China In Africa: A New Model For Development

We made reference earlier this week, if not by name, to what some call the “Beijing consensus”. This is a development model for Africa in which private-sector investment by Chinese companies, albeit often state-owned enterprises, takes the place of traditional government or multilateral agency aid. As private investors, the Chinese firms don’t need to interfere with the domestic governance of the African countries in which they are doing business. For its part, Beijing can operate though the internationally less restricted area of trade and bank financing instead of official aid, and is less constrained by any needs to impose conditionality on its assistance, such as requiring human rights improvements and labor or environmental safeguards.

A new report from the African Development Bank (AfDB) on China’s trade and investment in Africa acknowledges these changing winds. “The emergence of China and other new development partners  requires us to rethink, and in some cases, gradually adjust our approach. The African Development Bank Group stands ready to engage in this process and help to leverage the financial, technological, entrepreneurial, and knowledge resources from China to the benefit of the African economies.” Other development partners refers to China’s fellow Brics, India and Brazil, who are pursuing a similar approach.

One value of the report is to take an (exhaustive) inventory of China’s trade and investment in Africa. It is not as ubiquitous as popularly supposed:

China’s burgeoning trade and investment relationship with Africa does not benefit all sectors or countries equally. About 70 percent of Africa’s exports to China come from Angola, South Africa, Sudan, and the [DR C0ngo], and are heavily dominated by raw materials (e.g., oil, copper, cobalt, and cotton). And 60 percent of imports from China, largely manufactures, are destined to South Africa, Egypt, Nigeria, Algeria and Morocco. Most other African economies have only a limited trade relationship with China. Chinese outward FDI to Africa shows a similar pattern of concentration, with 50 percent flowing to the mining sectors of just a handful of resource-rich countries (Nigeria, South Africa and Sudan).

Africa accounts for only 4% of China’s trade. The EU and the US are still the largest trade and investment partners for many African economies.

The report notes the “significant benefits” that China is reaping from its relationship with Africa, “through access to raw materials, expanded markets for exports of manufactures, the establishment of investment relationships which could generate significant profits over time and diplomatic influence.” But it also sends a call to action to the recipient countries:

Leadership from African governments, particularly to strengthen domestic policies and governance and to harmonize regional policies so as to improve the continent’s bargaining position with China, are required to ensure that the China-Africa relationship contributes to sustainable growth and poverty reduction.

The AfDB’s to-do list for African nations is:

• Improve coordination between aid and investments from China and from traditional development partners.

• Enhance technology transfer and maximize the positive spillover effects from foreign investment through local labor and content requirements, as is done in several African countries.

• Achieve greater export diversification by identifying niche markets for African manufacturing products in China, and by expanding preferential trade access to Chinese markets.

• Build negotiation capacity, for example by obtaining specialized legal services, to ensure that large, complex commodity deals with China can be negotiated with favorable terms for the exporting African country.

• Build backward and forward linkages between the domestic economy and the Special Economic Zones supported by Chinese investment.

China’s to-do list from the AfDB:

• Prioritize the development challenges of Africa within the established Forum on China-Africa Cooperation (FOCAC) framework, including addressing issues such as food insecurity, climate change and adaptation technology and infrastructure.

• Integrate “best practices” of traditional development partners, notably through the China Development Assistance Committee (DAC) Group, which would share knowledge on development finance.

• Coordinate Chinese aid and investment flows more centrally instead of the current practice where over 20 Ministries, public banks and agencies provide support to Africa. A good example might be South Korea, which is also an emerging development partner, where aid is coordinated jointly by the Ministry of Foreign Affairs and Ministry of Strategy and Finance.

• Support additional investment in Africa in labor-intensive manufacturing industries. Currently, as wages are rising in China, labor intensive manufacturing is “relocating” to other Asian countries such as Cambodia and Vietnam.

• Coordinate with multilateral and bilateral institutions on debt sustainability analyses and debt relief.

• Untie aid gradually and open bids to international tender. This approach would enhance transparency, development effectiveness and ownership by the recipient African country.

• Enhance communication between management of Chinese-owned enterprises in Africa and African civil society organizations, including labour unions. Often these tensions reflect different traditions in Africa and China concerning engagement with civil society organizations, as well as cultural and linguistic differences. One way to improve African understanding of Chinese policies is to expand scholarship opportunities for Africans to study in China.

• Expand the implementation of the Equator Principals, a voluntary set of standards for determining, assessing and managing social and environmental risk in project financing, to Chinese investments. This approach could reduce tensions with local civil society groups as well as improve the sustainability of projects financed by China.

• Elevate China’s status in the Infrastructure Consortium for Africa (ICA) from an observer to full membership. This would enable better coordination between various infrastructure projects financed by China and traditional development partners.

Addressing all these points would help answer some basic questions on the Beijing consensus. Is it effective for promoting development? Does it provide job opportunities for Africans? Does it improve the quality of the business environment in Africa? Does it improve governance and lessen corruption? Does it promote African industrial diversification? Does it fill Africa’s infrastructure gap meaningfully? Does it alleviate or magnify African nations’ debt problems? Does it harm Africa’s environmental and social conditions? Does it mostly serve China’s national interests to Africa’s cost? And is it sufficiently transparent so those questions can be answered accurately.

These are all questions that traditional western approach to aid, let’s tag it the Washington consensus to be inclusive of institutions based there such as the World Bank, needs answer, too. The fact that it doesn’t pass all these tests with flying colors is why there is room for Beijing’s approach to find favor. What strikes this Bystander most, however, is that both the Beijing consensus and the Washington consensus aim to promote economic growth in their separate ways and mirror their domestic expectations of governance.  While developed economies would hold that economic development leads to democracy, China would hold that democracy retards economic development, at least for lesser developed economies, even if democracy would to a better job of encouraging development in more advanced economies, a transition that China itself is heading towards so uncomfortably.

In the meantime, there is no consensus on which consensus is right for Africa now, but the arrival of the Beijing version has at least got western donors reconsidering their aid and development models, and African nations benefiting from competing sources of development aid.

Drought Diplomacy

A group of more than 40 officials from China, Africa and the U.N. have been in Beijing for three days discussing how to reduce the risks of drought. It has been technical stuff for policy makers on drought monitoring, water resource management and drought resilient farming, as well as dealing with the social and economic impacts of droughts. The meeting was part of Beijing’s overall dialogue with Africa, but these are all topics of obvious mutual interest, given the severe droughts that China has been experiencing such as the one continuing in the south and southwest of the country and the recurring ones on the North China Plain.

Africa’s droughts, like those in China, are expected to become more frequent and widespread as a result of climate change. The Horn of Africa is currently suffering the continent’s worst drought in 60 years, for which Beijing has promised $82 million in emergency grain and relief aid. Techniques and practices that China uses at home as well as farming methods such as film mulching to preserve for crops what water there is in arid areas are applicable in Africa (and vice versa).

Drought is one of the leading threats to Africa’s development as agriculture is the main means of livelihood for most of the continent’s vast rural population. Beijing is rarely rigid over what aid it will provide a country, and Chinese firms see investment opportunities in water management systems and export markets for technology they develop for home. More than 90% of Africa’s farmland relies solely on rainfall for irrigation.

The lack of water management systems in Africa means that drought also has a far more profound impact on food supplies there than it does in China, which is yet again forecasting a record grain harvest. However, this relatively greater vulnerability prompts a second-level concern among Africans, that China might divert grain and livestock production from the farmlands it owns in Africa to make up potential food shortfalls caused if not by its own droughts then by its growing food demands and changes in consumption patterns. That could put Africa’s ability to feed itself even further beyond it. Last year, African nations needed to import $34 billion worth of food to feed their growing cities. Apart from a potential need to increase the volume of its food imports, it also faces the risk that Chinese demand would drive up the cost of food on world commodities markets.

For the past two decades, Chinese companies have been buying African farmland, mostly but far from all, smallholdings and family farms. Chinese own farms in 18 of Africa’s 50 or so countries through at least 63 investments from Angola to Zimbabwe. There are at least 1,100 Chinese agricultural scientists and experts working in Africa, where China has at least 11 research stations, and at least 1 million farm laborers.  All those ‘at leasts’ are because the numbers are based on Chinese official estimates from 2009. They likely undercount the country’s current farming activity on the continent.

It is easy to scaremonger here and to be critical of China’s engagement with Africa. In fact, cheap credit, world-class infrastructure companies, political pragmatism and, as noted above, a willingness to build what is asked for make for a compelling case to many African leaders to accept Chinese aid and investment. That said, China has its national interests, as does any Western aid donor to Africa, even if it is likely to express those in different ways. There is also a lack of transparency which commingles China’s state aid, trade financing and private investment. Nor should the impact that Chinese aid and investment often has on local environmental, social and labor conditions be sugarcoated.

The result of the Beijing meeting will likely be the emergence of some consensus on priority areas for co-operation between China and Africa on drought alleviation, and more infrastructure contracts related to that for Chinese firms in Africa. No doubt critics will deride them as further Chinese colonization of Africa this time by way of “drought diplomacy,” but this is increasingly the modern face of development assistance, which looks a lot more like commercial investment.

UN Warns Of Economic Cost Of Growing Urban-Rural Divide

Support, not unsurprising, though, for the Hu-Wen policy of harmonious development from the U.N.’s newly published China Development Report, compiled by researchers from the China Institute for Reform and Development and other think-tanks. China needs to provide rural areas with better education, health, social security and employment services to sustain the country’s economic growth, the report says. The increasing increasing rural-urban divide is restricting consumption and reducing productivity.

The U.N. report did acknowledge significant progress made in dealing with rural poverty since the reforms initiated by Deng Xiaoping three decades ago. Rural poverty rates had fallen from 30.7 per cent in 1978 to just 1.6 per cent in 2007. But rural areas were falling behind the cities’ gains in social security, healthcare and particularly education. One reason identified by the report was the hukou registration system that cuts off migrant workers from healthcare and other social services.

The U.N. report argues that investment in public services may produce more economic boost than infrastructure spending, which is the focus of the 4 trillion yuan stimulus package announced a week ago. Every 1 yuan rise in spending on rural education, for example, yields 8.43 yuan in added farm and livestock production, compared with a 6.75 yuan boost from infrastructure, the U.N. says. The trouble is that while that may be true in the medium- to long-term, it doesn’t give the immediate boost to GDP growth that Beijing now needs.