The Roles of Aid in Politics Putting China in Perspective

Broadman, Harry G. (2007), Africa’s Silk Road: China and India’s New Economic Frontier, Washington DC: The World Bank

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Broadman, Harry G. (2007), Africa’s Silk Road: China and India’s New Economic Frontier, Washington DC: The World Bank.

Overview (pp. 1-40)

Conclusions and Policy Implications

Market opportunities for trade and investment in the world economy will no doubt continue to grow for the countries of Sub-Saharan Africa. However, as the international economy continues to globalize, market competition from other regions—especially those in the South—will only become stronger. This poses a challenge to African policy makers to make better use of international trade and investment as levers for growth.

China and India’s rapidly growing commerce with the African continent presents to its people a major opportunity. In particular, the intense interest by these two Asian economic giants to pursue commercial relations with Africa could lead to greater diversification of Africa’s exports away from excessive reliance on a few commodities and toward increased production of labor-intensive light manufactured goods and services. It could also enable Africa to build on the strength of its endowment of natural resources and develop backward and forward linkages to extract more value from processing, and in some cases participate in modern global production-sharing networks. This intense interest could also lead to enhanced efficiency of African businesses through their being more exposed to foreign competition, advances in technology, and modern labor skills; and to greater international integration, not only with other regions of the world, but perhaps most important within Africa itself, where most domestic markets are too shallow and small to allow for the scale needed to produce exports that are internationally competitive.

To be sure, there are major imbalances in the current commercial relationships that Africa has with China and India. For example, whereas China and India are emerging as increasingly important destination markets for African exports, from the perspective of these Asian countries, imports from Africa represent only a very small fraction of their global imports. At the same time, FDI inflows to Africa from China and India, although still small in an absolute sense, are growing rapidly. But both the level and growth rate of African FDI going to China and India remains extremely limited.

Absent certain policy reforms, the opportunities presented by China and India’s interest in Africa may not be fully realized, while the existing imbalances could continue for the foreseeable future. All other things equal, taken together, these could reduce the likelihood of a boost in Africa’s prospects for economic growth and prosperity.

The reform experience in Africa, as well as in other regions of the world, shows that reform success in such an environment requires a combination of actions. In particular, the lessons from these experiences are that it is not only important to implement sound, market-based, at-the-border trade and investment policies, but also to take actions that deal with the impediments to trade and investment that exist behind the border as well as between the borders. Indeed, these experiences suggest that, if anything, behind-the-border and between-the-border reforms actually provide for trade to have greater leverage on growth than do at-the-border formal trade and investment policies. Moreover, the evidence suggests that these reforms should be designed in such a way as to exploit the growth-enhancing complementarities between trade and investment.

The study of which this Overview is a part discusses such policy implications based on the empirical findings presented. Below, the principal policy implications that deserve priority attention are summarized. A “division of labor” for the responsibilities of the various stakeholders with policymaking roles in furthering Africa-Asian trade and investment is also suggested.

It is important to emphasize that, because of the significant heterogeneity among the 47 countries of Sub-Saharan Africa, the enunciated policy reforms should not be interpreted as being “one-size-fits-all” actions. Indeed, in practice, the reforms must be designed to take into account country-specific circumstances. These circumstances will affect not only the actual contours of actions to be taken, but also the speed and sequencing of their implementation. […]

Chapter 2: Performance and Patterns of African-Asian trade and Investment Flows (pp. 59-128)

Africa’s trade with China and India has grown rapidly in both directions. This is based on high demand for natural resources by China and India and their industrial advantage in manufactured products against African countries. This reflects complementarities between African countries and China and India based on factor endowment of natural resources in Africa versus skilled labor in China and India.

Africa’s exports to China and India have not directly contributed to its export diversification in terms of products and trading partners. Even though the boom of natural resource exports to China and India may provide short-term benefits, African countries need long-term strategies to leverage the current export-boom revenue to create opportunities for long-term economic benefits through export diversification.

Three types of complementarities between Africa and China and India are emerging: (i) vertical complementarities along the cotton-textile-apparel value chain; (ii) exports based on endowed natural resources with greater processing work (aluminum, for example) done locally; and (iii) increased intraindustry trade with emerging African industrial hubs such as South Africa and Nigeria. These complementarities provide opportunities for African countries to increase and diversify their exports by focusing on policies and activities (i) to increase participation in global network trade, (ii) to develop diversified value-added local industries through forward and backward linkages to resource-based products, and (iii) to enhance subregional economic integration and to maximize its benefit.

In addition to trading in goods, Africa-China-India economic relations are deepening in service trade and FDI. Asian FDI in Africa targets various trading opportunities using Africa as the production base; examples include natural resources for overseas markets and construction services for local markets, as well as trade-facilitation service providers. This implies the existence of a strong synergy among trade in goods, trade in services, and FDI, which in turn enhances economic relations between Africa and China and India.

Through quantitatively analyzing bilateral trade flows between Asian and African countries, the evidence presented strongly suggests that, while formal trade policies matter in promoting Africa’s exports to Asia (as well as elsewhere), behind-the-border and between-the-border constraints are every bit as, if not more, critical. This means that, if African countries are to enhance their trade performance in Asia, it will take far more than simply liberalizing trade policies to reach that objective. Indeed, the deeper, more complex, and longer-run challenge is to confront the behind-the-border and between-the-border constraints. Improving trade policies is necessary but not sufficient. […]

Chapter 3: Challenges “At the Border”: Africa and Asia’s Trade and Investment Policies (pp. 129-186)

Tariff structures of African countries as well as China and India still have some unfavorable elements that constrain mutual trade. Some Asian tariff rates are high for many of African countries’ leading exports—those that account for about two-thirds of total African exports to Asia. Product-specific analysis of tariffs on African exports to Chinese and Indian markets suggests that in certain cases tariff escalation in these markets has been discouraging the export of higher value-added processed products from Africa. However, China is a relatively liberalized market, with zero or close to zero tariffs on 45 percent of its imports. China also has plans to further lower its tariffs and bring about lower dispersion in the structure of tariffs by the end of 2007.

Although African tariff barriers have been lowered significantly recently, Asian products still face relatively high tariff barriers on the African continent. In fact, some high tariffs on intermediate inputs into African countries constrain African manufacturing exports. This bias against exports is an obvious target for reform.

Nontariff barriers, such as inappropriate use of technical standards in African export-destination markets in China and India pose special challenges to African exports. At the same time, most countries in Africa lack the institutional capacity as well as the resources to fully implement or effectively enforce internationally recognized standards. This limits the ability of domestic producers to penetrate certain export markets, not only in more developed countries, but also in Asia, especially China and India.

While export and investment incentives, such as Export Processing Zones (EPZs), to date have been successful in China and India, their potential to stimulate exports has not materialized in African countries, with a few exceptions. The preceding analysis suggests that the ineffectiveness of these incentives in African countries is due in part to significant implementation and enforcement challenges in the face of generally weak institutional capacities, as well as the lack of the requisite infrastructure and labor skills. Export incentives in African countries have also had mixed results in creating backward production linkages.

The proliferation of regional and bilateral trade and investment agreements in recent years on the African continent comprises not only reciprocal agreements among other countries in the South, including those in Asia (China and India among them), but also preferential arrangements provided by developed countries in the North to facilitate market access for exports from Africa. The size of the benefits derived from such preferential treatment diminishes significantly when market barriers for other competitors are lowered. Trade diversion from such regimes challenges their desirability and sustainability. No bilateral free trade agreements are currently in effect between Asian and African countries, with the exception of a few unilateral preferential treatments of limited scale.

RIAs on the African continent are still very much nascent and have yet to significantly foster regional trade. To Chinese and Indian investors, they are not seen as particularly trade- or investment-facilitating. Some Chinese and Indian businesses already operating in Africa complain that these agreements’ spaghetti-like character actually inhibits rather than promotes international commerce.

In addition to formal international agreements, African-Asian trade and investment flows are also influenced—in varying degrees—by other instruments. Investment Promotion Agencies (IPAs) and public-private investors councils in African and Asian countries play an important role in facilitating international commerce between the two regions. China and India have also established various other mechanisms in the hopes of stimulating trade and investment with Africa. One of the more recent—and certainly most notable—initiatives is the January 2006 release in Beijing of “China’s Africa Policy,” a white paper that identifies a large set of economic issues over which China proposes to cooperate with Africa, including trade and investment. […]

Chapter 4: “Behind-the-Border” Constraints on African-Asian Trade and Investment Flows (pp. 187-234)

The basic diagnostics of behind-the-border conditions, based on the WBAATI survey data, find that surveyed larger firms outperform surveyed smaller firms both in productivity and exports. Among the surveyed firms, export propensity is lower for domestically owned firms than for Chinese or Indian firms.

An assessment of the sources of competition in these African markets at the country level suggests that, not only do imports play an important role, but so do low domestic entry and exit barriers, the incidence of FDI in the market, and access and integration into global production networks. Not surprisingly, firm turnover is found to be more prevalent among smaller businesses, while larger firms enjoy longer tenure and higher market shares. Again, this is true regardless of firm nationality. The data suggest that entry via FDI is an important channel through which competition is introduced into these surveyed African markets, a finding consistent with research on other regions of the world. International integration into production networks—the focus of chapter 6—particularly upstream in the value chain, appears to stimulate competition among the surveyed firms.

The evidence from the degree of competition among different nationalities of firms indicates a clear role played by Chinese and Indian investors in fostering domestic competition in African markets. In fact, a mutually reinforcing effect is found: African firms that face more competitive markets at home have greater involvement with Chinese and Indian capital, while the African markets where Chinese and Indian investors are most prevalent tend to be the most competitive. The analysis also shows that the major source of the competition engendered in the African markets by the presence of Chinese and Indian investors is competition from imports—indeed imports from China and India themselves. Chinese and Indian investment also provides opportunities for indigenous African firms to form joint ventures or backward-forward linkages with such investment. The question is whether skills and technology are effectively transferred from such business relations.

African countries continue to face high business transactions costs due to poor infrastructure quality, inefficient and insufficient factor markets such as shortages in credit access and skilled labor, labor market rigidity, and heavy regulatory burdens and weak governance and judiciary systems. As is the case elsewhere in the world, the analysis suggests why such factors constitute integral roles in Chinese and Indian (as well as other) investors’ location choices in Africa. To be sure, there have been visible efforts made by several African governments in reforming their domestic business environments. But African countries overall still lag other regions with whom they are competing, both in terms of attracting investment and exporting to foreign markets. […]

Chapter 5: “Between-the-Border” Factors in African-Asian Trade and Investment (pp. 235-288)

This chapter assessed various between-the-border factors that facilitate trade and investment, particularly in the context of Africa’s trade and investment ties with China and India. First, foreign market information on potential demand and investment opportunities is essential in facilitating trade and investment. Given the imperfect information flows now in existence for trade and investment with African countries, public information services, run by both the government or by private firms, have proven to be very important. While they also may work as a barrier to trade (chapter 3), standards and accreditation schemes may also reduce difficulties in assessing the quality of a product by enhancing the availability of reliable, accessible information on aspects considered important by exporters, importers, and consumers. Also, although they run the danger of restricting domestic competition by segmenting markets (chapter 4), ethnic networks that operate across national borders can help overcome between-the-border barriers by providing efficient circulation of market information within the networks that link African countries and India and China.

Also presented was how flows of technology and people between Africa and Asia facilitate the formation of business links that lead to trade and FDI flows, and how the latter two enhance technology transfers and migration simultaneously. The WBAATI survey as well as business case studies clearly suggest such two-way links in the context of China and India’s trade and investment ties with African countries. For example, Chinese investors operating in Africa tend to bring their workforce from China. Also, exporting firms tend to rely more on foreign workers, whose skills and knowledge help firms to link themselves with overseas markets. The complementary relationship among people flows, trade, and capital flows suggests that any removal of between-the-border barriers should facilitate all of these flows. Increases in these three flows are likely to accelerate the pace of technological diffusion throughout Africa and Asia.

However, local technological transfer or skills transfer is also somewhat compromised when foreign skilled workers are simply brought in with foreign capital without effective skills transfer to local workers either through subcontracts or employment opportunities. Furthermore, the emerging agenda for African firms is how to effectively capture opportunities for acquisition of technology and skills through participating in the international production network as discussed in chapter 6. At the same time, this chapter also showed how Chinese and Indian governments have increasingly invested their resources in providing technical cooperation to African countries to foster technological transfer to African countries.

The ability to enhance trade facilitation could offer significant opportunities to reduce direct and indirect costs in Africa. African, Chinese, and Indian firms have been hampered by inadequate and costly transport and logistics services in Africa. African firms continue to experience difficulty in accessing necessary trade financing tools, which is a particularly acute issue among small and medium enterprises. At the same time, it was found that investment by Chinese and Indian firms in Africa has been significantly aided by public trade finance programs by the Export-Import Banks of those two countries. […]

Chapter 6: Investment-Trade Linkages in African-Asian Commerce: Scale, Integration, and Production Networks (pp. 289-360)

Firms in Africa—both domestic and foreign owned—have had international operations and trading relationships for decades. But in recent years the world’s marketplace has witnessed the formation of new global-scale economic systems that are tightly integrated, and the rise of trade in intermediate goods constitutes a fundamental shift in the structure of the global trading system. These transformations pose a major challenge for African policy makers in their understanding of how their countries fit into today’s international division of labor. Under traditional notions of international trade, the direction of trade (that is, which countries produce what goods for export) was determined by the principle of “comparative advantage” and a country specialized in the production and export of the good (or goods) for which its relative productivity advantage exceeded that of foreign countries. It is clear, however, that a radically different notion of comparative advantage has now emerged due to the significant role that intermediate goods play in overall international trade, giving rise to intraindustry trade. This is true whether the trade is done within firms as a result of FDI or through more arms-length transactions, such as through subcontracting.59 In this environment, it is hard to imagine that the future of Africa’s economic development can be isolated from these systems.

Summary of Main Findings

It is in this context that a key issue facing the countries of Sub-Saharan Africa is how they can successfully leverage the newfound investment and trade interest of China and India so that the continent can become a more proactive player in modern global network trade. Over the last 15 years, Asia has already been Africa’s fastest-growing export market and is much more open to trade than are Europe and America. And there is no evidence to suggest that this trend will not continue. Yet, in spite of the many opportunities offered by trade in global supply chains, few African countries have been able to make the leap and exploit these opportunities. As the preceding analysis suggests, investment and trade activities by China and India with Africa can facilitate the continent’s ability to avail itself of such opportunities.

Evidence presented in this chapter from new firm-level survey data and original business case studies developed in the field provides strong support for the notion that, as is happening elsewhere in the world, in Africa, trade flows and FDI are complementary activities, rather than substitutes. (This finding at the firm level parallels that presented at the country level in chapter 2). The data clearly point to the fact that Chinese and Indian firms operating in Africa have been playing a significant role in facilitating this complementarity. For one thing, Chinese and Indian businesses tend to achieve larger-sized operations than do their African counterparts within the same sectors, and this appears to allow them to realize economies of scale. It is not surprising, then, that the evidence shows that, all other things equal, Chinese and Indian firms have significantly greater export intensity than do African firms. Moreover, the exports from Africa produced by Chinese and Indian businesses are considerably more diversified and higher up the value chain than exports sold by domestic firms.

The corporate structures of Chinese and Indian firms also differ from those of African businesses: the former tend to have more extensive participation in group enterprises or holding companies (with headquarters in their home countries). At the same time, relative to their African counterparts, Chinese and Indian firms engage more extensively in regional integration on the continent. They also exhibit more extensive integration into a greater variety of third countries outside of Africa than do African businesses. And Chinese and Indian firms tend to be vehicles for the transmission of advances in technology and new equipment to the African continent.

But the data also suggest that there are significant differences between Chinese and Indian firms operating in Africa. Chinese businesses in Africa tend to have a different risk-aversion profile than Indian firms, as reflected in their foreign investment entry decisions, their degree of vertical integration, the origin of source markets for their inputs, and the strength of affiliation with state (as opposed to private) entities in conducting transactions, among other attributes. Chinese businesses in Africa pursue business strategies that yield them greater control up and down the production line, resulting in enclave types of corporate profiles, with somewhat limited spillover effects. Indian firms, conversely, pursue African investment strategies that result in greater integration into domestic markets and operate extensively through informal channels, indeed even into facets of the local political economy, surely a result of the fact that there is a longer tradition of Indian ethnic ties to Africa.

That global value chains offer real opportunities for African countries to use Chinese and Indian investment and trade activities to increase the volume, diversity, and value-added of exports from the continent is corroborated by the evidence presented. Indeed, as has happened elsewhere in the world, even landlocked countries in Africa—with the right mix of policies—may well be able to engage in network trade. Value-chain analysis of particular industry cases in Africa shows that certain factors are likely to be especially critical in successful network trade. These include implementing a pricing scheme that fully takes into account market conditions, such as production and distribution costs, the strength of competition, and so forth; enhancing product quality; organizing the business to be flexible and responsive to changes in market conditions; enhancing labor productivity; and developing the capacity to maximize speed to market. As the analysis shows, there are several industries in Africa that have either already engaged in or have strong prospects to engage in buyer-driven network trade, including food, fresh-cut flowers, apparel, and fisheries, among others. These are all products where African exports face far tougher competition in international markets than the continent’s traditional raw commodities, and they must meet world-class standards. However, there are also examples where Africa can exploit its endowment of natural resources and climb the value chain.

The prospects for African industries to engage in producer-driven network trade in the short- to medium-run, apart from some sectors in South Africa, such as automotive assembly and parts and components, are far more limited—without attracting substantial FDI by firms plugged into such networks. Increasingly, as the chapter suggests, Chinese and Indian firms have these attributes. Still, the barriers to entry to global production sharing are significant.

Finally, there is evidence that African services exports can engender significant supply-chain spillover effects domestically. Some countries already are doing so, such as Ghana, Senegal, and Tanzania in back-office services. A second concrete opportunity for growth in services exports is tourism. With rising middle classes in China and India looking to spend a significant part of their increased disposable incomes on holidays, there is clear potential for Africa to reap the benefits. Through positioning itself as a relatively close and attractive holiday destination, the gain for Sub-Saharan Africa would not just be direct (in tourism services, hotels, restaurants, and the like) but also indirect: the fact that more and more flights arrive in African airports makes transport cheaper and Asian markets more readily accessible for African goods and services.

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