Benefits and pitfalls of Africa’s engagement with emerging economies

Nichodemus Rudaheranwa

n.rudaheranwa@commonwealth.int

Africa’s engagement emerging economies• Economic transactions provide the most powerful

evidence of Africa’s increasing engagement with emerging economies.

• The impact of emerging economies on Africa operates mainly through four main channels: – Trade;

– Foreign direct investment;

– Foreign aid;

– Migration.

Africa’s exports to China (% of China exports)

India’s trade with Africa (US$ billion)

Exports to China and India

• Africa’s export trade with China is currently small but has expanded rapidly over the last decade. Exports to China between 1996 and 2009:– Africa: US$ 1.4 billion to US$42.3 billion,– COMESA: US$ 207.2 million to US$11.5 billion,– SADC: US$ 877.4 million to US$25.7 billion

• Exports to India between 1999 and 2006 rose from US$ 5.6 billion to US$ 12.6 billion.

Import trade (% of china exports)

Africa’s export trade with China and India

• Africa accounts for a small share of China’s external trade.

• African exports to China are predominantly primary products, mainly oil and metal products.

• Mineral fuels and lubricants, for example, accounted for 24.9% of total exports in 1996, rising to 70.9% in 2005.

• China’s most important African trading partners are resource-rich countries.

Africa’s main exports to China

India imports from Africa (% share)

Imports from China

• There has also been a massive increase in African imports from China, which increased by 712% betweeen 1996 and 2005, from US$ 895 million to US$ 7.3 billion, respectively.

• China’s share of African imports increased from 2.5% in 1996 to 7.4% in 2005.

• Due to its cheap labor, China offers low–priced imports such as textiles and clothing, electronic devices, machinery, etc .

Imports from China

• Manufactured imports accounted for 92.1% in 1996, slightly increasing to 94.6% in 2005.

• Some domestic producers benefit from the low-priced intermediate and capital imports,

• These imports however undermine domestic firms that are unable to undercut Chinese production costs and prices.

Impact of China and India on African trade

• China and India are large countries and one has to take into account their indirect trade effects, which include:– Their impact in increasing commodity prices

which have favorable effects on African producers (barring Dutch disease effects) but adversely affect consumer countries (e.g. a global increase in the price of oil). The price of oil for example increased from $40 per barrel in 2004 to more than $70 per barrel in 2006 and even higher in 2007.

Impacts on African trade– There is potential and actual threat of crowding-out by their

exports in Africa’s third-country markets. A good example of the crowding-out is the case of textiles and AGOA.

• When AGOA came into effect in 2000, a number of China’s textile firms established themselves in Africa, first to exploit the preferential market access to the US market and second, to circumvent the Multi-Fibre Agreement (MFA) agreement.

• There was an impressive expansion of the textile sector especially in ESA countries.

• In Lesotho, for example, clothing and textiles accounted for 99% of exports and 50% of GDP in 2003.

• In Kenya, employment in EPZs export-oriented clothing enterprises accounted for nearly 20% of formal wage employment in 2003 (Kaplinsky and Morris 2006).

• When the agreement expired in January 2005, the textile boom witnessed a significant decline.

Impacts on African trade

• The value of African clothing exports to the US dropped by 16% in the first ten months after quota removals.

• As a consequence, employment in the sector fell very significantly in African countries economies: Kenya by 9.3%, Lesotho by 28.9%, South Africa by 12.2% and Swaziland by 56.2%.

• In contrast, China’s exports to the US rose by 58%((Kaplinsky and Morris 2006).

FDI and Foreign Aid • While globally small (US$ 900 million versus US$ 15 billion

in 2004), FDI from China to Africa has substantially increased in the last decade;

• The FDI is mainly from parastatals that have access to low-cost capital;

• Much of FDI from the country has gone to the extraction industries, and is mainly extended to countries such as Sudan, DR Congo and Angola;

• Chinese firms view the challenging political and economic environment in such African countries as an economic opportunity; and

• They are able to derive huge profits from rates of return to FDI that are said to be much higher in politically volatile African countries than elsewhere.

FDI and Foreign Aid

• In the last two decades, China has moved to increase its assistance to developing countries, a large component of it to African countries.

• In 2002, for example, some 44% of China’s overall assistance to developing countries of $ 1.8 billion went to Africa.

• China has also cancelled bilateral debts for 21 African countries totaling $1.27 billion.

Migration • There has been a relatively large migration of the Chinese to

the continent recently.– According to some estimates, some 80,000 migrant workers from

China have recently moved to Africa

– In Angola, for example, some 2,500 Chinese workers have recently arrived to work for the Chinese companies, with some 30,000 Chinese workers eventually expected.

– Some 3,000 Chinese for example are said to live in Cameroon, 5,000 in Lesotho, 50,000 in Nigeria.

– Local retailers too are said to be faced with rapidly increasing business competition from Chinese traders and there have been reports in local press that these migrants alongside the competition from cheap imports from China have stirred significant local resentments in some countries.

Overview of the benefits and pitfalls

• Clearly some of opportunities offered by the rapid growth of emerging economies include:– Potential export market in China and India given their large

populations, comprising two-fifths of the world’s total, at 1.3 billion and 1.2 billion respectively.

– Source of cheap imported inputs to the benefit of producers

– Investment flows particularly into the development of the infrastructure and basic sectors

– Increased range of consumer goods,

– Etc.

Associated pitfalls• The undermining of domestic firms that are unable

to undercut production costs and prices, leading to de-industrialization.

• Increase in global commodity prices, which adversely affect consumer countries (e.g. a global increase in the price of oil).

• The crowding-out of African countries in third-country markets; and

• Increased migration undermining African labor markets.

Challenge?

• Challenge is for African countries to position themselves to enhance arising opportunities from the emerging markets and address challenges thereof.

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