Leveraging engagement with emerging partners to boost Africa’s economic development

15 September 2016

The scramble for Africa by emerging economies, and the response by traditional partners, is all to Africa’s benefit. How can Africa leverage its growing ties with the South to boost industrial diversification and economic development?


Africa has witnessed a major shift in its development relations since the turn of the century, away from its traditional partners (the EU and the US) and towards emerging economies – a wide range of South partners, including in particular the BRIC economies (Brazil, Russian Federation, India, and China). This eastward shift of the “center of gravity” has spawned a large and growing literature on the emerging economies’ engagement with Africa, much of it focusing on China. Following Jenkins and Edwards[1], it has become conventional to analyse Africa’s relations with its emerging partners in terms of three vectors of influence, namely trade, investment, and aid.
 

How deep is Africa’s engagement with emerging partners?

Trade

The rise of South-South trade is not a trivial happenstance, considering the speed and intensity with which it occurred, and its potential to permanently alter the dynamics of global trade. Some critics have argued that the increased trade between developing countries is mainly a China story. Indeed, China alone accounted for over 70 percent of the market share gains by developing countries in both industrial and developing countries during the 2000s, and the Asian giant is now Africa’s second most important export destination behind the EU. Recent evidence suggests that a 1 percentage-point increase in China’s domestic investment is associated with a 0.6 percentage-point increase in export growth from Africa.[2]

However, several other emerging economies – notably Brazil, India, Korea, Turkey, and the United Arab Emirates – have also become key trade partners for Africa. Developing countries in the aggregate accounted for 56 percent of Africa’s exports in 2013, up from 51 percent in 2000 (Figure 1). The BRIC group of countries saw the largest increase in export share, from 8 percent to 28 percent, over the period. China alone accounts for two-thirds of Africa’s exports to BRIC. India has surpassed the US to become Africa’s third largest export destination.

Emerging economies have also become significant suppliers to Africa, with the BRIC group alone accounting for 27 percent of the continent’s imports in 2013. China’s exports to Africa crossed the US$100 billion mark in 2014 as a result of steady growth since 2009. India is trailing just behind the US, whose exports to Africa have progressed slowly in recent years. At current trends, the US is likely to cede its third place to India. However, even as the increase in South-South trade continues to squeeze traditional partners’ share in Africa, the EU remains by far Africa’s dominant trade partner and the recently concluded Economic Partnership Agreements could further strengthen this position in the future.

Figure 1: Africa’s main export destinations, 2000 and 2013

Source: UN Comtrade

Investment

Foreign direct investment (FDI) flows to Africa have increased almost six-fold, from US$ 9.6 billion in 2000 to US$ 54 billion in 2014. Although, in recent years, FDI to the continent seems to have levelled off after bouncing back from a low point in 2010 (Figure 2), greenfield investment has continued to grow, reaching US$87 billion – at a time of sluggish growth in global FDI flows. Much of the investment is market-oriented, with multinationals seeking to get a bite of Africa’s emerging middle class[3] in sectors like real estate and communications.

Figure 2: FDI flows to Africa, 200-2014

Source: UNCTAD TDI/TNC database

A significant share of this FDI is resource-seeking: 38 percent of investment flows in 2014 targeted the coal, oil, and natural gas sector. Concomitantly, announced FDI projects in the manufacturing sector have doubled in value relative to the previous year, with major investments in food and beverages as well as in textiles and clothing. Driven primarily by financial services and construction, the services sector continues to attract the largest FDI flows, accounting for 42.5 percent of greenfield FDI in 2014 and 48 percent of Africa’s inward FDI stock in 2012. Unfortunately, business services as well as transport and communications have witnessed sharp declines in new investment in 2014.[4]

Emerging partners’ investment activity in Africa has raised many questions – and some controversy. The questions arise presumably because of a lack of transparency around FDI projects, fueled by China’s opaque practices as one of the major investors on the continent. To date, however, poor data and patchy information have impeded research on the developmental impacts of investment.

Arguably, the hype about Chinese investment in Africa is overblown – for several reasons. First, China is far behind the top investors in Africa. While greenfield investment by China shot up to US$6.1 billion in 2014, placing the country third on the investors league, that was rather exceptional given that FDI the previous year was a mere US$289 million. A more reliable picture is presented by the FDI stock in Africa, which was estimated at US$655.3 billion at the end of 2013. China, a late entrant into Africa’s investment field, accounted for a mere 7.3 percent of this stock. The BRIC economies’ share stood at 17.6 percent, much of it attributed to India’s 10 percent stake. Brazil’s FDI presence is small, and has grown slowly in recent years, partly due to divestures. The Russian Federation’s investment activity is negligible.

Second, there is a perception that Chinese investment in Africa is predominantly concentrated in the oil and mineral sectors. Yet, a 2011 IMF study found that mining projects accounted for a mere 29 percent of Chinese FDI flows. Smaller investment projects, and those that do not require the blessing of Chinese authorities, often go unrecorded. This points to significant investment opportunities outside of the extractive sector. However, recent data suggests that Chinese non-mining investment is particularly sensitive to the country’s economic fortunes.

Moreover, critics have often confused aid for infrastructure investment with FDI per se, leading to erroneous analysis and unjustified criticism. This confusion derives from a loose definition of investment, which does not distinguish financing from ownership and control. The distinctive feature of FDI is that it gives the investor a degree of control over the project’s management and revenues. China’s so-called “investments” in African infrastructure projects, such as roads, railways, and ports, typically do not give the Chinese any ownership of the projects. The Chinese are simply financing these projects, not investing in them.

As we discuss below, Chinese and other emerging economies’ investments in Africa can do much to build productive capacity, transfer knowledge to the benefit of indigenous firms, and ultimately boost trade, both internationally and regionally.

Aid

Aid is the third channel through which emerging partners are engaging with Africa. Aid flows to Africa from the South have increased massively alongside trade and investment. However, since such aid occurs outside of the OECD Development Assistance Committee (DAC) framework, it has proved difficult to measure it accurately. There is also an issue about whether South aid is aid in the conventional sense. While it is usual to refer to it as “aid” in a blanket way, much of the financial assistance provided by the emerging economies to their African partners may not meet the minimum threshold of 25 percent grant element to qualify officially as aid. There is little doubt that technical assistance, capacity building, and scholarships constitute aid as commonly understood; but the same cannot be said of financial aid.

It appears that a significant portion of financial aid flows from emerging economies to Africa is in the form of lines of credit and other non-concessional loans that, strictly speaking, are not aid. Both China and India have provided large amounts of financing in this form. Under the first India-Africa Forum Summit, for example, India offered lines of credit worth US$7.4 billion to 41 African countries. China has used a range of ingenious alternative financing instruments, including export credits, natural resource-backed loans, and mixed credits (in which concessional and market-rate loans are combined), that have eluded any attempt to measure their aid component.

However, it would be wrong to say that emerging partners’ aid activity in Africa has been limited to loans, concessional or not. China’s aid, for example, spans across eight types, including technical cooperation, medical assistance, humanitarian aid, and debt relief,[5] but these are often left in the shadow of bigger financial deals partly because they are difficult to summarise in statistics. Where data is available, the scale of aid is significant. For example, by the end of 2009, China had provided a cumulative total of US$37.7 billion in aid globally, of which US$15.6 billion (or 41.4 percent) in the form of grants, US$11.25 billion as zero-interest loans, and US$10.8 billion as concessional loans.[6]

In other cases, data is not readily available, but this does not mean that the aid was less significant. At the UN Sustainable Development Summit in September 2015, for example, China’s pledge to set up a US$2 billion fund to assist poor countries in the areas of education, health, and economic development received a great deal of attention. The Chinese premier also vowed to write off an undisclosed amount of debt due to be paid in 2015 by least developed countries (LDCs) and small island economies. This offer of debt relief is of critical importance to a number of debt-saddled poor countries, but the fact that no official amount was announced made it less visible in the media.

A key distinction between traditional and emerging partners’ aid to Africa is the direction of the resource flows. Whereas large doses of aid from traditional partners have been directed to the social and productive sectors, aid from emerging economies has specifically targeted infrastructure projects. Given the visibility and importance of such large-scale projects, African politicians have welcomed aid from South partners. This has created the impression that emerging partners’ aid is more “effective” than official development assistance (ODA) from developed countries.

A number of critics, especially from the press, have claimed that Africa’s engagement with the South is shrouded in opacity and that it might harm good governance on the continent. This is partly due to the fact that Africa’s financial deals with emerging economies have not been subject to the same scrutiny as ODA from OECD donors. The lack of conditionality on loans as well as the growing popularity of oil-for-infrastructure deals, notoriously linked to Angola – even though the model is more widespread –, have been additional factors. China has specifically been singled out by traditional partners for its burgeoning relations with resource-rich African countries. Although the evidence does not support this view, China’s dominance in Africa will remain in the spotlight for years to come.
 

Impact on African economic development

Each of the three vectors of influence discussed above can have an important impact on economic development in Africa.

Trade

Africa’s trade with the South is skewed towards commodity exports whereas intra-Africa exports show a higher concentration in manufactures. Whether this suggests any pattern or causality is yet to be established. Perhaps it is symptomatic of a pattern of regional specialisation determined by differences in demand. But whatever may be the reason for the underlying correlation, if maintained over time, it can be a boon for industrialisation in Africa: as the continent’s trade with the South continues to increase, so also might its regional trade in manufactures.

An important development following the WTO ministerial conference in 2005 has been the offer of trade preferences by some emerging economies to LDCs. India launched its duty-free tariff preference scheme in August 2008, and published a revised scheme in April 2014. The current scheme provides preferential tariffs on 98 percent of Indian tariffs, including a number of products of key export interest to African LDCs. A series of country studies by ICTSD found that the initial scheme had limited impact on African exporters, mainly because of a lack of awareness among exporters and critical product exclusions. The revised scheme and greater initiative on the part of the Indian government to promote the scheme should, in principle, address these flaws.

China also came up with a preferential scheme in 2010, with an initial duty-free treatment on 60 percent of tariff lines, to be extended eventually to 97 percent. At the Asian-African Summit held in April 2015, China announced that the promise of a duty-free quota-free scheme would be fulfilled by the end of the year. Besides China, India, and Korea, no other emerging economy has proposed any meaningful trade preferences to LDCs. The pressure is currently on Brazil to follow the example set by its peers, but its domestic economic woes make this development unlikely any time soon.

Finally, it is often assumed that the imports of capital goods and technology-intensive products from a country can facilitate the transfer of technology from that country to the importing partner and its firms. The evidence suggests that Africa’s imports from the emerging economies, notably China and India, have been mainly in manufactured goods, including motor vehicles, machinery, and equipment. To the extent that these products can be sourced at lower cost from the South, African countries can afford to import more of them, leading to greater productive capacity and, ultimately, increased trade.

Investment

Foreign investment can contribute to building a country’s productive capacity – both directly and through knowledge spillovers. Where FDI is export-oriented, the impact on exports, employment, and economic growth could be significant, as illustrated by Ethiopia’s recent experience.

China’s investment abroad is bound to increase as Chinese labour-intensive industries seek cheaper production sites abroad. Already, some African countries – like Ethiopia – are welcoming large spurts of FDI as China carries out the initial phase of its plan of building nine special economic zones in seven countries.[7] These industrial zones are designed to succeed where Africa’s previous attempts have failed. Although the developmental impacts of the zones on the host economies are debatable, if they generated technological spillovers, cultivated backward and forward linkages in the host country or with other regional economies, or boosted regional exports, then the impact on African development could be significant.

Emerging evidence from Africa suggests that South partners’ investments in Africa are helping build domestic productive capacity and regional value chains. For example, a Taiwanese textile firm based in Lesotho sources 95 percent of its cotton from southern Africa, and does all of its packaging in the region. Chinese firms in Ethiopia are growing some of their cotton requirements in the country itself.

Indian investments in Africa can be of added benefit to African firms because of India’s reputation for transferring state-of-the-art technology and knowhow to host countries. A number of Indian companies – in sectors such as pharmaceuticals, automobiles, telecommunications, IT, and power – are already seizing emerging business opportunities in Africa. The third India-Africa Summit, held in October 2015, promised to energise Africa-India relations.

Aid

There has been a flurry of research recently on the developmental impacts of aid, particularly aid for trade (AFT). The evidence is at best mixed. Ancharaz, Ghisu, and Bellmann have argued that the best way to measure the effectiveness of aid is at the project level.[8] Using this approach, and drawing on a series of country-level case studies, they conclude that AFT generally works when a set of conditions – reminiscent of the Paris principles of aid effectiveness – are present.

There is much less evidence on the impact of emerging economies’ AFT flows on Africa’s export growth. One reason could be data issues and the definition of AFT. However, if the financing of infrastructure, whether hard or soft, includes a component of aid, then it is not hard to see that such aid can facilitate intra-Africa trade and development by reducing the cost of trading across borders. Aid in other areas, including technical assistance and technological collaboration, could also boost productive capacity and trade competitiveness over the long term.
 

Leveraging emerging partners to boost Africa’s economic development

African countries can take several concrete steps to leverage their budding partnership with emerging economies. First, while India and China have dedicated institutional structures through which they interact with their African partners, there is an absence of such mechanisms on Africa’s part. This gap can be filled by a simple extension of the African Union Commission’s (AUC) role. For example, the AUC could work with the emerging economies to promote their trade preference schemes more widely while advocating for less stringent non-tariff measures.  

A similar mechanism can help streamline Africa’s investment deals with the emerging economies and thus avoid a race to the bottom as African countries, desirous of attracting investments of any size and type, are rushing to offer the most generous concessions, at significant opportunity cost to the government. Finally, an AU-based pan-African institution that takes care of Africa’s aid relations with emerging economies (as well as traditional partners) can go a long way in ensuring that aid makes a greater impact on Africa’s development.

Second, African countries can individually, or at the regional level, take a number of measures to get the most out of their partnership with emerging economies. They must continuously reform their investment regimes, improve the local business environment, and provide efficiency-enhancing advantages, such as a trained workforce, infrastructure, and logistics. Moreover, African economies must ensure that FDI flows to sectors with significant potential for industrial development. Promising sectors include agro-processing, textiles, and light manufacturing, among others. Unfortunately, the recent trend of leasing out large tracts of agricultural land to foreign investors does not bring much economic value to the host countries. They must negotiate better terms with their partners, insisting on greater local content, domestic linkages, and technology transfer.

Third, there is a critical need for transparency to ensure that economic prosperity is shared as broadly as possible. In a number of resource-rich countries, deals have been concluded with emerging economies (especially, but only, China) under opaque conditions. Even in a country like Mauritius, which boasts a strong democratic tradition, the terms on which the Chinese Jin Fei project was awarded was kept a state secret. One way in which this could be done is for all African countries to sign on to the Extractive Industries Transparency Initiative, and for a pan-African institution like the AUC to monitor such commitment.

Finally, African economies can leverage financing for development from emerging economies. While a significant amount of funding, whether as lines of credit or concessional loans, have already flowed to African countries, most of it has been for national infrastructure projects. Financing for regional infrastructure has been limited. It is hoped that the New Development Bank, which announced its first set of loans in April 2016, would help fill Africa’s huge infrastructure deficit, both at the level of individual countries and across regional partners.


Author: Vinaye Ancharaz, Independent consultant, Mauritius.


[1] Jenkins, R. and Edwards, C. (2005), The Effect of China and India’s Growth and Trade Liberalisation on Poverty in Africa. Institute for Development Studies, London.

[2] Drummond, P. and E. Xue Liu (2013), “Africa’s Rising Exposure to China: How Large are the Spillovers Through Trade? IMF Working Paper WP/13/250, November 2013, IMF.

[3] Mubila, M. and ben Aissa, M.-S. (2011), “The Middle of the Pyramid: Dynamics of the Middle Class in Africa”, AfDB Market Brief, April 20, 2011, African Development Bank.

[4] UNCTAD (2015), World Investment Report 2015: Reforming International Investment Governance, United Nations.

[5] Sun, Y. (2014), Africa in China’s Foreign Policy, Brookings, Washington, D.C.

[6] Brautigam, D. (2011), “Chinese Development Aid in Africa: What, Where, Why, and How Much?” In J. Golley and L. Song, eds, Rising China: Global Challenges and Opportunities, Canberra: Australia National University Press, 2011, pp. 203-223.

[7] Brautigam, D. and T. Xiaoyang (2011), “African Shenzhen: China’s special economic zones in Africa”, Journal of Modern African Studies, 49 (1): 27-54

[8] Ancharaz, V., P. Ghisu and C. Bellmann (2013), “Assessing the effectiveness of Aid for Trade: Lessons from the ground”, Bridges Africa 2 (4), July 2013

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