Wednesday 28 June 2017

China’s export of capital offers new opportunities for Africa

China’s export of capital offers new opportunities for Africa
(Financial Times 04/04/17)
China’s export of capital offers new opportunities for Africa

Countries should develop policies to attract labour-intensive production leaving China.

China’s initial wave of investments in Africa focused on natural resource extraction. Their demand for metals and energy was so large that it actually boosted global commodity prices overall, which in turn accelerated growth across the African continent.

These times of China propping up global commodity prices are now over, as it has built up excess capacity in many sectors and now faces slow investment growth. This lower demand has contributed to the overall slump in global commodity prices since 2014, making it unlikely that China will again fulfil the role of driving commodity prices. Rather, its position has now shifted to becoming the largest exporter of capital. This provides new opportunities which governments in Africa should actively position themselves

Attracting labour-intensive value chains

Many labour-intensive global value chains are starting to re-locate out of China. As a result of its shifting demographics, due to economic development as well as its past one-child policy, China has a shrinking working-age population. Furthermore, economic growth has also resulted in an overall rise in wages. Both these factors mean that China no longer has a comparative advantage in the production of the most labour-intensive goods.

To date, African countries have played a minimal role in these value chains. Therefore, the current beneficiaries of this shift are largely China’s neighbours as well as other Asian countries. Given many African countries have a large and growing young working-age population, they too have the potential to supply labour to these production processes.

If governments can work to attract even a fraction of these value chains to relocate to Africa, it could result in a substantial increase in employment opportunities. To do this, however, substantial improvements will need to be made in the investment climate across the region.

Competition and conditionalities
China increasingly exporting capital has also resulted in competition in the development sector, as African governments are no longer solely reliant on aid from traditional donors. This has placed them in a better negotiating position, and aid conditionalities have become more flexible overall.

At the same time, having alternative options for financing has also given African governments increasing leverage when negotiating with Chinese investors to ensure they meet basic labour and environmental safeguards.

There is still a lot of space for more traditional donors in this shifting landscape. An emerging area of interest is for them to provide African governments with resources and expertise to help them proactively manage these relationships with Chinese investors. Examples of this are already happening across the continent.

For example, UK or US firms are being separately contracted to provide managerial oversight on Chinese construction projects to ensure they are meeting the necessary standards. Another area would be to support African governments in understanding how to set up more effective public-private partnerships.

Chinese investments, largely targeted at the energy and transport sectors, are also intrinsically starting to come with more stringent economic conditionalities. As China itself is experiencing loan repayment issues in certain countries, such as Venezuela, investors are now often requiring certain outcomes on IMF macroeconomic assessments before loan disbursements to ensure that repayment is feasible.

Challenges and opportunities
There are still various challenges with China’s growth and investment in Africa. For example, labour on large infrastructure projects is often Chinese, even in lower-skilled roles that could be filled by nationals. Furthermore, coupled with large investments in the infrastructure and manufacturing sectors across the continent, there are also increasing numbers of Chinese small and medium enterprises that are competing in African retail and wholesale sectors.

Given these enterprises often have better access to credit and can sell cheaper goods, there is resentment in many African business communities about this type of competition. These are challenges, however, that can and should be actively managed by African governments.

China’s rise, as well as its ever-growing interest in Africa, should be seen as positive, and the opportunities this presents should be actively harnessed by governments across the continent. In particular, policies should be put in place to attract the global value chains that are moving out of China as this could provide tremendous employment as well as economic growth possibilities.

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