investment

Infrastructure investment and economic growth

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This article first appeared in my weekly column with the Business Daily on September 18, 2016


There appears to be an on-going assumption that publicly funded infrastructure investment will spur economic and social growth and development in Kenya. In fact, the government is so certain of this that they are getting into substantial debt in order to finance infrastructure projects. Indeed according to the International Budget Partnership, Kenya’s 2016/17 national budget 30.4 percent of total gross expenditure was allocated to energy, infrastructure and ICT. Infrastructure investment in this article refers primarily to investment in energy and transport infrastructure.

There are several arguments that support massive infrastructure investment. The first, no brainer argument is that Kenya’s and indeed Africa’s infrastructure needs are so dire that any investment in the sector is bound to have positive effects. According to the Africa Infrastructure Country Diagnostic, the continent’s infrastructure spending needs stand at about $93 billion per year. Clearly, there is a need for this investment.

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(source: http://kbctv.co.ke/wp-content/uploads/2016/06/construction.jpg)

Additionally, the lack of infrastructure can be argued to be eating into economic growth. Some estimate that the negative effect of poor power supply alone reduces per capita growth by 0.11-0.2 percentage points in Africa. Further, other studies show that infrastructure investment increases the growth potential of an economy by increasing the economy’s productive capacity by lowering production costs or providing opportunities for human capital development for example.

Infrastructure is also tied into social development. According to a report by European Commission, good quality infrastructure is a key ingredient of sustainable development because countries need efficient transport, energy and communications systems. So some argue that not only does infrastructure boost economic growth, it can lead to a better quality of life for citizens as well.

This all sounds very impressive but massive and aggressive infrastructure investment carries sizeable risks. According to the London School of Economics emerging research seems to suggest that the magnitude of infrastructure’s contribution (to growth) display considerable variation across studies. So the notion that infrastructure is directly linked to or even engenders economic growth is not cast in stone.  Indeed recent literature tends to find smaller effects on links between infrastructure investment and economic growth than those reported in the earlier studies. So perhaps estimates that have previously linked infrastructure investment to economic growth and development may be overstating the causal effects.

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(source: http://www.startyourbusinessmag.com/wp-content/uploads/2016/06/economic-growth.jpg)

Further, it is assumed that government is making the right infrastructure investment decisions for Kenya and that the contracts are being given to the right people. The Economist makes the point that even in countries like the USA public investment is wasted on inflated contracts with politically connected suppliers. The same magazine also makes the point that even in countries like the USA whose public financial management is considered to be more transparent with lots of bureaucrats to conduct cost-benefit analyses, identifying the most beneficial investments is hard. These problems are magnified in countries like Kenya where there is limited information on how infrastructure projects were chosen, how the cost benefit analysis was done and how contractors were or will be selected.

Finally, the manner in which the infrastructure plans are implemented will inform if Kenya will truly gain from this investment drive. A study by FONDAD argues that in order for infrastructure investment to truly stand a chance to create economic and social development shifts, they have to be done with great economic scrutiny at the selection stage, integrity in procurement, efficiency in implementation, effective post-completion management to ensure maintenance and efficient operation and, continuing accountability to users.  Does Kenya tick all these boxes?

It is clear that infrastructure investment is a priority for government and the continued emphasis in government spending in this docket will continue. Bear in mind that, as KPMG states, a significant portion of these infrastructure projects are debt financed. It is therefore crucial that Kenyans are cognisant of the need for infrastructure investment but risks associated with aggressive infrastructure investment, and direct the warranted scrutiny at related projects.

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

 

 

 

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The effect of raising US interest rates on the Kenyan economy

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This article first appeared in my weekly column with the Business Daily on November 15, 2015

There is an increasing expectation coming out of the USA that the Fed will raise interest rates in December this year. Many African economists have been keeping an eye on the Fed and with good reason as the rate raise is likely to have an effect on frontier markets. The precise effect is hard to determine definitively but there are key elements of which one should be aware.

Firstly, a rise in interest rates will make investment in the USA more attractive after the Fed having pursued a zero interest rate policy for seven years. However, as the Financial Times speculates, because a rate hike has been anticipated for so long, the response to an actual hike may be muted. From a Kenyan perspective there are two ways we could go in terms of our own interest rates to keep Kenya an attractive investment destination. Interest rates could be cut to help the economy grow more robustly and boost domestic productivity, or rates could be maintained or increased in order to deter investors from taking their money abroad.

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Secondly, a US rate hike will inform the value of the Kenya Shilling. As has been seen in recent times, a stronger US dollar which will now be backed by higher US interest rates, has tended to place downward pressure on the value of currencies in Africa. Bear in mind that Kenya has been battling a weak shilling for months and the currency seems to have finally reached some point of stability. An interest rate hike in the US may put all the effort put into stemming KES depreciation to waste. Indeed, the CBK should expect the KES to depreciate when the rate hike is announced and will now face a renewed challenge of stemming the KES plummeting having already used most of the monetary policy tricks at their disposal. Further, although some say that investors may not react to a rate hike, there is the real risk that because the hike will strengthen the dollar, this may attract capital away from emerging and frontier markets. In short there may be a severe contraction of US dollars from global markets, especially frontier markets. Bear in mind the emerging and frontier economies as a whole benefited from an estimated $4.5 trillion gross inflow between 2009 and 2013. The thought of that scale of funds leaving emerging and frontier markets, Kenya included, is a daunting prospect.

Thirdly, Kenya has been accruing a great deal of dollar denominated debt and the government has largely been able to do so because of the leakage effects of the very low interest rates tied to the dollar. Rate hikes may therefore present the challenge of making such debt unsustainable. What can be sure is that any future sovereign bond issues by Kenya and other countries will not be nearly as favorable, with regards to interest rates, as was the case even last year. The serendipitous combination of plenty of QE informed liquidity and low interest rates in the US and Europe from which Africa and Kenya has benefited for so long, is not likely to occur again in the near future. Kenya will have to price any debt it offers particularly competitively to attract the scale of funds raised in the recent past.

(source: http://blog.heartland.org/wp-content/uploads/2013/10/debt.jpg)

However, the bottom line is that a rate hike will be a clear signal that the US is well into recovery terrain and thus US investors will be better placed and more confident in investing in general. This particularly good news for Africa, Kenya included, given the challenges the Chinese economy has been facing in the recent past. Also bear in mind that the QE from European Central Bank may buffer Africa and Kenya for a while still as a fresh round of liquidity enters global markets from Europe this time.

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

Kenya’s Land Issues are Stunting Economic Development

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This article first appeared in my weekly column with the Business Daily on October 4, 2015

The on-going wrangle between the National Land Commission and the Ministry of Lands highlights the emotive nature of land issues, adjudication and control in the country. This dispute aside, it is important to understand how land issues in Kenya stunt the development of the country and the urgent need for the government and Kenyans to resolve land disputes.

(source: http://www.bbc.co.uk/staticarchive/f7b5a5c6a1dbfcf3aaba75067a6a83a35ec7a6c7.jpg)

One of the problems with land tenure issues in Kenya is the reality that felt ownership of tracts of land is not necessarily associated with ownership of land title deeds. Further, even if private land has established owners, it is well know that some of these tracts of land have been grabbed as has public and communal land creating outcry in local communities. This further muddies the water with regards to establishing clear proof of land ownership. How do these issues affect the economic development of the country?

Well firstly, in many parts of Kenya, land owned by individuals is usually passed down from parents to children in the traditional spirit of inheritance. Therefore, in some communities if you ask locals to whom a certain tract of land belongs, there may be local consensus on ownership. However, in many cases the owner of the land does not necessarily have the legal title deed proving and establishing him/her as land owner. Tracts of land in rural areas where most agricultural land lies and indeed where most of the land mass is located, is affected by this problem of traditional ownership of land with no legal title. This creates several problems with economic impacts. Firstly, if a rural smallholder farmer for example, doesn’t have legal title but actively farms his tract of land, he cannot use that land as collateral and use the loan to improve inputs into his farm to get better yields and thus income. As a result, the farmer tills his land, often using basic and out-dated methods of farming, unable to afford inputs thereby condemning him to low yields and the vagrancy of unpredictable weather. Further, when legal title is lacking, it is difficult for many smallholder farmers to come together, agglomerate their small parcels of land to create a larger tract of land that can be farmed more efficiently. In short the land cannot be used to its full economic potential. Further, it can be argued agricultural and food security issues in Kenya are linked to the amorphous nature of land tenure in parts of Kenya.

(source: http://blog.worldagroforestry.org/wp-content/uploads/2014/09/Farmer-in-Embu-County-Kenya-ByAke-Mamo.jpg)

Secondly, if parcels of land exist without legal owners, that land ceases to be an asset that can be effectively traded and used for commercial purposes such as industrial development. Investors may want to build a factory in a certain county but if the ownership of the land in which they are interested has contested ownership, the investors will not make that investment and move on to an area where land ownership is clear. Therefore, counties in which land wrangles are particularly virulent ought to be aware that this fact makes them a county that is less attractive for investors who need land to build structures that will be economically productive. Investors do not want to sink investment into an area only for the land into which capital has been injected to be the source of contention. So again, the lack of clear land ownership of land may impede the extent to which economically productive investments can be made.

Finally, it is a well- known fact that land issues in Kenya were the root cause of the tribal clashes in 1992, 1997, 2002 and even informed the post-election violence of 2007/8. We as Kenyans have proven ourselves willing to kill each other in the name of land. This is a shame because not only is there a loss of precious life, the resulting instability negatively impacts the economic productivity of Kenyans and also scares investors away from the country.

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(source: http://www.monitor.co.ke/wp-content/uploads/2015/04/PEV-snip.png)

The confluence of these factors makes it clear that there is a need for the country to do the work and have the courage to fairly resolve the land disputes that currently plague a great deal of the country. Failing to do so is a sure way of ensuring land issues in Kenya continue to stunt the economic development of the country.

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

What regional businesses should do to gain from Obama summit

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This article first appeared in The East African on July 23, 2015

The visit by US President Barack Obama to the region and for the Global Entrepreneurship Summit has caused a media frenzy. The President Obama’s visit and the GES have turned global attention to East Africa’s economic and business potential. GES is an important summit East Africans should be poised to take advantage of. But what should the East African businesses be looking for from the summit and thereafter?

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While seeking investments that may arise from GES, regional entrepreneurs need to do three things. First, they should seek to attract long-term patient capital; second, leverage impact investment; and finally find local partners in securing investment deals. East Africa’s economies are young and most entrepreneurs are still in their nascent stage of innovation, creating business activity that can fundamentally shift the structure and direction of the region’s economy.

However, because many entrepreneurs have new business ideas, they may not be sure how long they require for their ideas to take off, and the factors needed to direct the venture into a success that generates attractive returns.

Credit hunger

Sadly, East African entrepreneurs function in a domestic environment that tends to be risk averse and often they find difficulty securing capital to seed their businesses. This has created a culture of credit hunger that may push some entrepreneurs to accept any type of investment without doing due diligence required to ensure the investors they get are a right fit for their businesses.

(source: http://www.greenbookblog.org/wp-content/uploads/2013/08/profit-and-loss-analysis.jpg)

This risks the creation of a scenario where entrepreneurs attract vulture capital where investors (usually venture capitalists who fund risky and new ideas) deprive an inventor control over his or her own innovations and makes most of the money the inventor should have made from the invention. Local entrepreneurs should avoid this and do the due diligence on those from whom they seek capital.

Ideally, East African entrepreneurs should be looking for long-term patient capital where the investor is willing to make a financial investment in a business with no expectation of generating quick profit. Instead, the investor is willing to forgo an immediate return in anticipation of more substantial earnings later. This patience is crucial to give local businesses time to pilot, and get their products and models right so that they have a solid foundation on which consistent returns can be generated. Thus, entrepreneurs should look for the right investment partner rather than letting their credit hunger get the best of them and lead them into deals where they are at a disadvantage.

This leads to the next point, East African entrepreneurs should do their best, where it works, to leverage impact investment funds that seek to generate triple bottom line returns (financial, social and environmental) as this type of capital tends to be patient with an appreciation for returns beyond the financial. Thus, those whose business ideas feed directly into development and improving the lives of East Africans should look for impact investment funds in the US, a sector due to reach $1 trillion over the next few years according to JP Morgan and Rockefeller Foundation.

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(source: http://acumen.org/content/uploads/2014/03/impactinvesting_article.jpg)

Finally, entrepreneurs ought to seek to partner with local companies, particularly business incubators that have a credible track record in attracting capital from the US. This is important because the incubators are experienced in working with US investors and have an understanding of the key features a business should have to attract capital; they will let entrepreneurs know whether they are ready for US investment or not. Also, local incubators can offer young and new entrepreneurs the technical support and mentorship to strengthen their business so that the business is a stronger candidate not only for investment but generating healthy returns.

If East African entrepreneurs consider the ideas above, they will be well placed to ensure that they make full use of the GES and any future investment opportunities that arise from it.

Anzetse Were is a development economist, email: anzetsew@gmail.com; twitter: @anzetse

Africa’s Infrastructure Hype: The Opportunities and Risks

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Earlier this month over 40 African Heads of State gathered in Washington DC at the inaugural US-Africa Leaders’ Summit. This is the first ever initiative of this scale initiated by an American President specifically targeted towards Africa and with a core focus on infrastructure. 90 U.S. companies participated in the forum including Chevron Corp , Citigroup Inc, Ford Motor Co, Lockheed Martin Corp and Morgan Stanley.[1] We in Africa understand that the world is beginning to wake up to the potential and capabilities of the continent but this summit was still important in order to garner the type of international attention required to continue to drive investments of significant scale on the continent by the North which has been losing ground to the East in recent times. This summit is also important because it has allowed African leaders to articulate their commitment to moving away from a relationship of “aid donor and aid recipient” to one of investment and trade.[2]

 According to the White House, US companies pledged investments totalling more than $33 billion to Africa.[3] US and African companies as well as the World Bank pledged new investment in construction, energy, water and information technology projects in Africa. This article will focus on infrastructure deals as these were where key pledges were made, where Africa’s needs are dire and where the scale of investment will be significant. The key deals in the summit include:[4],[5],[6],[7],[8]

  • General Electric Co: $2 billion to boost infrastructure, worker skills and access to energy
  • Power Africa: $12 billion in new commitments from US private sector partners, the World Bank and the government of Sweden
  • Beyond the Grid program: US Private sector commitments of more than $1 billion, including new investments in off-grid and small-scale energy solutions to rural communities.
  • IBM: $2 billion into the region over seven years
  • $5billion partnership between private-equity firm Blackstone and Carlyle, and Aliko Dangote (Africa’s richest businessman) for energy infrastructure projects.
  • Coca Cola: $5 billion for projects including safe water access programs

 GROUP4

How does the USA compare with China?

In terms of how this investment fits into the trend in energy and investment, $33 billion sounds massive but pales in comparison to what China has been putting into Africa, in infrastructure alone, over the past few years. China, invested more than $13 billion in infrastructure in Africa in 2012 alone. [9] But that’s not all, let’s take a handful of recent deals; in May 2014 China committed US 20 billion in loans for infrastructure development to Nigeria alone.[10] In terms of East Africa, 2013 saw Kenya sign deals worth $5 billion with China for the construction of a railway line and an energy project.[11] Earlier this year, China announced that it will finance a $1.2 billion gas pipeline project in Tanzania from Mtwara to Dar es Salaam as well a railway network at Bagamoyo with investment of more than $10 billion.[12] Uganda is not far behind where China is financing 85% of two hydroelectric projects worth $1.4 billion and $556 billion respectively. Also in Uganda 2013 saw the China National Offshore Oil Corporation win the right to develop Uganda’s Kingfisher field with investments worth $2 billion. You get the picture; the USA has a lot of catching up to do.

Other major foreign players in African infrastructure are Brazil, India and South Korea in addition to a significant increase in commitments from the Arab Coordination Group, totalling $5.15bn in 2012.[13] 

Africa’s Infrastructure Needs

One may wonder if Africa truly needs all these billions in targeted at infrastructure. According to the Africa Infrastructure Country Diagnostic, the continent’s infrastructure spending needs stand at about $93 billion per year.[14] Over 40 % of the expenditure needed is in the power sector; 20 % the for the transport sector to achieve a reasonable level of regional, national, rural, and urban connectivity and slightly more than 20 percent is for water supply and sanitation.[15] The main element of the infrastructure puzzle that Africa is getting right is the increase in penetration of telecommunications; but this sector can and must be further developed.

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Why is Infrastructure Important?[16]

  • Electricity: Supply creates benefits for health because vaccines and medications can be safely stored in hospitals and food can be preserved at home. Electricity also improves literacy and primary school completion rates because students can read and study after sundown. Access to electricity lowers costs for businesses and increases investment and driving economic growth.
  • Transport: Enables isolated rural communities to move into commercial agriculture, thereby increasing their income, and to use health and education services some distance away. By reducing the time and money it takes to move goods, better transportation improves competitiveness, helping create more jobs and boost incomes.
  • Water and Sanitation: Prevents serious illnesses transmitted through unsafe water and better water and sanitation service is associated with less malnutrition and stunting. Waterborne illnesses can be a substantial economic burden, affecting both adult productivity and children’s overall health and education. Sufficient water also reduces the substantial opportunity cost in travel time when women in particular have to fetch water.
  • ICT: Expansion of ICT networks democratizes access to information. It can be particularly critical for rural populations otherwise cut off from important technological know-how or critical information about market prices. telecommunication improvements also reduce transportation spending by allowing people to avoid fruitless journeys or to perform transactions remotely

 So dire is the negative effect of poor infrastructure on economic growth that for most of Africa that power deficiencies alone reduce per capita growth by 0.11-0.2 percentage points. For many countries, such as Ethiopia, Malawi, and Senegal, the negative effect of deficient infrastructure is at least as large as that of crime, red tape, corruption, and lack of financing.

 Kenya is the number one choice in Africa for investors in infrastructure[17]

According to the African Development Bank, Kenya is considered the most attractive infrastructure investment destination in Africa,; South came second. When respondents to the Survey of Private Sector Investors (in infrastructure) were asked why Kenya, the following was stated:

  • Transparent operating environment.
  • Growing economy and emerging sector in ICT and low rate of criminality and corruption
  • The Kenyan government is very pragmatic in its approach when dealing with private investors
  • Institutional capacity and its clear and fit-for-purpose regulatory framework, which ensured projects are run relatively efficiently

 

 Opportunities in investment in Infrastructure

So what opportunities does investment in infrastructure offer the continent now?

Firstly, Africa’s energy needs are dire. In fact, ‘Africa will need to install 7 gigawatts of new power generation per year’ to meet energy needs. This means that the African market is still underserved therefore opportunities for investments exist in a context where Africa is tabling robust growth. In a continent where, ‘power costs 14 US cents per kilowatt-hour against 5– 10 US cents elsewhere’, investment presents attractive opportunities that ensure, ‘returns to investors are high’. [18] This creates an environment where investors want to invest in infrastructure in Africa at a time when Africa needs it the most. Win-win.

 

Secondly, a massive opportunity lies in the fact that Africa’s infrastructure needs are going to be met at a time when high-tech, clean and efficient energy options are available. Renewable energy is seen as an ideal fit for Africa across the board. In a report on investment and trends in Africa’s clean energy sector that surveyed 140 senior executives and industry stakeholders from around the world, respondents stated that, ‘Africa’s strong wind and solar resources as a strong driver for renewables deployment’ and that, ‘wind, solar, hydro and biomass projects will play a major role in meeting Africa’s growing power needs’. Added to this Africa can focus on building clean coal capacity as well. Africa stands to become the continent with cleanest energy infrastructure in the world.[19]

 RES-Southern-Africa

Linked to the point above Africa stands to gain more bang for the buck as,’ Renewable energy is relatively quick and cheap to deploy on a small scale compared with fossil fuels’.[20] This affordability for Africa is enhanced by the fact that there is competition in the sector for energy, ‘Japanese trading houses and industrial corporations, the big five Chinese power companies and Chinese wind and solar equipment manufacturers’ are keen to get a slice of the pie in addition to Northern partner. Africa has the solid opportunity to get clean energy affordably.[21]

 

Thirdly investment in infrastructure, specifically the transport sector, has multiplier effects by not only linking people, goods, services, knowledge and markets but also by more creating a more attractive environment for foreign investors.[22]

 

Fourthly, investment in infrastructure will help Africa develop economically; indeed, infrastructure could, ‘add 2% to Africa’s GDP growth rate and improve productivity by 40%’.[23] Infrastructure will also enhance intra-African trade and take an important step towards broader regional integration.[24] Indeed, ‘regional infrastructure will create scale economies, harness regional public goods, increase intra-regional trade and global trade, and improve competitiveness’.[25] Africa can use this opportunity to drive intra-African trade and make use of economies of scale.

 

Fifthly, investment in infrastructure will help Africa meet development and poverty reduction goals. The MDG Africa Steering Group which consists of representatives of the UN, AfDB, AU, EC,IMF, OECD and the World Bank Group, argues that, ‘investments in transformational energy generation projects, including large-scale hydropower, and transmission net­works need to be increased substantially if the continent is to meet the MDGs’. [26] The visual below from the UN-Africa Working Group (2007) illustrates the power that improving infrastructure can have on African development by meeting 7 of the 8 MDGs:

Role of infrastructure in the MDGs [27]

 

Energy

ICT

Transport

Water and Sanitation

MDG 1: Eradicate extreme poverty

Energy increases productivity of firms

ICT increases productivity of firms

Transport facilitates trade of goods

Enables greater workforce participation

MDG 2:   Achieve universal primary education

Lighting facilities for reading and studying at home

Improved access to educational material

Ensure access to educational facilities

Reduces burden of domestic work on children

MDG 3: Promote gender equity and empower women

Energy facilitates domestic work

   

Reduces burden of domestic work

MDG 4: Reduce child mortality

Modern energy reduces respiratory illness

Improved access to public health messages

Ensures access to health facilities

Improved water and sanitation reduced the risk of waterborne diseases

MDG 5: Improve maternal health

Energy improves quality of health care

Improved access to public health messages

Ensures access to health facilities

Improved water and sanitation reduced the risk of waterborne diseases

MDF 6: Combat HIV/AIDS, malaria and other diseases

Modern energy reduces respiratory illness

Improved access to public health messages

Ensures access to health facilities

Clean water, sanitation and hygiene are significant elements of health programs including HIV/AIDS. Proper drainage contributes to control of malaria and other waterborne diseases.

MDG 7: Ensure environmental sustainability

Use of modern energy reduced the pressure on deforestation

   

Access to improved water and sanitation is one of the targets of this MDG

 

Another opportunity for Africa is that these incoming projects offer, ‘substantial short-term employment to counteract otherwise rising unemployment’.[28]

 

Additionally, this focus on infrastructure is happening in a context where there is a push for efficiency and organisation from infrastructure investors who, ‘do not want to be involved in projects where there are no clear implementation timelines or where the timelines, are repeatedly moved out. Infrastructure investors want to be involved in projects that are high priority for governments and thus are likely to come to a conclusion’. [29]This emphasis will serve the interest of African citizens many of whom are interested in ensuring projects are not only completed in a timely and efficient manner but also meet their needs.

 

Finally, infrastructure has a role to play in securing peace on the continent, ‘a national system of highways and railroads can provide opportunities for the types of cultural exchanges (e.g., between ethnic communities) that will greatly enhance national integration and minimize destructive ethnic and religious conflict’.[30]

 peace

It is clear there is ample room for Africa to benefit from the infrastructure hype but what are the risks?

 What are the risks?

Firstly there is the issue of malinvestment and the potential creation of ghost towns and bridges to nowhere. Here malinvestment means mistaken investment in infrastructure, ‘which inevitably leads to wasted capital and economic losses, subsequently requiring the reallocation of resources to more productive uses. “Wrong” in this sense means incorrect or mistaken from the point of view of the real long-term needs and demands of the economy’.[31] This becomes a risk particularly when there are numerous lines of credit and plenty of liquidity. Africa’s risks with regards to malinvestment do not lie in central bank policies setting artificially low interest rates or aggressive stimulatory policies as has been the case elsewhere, in Africa’s case, ‘infrastructure projects and their large scale require different types of financiers, including private sector, bilateral and multilateral partners’.[32] Thus given the number of players on the field, some with very deep pockets (from Africa’s point of view), there is a risk of money being thrown at infrastructure projects of poor merit. Lessons can be learnt from China’s Kongbashi District with, ‘sky high apartments, gleaming infrastructure and modern townhouses. Nearly empty of residents, it has been dubbed China’s ‘Ghost Town’.’[33] Africa simply cannot afford to indulge in projects that do not support or lead to economic activity. As Nderi, an investment analyst states, ‘in short we have to ensure that the infrastructure will grow businesses that will support and pay for the infrastructure. Imagine a road that links two towns but with no production to support it’.[34] Also bear in mind that African politicians have a penchant for, ‘”prestige projects” or “white elephants”- infrastructure projects that generate significant benefits for governing elites but provide very little or even negative social value’.[35] This should be a prescient warning that malinvestment will likely have a different face in Africa.[36] So while it is clear Africa needs infrastructure, each project should be rigorously analysed on its own merit so that Africa is not lured into investing in projects that build bridges to nowhere.

 bridge-to-nowhere

Secondly, there are uniquely high costs for infrastructure development in Africa. In fact, ‘Africa’s infrastructure services are twice as expensive as elsewhere, reflecting both diseconomies of scale in production and high profit margins caused by lack of competition.’[37] Further, ‘whether for power, water, road freight, mobile telephones, or Internet services, the tariffs paid in Africa are several multiples of those paid in other parts of the developing world’.[38] This is an issue for Africans because a number of infrastructure projects will be co-financed by government making the poorest continent in the world pay the steepest prices to meet basic infrastructure needs.

 

Linked to the point above is the risk that the new projects will be a sight to behold when completed but will fall into disrepair due to poor maintenance of new structures. Nderi alludes to the new Thika road in Kenya, ‘whose maintenance cost is proving to be a drain…it is possible to develop infrastructure that a country may not be able to afford’.[39]

 

Africa is already grappling with this next risk which is a failure to use projects to create local employment opportunities and ensure skills transfer to the local workforce. Just this month in Kenya, ‘at least 5,000 foreign workers will be shipped into the country from China to undertake the construction of the 609km standard gauge railway from Mombasa to Nairobi.’ [40] Although there will be a local workforce of 30,000, experience with China indicate that Africans employed on construction sites are often as cheap and poorly skilled labour, and even this isn’t guaranteed as China has been known bring in unskilled labour. Such patterns cannot continue as they not only keep Africa from reaping the benefits of the creation of jobs, they also condemn Africa to being eternally reliant on foreigners to build infrastructure and prevent Africa from developing the capacities required to maintain the new structures.

 

Another risk is government; there are, ‘concerns about governance and slow project approvals by the government…Clearances from various ministries and departments add to the delay. Since there is no single-window mechanism, considerable time is wasted addressing the protocols of multiple agencies. This complex clearance mechanism delays many projects… The pre-tendering process can extend for almost a year.’[41] Even the casual African observer would likely agree that government can be a slow and lethargic animal that can make one pull one’s hair out.

 

Fourthly, in Africa multiple agencies will be working on infrastructure projects which means various approvals required across the different stages of the project cycle. Multiple players will invariably mean conflict rooted in differing viewpoints and expectations, potentially making implementation of projects hard. Trinity International LLP, a law firm that advises on power, energy/renewable energy, resources and infrastructure in sub Saharan Africa shares experiences where, ‘public sector’s expectations as to the risks it should bear are different from the expectations of the developer and, the banks’ and thus ‘the developer continues to push the public sector in a direction it is unwilling to go, thereby (further) delaying the negotiation process.’[42] Although this delay also affects financiers and developers, Africans waiting for roads to be built will be affected by the fact that big deals may be mired in conflict thereby delaying urgently needed work.

 pump

Another risk that should make one shudder is the beast called land. There may be agreement across the board that Africa needs infrastructure, but issues such as land acquisition on which the structures will be built are not always adequately dealt with. In, ‘sub-Saharan Africa where land ownership is complex and legally uncertain, third party claims to land can often arise on an unregulated basis, free from planning constraints. This results in houses, businesses and often informal utilities connections being located illegally on areas of land ear-marked for the project’.[43] From the citizens’ point of view, there is the risk of being forced to relocate and leave ancestral land without necessarily being compensated adequately, if at all. And of course for African governments the risk is creating acrimony and political difficulties. Land use issues must be sensitively managed as a failure to do so may create pockets of instability on the continent.

 

Another risk is the environment and herein lays a conundrum; while Africa stands to benefit from becoming the cleanest energy producer in the world, ‘there is a dark side to infrastructural investments: they often lead to environmental degradation. Fossil fuel energy generation and transportation create emissions that contribute to acid rain locally and global warming. Hydropower and irrigation can lead to flooding, water pollution, and disruption of communities. Roads can lead to erosion, deforestation, and biodiversity loss. These environmental costs have been estimated to each four to eight percent of GDP for some developing countries, with most of the effects falling on the poor.’[44]

 

Asymmetrical investment is a risk for Africa as well because often, ‘the territories most in need of development are generally those that are in the direst of circumstances and therefore the least attractive to investors’.[45] As a result, investment may leave marginalized communities out of the loop as projects in remote areas are not viable. However, while the centrality of prudent investment should remain, Africa cannot afford to continue to neglect communities that have been left out of development projects for decades. This is a difficult risk to grapple with but it must be addressed.

 

Another important risk is that of overleveraging, particularly if Africa’s infrastructure will be financed by shadow banking which Standard and Poor’s define as, ‘the system of finance that exists outside regulated depositories, commercial banks, and publicly traded bonds. Shadow banking participants include pension funds, insurers, sovereign wealth funds, and export credit agencies, alongside finance companies, private investment funds, business development corporations, asset managers, hedge funds, and sponsored intermediaries such as money-market funds’. In 2013 S&P anticipated that for infrastructure projects around the world, Africa included, ‘up to $25 billion of project finance debt will sourced from the shadow banking sector’.[46] Such trends complicate what will be an already complicated financing structure for projects in Africa. Is there going to be a central point through which all projects will be monitored and managed? Will progress and financial transactions be communicated to the public? If not, it creates an overleveraging risk because if, ‘loans and private placements from institutions do not trade through a central exchange, there is no place to observe the activity. This leaves the potential for a build-up of debt to be largely overlooked’.[47]

 

Finally, government mismanagement of funds perhaps is the largest risk of all. Look at Ghana which not only, ‘anticipated too much revenue from its recently found oil reserves’ but also ‘frittered it away paying higher salaries to civil servants’ rather than using the funds for infrastructure projects.[48] When high infrastructure costs (which make it difficult to ascertain if budgets are inflated) are coupled with high liquidity and interfaced with corruption, it is a recipe for disaster. And it is the African people who will pay if their governments engage in financial misbehaviour.

 anti c

So what is Africa to do given that there are juicy opportunities yet worrisome risks associated with infrastructure investment? Find out next week where recommendations that address the risks and optimise the opportunities will be discussed.

 Anzetse Were is a Development Economist

anzetsew@gmail.com

 

Endnotes

 

[1] Reuters (2014), ‘UPDATE 4-U.S.-Africa summit garners over $17 bln in investment pledges’,

http://www.reuters.com/article/2014/08/05/africa-summit-idUSL2N0QB0MW20140805

[2] Reuters (2014), ‘UPDATE 4-U.S.-Africa summit garners over $17 bln in investment pledges’,

http://www.reuters.com/article/2014/08/05/africa-summit-idUSL2N0QB0MW20140805

[3] White House (2014), ‘President Obama Engages with African Leaders on Final Day of the U.S.-Africa Leaders Summit’,

http://www.whitehouse.gov/blog/2014/08/06/president-obama-engages-african-leaders-final-day-us-africa-leaders-summit

[4] Reuters (2014), ‘UPDATE 4-U.S.-Africa summit garners over $17 bln in investment pledges’,

http://www.reuters.com/article/2014/08/05/africa-summit-idUSL2N0QB0MW20140805

[5] Mipe Okunseinde (2014), ‘U.S. Companies Prove Eager To Take the Lead in Investing in Africa’, http://www.covafrica.com/

[6] BBC(2014), ‘US-Africa Summit: US firms to invest $14bn in Africa’, http://www.bbc.com/news/business-28668533

[7] White House Office of the Press Secretary (2014), ‘FACT SHEET: Powering Africa: Increasing Access to Power in Sub-Saharan Africa’

http://www.whitehouse.gov/the-press-office/2014/08/05/fact-sheet-powering-africa-increasing-access-power-sub-saharan-africa

[8] The White House Office of the Press Secretary (2014), ‘FACT SHEET: The Doing Business in Africa Campaign’. http://www.whitehouse.gov/the-press-office/2014/08/05/fact-sheet-doing-business-africa-campaign

[9] Rene Vollgraaff and David Malingha Doya (2014), ‘African Development Bank Raises Funding as China Boosts Role’, Bloomberg, http://www.bloomberg.com/news/2014-05-18/african-development-bank-steps-up-funding-as-china-boosts-role.html

[10] Patrick Atuanya (2014), ‘Nigeria to benefit from $12bn Chinese Africa infrastructure fund’,

http://businessdayonline.com/2014/05/china-promises-africa-robust-infrastructure-transformation/#.U-NYRKNasdU

[11] Reuters (2013), ‘Kenya signs infrastructure, energy deals worth $5 bln with China’, http://www.reuters.com/article/2013/08/19/kenya-china-idUSL6N0GK2MT20130819

[12] Henry Lyimo (2014), ‘Tanzania’s Economy On Right Track – – Chinese Ambassador’, Tanzania Daily News, http://allafrica.com/stories/201402261451.html

[13] African Development Bank (2013), ‘Infrastructure Financing Trends In Africa: Ica Annual Report 2012’, http://www.icafrica.org/fileadmin/documents/Annual_Reports/ICA%20_AnnualReport%202012.pdf

[14] Amadou Sy (2013), Financing Africa’s Infrastructure Gap

Brookings Institute, http://www.brookings.edu/blogs/up-front/posts/2013/10/09-financing-africa-infrastructure-gap-sy

[15] Vivien Foster and Cecilia Briceño-Garmendia (2011), ‘Africa’s Infrastructure: A Time For Transformation’, African Development Bank Group, http://infrastructureafrica.org/library/doc/552/africa%E2%80%99s-infrastructure-time-transformation

[16] Vivien Foster and Cecilia Briceño-Garmendia (2011), Africa’s Infrastructure: A Time For Transformation

[17] African Development Bank Infrastructure Financing Trends In Africa: Ica Annual Report 2012

[18] Albert Mafusire, John Anyanwu et al (2010), ‘ Infrastructure Deficit and Opportunities in Africa, The African Development Bank Group, http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/ECON%20Brief_Infrastructure%20Deficit%20and%20Opportunities%20in%20Africa_Vol%201%20Issue%202.pdf

[19] Baker & McKenzie (2013), ‘The Future for Clean Energy in Africa’, http://www.bakermckenzie.com/files/upload/The%20future%20for%20clean%20energy%20in%20Africa%20%28Final%29.pdf

[20] Baker & McKenzie (2013), ‘The Future for Clean Energy in Africa’, http://www.bakermckenzie.com/files/upload/The%20future%20for%20clean%20energy%20in%20Africa%20%28Final%29.pdf

[21] Baker & McKenzie (2013), ‘The Future for Clean Energy in Africa’, http://www.bakermckenzie.com/files/upload/The%20future%20for%20clean%20energy%20in%20Africa%20%28Final%29.pdf

[22] Oxford Business Group (2014), ‘ The multiplier effect: Public-private partnerships should provide a boost to infrastructure development’, http://www.oxfordbusinessgroup.com/news/multiplier-effect-public-private-partnerships-should-provide-boost-infrastructure-devel

[23] Tanya Konidaris and Clare Allenson (2011), ‘Africa’s Infrastructure Regional Challenges And Opportunities, Johns Hopkins University-Sais, http://www.wilsoncenter.org/sites/default/files/Infrastructure%20Discussion%20Paper.pdf

[24] Tanya Konidaris and Clare Allenson (2011), ‘Africa’s Infrastructure Regional Challenges And Opportunities, Johns Hopkins University-Sais, http://www.wilsoncenter.org/sites/default/files/Infrastructure%20Discussion%20Paper.pdf

[25] Tanya Konidaris and Clare Allenson (2011), ‘Africa’s Infrastructure Regional Challenges And Opportunities, Johns Hopkins University-Sais, http://www.wilsoncenter.org/sites/default/files/Infrastructure%20Discussion%20Paper.pdf

[26] MDG Africa Steering Group (2008), ‘Achieving the Millennium Development Goals in Africa: Recommendations of the MDG Africa Steering Group’, http://www.mdgafrica.org/pdf/MDG%20Africa%20Steering%20Group%20Recommendations%20-%20English%20-%20HighRes.pdf

[27] UN-Africa Working Group (2007) Infrastructure and Millennium Development Goals, http://www.icafrica.org/en/topics-programmes/focal-points/infrastructure-and-millennium-development-goals/

[28] IFC, (2009)Infrastructure: Crisis & Response, Energy Week 2009, http://siteresources.worldbank.org/INTENERGY/Resources/335544-1232567547944/5755469-1239633250635/Bernard_Sheahan.pdf

[29] Milla SA’s Infrastructure Division (2013), ‘The Africa Infrastructure Rollout Conference 2013’, http://assets-production-webvanta-com.s3-us-west-2.amazonaws.com/000000/23/58/original/The%20Africa%20Infrastructure%20Rollout%20Conference%202013%20-%20v5.pdf

[30] John Mukum Mbaku (2013), ‘Building Opportunities: Addressing Africa’s Lack Of Infrastructure’. The Brookings Institution, http://www.brookings.edu/~/media/research/files/reports/2013/01/foresight%20africa/foresight_mbaku_2013.pdf

[31] Ludwig Von Mises Insitute (2014), ‘Malinvestment’, http://wiki.mises.org/wiki/Malinvestment

[32] Amadou Sy (2013), Financing Africa’s Infrastructure Gap

Brookings Institute, http://www.brookings.edu/blogs/up-front/posts/2013/10/09-financing-africa-infrastructure-gap-sy

[33] Lin Henry (2013), ‘China’s Biggest ‘Ghost Town’: A Microeconomic Perspective, http://economicstudents.com/2013/02/microeconomic-factors-keeping-chinese-modern-city-a-ghost-town/

[34] Nderi Johnson (2014), personal interview

[35] John Mukum Mbaku (2013), ‘Building Opportunities: Addressing Africa’s Lack Of Infrastructure’. The Brookings Institution, http://www.brookings.edu/~/media/research/files/reports/2013/01/foresight%20africa/foresight_mbaku_2013.pdf

[36] John Mukum Mbaku (2013), ‘Building Opportunities: Addressing Africa’s Lack Of Infrastructure’. The Brookings Institution, http://www.brookings.edu/~/media/research/files/reports/2013/01/foresight%20africa/foresight_mbaku_2013.pdf

[37] Vivien Foster and Cecilia Briceño-Garmendia (Ed) (2010), ‘Africa’s Infrastructure: A Time for Transformation’, Agence Française de Développement and the World Bank, http://siteresources.worldbank.org/INTAFRICA/Resources/aicd_overview_english_no-embargo.pdf

[38] Vivien Foster and Cecilia Briceño-Garmendia (Ed) (2010), ‘Africa’s Infrastructure: A Time for Transformation’, Agence Française de Développement and the World Bank, http://siteresources.worldbank.org/INTAFRICA/Resources/aicd_overview_english_no-embargo.pdf

[39] Nderi Johnson (2014), personal interview

[40] Kiarie Njoroge (2014), ‘5,000 Chinese workers expected for railway project, http://www.businessdailyafrica.com/5000-Chinese-workers-set-for-railway-project—/-/539546/2409994/-/4kq0l9/-/index.html

[41] Milla SA’s Infrastructure Division (2013), ‘The Africa Infrastructure Rollout Conference 2013’, http://assets-production-webvanta-com.s3-us-west-2.amazonaws.com/000000/23/58/original/The%20Africa%20Infrastructure%20Rollout%20Conference%202013%20-%20v5.pdf

[42] Trinity International LLP (2010), ‘Are We There Yet? Sub-Saharan Africa Transport Projects, http://www.trinityllp.com/are-we-there-yet-sub-saharan-africa-transport-projects/

[43] Trinity International LLP (2010), ‘Are We There Yet? Sub-Saharan Africa Transport Projects, http://www.trinityllp.com/are-we-there-yet-sub-saharan-africa-transport-projects/

[44] African Development Bank, Asian Development Bank, European Bank for

Reconstruction and Development, European Investment Bank, Inter-American

Development Bank, International Monetary Fund, and the World Bank Group (2007) ‘ The Nexus Between

Infrastructure and Environment: From the Evaluation Cooperation Group of the International Financial’, Institutions, http://siteresources.worldbank.org/INTOED/Resources/infrastructure_environment.pdf

[45] Trinity International LLP (2010), ‘Are We There Yet? Sub-Saharan Africa Transport Projects, http://www.trinityllp.com/are-we-there-yet-sub-saharan-africa-transport-projects/)

[46] Mike Wilkins (2013), ‘Out Of The Shadows: The Rise Of Alternative Financing In Infrastructure’, http://www.infrastructureviews.com/2013/02/01/out-of-the-shadows-the-rise-of-alternative-financing-in-infrastructure/#sthash.KDaxEdLZ.dpuf

[47] Mike Wilkins (2013), ‘Out Of The Shadows: The Rise Of Alternative Financing In Infrastructure’, http://www.infrastructureviews.com/2013/02/01/out-of-the-shadows-the-rise-of-alternative-financing-in-infrastructure/#sthash.KDaxEdLZ.dpuf

[48] Financial Times (2014), Ghana tarnishes ‘Africa rising’ story, FT Editorial, http://www.ft.com/cms/s/0/d9c39f02-1c8c-11e4-88c3-00144feabdc0.html

 

The consequences of China’s economic slowdown for Africa

Posted on Updated on

The Chinese economy is officially slowing down, ‘In January 2014, figures from China’s National Bureau of Statistics showed that in the quarter October to December 2013, China’s GDP grew at rate of 7.7%. This is the lowest since 1999’.[1] While these GDP growth rates are still spectacular comparatively speaking, most of us are unaccustomed to them. In fact as Africans we’ve banked on roaring GDP rates to feed China’s voracious appetite for African raw materials some of which are then converted into cheap goods sold on global markets. Africa has benefitted from both sides of this spectrum as we are providers of the raw materials and thankful consumers of cheap goods. But what are the implications of the slowdown for Africa? Quite frankly, it seems to be a bit of a mixed bag.

mixed-bag-logo

The first consequence is obvious: A smaller appetite for Africa’s raw materials which means lower demand which may eventually cause a dip in commodity prices which then negatively impact African economies. And the slowdown is serious, in fact, ‘China’s manufacturing sector is not only slowing down, it’s contracting’.[2] Sadly, ‘African economies in their present state remain highly dependent on their trade with China and none will be immune to the consequences of reduced demand’ so with, ‘revenues down, (African) exporters are cutting jobs and governments are tightening their spending’.[3],[4] This does not bode well for African governments as they may, ‘have to cut ambitious plans for spending on education and other social programs’. Not good.

The second consequence is that the slowdown will force the Chinese government and investors to take a good look at their economy and regroup. There will likely be a period of introspection and economic restructuring within China and this is both good and bad news for Africa. The good news is that such introspection may reduce the pace of investments made in Africa, thereby giving African governments and companies time to regroup and have a more intelligent strategy when interacting with China. This investment slowdown is also likely to make African government reduce the pace of their ‘look East’ policy and prompt some rebalancing. The bad news however is that with the deceleration, Chinese investors are likely to become pickier than they have been. Africa may find investment propositions tabled scrutinised with China bargaining with more zeal than Africa has been used to. This paradox is one African governments need to get their heads around, and quickly.

china-slow-down-red-flag-sign

The third consequence linked to the point above is that with the slowing in demand for African raw materials and less rambunctious Chinese investment into Africa, African GDP rates may falter in the short to medium term. This does not bode well for African governments who have been desperately trying to sell themselves as the new global investment destination, promising robust returns.

Fourthly however, this slowdown may be good news for the global economy which is good news for Africa. In fact, ‘we should all welcome a slower China. Debt has been piling up to dangerous levels, industry is burdened by excess capacity, and the financial sector has been taking on bigger risks as a result’.[5] And because of the sheer scale of China’s economy, ‘fears have been mounting that China could suffer a financial crisis like the one that tanked Wall Street in 2008. That would threaten the stability of the entire global economy’.[6] Indeed, analysts have long questioned whether China’s model is sustainable thus the slowdown is welcome.
Fifthly, the China slowdown is an indication of a shift of from an, ‘investment-led to a consumer-led’ economic model. The implication for Africa is that this will pressurize African economies to, ‘expand their consumer good exports and manufacturing bases, in order to keep up with shifting demand’.[7] In short, China’s demand is shifting from copper to cameras.[8] This is a conundrum because a long-term solution is needed to address the short to medium-term consequences of a China slowdown.

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Africa however has reason to be optimistic despite this deceleration. Firstly, as the African Development Bank Chief Economist stated, the fallout will not be catastrophic for Africa and indeed African economies should be relieved there is a slowdown as , ‘the 7% rate of growth is a more sustainable rate of growth…this level of economic growth will still manage to [sustain] the upward trend in terms of demand for commodities’.[9] Secondly, Africa remains attractive to China as an investment destination. Africa is investment hungry and China still wants to do business. So although the specifics of the dynamics may change, healthy investment and trade will still occur. Finally, it will do African companies and governments a world of good to stop seeking economic solutions from outside. This slowdown ought to prompt African governments to do the much needed work to: a) Ensure investments already made are executed effectively with a positive impact of development and, b) Engage in the effort to promote intra-African trade and investment with renewed rigour as it appears that Africa can rely neither on the West nor East to fuel economic growth and development.

00-Africa-_trade1


[1] Gumede, William  (2014), ‘China’s economic slowdown and the potential impact on African growthOpinion’, http://www.enca.com/opinion/china%E2%80%99s-economic-slowdown-and-potential-impact-african-growth
[2] Minqi Li (2014), ‘Why is China’s Economy Slowing Down?’, http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=11405
[3] Cape Breton Post (2014), ‘5 ways China’s slowdown will ripple across global economy’, http://www.capebretonpost.com/Business/2014-02-11/article-3611600/5-ways-China%26rsquo%3Bs-slowdown-will-ripple-across-global-economy/1
[4] African Arguments (2014), ‘Could China’s slowdown mark the end of Africa’s decade of growth? – By Barbara Njau, Senior Reporter at fDi Magazine, fDi Intelligence’, http://africanarguments.org/2012/08/28/could-china%E2%80%99s-slowdown-mark-the-end-of-africa%E2%80%99s-decade-of-growth-by-barbara-njau-senior-reporter-at-fdi-magazine-fdi-intelligence/
[7] African Arguments (2014), ‘Could China’s slowdown mark the end of Africa’s decade of growth? – By Barbara Njau, Senior Reporter at fDi Magazine, fDi Intelligence’, http://africanarguments.org/2012/08/28/could-china%E2%80%99s-slowdown-mark-the-end-of-africa%E2%80%99s-decade-of-growth-by-barbara-njau-senior-reporter -at-fdi-magazine-fdi-intelligence/
[8] Langi Chiang and Jonathan Standing, ‘From copper to cameras; feeling the heat from China slowdown’, http://www.reuters.com/article/2013/07/24/us-china-economy-idUSBRE96N04N20130724
[9] Creamer, Terrence (2013) ‘African growth ‘resilient’ to China slowdown, but AfDB wary of QE tapering risks’, http://www.engineeringnews.co.za/article/african-growth-resilient-to-china-slowdown-but-afdb-wary-of-qe-tapering-risks-2013-08-07

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CHINA AND AFRICA: WHAT’S THE DEAL? PART 2…THE PROS AND CONS

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There are pros and cons with regard to Africa’s interaction with China. The discussion here is not exhaustive but is rather aimed at highlighting the salient features that tend to define opinions over Sino-African relations. Let’s look at these arguments.

CHINA-AFRICA

PRO-CHINESE ARGUMENTS

  • China has forgiven African debt

China cancelled debt owed by heavily indebted African countries. In fact, 156 debts owed by 31 heavily indebted African countries totalling 10.5 billion RMB were forgiven by China. This can be seen as an indication that China is interested in Africa’s positive economic growth and development and is not interested in creating dependency and economic slavery of Africa by China.[1]

  • China is creating employment opportunities for Africans

The entrance of China into Africa has created jobs for many Africans. Indeed China seems so committed to this ideal that in 2012, talks between China and Uganda began to promote the transfer of low-value manufacturing jobs to Africa because, ‘China will likely shed some 85 million manufacturing jobs in the coming years because of fast rising wages for unskilled workers’.[2] The two countries launched work to, ‘help African countries seize the opportunity and facilitate the relocation of labor-intensive manufacturing industries (from China) to countries where wage differentials are large enough to ensure competitiveness in global production networks’.  This is another indication that China is committed to ensure its presence in the continent benefits Africa.

  • Some African countries have a trade surplus

Contrary to popular opinion, some African countries actually have a trade surplus with China. At least ten countries including Zambia, Congo Angola, Gabon, and Sudan have a trade surplus with China. Such countries benefit from China’s activities in their countries.

ibgjLjXixOBg

  • China’s investments are giving Africa the capital and investment the continent needs

It is clear that Africa has been, ‘historically underinvested and underserved by international investors. Chinese capital offers a valuable alternative source of financing to develop the African economy.’[3] China is another valid investment partner that Africa should take seriously. This point is particularly pertinent given that in Africa, ‘most resources-rich states are in dire need of infrastructure development and support’.[4] Why should China refrain from improving the dilapidated infrastructure of so many African states? Because there may be challenges? Note that investment in infrastructure and other projects will arguably serve Africa for decades in the future…whether the Chinese are still active on the continent or not.

  • China invests where no one else is willing to invest

Linked to the point above is the fact that not only does China invest where Africa needs it to invest, it invests in high-risk areas where no one else is willing to go. Indeed there is empirical evidence that Chinese firms are less adverse to political risk compared to Western counterparts.[5] State Owned Enterprises are particularly risk friendly and, ‘may not behave solely as profit maximizers. Thanks to the financial support of Chinese state banks, they might indeed be able to undertake higher risks’.[6] Thus, ‘Through significant investment in a continent known for its political and social risks, China has helped many African countries develop their nascent sectors’.[7] Due to this, ‘China can promote economic projects in areas in Africa deemed too risky or unfeasible by other governments or multinational corporations’.[8] Why would Africa reject much-needed investment into areas that desperately need it? This indicates that China, in some ways, is perhaps the main country on which Africa can rely to develop areas that have been neglected for so long. Such engagement ought to be encouraged.

china_africa_1107 (1)

  • Africa exports a meagre amount of oil and minerals to China when compared to other countries

The standard argument is that 1) China is resource hungry and 2) Africa is exporting huge amounts oils and minerals to China to ‘feed the dragon’ and this is creating dependency. However, the following must be noted: [9]

–       China still produces much of the oil it consumes

–       China imports most of its oil from the Middle East (Saudi Arabia, Iran, and Iraq), Asia (Russia), Latin America (Brazil, Venezuela), and North America (Canada). Indeed for China, the Middle East remains the most important source for oil.

China is not singling out Africa for its resource needs. Africa is merely one of China’s many trading partners and Africa has good reason to meet such resource requirements like any other pragmatic trading partner would do.

  • Growing positive effect of Chinese diplomacy in Africa

Initially China declared a, ‘respect for the sovereignty of other nations and pledged to avoid interfering in the internal affairs of other countries’. This gained heated criticism because ongoing Chinese investments in certain countries were seen as encouraging the continued existence of rogue African states which had (have) dictatorial regimes with poor human rights records. Countries such as Sudan and Zimbabwe were mentioned often during such criticisms. Recently however China’s, ‘actions demonstrate a more proactive involvement on the African continent’.[10] In the case of North and South Sudan for example, in 2011 tensions between the two parties reached a near breaking point until China sent their envoy for African affairs to intervene in the matter. He managed to break the deadlock. In addition to this, ‘China supported the UN resolutions for peacekeeping missions in Darfur, and has sent several hundred troops to the region’.[11] Therefore, there seems to be an evolution towards a more positive proactive role in China’s political interaction with Africa that ought to be noted.

1337165711HuAfrica

  • Steps by China to protect Africa’s environment

It is generally NOT known that, ‘China is a world leader in renewable energy technologies – a much needed energy technology for both urban and rural communities in Africa’.[12] In addition to this, Chinese energy- efficient products have proven to be more affordable than Western products thereby making them more accessible to the African market. Further, technical assistance from China to Africa exists and is not only addressing environmental issues in Africa, it is also building the ability of Africans to better manage their ecosystems. China in conjunction with UNEP have a joint program to, ‘build the capacity of African countries in the fields of ecosystem management, disaster reduction, climate change adaptation and renewable energy’.[13] Therefore, it can be said that the perception that China is an environmental monster in Africa is not fully accurate…some positive acting in this field continues to happen.

  • China is treating Africa better than EuroAmerica did

It should be borne in mind that Europe and North America, often the harshest critics of China’s activities in Africa, have a very dark history with the continent with imbalances that continue to this day. Slavery and colonialism were crimes against humanity and continued in Africa for eons. Furthermore, the disastrous Structural Adjustment Programs introduced by EuroAmerican institutions in the past are often seen as having had dire consequences on African welfare. Trade imbalances between the two players continue to this day as seen in the failure of the Doha round of talks. In fact, the negative experiences African governments suffered at the hands of EuroAmerica have made Africans tougher negotiators and bargainers when interacting with China. African governments are learning from past mistreatment and mistakes. Further, Africa is no longer what it used to be. For example, opening a mine in Africa today is, ‘not so easy any more, you need to take into account the environment, local employment and benefits to local economy’.[14] Africa has learnt from the past. In fact it can be argued that China is getting a tougher time in Africa because of past injustices suffered at the hands of EuroAmerica. This is why some view China as the better option for Africa. China has a much cleaner record of interaction with the continent and given that Africans are now wiser, Africa stands to benefit a great deal from engagements with China.

These points indicate that China’s interaction with the continent has positive elements that should not be skimmed over or ignored.

angolan-chinese-engineers[1]

ANTI-CHINESE ARGUMENTS

 However, there are criticisms to China’s engagement with Africa.

  • Imbalanced trade

Although it is true that some African nations have a trade surplus with China, Africa as a whole does not. By 2008, Africa had a USD10 billion trade deficit with China.[15] This is particularly pertinent when one considers that, China-Africa trade, ‘represents close to 10 percent of the continent‘s exports and imports’.  Further, China continues to import basic raw materials from Africa, ‘Approximately 70 percent of registered African exports to China consist of crude oil and 15 percent of raw materials’.[16]

Chinese imports from Africa

sino-african-bilateral-trade

This continues to relegate Africa to being a mere provider of unprocessed goods with little value addition. If China were truly pro-Africa, surely it would seek to address such imbalances.

  • China’s political interaction with African nations

As indicated previously, China’s non-interference policy with African nations has been subject to negative criticism. Although there are certain indications that China may be taking a more positive role in Africa, certain actions continue to be negative. For example, ‘In Zimbabwe, China delivered propaganda bearing the insignia of Robert Mugabe’s incumbent political party prior to the 2005 election…The Chinese are reported to have offered Mugabe jamming devices to use against pro-opposition radio stations.’[17] Further China continues sell arms to African nations, even those with regimes the international community consider problematic such as Sudan and Zimbabwe.[18] If China truly had African welfare in mind, it is argued, it would not engage in such delinquent behaviour.

  • Environmental degradation

Chinese investments in environmentally sensitive sectors, including forestry, agriculture, fishing, oil and gas, have spurred anti-Chinese sentiment in many African countries. Chinese mining projects have also caused serious environmental problems, and demand in Asia for rhino horn and ivory has spurred the illegal wildlife trade in Africa.[19] Kenya has been particularly bad hit with the poaching of rhino and elephant horns and tusks this year to the extent that, ‘Tour operators and tourist hotel owners want the Kenya government to impose sanctions against Asian countries where trade in animal trophies is rampant…Increased poaching has been blamed on the demand for ivory in Middle East and China’.[20] In 2012 Kenya lost 384 elephants and 29 rhinos to poachers.[21]

Other examples abound of Chinese companies destroying Africa’s environment, for example a state-owned oily company created lakes of spilled crude in Sudan. In another example, Ghanaians say that not only are the Chinese destroying their environment, they are illegally taking over land. One villager said, ‘The Chinese destroyed our land and our river, they are sitting there with pick-ups and guns, plenty of guns…They operate big machines and it makes it very difficult to reclaim the land for farming when they are done.[22], [23]  Such transgressions make the Chinese look like they have absolutely no regard for African welfare at all.

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  • Poor working environment for Africans

Reports of poor labour conditions for African in Chinese activities are also rife, ‘At Chinese-run mines in Zambia’s copper belt they (Africans) must work for two years before they get safety helmets. Ventilation below ground is poor and deadly accidents occur almost daily. To avoid censure, Chinese managers bribe union bosses and take them on “study tours” to massage parlours in China….Workers who assemble in groups are violently dispersed. When cases end up in court, witnesses are intimidated’.[24]  To add insult to injury Chinese on the continent have killed Africans over labour-related disputes, ‘Chinese mine managers shot and wounded 11 of their employees in southern Zambia over a pay dispute, sparking a countrywide outrage’.[25]  Such allowances are simply unacceptable and create just anger in Africans who resent being so poorly treated on their own continent.

 

  • Bringing in employment from China

There is concern that, ‘Chinese infrastructure projects often import Chinese labour rather than developing local skills’.[26] The reality is that, ‘Chinese migration has followed in the wake of their country’s involvement in the local economies’.[27]  Although, generally speaking, more Africans than Chinese are employed, significant numbers of Chinese come in and there is concern that they are doing jobs that could be done by Africans. Look at these numbers: [28]

–    2011: Rwanda- Huawei is maintaining its project handed over in 2007 with 30 Chinese and 17 local technicians.

–    2010: Angola- China Railway 20 Bureau Group rehabilitation of 540 km of the Benguela Railway between Munhango and Luau, employing 300 Chinese technicians and 300 Angolans.

–    2010: Mozambique stadium- 500 Chinese, 1000 Mozambicans.

–    2010: Luanda stadium, Angola- 700 Chinese, 250 Angolans

Click here for more info. This pattern has disgruntled many Africans, particularly due to the fact that all the low-skill jobs are saddled on Africans while technical and management positions are reserved for the Chinese. This leads to the next point.

  • Even if jobs are created, they are of poor quality

Even in cases when China does create jobs for Africans, they are usual only for cheap, unskilled labour. For example, ‘Algerians are employed on construction sites as cheap local labour. Educated Algerians do not seem to have much access to Chinese companies’.[29] The extent to which this is replicated in Africa is not clear, however a casual look at sites managed by Chinese often have Africans as the cheap labour while the Chinese manage and supervise.

  • Racial tensions

Africans should not deceive themselves into thinking that merely due to the fact that both Africa and China have a history of struggle against Western imperialism and racism, this confers some immunity against racism to the Chinese. It does not. All signs seem to point to the fact that anti-black racism amongst Chinese is rife. For example, ‘Liberian student David Johnson moved to China just two months ago. He said he has already been subjected to several racist remarks. “One time I was walking down the street and someone called me a stupid black c***,” he reported’.[30] In fact when Chinese men were asked, ‘what they think about black women, many smiled and said they prefer white women, but black women with whiter skin are OK. They can “try one for fun.”’.[31] The reality is that, ‘Non-white foreigners, especially black people, are likely to face more obstacles in China as many Chinese see them as inferior’.[32] And this is not a recent phenomenon, ‘this kind of racism dates back to when Africans were first welcomed into China to study at Chinese universities in the 1960s. And in 1988, a violent, 300-strong mob broke into an African students’ dormitory at Nanjing University and destroyed their possessions while chanting “down with the black devils”.’[33] Some Africans need to get their blinders off for this one. Anti-black racism is a reality to contend with in Sino-African relations.

NIGGER-KING-STORE

 So what should Africa do to take control of and manage this growing relationship in a manner that is favourable to Africa? The next post will be on recommendations for Africa. At the core of these recommendation is the thought that, ‘Africa must not be too Westwards or Eastwards minded- but rather Inwards minded. It is within Africa that all the answers lie’.[34]


[1] Wenping, He, ‘China’s Diplomacy in Africa’, http://www.african-bulletin.com/doc/wenpingc.pdf

[2] Tentena, Paul (2012), ‘Africa: China to Create 85 Million Jobs for Africa’, All Africa, http://allafrica.com/stories/201203261325.html

[3] Cheung, Yin- Wong, Jakob De Haan, Xingwang Qian And Shu Yu(2011), China’s Outward Direct Investment In Africa, Hong Kong Institute For Monetary Research.

[4] Cheung, Yin- Wong, Jakob De Haan, Xingwang Qian And Shu Yu(2011), China’s Outward Direct Investment In Africa, Hong Kong Institute For Monetary Research.

[5] Belligoli, Serena (2011), ‘ Chinese Investments on the African Continent and Political Risk: the Ongoing Debate in China’, Journal of Cambridge Studies, http://journal.acs-cam.org.uk/data/archive/2012/201203-article8.pdf

[6] Belligoli, Serena (2011), ‘ Chinese Investments on the African Continent and Political Risk: the Ongoing Debate in China’, Journal of Cambridge Studies, http://journal.acs-cam.org.uk/data/archive/2012/201203-article8.pdf

[7] Alessi, Christopher, and Stephanie Hanson (2012), ‘Expanding China-Africa Oil Ties’, Council on Foreign Relations, http://www.cfr.org/china/expanding-china-africa-oil-ties/p9557

[8] Zhao, Shelly (2011), ‘The Geopolitics of China-African Oil’, China Briefing http://www.china-briefing.com/news/2011/04/13/the-geopolitics-of-china-african-oil.html

[9] Zhao, Shelly (2011), ‘The Geopolitics of China-African Oil’, China Briefing http://www.china-briefing.com/news/2011/04/13/the-geopolitics-of-china-african-oil.html

[10] Parenti, Jennifer (2012), ‘China-Africa Relations in the 21st Century’, http://www.ndu.edu/press/lib/images/jfq-52/23.pdf

[11] Green, James (2012), ‘China in Sudan and South Sudan: an Unlikely Mediator?’, Think Africa Press, http://thinkafricapress.com/south-sudan/china-sudan-and-south-sudan-unlikely-intervention

[13] UNEP, ‘UNEP – China – Africa Cooperation On The Environment’, http://www.unep.org/roa/portals/137/docs/UNEP-China%20flyer-WEB.pdf

[14] Becker, Antoaneta (2011), ‘China’s changing tone on African investment’, Al Jazeera, http://www.aljazeera.com/indepth/features/2011/06/201167142556551565.html

[15] The African Development Bank Group (2010), ‘Chinese Trade and Investment Activities in Africa’, Policy Brief , http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Chinese%20Trade%20%20Investment%20Activities%20in%20Africa%2020Aug.pdf

[16]The African Development Bank Group (2010), ‘Chinese Trade and Investment Activities in Africa’, Policy Brief , http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Chinese%20Trade%20%20Investment%20Activities%20in%20Africa%2020Aug.pdf

[17] Parenti, Jennifer (2012), ‘China-Africa Relations in the 21st Century’, http://www.ndu.edu/press/lib/images/jfq-52/23.pdf

[18] Zhao, Shelly (2011), ‘The Geopolitics of China-African Oil’, China Briefing http://www.china-briefing.com/news/2011/04/13/the-geopolitics-of-china-african-oil.html

[19] Van Sant, Shannon (2012), ‘Africans Urge China to Help Create Sustainable Development’, VOA, http://www.voanews.com/content/africans_urge_china_to_help_creating_sustainable_development_in_africa/1443475.html

[20] Kitimo, Anthony (2013), ‘Tour operators want Asian states sanctioned over wildlife trade’, http://www.businessdailyafrica.com/Tour-operators-want-Asian-states-sanctioned-over-wildlife-trade/-/539546/1685288/-/15lgk19z/-/index.html

[21] Opiyo, Dave (2012), ‘Wildlife count on way as poaching rises’, http://www.nation.co.ke/News/-/1056/1690230/-/x60v4nz/-/index.html

[22] The Economist (2011), ‘Trying to pull together’, http://www.economist.com/node/18586448

[23] Bax, Pauline (2012), ‘Ghana’s Gold Sparks Conflict With Illegal Chinese Miners’, Bloomberg,

http://www.businessweek.com/news/2012-10-07/ghana-s-gold-sparks-conflict-with-illegal-chinese-miners

[24] The Economist (2011), ‘Trying to pull together’, http://www.economist.com/node/18586448

[26] Grammaticas, David, ‘Chinese colonialism?’,  BBC, http://www.bbc.co.uk/news/world-asia-18901656

[27] The African Development Bank Group (2010), ‘Chinese Trade and Investment Activities in Africa’, Policy Brief , http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Chinese%20Trade%20%20Investment%20Activities%20in%20Africa%2020Aug.pdf

[28] Brautigam, Deborah (2011) ‘ Chinese Workers in Africa’, http://www.chinaafricarealstory.com/p/chinese-workers-in-africa-anecdotes.html

[29] The African Development Bank Group (2010), ‘Chinese Trade and Investment Activities in Africa’, Policy Brief , http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Chinese%20Trade%20%20Investment%20Activities%20in%20Africa%2020Aug.pdf

[30] Jaffe, Gabrielle ‘Tinted prejudice in China’, CNN, http://edition.cnn.com/2012/07/24/world/asia/china-tinted-prejudice

[31] Global Times Community (2012), ‘Racism still obstacle for blacks in China’, http://community.globaltimes.cn/portal.php?mod=view&aid=1521

[32] Global Times Community (2012), ‘Racism still obstacle for blacks in China’, http://community.globaltimes.cn/portal.php?mod=view&aid=1521

[33] Jaffe, Gabrielle ‘Tinted prejudice in China’, CNN, http://edition.cnn.com/2012/07/24/world/asia/china-tinted-prejudice

[34] Obadias Ndaba (2012), ‘Why China Will Not Solve Africa’s Problems’, The African Executive, http://www.africanexecutive.com/modules/magazine/articles.php?article=6753