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Unpacking Africa’s great Asian opportunity
David Christianson
Published: 12-JUN-06

David Christianson won the 2006 Diageo African Business Reporting Award for Best Journalist

In recent centuries a new great power has arisen every hundred years or so and, in the process, remade the global economy. The rise of France overwhelmed Spanish international power over the course of the 17th century. After 1815, Britain, driven by “the” industrial revolution succeeded France, only to give way to US dominance in the early twentieth century. Although Asia’s mid-to-late twentieth century thrust, championed by Japan, petered-out in the 1990s, two new Asian powerhouses have emerged to take up the challenge. The rise and fall of the great powers illustrates the intimate inter-relationship between politics and economics. This is an important point for it is this nexus that will determine Africa’s success or failure in coping with the new global game.

The US-dominated twentieth century was not kind to Africa. Colonialism has been replaced by neo-colonialism and the era of political independence has seen the continent’s wealth base halved, although a handful of countries do constitute significant exceptions to the trend.

The rise of China and India contains the potential to reconfigure the global economic game in Africa’s favour. But this is by no means inevitable. Africa’s side of the relationship has to be managed by African countries themselves. They need to understand the limitations of the process, the trade-offs involved and, as a result, that a “two-steps-forward-one-back” progression is the very best they can expect. Even the most optimistic analysts agree that every additional resource dollar earned when Africa exports oil, coal, platinum or iron-ore signifies a strengthening of especially Chinese manufacturing capacity. And where Asian competition in manufacturing doesn’t actually shrink African employment, it tends, at the very least, to close opportunities to the continent’s nascent and not terribly competitive manufacturers.

There are dangers that engagement with global economic growth, if poorly managed, could go the other way: That the new game could see Africa’s economies take two steps backward for every one forward. Above all, African leaders – in both politics and business – need to be alert to opportunities and informed about the possible pitfalls. For the shape of things to come lies overwhelmingly in their own hands.

There are two significant things about the timing and duration of the Asian surge. The emergence of the potential Asian superpowers appears to have happened very rapidly. Indeed China has developed so rapidly over the past 25 years that even India has been taken by surprise. Martyn Davies, director of the Centre for Chinese Studies at Stellenbosch University, argues that India is essentially “trying to play catch-up” in competition with China. Peter Draper of the SA Institute of International Affairs, argues that while India is participating in the boom, it is “behind the curve” by comparison with China.

What is significant is, first, that the surge forward, of both countries, has not come out of nowhere. Each has long been identified as a potential twenty-first century superpower. It has long been understood that they potentially offer the two largest national markets on earth with current populations of 1,3 billion (China) and 1 billion (India). Both, even before the present growth phase, possessed enormous skills reservoirs, at least equal in size to the entire populations of the largest Western European countries. Both, while classified as underdeveloped countries in terms of per capita incomes, had produced advanced jet fighters and space programmes. Perhaps most important, especially in the case of China, there is an ancient tradition of international pre-eminence, which has animated decision-makers in recent times. India’s corresponding “sense of destiny” is less often remarked upon and is probably nowhere near as strong as China’s. But India watchers suggest that it is certainly not negligible.

The sheer scale of available resources, especially potential human resources and domestic markets, implies that both countries can avoid the limitations of scale that limited Japan’s economic potential (and for that matter, that of Asia’s secondary 20th century champion, South Korea).

What the two emerging superpowers lacked for most of the twentieth century, aside from political stability in China’s case, was appropriate policies. For decades, there has been a sense of immense potential, in both countries, constrained primarily by poor choices made by the political elites.

China seized the nettle in 1980, embarking on a programme of market-based economic reforms while retaining an authoritarian political system. Subsequent growth has averaged an astounding 9,5 percent per year. Democratic India was slower out of the blocks, properly starting its pro-competition reforms only after the 1990 foreign exchange crisis, although these did build on the Gandhis’ incremental pro-business reforms in the previous decade. Indian economic growth picked up from under 1 percent per year prior to 1980 to average over 6 percent for nearly two decades.

The significant comparison with sub-Saharan Africa is that in both countries there was already a substantial capital and skills basis for future growth. Indeed IMF economic councillor, Raghuram Rajan, points out that India’s accelerated growth was achieved not by employing more capital or skills, but by more efficiently utilising that which already existed. The same baseline conditions simply do not exist in Africa. In 2005, an IMF report suggested that “(Africa’s) already weak human capital base severely limits its growth prospects”. It noted that the continent’s “slow-growing rural-based economies do not generate the (public) revenues needed to (effectively finance) education. Nor do they generate modern sector jobs for graduates.”

Most African countries are trapped in a vicious circle. Their low skills bases hold back economic growth; but poor growth limits the financial and political resources needed if the skills issue was to be addressed. In Africa many of the pre-conditions for growth need to be put in place before a sustainable surge can be expected. This suggests that, even under the most optimal conditions, a meaningful “African Renaissance” should be expected to take several decades to really get going.

The timing and duration of the emergence of the Indian and Chinese economies contains a second crucial issue. Despite the splash that both countries are making in the global economy, it remains the fact that only a small portion of the populations of each are truly globalised. In this respect the two emerging giants have more in common with sub-Saharan Africa than they do with the developed world.

Perhaps something like one-in-three Chinese – a total of 430 million – are real participants in the global economy. The vast majority of these individuals live along the coast and are especially concentrated around Shanghai and in the Hong-Kong/Guangzhou area in the south. The rest of the country is largely rural, impoverished and often unemployed. Former World Bank chief economist, Kenneth Rogoff, suggests that the total effective unemployment in deep hinterland China is 150 million.

In India, the proportions are even more extreme with Rogoff estimating that India has globalised at most 250 million or one-in-four of its population. Rogoff refers to India’s “caste-bound record of exclusion”.

The main complication is that both trends are undoubtedly factors in the futures of both countries. Economic booms tend to both expand the modern sector of the economy and, at the same time, have considerable potential for exacerbating political strife.

This is a conundrum Africa knows well. One of the continent’s problems is that the institutions that have to absorb the problems – the state, the legal framework, corporate business, trades unions and the political party system – are so weak. In particular, weak systems battle to accommodate change – and there are no changes so profound as those generated by economic development. Corruption and environmental despoliation are only two of the more obvious problems. At a deeper level perhaps, the rise of new economic power-holders (especially business), whose new status and power is not reflected in existing arrangements, and the threat to established interests (especially those clustered around public bureaucracies), creates inherently unstable dynamics.

It is clear that these dynamics worry the established powers and that Africa is seen as a potential flashpoint. China seized control of Sudan’s oil industry at a time when US firms were barred from that market as a result of an official embargo imposed as a result of concerns about human rights abuses in Darfur and south Sudan. US anger and resentment, while not prominently articulated through official channels, was both deep and inevitable. The US has of course developed a strong interest in African oil as an alternative to Middle Eastern suppliers. But China, in addition to wrapping-up Sudan, has massive influence in the continent’s second biggest supplier, Angola, and last year made a huge entry into the Nigerian market when the China national Offshore Oil Corporation (CNOOC) paid $2,3bn for a prime Niger Delta concession. A Cold War style contest over Africa’s resources is as yet nascent. But it is undoubtedly in the process of escalation.

China’s Africa Policy Paper, published in January this year, makes it clear by omission that human rights and democracy are not considerations in China’s interaction with Africa. The paper harps on about the “interests” China and Africa have in common, the need for “mutually beneficial co-operation”, historical links and China’s commitment to peace and development. It makes it clear that conflict resolution in Africa is primarily the responsibility of African countries and the African Union.

The Africa Policy Paper simply formalises an approach that is already established and widely understood. Indeed Martyn Davies suggests that the launch of the Forum on China-Africa Co-operation in October 2000 – an event attended by 85 African cabinet ministers – represents the moment this understanding became public. China is and has for some time been wooing sub-Saharan Africa.

There are potential dangers for African countries that become enmeshed in Great Power rivalries. It is tempting to see China – and to a much lesser degree India – as a counter-balance to Western meddling, aid conditionality, hypocrisy and perhaps even racism. China appears to offer an ally in the less developed countries efforts to negotiate a fairer global trade regime through the World Trade Organisation. There is undoubtedly some substance to this perspective.

But China is no less self-interested in its engagement with Africa than the West. Deals with China may suit established African elites who stand to benefit through the export of the continent’s resources and who sometimes resent the “pickiness” of the West – articulated sometimes through governments and corporates but most consistently by the NGO sector – over how those resources are harvested. But the absence of a human rights component to the relationship reduces the pressure to act in ways optimal to African development.

Africa’s leaders may do the continent great harm if they accept China’s warm statements without paying adequate attention to the hard economic issues.

But India is much less an emerging power than China. Sheer numbers dictate a lesser impact. But, in any case Indian firms in Africa do not have a bad track record when it comes to corporate social engagement. In many cases, ethical corporate behaviour is driven by a different sort of prudence to the shareholder/ civil society activism that animates Western corporates. Indian communities in Africa have experienced extreme discrimination. In East Africa, the expulsion of the entire national community from Uganda under Idi Amin left deep scars. Indian firms tend to be as concerned about earning their “licences to operate” as the big Western corporates, even if their motives are slightly different.

Furthermore, India appears to have lesser global political ambitions. China is determined to exclude Taiwan from Africa through a combination of its economic muscle and charm offensive. And sheer weight of resources guarantees China’s success. China also has ambitions in the Middle East and Asia that parallel its policy for Africa.

Chinese companies are essentially “mercantilist”. Davies uses the term to describe a situation where the interests of the corporates and their backing state are identical. Mercantilist corporates are effectively agents of their state and, apart from operational considerations, are subject to influence only from that quarter. Where Chinese companies act as good corporate citizens they do so because they choose to do so – and the main reason for making such a choice is instruction from Beijing.

This is not necessarily an ineffective means of controlling corporates, in principle. But Africans need to ask why a government that is not known to be particularly nice to its own citizens would do them any favours. Chinese companies never face independent shareholders or real fears of victimisation. Indeed some do not even always face the rigorous discipline of the profit motive. Arrangements with their government – concerned to obtain access to strategic resources – may allow them to do deals at less than break even. For example, when CNOOC bid for US oil firm Unocal last year – offering $2bn more than rival bidder Chevron – it seemed that the premium was only possible because the Chinese government was sugar daddy in the financing.

Indian policy is less ambitious and less coherent than that of China. Indeed the same may be said of almost every other country on earth. India is however pushing to make up lost ground on China. The Indian government is currently sponsoring trade and buying commissions from Africa in an overt attempt to wean the continent off China.

The Indian, and especially Chinese, surges have prolonged a commodity super-cycle. Higher commodities prices are clearly in the interest of African countries, which do not sell much else. But the decisive issue is to what use Africa puts its resource revenues.

Peter Draper suggests that there are opportunities in the “minerals-manufacturing nexus”. But further job creation – the key to reducing poverty – requires that Africans add value to commodities before they are exported. Minerals beneficiation policies sound like a good idea, but can be a great deal more difficult to implement because products are often more expensive. In other words national beneficiation policies are driven by considerations other than market economics. But with China and India’s massive demand for raw materials, there is room for negotiation.

In any case it is not necessarily a bad thing to export resources – depending on what countries do with the revenues. Draper points out that country as diverse as Chile, Sweden and Australia kick-started development in this way.

This throws the spotlight squarely on the issue of governance. Africa has to take responsibility for the way it responds to the new opportunities. The challenge is to use the resources available to deepen development, especially of the local private sector. That requires linkages between the big Chinese and Indian operators and local businesses. It also means that there has to be a primary emphasis on broader local impacts and capacity building. Sustainability has to be the watchword. Resources do not last forever and – as the example of all too many oil producing nations demonstrates – it is all too easy to allow some to benefit privately while the broader public sees little or no benefit.

Prof Nick Binedell of Pretoria University’s Gordon Institute for Business Science remarks that many African states seem too weak to stand up for – or often to even define – their own national interest. “Nigeria can export $50bn of oil, but can’t generate electricity,” he observes. In general, the absence of the rule of law, weak democratic institutions and ineffective political systems – measured in terms of mediating conflict over resources and controlling corruption – are all factors. Only Africa can fix these things.

What is needed? “A future-oriented mindset is the key”, suggests Binedell. “Too many Africans define themselves as ‘post-colonial’ – which suggests a reference point in the (colonial) past,” he argues. “They need rather to look to the new game unfolding ahead.” A large part of that new game is driven by China and India.

This article was first published in Business in Africa Magazine, May 2006. To subscribe click here

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