remains very low when comparing to the total amount of FDI China provides (currently, about 5%). Moreover, as the trade, FDI are motivated by oil presence in some countries. That is to say that these countries attract about 70% of all FDI in Africa (see up the 6 countries concerned). But the trend is changing: indeed, lots of countries are changing things in order to be more able to attract FDI in other sectors of their economies (like construction, electricity, transportation…) which are more relevant, as far as development is concerned. Chinese firms are becoming more and more present on the African continent, as there are nowadays about 700 there.

Evaluation of the potential advantages of Africa in making business with China

Many African countries benefit from their increasing trade relations with China, but some other suffer from it, as it sometimes represent an increasing competition for the local firms.

Potential positive impacts

What is first very important to say is that the effects of Chinese investments in Africa will depend on each country’s specializations and specificities. For countries who mostly export primary products or high technology products, China’s investment can be very important and have a big positive impact on the local economies. For oil and ram materials exporting countries, Chinese presence should allow them to increase the volume and prices of these exported products. The most popular indicator to measure growth is the GDP, and allows making comparison between the countries. A first positive effect of foreign investments in developing countries is that it increases many factors affecting the GDP. First of all, FDI must not be seen just as a money flux towards a developing country, it also implies many longer term effects, like new international trade networks, which should allow it to develop and enter the developed countries circle after many years. FDI can also represent a way of increasing exports, but this mainly depends on the geographical zone where countries are. In order to benefit from this effect, a new type of economic zones can be created. These are the EPZ (Export Processing Zone), also called FTZ (Free Trade Zone): between two or more countries, the trade of one specific type of product is free from charges, in agreement with the counterparts. These zones are already present on the African continent, for example in Kenya, Nigeria or Madagascar, and were also used in China, as a matter of development.

By FDIs, developing countries can also expect technology transfers, as it can stimulate corporate research and development (R&D). As companies which are investing in Africa mostly have a long experience (or at least longer) than the countries where they invest, they also own a better technology. So, it is often seen as a chance for local people, to acquire technological skills, which they could use in local firms to develop. There are four main channels to transfer technologies from a country to another one. Vertical transfer is the first one, transferring technology from suppliers in the host country; horizontal transfer, where host countries learn from their trading relations with competitors in the same industry; migration of skilled labor; internationalization of R&D.

The major positive effect from FDIs on growth is the development of a greater human capital. But this is mainly an indirect effect, as it depends on the governments to have this workers’ skills development policy to create an attractive place for foreign companies to invest there. This will be seen more in details in the fourth part of this paper, focusing on African governments’ policies to be followed in order for them to benefit the best from FDIs coming from China.

Moreover, populations in Africa have access to many goods that they could not find or when they found it, could not buy it, because of the high prices. When China is present in a sector, it lower the price of the good produced.

In the agricultural field, Africa benefits from high competitive advantage, as it is producing various goods, and has big potential. The context of worries about food security is also something “good” for Africa, as its arable land represents a huge place to grow crops that would feed tomorrow’s World population. China has acted a lot in the field of trade barriers between Africa and it, at the World Trade Organization (WTO) level, so African economies should benefit more and more from the trade with China.

Some studies have shown that China’s investment in Africa is leading other countries to do the same. For example, in 2008, India has leaded an India-Africa summit, where it has started to focus on the continent. From this time on, India has increased a lot its trade relations with Africa, and FDIs as well.

Potential negative impacts

Chinese and African efforts have to be done in the way of a higher development to be meaningful.

For countries who mainly export goods with high need for human resources can fear Chinese presence in the country. Generally, FDI seem to have a reduced effect on growth in developing countries. According to the “threshold externalities” theory from Azariadis and Drazen (1990), different countries, benefiting from the same technologies can thus keep different levels of growth. This is due to the economic development level the country has reached yet.

Concerning FTZ which we already talked about previously, they are criticized because they are said to be more interesting for foreign companies and countries, than for the local economies. Indeed, FTZ allow more liberties to foreign companies to set up their businesses in emerging countries, and local entrepreneurs are mainly excluded from this opportunity to make business free of fees. This could even have a harmful effect, as foreign enterprises could benefit from a competitive advantage towards local firms. And this would even go against the country’s growth and development. Sometimes even, local governments pay for a part of the local factory set up, and allow the firms not to pay any charges for the coming years. After these years have passed, the foreign enterprises which want to settle their businesses somewhere else just have to repeat this strategy. Of course, this is a very perverse way of doing, but it is seen more and more in the African developing countries.

The technology transfers are also criticized, as the effects on growth depend on the significance of the technology transferred for the hosting countries. Indeed, a Chinese company which imports technology in Zimbabwe to make something people do not need will not be of any help for the local development or growth. If, on the contrary, the transferred technology is relevant and useful for local people, then it is worse transferring these technologies.

The effect on wages is also controverted. Indeed, for a person who is working in an agricultural field, the Chinese presence is something good as it is increasing the revenue he can have by selling its products not only on a local market, but worldwide. On the other hand, for workers who have no skills and who are working in an industry, Chinese presence could on the contrary be very harmful, as they are willing to gain cost efficiency. The working conditions can be lowered by these Chinese firms’ policies.

Recommendations for Africa and its trading partners

African governments have to improve their governance

According to Ernst and Young, there are many ways for Africa to benefit from new FDIs and for existing FDIs to have a greater impact on the African economies. The first point is to set more commonness between African countries, in a way that the African continent could be much more attractive if the countries would have almost some common points. The conditions for investing between Nigeria and Namibia for example, are not the same at all yet, and this could change. Indeed, what is missing yet, is the opportunity to make cross-borders trade.

One of the tricky points about African economies is the political risk it is presenting to invest there. As most of the people know, Africa concentrates various political systems, and the way they deal with elections is sometimes not democratic. The changes possible in African economies will mostly be possible if African countries’ governments are aware of the chances China’s investments represents for their economies, and if the political leaders are seeing themselves as a key to enable the continent’s growth and development. If the leading spheres concentrate all the wealth created in their families, the country will not benefit at all from the money flux entering the country. Democracy has to be institutionalized in all of the African countries.

Africa concentrates lots of the countries which have the highest corruption rates across the World. All Sub-Saharan countries with the exception of Botswana, Cape Verde, Mauritius and Rwanda rank in the lower half of the Corruption Perception Index in 2011. According to the United States Institute for Peace (USIP) data from 2010, this general high level of corruption can be illustrated by the percentage of political elections which are affected by violence (a bit less than 25%).

African governments have to adopt new economic policies

African countries have to become aware of the advantages they have as far as exports are concerned, and enhance employment in the countries must be the first points of the economic policy African governments have to set up. This can be reached by setting up the conditions for Chinese companies to invest in Africa. Efforts have to be done in the field of business environment and in the big sources of employment.

Human capital is very important for a country, and this also has to be improved by governments. Indeed, they have the chance to set up new starting conditions by investing in education to reach a minimal level that could attract FDIs. This could also allow people to benefit better from the technology transfers in the local countries and towards local populations. Learning opportunities for young people should be put in place in African countries, so that they could find jobs easily.

To attract FDIs, basic labor conditions must be reached, in order to create an investment environment which could be similar to what investors know in their own countries. They should also focus on an openness policy that would make sure that the investment the countries benefit from will be enough to develop trade between it and the rest of the World, but first starting with the neighbor countries. This can be reached by making agreements like FTZ, which can attract investment, as entering on country means that you have access to others without barriers.

Moreover, African governments should invest in infrastructure. Indeed, it is really risky to invest in a country where there only is 80 days of electricity in the year, like it is the case in Nigeria. Roads are not sufficient yet to enable investing companies to have the highest benefits. It is partly up to governments to start such policies in their countries. These infrastructure policies should be part of an overall trade and investment policy.

Recommendations for China to trade with Africa

The Africa Progress Panel also focuses on the way Africa’s trade partners should behave with African countries in its Policy paper 2012. The first step for this is to “improve market access for African goods […] by simplifying rules of origin, removing tariff escalation for processed products where it exists”. The investing companies should also hire African people, local, so that they could benefit from the Chinese presence. This is corroborated by the Center for Chinese Studies for example, or the African Economic Research Consortium (AERC).

China as well as other countries should help African countries to adopt and apply the new policies. They should also “continue [to] build capacity to help African producers meet and prove compliance with standards of agricultural, processed, and manufactured products in destination markets”.

According to the Center for Chinese Studies, China should do many things in order to improve its relations with Africa. For example, it could provide medical assistance in the countries where malaria for example is present, as China has already fought this disease.

For the African Center for Economic Transformation (ACET), African governments should work closer with Chinese institutions and firms, in order to make their presence written in the long term development of Africa. Another point they defend, is that China should stop concentrating only on a few African countries, and start thinking globally, and for the African continent as a whole. This is also important in order to develop cross-borders trade in this continent. And it would also create a virtuous circle, as it would attract other countries’ FDIs.

Conclusion

As a conclusion, we can say that Chinese investments and presence in Africa has risen in the last decades, and that it is still going on this increasing trend. Many steps and efforts are still to do for both of the parts, in order to create and efficient way of trading, and of taking benefit of these investments. We have seen that many aspects are positive in the Chinese FDIs, but that some others are controverted. One of the questions which are rising when talking about China’s investment in Africa as a model of development is to know if China’s development is sustainable. Far from being a perfect model of growth, China has known a really quick and strong growth like the other members of the BRICS, but we also know that many problems are still present in China. As the HEC Eurasia Institute was saying in 2008, “current problems about energy, environment, water, social equilibrium” in China are not sustainable anymore. [2] Urban population keeps on increasing and the current issues become even worse because of it. On a political level also, China is not a model for democracy and free enterprise, on the contrary, this paper points out the many problems which can be seen there. Moreover, Chinese pollution issues are huge and the development of the industry and the strongly increasing urban population will even have a negative effect on this trend. This is why the Chinese growth model is currently questioned, and we could wonder if it is interesting for Africa to imitate a model which has not proven its perfect functionality.

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