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Africa boasts resources, both natural and human, that are unmatched by any other continent in the world. Yet despite its innate richness, it is also one of the poorest places on earth. For decades the gap between primary resource activity and industrial manufacturing left Africa at the mercy of the First World that had the capacity to turn raw materials into consumable goods. Historically, the African continent has been primarily focused on supplying raw materials to developed countries – the focus to try and generate revenues through exports, which in turn were imported back again at a higher price.
While other factors have played a role in weakening Africa’s economic growth, the dilemma of primary to tertiary transference of non-renewable resources, is for this discussion a key player. One must, however, remain mindful of Africa’s broader economic growth story. The continent has become a game changer in terms of the global race for resource acquisition, and it now occupies an important space in the international political and economic arena.
As a result of its newly found status, the continent and its countries have forged new economic ties, both with the developed world and the emerging markets of China and India to name a few. Through effective participation in the global market, many African countries have been able to increase their economic growth rates and it is through these robust trade agreements and economic policies that the continent has found a new bargaining power.
From one perspective, the economic agreements struck between China, India and African states provoke a feeling of hope that the economic pulse of this resource-rich continent will be revived and indefinitely sustained. In contrast, there is also concern that Africa will merely continue to have its markets determined and undermined by the age-old practice of supply and demand.
It is therefore the purpose of this discussion paper to critically analyse the relationship between Africa and the emerging economies of China and India, in order to understand whether the current increased economic momentum and long-term agreements struck with these players will have a lasting and positive effect on the continent.
Africa and the global political economy
Dependence on natural resources often relates to a country being subjected to the supply of the natural resources it requires. According to some economists, lack of supply is a leading factor for decreased economic growth, which could possibly lead to an economic breakdown. China and India are both examples of markets that require natural resources to continue along their economic expansion, and because both countries are resource intensive, they must thus forge new alliances with resource-rich states to meet their ongoing needs.
Secondary to the initial resource-dependent motivations, emerging markets understand that many existing mineral rich regions are owned by multi-national or state-owned corporations. In these cases, securing access to large mineral deposits on a long-term basis have become increasingly more difficult, forcing countries such as China and India to strike new deals with African states to access unexplored resource deposits.
Furthermore, these emerging markets are challenged to find new and innovative ways to compete with multinational corporations which have for decades focused on resource extraction from places as remote and secluded as Africa, and the capabilities of which far outweigh emerging markets in terms of technology, capital and long-term negotiation skills. Emerging markets like China and India have had to challenge corporations that are able to make offers that are more appealing or more complementary to African Governments and their agendas. To compete with what multinationals bring to African tables, China’s state-owned enterprises are given easier access to credit, at much lower interest rates by Chinese banks, owing in part to the fact that the Chinese Government controls the interest rate.(2) They have also made it easier for African Governments to access development aid, which comes with less stringent policy conditions attached to them as opposed to aid that comes from the West.
Lastly, China has shown that it is willing to take both financial and security risks in order to secure natural resources by encouraging its companies to invest in dangerous states. These states, which include Zimbabwe, Sudan and the Democratic Republic of Congo, are the same places Western multinationals have historically avoided because the benefits of mineral deposits did not outweigh the dangers associated with the investment.(3) This move by emerging markets is evidence that their need for natural resources far outweighs the risks involved, and also points to Africa’s potential in terms of building a new global presence in the twenty-first Century.
The scramble for African resources
Because of a global increase in the world’s population, countries – developed or otherwise – understand that non-renewable resources are important assets. Their value in terms of lasting investments has arguably been most identified by China and India. By the end of 2012 these two emerging economic powerhouses are expected to have reached a growth rate of 9% and 8% respectively.(4) These projected outcomes highlight the fact that as a consequence of their ongoing economic development, they are both inclined to have high demands in terms of consumption. By 2020, it is estimated that China will account for 12% of the world’s total consumption and its economy will be driven more by the goods that it consumes than the commodities it produces.(5) India will follow a similar path, increasing its consumption rate fourfold by 2025, thus becoming one of the largest consumer markets in the world.(6) Growing populations coupled with an increase in economic development means that a continent such as Africa is an attractive destination for countries seeking to accommodate the rapid pace at which resources are spent. However, the question arises: Is Africa’s new muscle a sustainable accessory or will the global race for commodities leave the continent in a state of degradation once countries such as China and India have had their fill?
The new bargaining power of Africa lies precariously between optimising on the influx of foreign investment and exploitation that has no long-term benefits. Africa’s economic growth relies heavily on resources that are not renewable, and while foreign investment serves as an important means of promoting industry, the majority of it is targeted towards extracting Africa’s natural resources.
Asia’s intent: Identifying interests
China is the world’s largest consumer of energy, with more than one-third of its oil being supplied by Africa.(7) Its rapid rate of industrial growth has also meant that a sustainable supply of metals must be ensured. Similarly, a largely untapped consumer market has made China Africa’s largest trading partner in 2010, of which investments are set to increase to US$ 50 billion in the next five years.(8) In exchange for China’s presence in Africa, the continent is able to improve its manufacturing capabilities, increase its knowledge and skills base and develop infrastructure in areas such as transport, healthcare and education.
India’s investment strategies are similar to China’s, save for a few differences. The rate at which India’s economy is growing has forced its Government to outsource raw materials, energy and new markets to consume their products. In contrast to China’s US$ 126.9 million resource extraction and infrastructure agreements that were made in 2010, India only managed to attain US$ 46 million in investment in Africa, but has promised to invest a further US$ 70 million by 2015.(9) India’s interests in the agriculture and telecommunications sectors as opposed to direct resource extraction also present an opportunity for Africans to develop a long lasting knowledge and skills base, this in part because investors prefer to hire locally, rather than outsource.
China understands that in order for African consumers to afford its exports, and for African markets to produce prime investment opportunities for Chinese firms, Africa must get richer.(10) This is a reality that India is aware of as well, making both Asian markets truly vested in Africa’s sustainable development. With that in mind, it is also important to understand that Africa stands to lose just as much, if not more, should either retract its financial interests from the continent.
Firstly, Africa is still very much a primary resource supplier and has not developed its infrastructure to self-sustaining levels. Should China and India retract or reduce their current slew of investments, the continent runs the risk of reverting back to being a primary resource exporter, which as a consequence will exacerbate the crisis of third world debt and aid dependency. Secondly, Africa’s current bargaining power has opened the continent in terms of developing new and improved domestic and foreign policies. The potential to forge new alliances gives African countries the opportunity to further promote their political, economic and social agendas at an international level through the exchange and adoption of knowledge and skills. By reducing the number of potential bi-lateral relationships, Africa runs the risk of its countries reverting back to being branded pariah states.
Lastly, by accepting financial aid from China, Africa has inadvertently cut dependency ties with the West. In comparison to China’s no-strings attached attitude, the West has continued to supply aid to Africa on the premise that its Governments implement Western conditions. Should Chinese aid for example suddenly stop, Africa would, for all intents and purposes, have no recourse. Should this lack of financial assistance materialise, the African continent would run the risk of falling into a situation that is ripe for economic decay and political unrest.
Investing in Africa for the long haul?
There is no question that the financial injections brought to Africa by China and India have meaningfully impacted on the overall economic growth of the continent so far, but the majority of these contributions have been to a select few countries which meet, most notably, China’s interests. It is no secret that Chinese investment in Africa is largely concentrated in sectors that are strategically beneficial to the Asian giant, most notably those related to resource extraction. It is also known that a large portion of Chinese investment is wielded by state-owned enterprises that seek new markets, hungry for product consumption.
Unlike China’s Government, India’s private sector has presented its intention to promote long-term growth for Africa and by Africa, with its assistance. However the legitimacy of this claim has yet to be founded due to the infancy of India’s investment activity. While all parties involved have displayed good intention, it is also no secret that Africa is for now, India’s answer to its shortage in natural resources and energy crisis.
It is in this light that the question of whether Africa has been, or will be, able to leverage sufficient gains in terms of Chinese and Indian investment, and if these gains will be enough to counteract the risk of their withdrawal. If Africa does not apply enough long-term strategic focus, it threatens to exacerbate its current status as a supplier of natural resources only. This will ultimately prove disastrous for a continent that could have formed long-lasting and mutually beneficial ties with powerful foreign investors.
Written by Daniela Kirkby (1)
(1) Contact Daniela Kirkby through Consultancy Africa Intelligence’s Asia Dimension Unit (firstname.lastname@example.org)
(2) Hays, J., ‘China’s State-Owned Economy and State-Owned Companies’, Facts and Details, April 2012, http://factsanddetails.com.
(3) ‘China’s Achilles Heel’, The Diplomat, 8 February 2012, http://the-diplomat.com.
(4) ‘Countries with the Highest GDP Growth’, Global Finance, September 2011, http://www.gfmag.com.
(5) ‘China’s total Consumption in 2020 will Reach 2/3 of US Consumption’, Proactive Investors, 6 December 2010, http://www.proactiveinvestors.co.uk.
(6) ‘India’s Consumption Evolution’, Business Standard, 5 May 2007, http://www.business-standard.com.
(7) ‘China Overtakes United States to become World’s Largest Energy Consumer’, International Energy Agency, 20 July 2010, http://www.iea.org.
(8) ‘Standard Bank Estimates China’s Investment in Africa will reach US$ 50 billion by 2015’, Finance Asia, 19 May 2011, http://www.gsklaw.sn.
(9) ‘India Boosts Bid to Rival China in Africa’, The Christian Science Monitor, May 2011.
(10) Haroz, D., 2011. China in Africa: Symbiosis or Exploitation. The Fletcher Forum of World Affairs, 35(2), pp. 65-88, http://fletcher.tufts.edu.