NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

This post is the first in a two part series exploring China’s role in Africa’s development. Part 1 focuses on the breakdown and impact of African exports to China, and Part 2 focuses on the role of Chinese investment and imports in Africa.

I think that those of us who are interested in the potential of market-based development need to initiate a conversation around one of the biggest elephants in the room, and that is the role that Chinese foreign direct investment (FDI) and aid is playing in Africa’s development. In particular, this inflow could fuel potential base of the pyramid (BoP)-focused enterprises and mean new opportunities in both employment and a greater access to choice in goods and services for BoP consumers.I became interested in doing this piece on a recent trip to Hong Kong, where I was studying strategies that have been taken to propel corporate social responsibility in Asia. One morning at breakfast I came across the headline, “China’s Investments ease Africa’s Poverty, says World Bank report” in the South China Morning Post. This July 12th headline grabbed my attention, as it was clearly at odds with those I had been seeing in the U.S., such as last August’s New York Times story entitled, “China’s Trade in Africa Carries a Price Tag.”

So, which is it? Clearly, the two seemingly opposing articles demonstrate that this is a very divided issue, and the strong journalistic stances risk convincing people one way or the other, when the reality of the effect is probably somewhere in the middle.

Between 2001 and 2005, both bilateral trade and Chinese FDI in Africa grew about fourfold. FDI from China to Africa amounted to $100 billion between 1990 and 2004. In terms of exports, the majority of the outbound trade to Asia is in natural resources. According to the World Bank report Africa’s Silk Road, the greatest percentage of African exports to Asia are crude oil (62.2%), sawlogs and veneer logs (4.91%), iron ore and concentrates (4.59%), and diamonds (3.3%). Although there has been optimistic chatter about a nascent manufacturing export sector, there are no value-added products within the top 20 exports.

China’s natural resource imports alone from Sub-Saharan Africa reached US$22 billion in 2006. As a result, China now depends on Africa for around 30% of its oil imports, 80% of its cobalt imports and 40% of its manganese imports.

As China and Africa’s economic relations have strengthened, on some indicators, life has improved for those Africans at the BoP. Some are able to access cheaper, “Made-in-China” products, while others have benefited from the much-needed investment in infrastructure, which has contributed to everything from energy to ICT development. However, many argue that China’s no-strings attached aid packages ignore some of the structural changes that need to occur to ensure long-term peace and prosperity in the region, and that cheap Chinese goods have crowded out native industries.

Of course it is difficult to draw generalizations across the entire African continent, which encompasses distinct political, geographical, religious, and industrial realities across the diverse nations. Across the Sub-Saharan, GDP per capita ranges from less than $200 to more than $7,000. But on a macro level, although the continent represents nearly one-fifth of the earth’s landmass, the total economy is smaller than that of Florida and 300 million people (about the same size as the U.S. population) live on less than $1 a day.

Therefore, despite the diversity, most can agree that Africa is in dire need of investment. China has seemingly come to the rescue. “At any given time, roughly 800 Chinese state-owned or state-controlled corporations are operating in Africa, with China’s Export-Import Bank funding more than 300 projects in at least 36 countries.”

The World Bank seems to be optimistic, saying that China’s “newfound interest in substantial international commerce with Africa?home to 300 million of the globe’s poorest people and the world’s most formidable development challenge?presents a significant, and in modern times, rare, opportunity for growth, job creation, and the reduction of poverty on the Sub-Saharan continent?.”

While the prospects for job creation and poverty reduction surrounding greater exports are promising, there should be valid worries when it comes to the social and environmental implications of this resource plunder. According to the World Health Organization, developing nations, which emit the fewest greenhouse gases, will have the most serious problems associated with climate change. The jobs afforded to those in extractive industries are dirty, dangerous and unpredictable.

In addition, from a long-term poverty-reduction standpoint, the tiny percentage of value-added goods being exported, the minimal technology transfer, and the lack of skill development does not bode well for the hope of sustainable change. And while U.S. and European companies certainly do not have a clean history in Africa, they are now under much greater social and environmental scrutiny, while Chinese firms appear to be operating with little or no oversight.

One of the most comprehensive journalistic pieces on this topic that I came across was the May 2008 Fast Company Series Special Report: China in Africa. It is definitely worth a read. Author Richard Behar traveled to Mozambique, Zambia, The Democratic Republic of the Congo, and Equatorial Guinea in the six-part special. After all of his travels, he came to the conclusion (primarily through visiting extractive resource sites) that Africa is bearing the brunt of China’s massive energy and resource needs that are fueling the established Western and newfound hyperactive Eastern consumer economies. He compared China to a parasite infesting the Sub-Sahara, saying that the Chinese are, “there to get what they need to feed the machine.”

What Behar found was that, “while flat-footed Western governments largely watch from the sidelines, cash-flush Chinese firms — many with state-directed financing — are cutting deals at a dizzying pace, securing supplies of oil, copper, timber, natural gas, zinc, cobalt, iron, you name it.”

China needs Africa, and it has offered much in return for the resources that are driving its booming economy. The question that we need to consider, however, is what this means for those living at the BoP. Should we can point a finger at Chinese companies for potentially stripping Africa of its natural resources, or should we should instead encourage this much-needed investment and potential job opportunity?

Or, in this case, should we step aside and suppress our White Man’s impulses to apply what Easterly would call the “intellectual hubris at the top that disdains the messy realities at the bottom?” According to some Africans, they welcome the partnership with China because China “treats them like a peer.”