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Africa: Asia’s one-stop shop

29th November 2010

By: In On Africa IOA

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From oil and gas to cocoa, cotton and copper, Asia’s shopping list covers all the goods and commodities that Africa could possibly supply. Indeed, the past decade has witnessed a substantial growth in Asian involvement on the continent, which has in turn, sparked intense academic and policy debate as to the potential opportunities and risks for Africa’s future development that this expansion entails.(2) The export-oriented emerging economies have succeeded in taking advantage of opportunities emanating from three decades of increasing integration of political and economic relationships beyond borders, achieving high and sustained growth rates, as well as rising as new poles of power in the global political economy.(3)

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In addition, the ever-growing emerging markets of the East are hungry: their re-discovery of Africa as a place that could quench their thirst for natural resources and strategic minerals, as well as serve as an outlet for abundant accumulated capital for investment purposes has become evident by the Asians’ consolidated presence on the continent, and their increasing role as a countervailing force to Africa’s traditional trading and development partners.

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Africa is often viewed as a continent that has been ‘left behind’ and largely excluded from the benefits of intensified global economic, political and cultural interdependencies, with almost 40% of its population living in extreme poverty and being the only continent to have experienced a decline in its living standards since World War II.(4) As such, it has been questioned whether Asia’s growing footprint in Africa merely constitutes a new ‘scramble for Africa’ or a genuine effort to re-integrate Africa into the global political economy in such a way that contributes to its sustainable development and growth.


This discussion paper seeks to provide a snapshot of Asian trade and investment interests on the African continent, thereby demonstrating that while these serve to fulfil Asia’s own economic needs, they may simultaneously aid in the revitalisation and development of some of Africa’s neglected sectors - thus alleviating some of the factors which have, in the past, hindered the continent’s growth and development.

 

What Asia needs from Africa: Energy security and market access

 

Ensuring a stable supply of oil and gas, raw materials and other strategic minerals is vital if the Asian economies wish to further fuel economic growth. This is especially true for China, where oil consumption has doubled since 1996, and which is currently the largest net importer of oil after the United States.(5) Considering Asia’s (particularly China’s and India’s) geo-strategic distance from the Middle East, the “volatility of the region and the dominance of the [United States] therein”, Africa seems a well-suited alternative in this respect, holding 70% of global strategic minerals.(6)

 

Indeed, those African states possessing ample energy resources have seen the greatest investment by both China and India (as well as the traditional trading partners in the OECD).(7) Angola, for example, replaced Saudi Arabia as China’s largest supplier of crude oil in 2006 and emerged as the economic giant’s largest trading partner at the end of 2008.(8) The fact that investments in African extractive industries have also occurred in states such as Sudan, Nigeria and the Democratic Republic of Congo (DRC), which are considered despotic or ruled by elites to the detriment of the general population, reflects the realist considerations directing the emerging markets’ foreign policy towards Africa i.e. ensuring energy security.(9)

 

Asian investment and trade is not limited to energy resources, however. The emerging markets’ strong economic growth through factor accumulation means that these states have abundant capital with which to invest abroad.(10) This perhaps explains why China, India and Malaysia have chosen to invest in Africa’s extractive industries, where it did not appear feasible for the industrialised states to do the same, especially not on such a large scale.(11)

 

In addition, the Asian emerging economies have invested in a wide array of projects in the manufacturing and service sectors on the continent. Indeed, Africa appears to be a ‘testing ground’ for Asia’s rapidly growing multi-national corporations (MNCs), which are as yet unwilling to prove their competitiveness on a global scale. To illustrate, a deciding factor in explaining Malaysia’s support for its MNCs’ ventures abroad is the Government’s aspiration to foster the development of ‘world-class Malaysian-owned companies.’(12) The aim is to create companies that are not only the best locally, but also globally. Malaysia International Shipping Corporation (MISC), for example, is the world’s leader in the shipping of liquefied natural gas, owning over 100 vessels, which ship everything from woodchips to jet fuel to and for customers worldwide.(13) In a similar fashion, India’s involvement in Africa is aimed at “finding export markets, attracting foreign capital and technological know-how [and] business opportunities.”(14)

 

In agriculture, the Asian economies (particularly India and South Korea) have focussed on generating productivity gains and food security through technology and skills transfers, with India sending 500 farmers to Kenya and Uganda in 2007. The Asian elephant has further emphasised the development of IT goods and services and pharmaceutical goods on the continent, while Malaysia has made significant investments in everything from tourism and property to amusement and recreational activities (the Malaysian multi-national Magnum acquired Madagascar’s National Lottery in 1997).(15)


On the other hand, some African countries have expressed their concern over a possible “race to the bottom”, with a substantial proportion of Asian investment being directly guided by the state (e.g. Asian countries’ respective Investment Promotion Agencies), involving requests for investment concessions (i.e. tax or regulatory concessions) and goods in which Africa has a comparative advantage. This fear may prove valid if Asian firms repatriate the profits made from their subsidiaries in Africa and the continent remains in a low-equilibrium trap of low savings and low capital accumulation.(16)

 

What Asia is doing differently: Resources for infrastructure


The risks associated with doing business in Africa and that have too often made MNCs reluctant to make significant investments in long-term or Greenfield projects are numerous. Compared to the rest of the world, poor infrastructure and logistical challenges, corruption, lack of respect for the rule of law and a poor regulatory environment make sub-Saharan Africa the most difficult place to do business.(17) To demonstrate, weak infrastructure increases transaction costs, which in turn decreases a firm’s productivity and thus profits. The catch is, however, that African countries need to attract foreign investment to supplement domestic savings and thus realise their investment requirements, such as building appropriate infrastructure.(18)

 

Both China and India have been investing in massive infrastructural projects such as roads, railways, harbours, telecommunications, finance and banking, thereby lowering firms’ operational costs, while also regenerating Africa’s decaying infrastructure.(19) By linking the building of infrastructure to their burgeoning economies’ hunger for resources, Asia is thus also addressing Africa’s deficient infrastructure networks. To demonstrate, China and the DRC have signed a resource-backed deal, whereby China’s Sinohydro will receive mining rights for approximately 10 million tonnes of copper in return for China Railway Engineering Corporation (CREC) revitalising an estimated 3,000 km of railways and 6,000 km of roads, as well as constructing hospitals, schools, power and other transport infrastructure.(20)

 

Such infrastructure development suggests that although those Asian MNCs venturing into Africa are guided by self-serving concerns, they are also focusing on long-term investment, which results in positive externalities to the African continent.(21) This is because improved infrastructure also benefits domestic enterprises through the lowering of costs (they can exploit the public goods supplied by foreign investment); manufacturing enterprises require backward and forward linkages to ensure stable output (Africans could thus develop upstream and downstream industries e.g. suppliers of the materials needed for manufacturing and retailers that sell the manufactured goods); and the inflow of investment also results in a transfer of knowledge and technology, which improves agricultural and manufacturing processes, thus increasing output, productivity and efficiency.(22)

 

Thus, Asia’s long-term objectives concerning Africa may be more beneficial to the continent’s sustainable development than short-term portfolio flows by speculating investors, which tend to disrupt smaller economies with undeveloped financial markets.(23) In addition, making these long-term investments means that Asian investors and countries have a growing stake in Africa’s future development if they wish to see returns on their investments.(24)


Written by: Fiona Dwinger (1)


NOTES:

(1) Contact Fiona Dwinger through Consultancy Africa Intelligence's Asia Dimension Unit (asia.dimension@consultancyafrica.com).
(2) Mbabazi, P.K., ‘Which Way for Africa in the 21st Century?’, CODESRIA Bulletin. No. 3 (2005).
(3) Shaw et al., ‘Global and/ or Regional Development at the Start of the 21st Century? China, India and (South) Africa’, Third World Quarterly. Vol. 28 (7), 2007.
(4) Stutz, F.P. and B. Warf, The World Economy. Resources, Location, Trade, and Development. Pearson Prentice Hall, New Jersey, 2007.
(5) Corkin, L., ‘Competition or Collaboration? Chinese & South African Transnational Companies in Africa’, Review of African Political Economy. Vol. 35 (115), 2008.
(6) Naidu, S., ‘India’s Growing Africa Strategy’, Review of African Political Economy. Vol. 35 (115), 2008.
(7) Davies, M., ‘China’s Development Model Comes to Africa’, Review of African Political Economy. Vol. 35 (115), 2008.
(8) George, M., ‘China Africa Two-Way Trade: Recent Developments’, DFID Briefing Paper, 30 January 2009, http://www.dfid.gov.uk.
(9) Corkin, L., ‘Competition or Collaboration? Chinese & South African Transnational Companies in Africa’, Review of African Political Economy. Vol. 35 (115), 2008.
(10) Lardy, N.R., ‘China’s economic growth in an international context’, The Pacific Review. Vol. 12 (2), 1999.
(11) Davies, M., ‘China’s Development Model Comes to Africa’, Review of African Political Economy. Vol. 35 (115), 2008.
(12) ‘Asian Foreign Direct Investment in Africa’, United Nations Development Programme, 2007, http://www.unctad.org.
(13) Van Agtmael, A., The Emerging Markets Century, Simon & Schuster, London, 2008.
(14) Naidu, S., ‘India’s Growing Africa Strategy’, Review of African Political Economy. Vol. 35 (115), 2008.
(15) ‘Asian Foreign Direct Investment in Africa’, United Nations Development Programme, 2007, http://www.unctad.org.
(16) Meier, G.M. and J.E. Rauch, Leading Issues in Economic Development, Oxford University Press, New York, 2005.
(17) ‘Doing Business in Africa: Different skills required’. The Economist, 30 June 2005, http://www.economist.com.
(18) Dupasquier, C. and P.N. Osakwe, ‘Foreign Direct Investment in Africa: Performance, Challenges and Responsibilities’, African Trade Policy Centre. No. 21, 2005.
(19) Davies, M., ‘China’s Development Model Comes to Africa’, Review of African Political Economy. Vol. 35 (115), 2008.
(20) ‘Massive DRC Mining (and Infrastructure) Agreement with China’, International Mining, 9 May 2008,
http://www.im-mining.com.
(21) Burke, C. and L. Corkin, China’s Interest and Activity in Africa’s Construction and Infrastructure Sectors, Centre for Chinese Studies, Stellenbosch, 2006.
(22) Meier, G.M. and J.E. Rauch, Leading Issues in Economic Development, Oxford University Press, New York, 2005.
(23) Makin, A.J., Global Finance and the Macroeconomy, Palgrave, New York, 2000.
(24) Jiang, W. and J. Jing, ‘Deepening Chinese Stakes in West Africa: The Case of Ghana’, China Brief. Vol. 10 (4), 2010.

 

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