China

Podcast: Chinese debt in Africa

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I talked with Eric Olander of The China Africa Project on growing Chinese debt in Africa.

 

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What China’s One Belt, One Road initiative means for Africa

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This article first appeared in my weekly column with the Business Daily on May 21, 2017

Last week China announced a plan to build a vast global infrastructure network linking Africa, Asia, Europe and the Middle East into ‘One Belt, One Road’. China plans to spend up to USD 3 trillion on infrastructure in an effort that seems to be centred more on linking 60 countries in the world with China, not necessarily each other. This One Belt initiative is perhaps part of China’s determination to position itself as the world’s leader in the context of Trump’s insular USA. This initiative has two-fold implications for Africa: the opportunities and potential problems that it creates.

One belt, one road

(source: https://qz.com/983581/chinas-new-silk-road-one-belt-one-road-project-has-one-major-pitfall-for-african-countries/)

In terms of opportunity, obviously African needs continued financial support in infrastructure development. The Africa Development Bank (AfDB) estimates that Africa’s infrastructure deficit amounts to USD 93 billion annually until 2021. In this sense any effort to support the development of Africa’s infrastructure is welcome.

Secondly, this is an opportunity for Africa to negotiate the specifics of the type of infrastructure the continent requires and create a win-win situation where Africa leverages Chinese financing to not only address priority infrastructure gaps, but also better interlink the continent.

However there are multiple challenges the first of which is that Europe, India and Japan seem edgy about this initiative and have distanced themselves from it. According to India’s Economic Times, India and Japan are together embarking upon multiple infrastructure projects across Africa and Asia in what could be viewed as pushback against China’s One Belt initiative. The countries have launched their own infrastructure development projects linking Asia-Pacific to Africa to balance China’s influence in the region.

Europe is also edgy because the initiative has not been collaborative and comes across as an edict from China; countries in the initiative were not consulted. Europe is also uneasy with the lack of details and transparency of the initiative seeing it as a new strategy to further enable China to sell Chinese products to the world.

Secondly, analysts have pointed out that from an Africa perspective, the One Belt seems to continue the colonial legacy of building infrastructure to get resources out of the continent, not interlink the continent. Will the initiative entrench Africa’s position as a mere raw material supplier to China and facilitate the natural resource exploitation of the continent?

Image result for Africa infrastructure

(source: africanbusinessmagazine.com/wordpress/wp-content/uploads/2017/01/Africa-infrastructure-1k.jpg)

Additionally, there are concerns with how the financing will be structured and deployed. Will financing be debt or grants? It can be argued that China needs to increase its free aid toward Africa in order to build its image as a global leader. Further, who will build the infrastructure? Africa has grown weary of China linking its financing to the contracting of Chinese companies. Will this infrastructure drive employ Africans and use African companies? If not, then it can argued that Africa will merely be borrowing money from China to pay itself back.

Linked to the point above, is the fact that Africa is already deeply indebted to China. In Kenya, China owns half of the country’s external debt. Kenya will pay about KES 60 billion to the China Ex-Im Bank alone over the next three years.  Kenya and Africa do not need more debt from China, and if this initiative is primarily debt-financed (in a non-concessionary manner), it will cause considerable concern in African capitals.

Anzetse Were is a development economist; anzetsew@gmail.com

Interview on the China in Africa Podcast: How Trump will affect China’s interactions with Africa

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I joined Eric Olander and Cobus van Staden on the China in Africa Podcast to discuss my recent column on how Africa is bracing for a Trump-inspired shift towards to China in response to the new U.S. president’s apparent determination to shake up the international order.

Trump will push China deeper into Africa

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This article first appeared in my weekly column with the Business Daily on February 5, 2017

The President of the United States, Donald Trump, made it clear during the campaign trail and his inauguration speech that from now on it is ‘America First’. He wants to build America, hire American, sell American and buy American. Many are bracing for protectionism from the Trump and even a trade war. In Africa, we’re looking at the developments in the USA with a mixture of amusement and concern. How will Trump’s administration affect AGOA? Will a Trump economy negatively affect remittances from the African Diaspora? To what extent will FDI from the USA into Africa be affected as investors scramble to adjust to policy action from Tump? Will Trump’s insularity be reflected in US support to Africa’s economy?

Image result for trump africa

(source: https://thisisafrica.me/wp-content/uploads/sites/4/2016/05/5440002785_7b1ed0ac3e_z.jpg)

China is cognisant of the global havoc being wrought by Trump and the lacuna in global leadership Trump is creating through the singularity of his ‘America First’ rhetoric. China is aware of the fact there will be economic implications that will affect it during the Trump era. China may lose out on investment that had targeted the country in the context of global value chains. The Harvard Business School makes the point that major global manufacturers worry that Trump’s new policies (such as the introduction of 20 percent border tax) could disrupt their global manufacturing plans, which have been carefully constructed to optimize the efficiency of their supply chains based on free trade policies. If the tax is effected, calculations may dim China’s prospects of continuing as the world’s factory. On the other hand, China may benefit from Trump’s insularity and take advantage of the weakened presence of the USA in the global economic arena. Perhaps this informed the speech made by the China’s leader Xi Jiping during the World Economic Forum where he stressed that pursuing protectionism is just like locking one’s self in a dark room; he supported continued globalisation.

So what does this all mean for Africa? Firstly, Africa should prepare for a China that seeks to take on the reins of being the world leader both economically and politically. Africa should expect China to more aggressively engage in consolidating its economic strength and influencing global trade rules and dynamics to its advantage. There is a sense that Trump does not really understand the continent and is still trying to figure out the best course of action for the USA in Africa.

Image result for china africa

(source: http://www.chinaafricaproject.com/wp-content/uploads/2013/12/china-africa-france-discourse.jpg)

That said, Trump’s does have a Sino-phobic trade advisor, Peter Navarro, who is of the view that China dominates the continent and is locking out the USA. Time will tell whether such sentiments will translate to determined action from the Trump administration in Africa or not. What is clear is that China is likely to be willing to step up its activity in Africa as the USA figures out its strategy. And once a Trump strategy for Africa is developed, China will analyse the trade, investment and financial gaps in the plan and act to further consolidate its dominance on the continent. The truth is that Africa’s economy continues to grow (albeit more slowly) and Africans are slowly getting richer. China is aware of this and will tenaciously expand its presence in African markets. It will be very difficult for the Trump administration to reverse this momentum if its isolationist rhetoric is anything to go by.

Additionally, given Trump’s border tax threats, Africa should expect a more aggressive continuation of China’s entry into African manufacturing. The Washington Post makes that point that in terms of low-end manufacturing, what was ‘Made in China’ is now ‘Made in Africa’. Chinese factories are already moving to Africa and Trump may incentivise the relocation of labour intensive manufacturing from China to Africa where wages are cheaper. Thus, in trying to protect America, Trump’s policies may push China further into Africa.

Time will tell whether Trump is truly serious about China; and Africa will be at the centre of the action.

Anzetse Were is a development economist; anzetsew@gmail.com

Time for Africa to change strategic partnership with Asia

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This article first appeared in my weekly column with Business Daily on June 26, 2016


Earlier this month the President of South Korea visited Kenya and numerous intentions of bilateral cooperation were articulated including a deal to establish a science and technology centre and other agreements centred on trade, investment promotion, education, sport and culture. It was a shame that industry and manufacturing did not feature very prominently during the visit as Kenya and other African countries can clearly learn from South Korea and other Asian countries on this sector.

Sadly if you look at Kenya’s trading patterns with Asian countries, it’s the continuation of an old story; Kenya exports mainly raw agricultural commodities and imports finished and manufactured goods. Our biggest trading partners are from Asia, specifically India, China and Japan.  It seems as though although Africa is waking up to the need to industrialise, practical partnerships both between governments and between businesses do not exist to catalyse industrialisation on the continent. In short, Africa should shift from calling in Asia to build roads, rails bridges and instead start to focus on partnerships to boost industry and manufacturing.

(source: http://resources.carsguide.com.au/dp/images/uploads/asian-industry-factory-w.jpg)

With China alone due to shed about 85 million jobs at the bottom end of the manufacturing sector between now and 2030, Africa has to shift from the development assistance and infrastructure focused partnerships with Asia and shift to building low end manufacturing on the continent. Yes it is true that the infrastructure base in the continent is poor, but so is the manufacturing and industry base. While infrastructure development is front and centre for Africa right now, manufacturing has not received such prominence. There ought to be a dual focus on infrastructure and industry while working on other aspects of Africa’s landscape particularly with regards to education, land reform and technology absorption and development.

Bear in mind that getting guidance and mentorship from industrialised countries is how much of Asia rose to become the manufacturing giant it is in the world today. For example industrialisation in Japan was a result of many factors but a key factor was the support it got from the USA. Japan’s industrialisation took off in during the Cold War. With the massive communist dragon called China so nearby, the USA made a deliberate effort to build ties with Japan to buffer China’s influence as well ensure capitalism took root in Japan next to a bastion of communism. As a result, some analysts argue that the USA even hollowed out some of its own manufacturing capacity and made deliberate efforts to build Japan’s industrial and manufacturing base and also opened its markets to manufactured Japanese products.  Indeed by 1953, US military procurement from Japan peaked at a level equivalent to 7% of Japan’s GNP.

Although the global context in which Africa seeks to industrialise is very different the core point remains the same; Africa must learn from others and seek to reach out to countries that have successfully industrialised to build this sector on the continent in a very practical manner.  African governments ought to more deliberately bring the issue of industry and manufacturing on the table during any negotiations with Asian countries. We all know that as wages rise in China, Chinese exports will become more expensive and this provides opportunities for manufacturing in Africa. Africa should position itself to do the manufacturing Asia no longer wants to do as their economies sophisticate.

(source: http://resources3.news.com.au/images/2014/04/20/1226890/654895-6c56fdd8-c6d8-11e3-8387-e6d61b132205.jpg)

The path Africa can take can include starting with building low end manufacturing that is not too complex and can absorb what is still largely an under-educated labour force by starting with textiles and other light manufacturing. This can then be displaced by the growth of engineering and chemical industries. I am of the view that the textile assembly that goes on in the Export Processing Zone in Kenya does not count as manufacturing since most of the components of the apparel are imported and are not building Kenya’s textile factories and industry. Thus the point is simple; Africa should call in Asia to help build industry not just infrastructure.

Anzetse Were is a development economist; anzetsew@gmail.com

How the commodities decline is good for Africa

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This article first appeared in my weekly column with the Business Daily on May 22, 2016

The fact that the prices of commodities such as crude oil, iron ore, copper, aluminium and coffee have been in decline is not a secret. What seems to have been lost in the story however is how Africa is actually benefiting from this decline. The main story we’re hearing as Africans is that Africa is suffering from the commodities decline. The IMF makes the point that particularly hard hit are the region’s eight oil exporters (which together account for about half of the region’s GDP and include the largest producers, Nigeria and Angola) as falling export incomes emerge due to lower commodity prices. This results in sharp downward fiscal adjustments which limits government activity. The IMF goes on to say that among oil exporters, the sharp and seemingly durable decline in oil prices makes adjustment unavoidable, and while some had space to draw on buffers or borrow exist to smooth the adjustment, that space is becoming increasingly limited. This column agrees with much of this- but the positive elements of the commodity decline have not gotten nearly as much attention.

https://i1.wp.com/thumbnails-visually.netdna-ssl.com/world-commodities-map-africa_536becb7083f7_w1500.png

(source:http://thumbnails-visually.netdna-ssl.com/world-commodities-map-africa_536becb7083f7_w1500.png)

To be clear, there are positive consequences to the commodity decline for Africa. So although Africa has to be aware of the difficulties this dynamic raises, the positive elements also ought to be highlighted.

The first positive result of declining commodity prices is that Africa finally seems to be truly serious about building manufacturing capacity on the continent. Once again Africa has found itself at the short end of the stick; because commodities were booming for so long, there was no pressure on Africa to domesticate value addition and build up manufacturing activity on the continent. Africa, once again, in the 21st century, found itself in the very old position of having just largely exported raw commodities during the commodities boom and is now suffering. It is almost as though Africans told themselves, ‘ let’s ride this wave while it lasts’, and the continent did not make any serious re-orientation in terms of domesticating value addition. Now that boom has ended and clearly African economic growth still seems tethered to commodity prices perhaps to a greater extent than expected. Thus, we now see increased impetus on the continent and scrutiny directed towards the continent on building up manufacturing and value addition capacity. . This is good news for Africa because the value of building up manufacturing, especially export-oriented manufacturing has long been an important story in countries pulling populations out of poverty. This is a chance for the fundamental reorientation of Africa’s economy which is long overdue.

Bear in mind that given the fact that China will shed 85 million jobs at the bottom end of the manufacturing sector between now and 2030 the question becomes: where will they go? Africa finally seems to be saying ‘Africa!’. Those interested in the African economy driving development, now due to the commodities decline, are seeing manufacturing taking its rightful place in terms of the priorities of the continent.

(source:http://i2.cdn.turner.com/cnnnext/dam/assets/120604110703-marketplace-africa-manufacturing-china-00000403-story-top.jpg)

Secondly, the commodities decline is very good news for East Africa. The region is minimally exposed to the commodities debacle. Yes there are new oil deposits that have been discovered in some of East Africa, but these have not been fully exploited yet so East Africa economies continue to grow in spite of the commodities decline. Let’s look at some figures based on average growth rate of about 3.4 percent for the global economy in 2016. Africa, for the first time in years is below the global average and is expected to grow at only 2.9- 3.2 percent this year, the slowest since 2001 according to some estimates. Compare this to East Africa where Kenya grew by 5.6 percent in 2015 and preliminary estimates suggest Tanzania registered 6.9 -7 percent GDP growth in 2015, Uganda around 5 percent, Rwanda was estimated to have grown at 6.9 percent in 2015 and Ethiopia at 6.3 percent a year between 2016-20. Please bear in mind getting data for some of these countries is difficult. But the point is that these are all well above the estimated African GDP growth rate of 2.9- 3.2 percent and the global growth rate. So the global community is alive to the fact that East Africa is really a bright spot and is a space where economies seem to be relatively unaffected by the commodities decline.

The message is simple: Africa should more fully exploit what it stands to gain from the commodities decline. There is plenty of good news therein.

Anzetse Were is a development economist; anzetsew@gmail.com

How Africa can benefit from China’s slowdown and reorientation

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This article first appeared in my weekly column with the Business Daily on March 6, 2016.

An analyst with the Brookings Institution made an important point during a podcast recently; China will shed 85 million jobs at the bottom end of the manufacturing sector between now and 2030. So naturally the question becomes: where will they go? The analyst made the point that at the moment most of the jobs are being absorbed by China’s neighbours. But a more important question for Africa is: how can the continent poise itself to be a key absorber of those jobs?

Before answering that question, key details of the shedding of jobs in manufacturing by China need to be more intimately understood. There are two key drivers that are pushing jobs out of manufacturing in China; the first is the general slowdown of China. China has been slowing and growth in 2015 was the slowest in 25 years. Part of the consequences of this slowdown is the shutdown of numerous factories in textile, machine tool and chemicals industries. The boom China enjoyed for decades has created factory overcapacity. Combined with slowing demand in global markets China’s manufacturing sector is struggling. The second factor that is informing the migration of jobs from China is that the Chinese economy is going through a fundamental reorientation where services and household consumption fuel economic growth rather than the investment and industry. China is shifting from being the ‘world’s factory’ with an aggressive export orientation strategy to one led by consumption and services.

(source: http://media.oregonlive.com/business_impact/photo/chinafactory5jpg-1c120a5a64eae8c7_large.jpg)

The scale of this reorientation is made clear when one considers that China’s growth in the past 15 years or so has been driven by exports and exports account for about 20% to 30% of China’s economic growth. The Chinese government has long sought to encourage this reorientation and indeed, in 2015 the service industries absorbed some job losses from manufacturing. Perhaps another factor informing the reorientation is the reality that China will soon face labour shortages and coupled with rising wages, export driven growth will be difficult.

This scenario should be good news for Africa, a continent that has yet to effectively industrialise. Indeed, many African countries are going through premature deindustrialisation driven by several factors the most salient of which is the lack of robust industrial policy by African governments. As it stands, it seems likely that what will inform African economic growth will shift from agriculture straight into the services sector and bypass industry altogether. At the moment the African economy is not leveraging industry to drive growth. This is a concern for the continent as industry is an important and large employer not only for the manufacture of goods consumed locally, but global markets as well. Through encouraging manufacturing and industry the continent can make a dent in the poverty problem as millions are absorbed in waged employment.

(source: http://www.southafrica.be/wp-content/uploads/2012/04/Trade2-copy.jpg)

So there is no better time than now for Africa to finally get serious about industrialisation and absorb some of the 85 million jobs in low end manufacturing migrating out of China. What is required for this to happen? Four elements; the first is aggressive, well thought out and strategic industrial policy formulation and implementation by African governments.

The other three, as the Brooking analyst stated, are competition, clustering and management. Africa has to deliberately encourage the creation of a competitive manufacturing sector to create strong businesses that can survive domestic and global economic shocks. Clustering is also important because analysts have observed that businesses are more productive when they are located next to businesses that engage in similar activity. This has been encouraged, to a certain extent, through the creation of Special Economic Zones etc., but more research has to be done to determine the specific type of clustering that can facilitate robust African industrialisation. The final factor is effective management; poorly managed companies do not stand of chance of surviving in a global economic context that is difficult. So the time is now for Africa to lay the ground work for industrialisation so that when the global economy eventually recovers, the continent will be well poised to reap the dividends of industrialisation.

Anzetse Were is a development economist; anzetsew@gmail.com