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Africa: New Silk Road

AfricaFocus Bulletin
Oct 22, 2006 (061022)
(Reposted from sources cited below)

Editor's Note

"Exports from Africa to Asia tripled in the last five years, making Asia Africa's third largest trading partner (27 percent) after the European Union (32 percent) and the United States (29 percent)," reports a new World Bank study.

The study goes on to say that this shift towards South-South trade presents enormous opportunities for Africa, but that it also requires changes to enable Africa to overcome "asymmetries" and take advantage of those opportunities.

This AfricaFocus Bulletin contains a feature article and excerpts from the overview of Africa's Silk Road, a new World Bank report of research on the rapidly growing economic involvement of China and India in Africa.

For other related articles on this topic, see, for example:

Forum on China-Africa Cooperation, website of November 3-5 summit http://www.focacsummit.org

Destination Africa: India's Vision, 2005 report by the Federation of Indian Chambers of Commerce and Industry
http://www.ficci.com/studies/destination-africa.pdf

"We Love China," Lindsay Hilsum reporting from Sierra Leone and Sudan
http://www.granta.com/extracts/2616

"China's Big Investment" Lindsay Hilsum on PBS NewsHour http://www.pbs.org/newshour/bb/asia/july-dec05/china_7-05.html

"Leveraging the Dragon." Chris Alden
http://yaleglobal.yale.edu/article.print?id=5336

"China's Growing Presence Met with Resistance." Isabel Chimangeni reports from Lusaka
http://www.ipsnews.net/news.asp?idnews=35152

"Africans Lash Out at Chinese Employers," from Los Angeles Times, October 6, 2006, available at http://www.latimes.org and http://www.afroshanghai.com/blog/?p=10

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New Trade Directions for Africa on Asia's Silk Road

Africa's Silk Road: China and India's New Economic Frontier

by Harry G. Broadman

Recently accelerating Asian trade and investment in Africa hold great promise for Africa's economic growth and development - provided certain policy reforms on both continents are implemented. This is a central finding of a new book, Africa's Silk Road: China and India' New Economic Frontier .

The author of the book, World Bank Economic Adviser Harry Broadman, says that skyrocketing Asian trade and investment in Africa is part of a global trend towards rapidly growing South-South commerce among developing countries.

Africa's Silk Road provides, for the first time, systematic empirical evidence on how the two emerging economic giants of Asia - China and India - now stand at the crossroads of the explosion of African-Asian trade and investment.

Broadman surveyed 450 firms, including Chinese and Indian companies, operating in four African countries - South Africa, Tanzania, Ghana, and Senegal - and developed in-depth business case studies in the field of additional 16 Chinese and Indian firms in Africa. Africa's Silk Road offers original firm-level data on the African continent of Chinese and Indian firms operating there.

Growing demand and greater investment

The book shows that exports from Africa to Asia tripled in the last five years, making Asia Africa's third largest trading partner (27 percent) after the European Union (32 percent) and the United States (29 percent).

Indian and Chinese foreign direct investment in Africa also grew, with China's amounting to $US1.18 billion by mid-2006.

China and India each have rapidly modernizing industries and burgeoning middle classes with rising incomes and purchasing power. These societies are demanding not only natural resource-extractive commodities, agricultural goods such as cotton, and other traditional African exports, but also diversified, nontraditional exports such as processed commodities, light manufactured products, household consumer goods, food, and tourism.

Because of its labor-intensive capacity, Africa has the potential to export these nontraditional goods and services competitively to the average Chinese and Indian consumer and firm.

"To be sure, if you take a snapshot of today, the overwhelming bulk of Africa's exports to Asia is natural resources," says Broadman. "But what's new is there is far more than oil that is being invested in - and this is an important opportunity for Africa's growth and reduction of poverty because Africa's trade for many years has been concentrated in primary commodities and natural resources."

Roadblocks along the way: asymmetries and the need for policy reforms

While growing Asian trade and investment is cause for optimism, the book cautions that there are major asymmetries in the economic relations between the two regions. While Asia accounts for one-quarter of Africa's global exports, this trade represents only about 1.6 percent of the exports shipped to Asia from all sources worldwide. By the same token, FDI in Asia by African firms is extremely small, both in absolute and relative terms.

And, the rise of internationally competitive Chinese and Indian businesses cuts into both domestic sales and exports of African producers of, for example, textiles and apparels.

"It is imperative that both sides of this promising South-South economic relationship address asymmetries and obstacles to its continued expansion through reforms," says Broadman.

The study details a series of reforms that should be undertaken by all the countries:

  • "At-the-border" reforms, such as elimination of China and India's escalating tariffs on Africa's leading exports; and elimination of Africa's tariffs on certain inputs that make its own exports uncompetitive.
  • "Behind-the-border" reforms in Africa, to unleash competitive market forces, strengthen its basic market institutions, and improve governance.
  • "Between-the-border" improvements in trade facilitation infrastructure and institutions to decrease transactions costs, such as customs administration, transport and communications.
  • Reforms that leverage linkages between investment and trade to allow African businesses' participation in modern global production-sharing networks generated by Chinese and Indian investments in Africa.

With this newest phase in the evolution of world trade and investment flows taking root - the increasing emergence of South-South international commerce - African businesses cannot afford to be left behind. Those reforms are critically important to allow Africa to be able to genuinely participate - and most importantly, benefit from - the new patters of international commerce.


Africa's Silk Road

China and India's New Economic Frontier

Harry G. Broadman
with Gozde Isik, Sonia Plaza, Xiao Ye and Yutaka Yoshino

The World Bank
http://www.worldbank.org

Overview: Connecting Two Continents

[Excerpts: full text of overview and entire volume available on World Bank website]

China and India's newfound interest in trade and investment with Africa home to 300 million of the globe's poorest people and the world's most formidable development challenge presents a significant opportunity for growth and integration of the Sub-Saharan continent into the global economy. These two emerging economic "giants" of Asia are at the center of the explosion of African-Asian trade and investment, a striking hallmark of the new trend in South-South commercial relations. Both nations have centuries-long histories of international commerce, dating back to at least the days of the Silk Road, where merchants plied goods traversing continents, reaching the most challenging and relatively untouched markets of the day. In contemporary times, Chinese trade and investment with Africa actually dates back several decades, with most of the early investments made in infrastructure sectors, such as railways, at the start of Africa's post-colonial era. India, too, has a long history of trade and investment with modern-day Africa, particularly in East Africa, where there are significant expatriate Indian communities. Today's scale and pace of China and India's trade and investment flows with Africa, however, are wholly unprecedented.

The acceleration of South-South trade and investment is one of the most significant features of recent developments in the global economy. For decades, world trade has been dominated by commerce both among developed countries the North and between the North and the developing countries of the South.1 Since 2000 there has been a massive increase in trade and investment flows between Africa2 and Asia. Today, Asia receives about 27 percent of Africa's exports, in contrast to only about 14 percent in 2000. This volume of trade is now almost on par with Africa's exports to the United States and the European Union (EU) Africa's traditional trading partners; in fact, the EU's share of African exports has halved over the period 2000 2005. Asia's exports to Africa also are growing very rapidly about 18 percent per annum which is higher than to any other region. At the same time, although the volume of foreign direct investment (FDI) between Africa and Asia is more modest than that of trade and Sub- Saharan Africa accounts only 1.8 percent of global FDI inflows5 African-Asian FDI is growing at a tremendous rate. This is especially true of Asian foreign direct investment in Africa.

China and India each have rapidly modernizing industries and burgeoning middle classes with rising incomes and purchasing power. The result is growing demand not only for natural resource-extractive commodities, agricultural goods such as cotton, and other traditional African exports, but also more diversified, nontraditional exports such as processed commodities, light manufactured products, household consumer goods, food, and tourism. By virtue of its labor-intensive capacity, Africa has the potential to export these nontraditional goods and services competitively to the average Chinese and Indian consumer and firm.

With regard to investment, much of the accumulated stock of Chinese and Indian FDI in Africa is concentrated in extractive sectors, such as oil and mining. While this has been grabbing most of the media headlines, greater diversification of these countries' FDI flows to Africa has in fact been occurring more recently. Significant Chinese and Indian investments on the African continent have been made in apparel, food processing, retail ventures, fisheries and seafood farming, commercial real estate and transport construction, tourism, power plants, and telecommunications, among other sectors. Moreover, some of these investments are propelling African trade into cutting-edge multinational corporate networks, which are increasingly altering the "international division of labor." China and India are pursuing commercial strategies with Africa that are about far more than resources.

Despite the immense growth in trade and investment between the two regions, there are significant asymmetries. While Asia accounts for one-quarter of Africa's global exports, this trade represents only about 1.6 percent of the exports shipped to Asia from all sources worldwide. By the same token, FDI in Asia by African firms is extremely small, both in absolute and relative terms. At the same time, the rise of internationally competitive Chinese and Indian businesses has displaced domestic sales as well as exports by African producers, such as textile and apparel firms, whether through investments by Chinese and Indian entrepreneurs on the Sub-Saharan continent or through exports from their home markets. ...

As the global marketplace continues to be increasingly integrated, with rapidly changing notions of comparative advantage, much is at stake for the economic welfare of hundreds of millions of people in Sub-Saharan Africa. With this newest phase in the evolution of world trade and investment flows taking root the increasing emergence of South-South international commerce, with China and India poised to take the lead Africans cannot afford to be left behind, especially if growth-enhancing opportunities for trade and investment with the North continue to be as limited as they have been. Nor can the rest of the world, including Africa's international development partners, afford to allow Africans to be unable to genuinely participate and most importantly, benefit from the new patterns of international commerce.

Objectives of the Study

Against this backdrop, there is intense interest by policymakers and businesses in both Africa and Asia, as well as by international development partners, to better understand the evolution and the developmental, commercial, and policy implications of African-Asian trade and investment relations. ...

Yet despite the sizeable and rapidly escalating attention devoted to this topic, especially by some of the world's most senior officials, there is, surprisingly, a paucity of systematic data available ... The vast majority of accessible information is based on anecdotes or piecemeal datasets, which make a well-informed assessment difficult to generate.

This study utilizes new firm-level data from a large World Bank quantitative survey and from originally developed business case studies both carried out by the World Bank in the field in mid-2006 in four countries Ghana, Senegal, South Africa, and Tanzania. The survey and business case studies focused on the African operations of Chinese and Indian businesses, as well as the operations of domestic (African-owned) and other internationally owned firms located in Africa. Based on these data, official government statistics, and existing data compiled by the World Bank and other donors, the study seeks to answer:

  • What has been the recent evolution of the pattern and performance of trade and investment flows between Africa and Asia, especially China and India, and which factors are likely to significantly condition these flows in the future?
  • What have been the most important impacts on Africa of its trade and investment relations with China and India, and what actions can be taken to help shape these impacts to enhance Africa's economic development prospects?

...

The assessment undertaken in this study is largely economic in nature. In this regard, the analysis focuses on political economy, governance, and institutional issues insofar as they directly have economic implications. Important as these issues are, however, the intention here is not to focus on them per se; they are topics deserving of separate, dedicated study.

Moreover, the study's prism is largely on the impacts on Africa of China and India's trade and investment flows with that continent, rather than the reverse. To be sure, the analysis does cover lessons that can be drawn from Asia's economic success stories that might be applicable for Africa. But a focus on the implications of African-Asian trade for China and India is beyond the scope of the study.

Finally, Sub-Saharan Africa is not a country: it is a very heterogeneous continent comprised of 47 nations with great variations in physical, economic, political, and social dimensions. ... The countries that are the subject of the analysis were chosen to be somewhat representative of the continent, but there is no pretense that the study's findings are necessarily applicable to all African countries.

...

Country-Level Patterns and Performance of African-Asian Trade and Investment Flows

There has been a dramatic increase in trade flows between Africa and Asia, and this trend is a major bright spot in Africa's trade performance. These trade flows are largely driven by economic complementarities between the two regions. Africa has growing demand for Asia's manufactured goods and machinery, and demand in Asia's developing economies is growing for Africa's natural resources, and increasingly for labor-intensive goods. Factor endowments and other economic resources will likely continue to yield these strong country-level African-Asian complementarities, indicating the likely sustainability of the current African-Asian trade boom.

The volume of African exports to Asia is growing at an accelerated rate: while exports from Africa to Asia grew annually by 15 percent between 1990 and 1995, they have grown by 20 percent during the last five years (2000 2005). Asia is now a major trading partner of African countries. Asia accounts for 27 percent of Africa's exports, an amount that is almost equivalent to the EU and US share of Africa's exports, 32 percent and 29 percent, respectively. Despite this growth, Africa's exports still remain relatively small from the Asian perspective: Africa's exports to Asia account for only 1.6 percent of Asian global imports.

The recent growth of African exports to Asia largely reflects a sharp upturn in their exports to China and India. ... Though China and India still account for only 13 percent of all of Africa's exports, Africa's exports to China and India have grown 1.7 times the growth rate of the continent's total exports worldwide. Between India and China, it is China that is the more dynamic destination market for Africa's exports. Exports to China grew by 48 percent annually between 1999 2004, compared to 14 percent for India. Ten percent of Sub-Saharan exports are now to China and some 3 percent are to India. China has overtaken Japan as the leading importer of African products in Asia.

The growth in African exports to China and India in the last few years is largely driven by large unmet domestic demand for natural resources in those countries, reflecting growing industries as well as increasing consumption by households. Petroleum is the leading commodity, followed by ores and metals. That oil dominates Africa's exports to China and India is part of the larger profile of Africa's global export pattern.

Africa's rapidly growing exports to China and India are not limited to fuels and other mineral and metal products. Labor-intensive raw or semiprocessed agricultural commodities that are used for further processing either for industrial use (timber, cotton) or for consumer use (food products) are also increasingly imported by China and India. Still, taken together, petroleum, metals, and agricultural raw materials account for 85 percent of Africa's exports to China and India.

The current geographic distribution of Africa's origin markets for the continent's export to China and India is concentrated. Five oil- and mineralexporting countries account for 85 percent of Africa's exports to China. South Africa alone accounts for 68 percent of Sub-Saharan exports to India. Asian exports to Africa are also increasing. Over the last five years, they have grown at an 18 percent annual rate, higher than that of any other region, including the EU. These exports are largely manufactured goods, which have surged into African markets. ...

African-Asian FDI flows are also growing rapidly, but the volume of such flows is more modest than that of trade. ... The vast majority of Chinese and Indian FDI inflows to Africa over the past decade have been largely concentrated in the extractive industries. Since such investments are typically capital intensive, they have engendered limited domestic employment creation. However, in the last few years, Chinese and Indian FDI in Africa has begun to diversify into many other sectors, including apparel, agroprocessing, power generation, road construction, tourism, and telecommunications, among others. ...


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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