THE NEW GLOBAL DEMAND FOR NATURAL RESOURCES: OPPORTUNITIES FOR STRUCTURAL TRANSFORMATION IN AFRICA ERNEST ARYEETEY ISSER University of Ghana

ERNEST ARYEETEY

ISSER

University of Ghana

Outline Overview of Chinese and Indian transformation: Any Lessons for Africa? The Size and Composition of Trade between Africa and China & India Assessment of the Impact of Trade, FDI and Aid from China and India Africa Strategizing for a more equal relationship

Overview of Chinese and Indian transformation: Any Lessons for Africa?

The Size and Composition of Trade between Africa and China & India

Assessment of the Impact of Trade, FDI and Aid from China and India

Africa Strategizing for a more equal relationship

1 . OVERVIEW OF CHINESE & INDIAN TRANSFORMATION Economic reforms in China began a decade earlier than in India – Late 1970s Generally, Economists attribute China’s rapid growth to: - large-scale capital investment (largely financed by domestic savings and foreign investment) - rapid productivity growth For India, better institutional infrastructure, corporate governance standards and more commercially-driven companies are well-noted edge

Economic reforms in China began a decade earlier than in India – Late 1970s

Generally, Economists attribute China’s rapid growth to:

- large-scale capital investment (largely financed by domestic savings and foreign investment)

- rapid productivity growth

For India, better institutional infrastructure, corporate governance standards and more commercially-driven companies are well-noted edge

Some reform initiatives in China 1. Establishment of the special economic zones to attract FDI, boost exports and engender import of high technology products 2. Decentralization of economic policymaking, especially in trade and control of enterprises, from central to provincial and local authorities 3. Declaration of open cities and development zones as test grounds for free-market policies 4. Gradual elimination of price controls and general market reforms, among others

1. Establishment of the special economic zones to attract FDI, boost exports and engender import of high technology products

2. Decentralization of economic policymaking, especially in trade and control of enterprises, from central to provincial and local authorities

3. Declaration of open cities and development zones as test grounds for free-market policies

4. Gradual elimination of price controls and general market reforms, among others

Emerging Results in China World’s fastest growing economy (2005): GDP 4 th largest in the world 9.6% average RGDP growth (1979 - 2005 ) Rapidly rising per capita GDP ≈ $1,709 Exports - $762 billion; Imports - $660 billion Trade surplus estimated at $102 billion FDI $61 billion (2004), $58 billion (2005) Third largest trading economy in the world Projected to be 50% larger than US in 2025 and 100% by 2035 (Morrison, 2006)

World’s fastest growing economy (2005):

GDP 4 th largest in the world

9.6% average RGDP growth (1979 - 2005 )

Rapidly rising per capita GDP ≈ $1,709

Exports - $762 billion; Imports - $660 billion

Trade surplus estimated at $102 billion

FDI $61 billion (2004), $58 billion (2005)

Third largest trading economy in the world

Projected to be 50% larger than US in 2025 and 100% by 2035

(Morrison, 2006)

Some reform initiatives in India Deepening of private sector participation in economic growth process Government-led modernisation of agriculture through infusion of modern technology Sustained transformation of agriculture, forestry and fisheries, textiles and manufacturing to heavy industry, transportation and telecommunication

Deepening of private sector participation in economic growth process

Government-led modernisation of agriculture through infusion of modern technology

Sustained transformation of agriculture, forestry and fisheries, textiles and manufacturing to heavy industry, transportation and telecommunication

Emerging Results in India Since 1979 - average GDP growth rate 5.7% & 6.8% since 1994 4 th largest economy by PPP Relative to most East Asian economies: - much higher rate of return on assets - Lower non-performing loans in banking sector - Much better stock market performance Share of world GDP projected to rise to 11% (2025) Size to reach 60% of US economy (2025) Any lessons for Africa? Yes

Since 1979 - average GDP growth rate 5.7% & 6.8% since 1994

4 th largest economy by PPP

Relative to most East Asian economies:

- much higher rate of return on assets

- Lower non-performing loans in banking sector

- Much better stock market performance

Share of world GDP projected to rise to 11% (2025)

Size to reach 60% of US economy (2025)

Any lessons for Africa? Yes

2. TRADE BETWEEN AFRICA AND CHINA & INDIA Trade flows between Africa and Asia have increased steadily since 1991 Bilateral trade between India and Africa rose from $967 million (1990/1) to $9.14 billion (2004-2005). Trade between China and Africa has quadrupled in the last 5 years to reach $40 billion (2005) Since 2003, annual growth rate of Africa’s exports to China reached 30%, the highest.

Trade flows between Africa and Asia have increased steadily since 1991

Bilateral trade between India and Africa rose from $967 million (1990/1) to $9.14 billion (2004-2005).

Trade between China and Africa has quadrupled in the last 5 years to reach $40 billion (2005)

Since 2003, annual growth rate of Africa’s exports to China reached 30%, the highest.

Obvious complementarities exist between the economies of Africa and China/India: Africa imports manufactures - e.g. machinery, transport equipment, textiles, apparel, footwear and manufactured materials Africa’s Imports from Asia: China 36%; India 13% China and India import mainly raw materials – e.g. oil, non-oil minerals, metals and agricultural raw materials Africa’s exports to Asia: China 40; India 9% Trend largely driven by increasing demand from growing industrial sectors and purchasing power in China/India

Obvious complementarities exist between the economies of Africa and China/India:

Africa imports manufactures - e.g. machinery, transport equipment, textiles, apparel, footwear and manufactured materials

Africa’s Imports from Asia: China 36%; India 13%

China and India import mainly raw materials – e.g. oil, non-oil minerals, metals and agricultural raw materials

Africa’s exports to Asia: China 40; India 9%

Trend largely driven by increasing demand from growing industrial sectors and purchasing power in China/India

Current Trade & Investment Relations Nevertheless structure of exports and imports of Africa to Asia not different from structure of overall African exports to and imports from the rest of the world African imports from China/India are more diversified than the exports; For both geographic and product concentration, trade with China is more concentrated than trade with India – possibly influenced by India’s ethnic networks in Africa

Nevertheless structure of exports and imports of Africa to Asia not different from structure of overall African exports to and imports from the rest of the world

African imports from China/India are more diversified than the exports;

For both geographic and product concentration, trade with China is more concentrated than trade with India

– possibly influenced by India’s ethnic networks in Africa

Table 1: Geographic & Sectoral Concentration of Africa’s Trade with China/India: Herfindahl-Hirschman Index (HHI) Source: Broadman (2006) based on UN COMTRADE Data 0.02 (0.02) 0.30 (+0.15) 0.02 (+0.01) 0.04 (+0.25) Product Concentration of African Exports/ Imports 0.01 (-0.03) 0.05 (-0.03) 0.09 (+0.05) 0.17 (+0.09) Geographic Concentration of African Exporters/ Importers Imports from India Exports to India Imports from China Exports to China Indicator

Table 1: Geographic & Sectoral Concentration of Africa’s Trade with China/India:

Herfindahl-Hirschman Index (HHI)

Table 2: Composition of African Exports to China 100 14,111,720 100 1,119,229 Total 0.1 12,505 0.8 8,544 Miscellaneous manufactured articles 8 0.6 90,343 0.6 6,948 Machinery/transport equipment 7 10.7 1,505,543 13.0 145,007 Manufactured goods 6 1.2 170,302 2.8 31,115 Chemicals/products n.e.s 5 0.0 2,363 00 94 Animal/vegetable oil fat/wax 4 67.3 9,492,959 24.9 278,530 Mineral fuel/lubricants 3 18.8 2,648,121 50.3 563,237 Crude materials, except food/fuel 2 0.8 117,676 4.9 55,244 Beverages and tobacco 1 0.5 71,908 2.7 30,510 Food & Live animals 0 % US $ ‘000 % US $ ‘000 Product Name SITC 2004 1996

Comparative advantage suggests that Africa will export natural resources and import processed/manufactured products; But there are signs of a few countries exporting processed/manufactured products to China and India (SA and Nigeria mainly); And there appears to be growing prospects for more processed exports from Africa

Comparative advantage suggests that Africa will export natural resources and import processed/manufactured products;

But there are signs of a few countries exporting processed/manufactured products to China and India (SA and Nigeria mainly);

And there appears to be growing prospects for more processed exports from Africa

Foreign Direct Investment (FDI) FDI per GDP declining in China while increasing in Africa - for China, FDI more into manufacturing - For Africa, FDI focused on extractive sectors FDI from Africa to China steadily growing - $565 million (2002) to $776 million (2004) FDI from India to Africa focused on services, manufacturing & extractive sectors - Indian FDI flowing into Africa mainly through informal trade links.

FDI per GDP declining in China while increasing in Africa

- for China, FDI more into manufacturing

- For Africa, FDI focused on extractive sectors

FDI from Africa to China steadily growing

- $565 million (2002) to $776 million (2004)

FDI from India to Africa focused on services, manufacturing & extractive sectors

- Indian FDI flowing into Africa mainly through informal trade links.

Tariff Structures Relative to India, China more liberalized - About 45% imports zero rated Generally, tariffs apply only to few products but end up driving up average tariff rates for African exports Tariff escalation on African exports to China/India Lack of capacity limits benefits from relatively low tariffs on the few intermediate & final African exports African tariffs on Asian exports still relatively high - Average 30% on Agric. products in East Africa

Relative to India, China more liberalized

- About 45% imports zero rated

Generally, tariffs apply only to few products but end up driving up average tariff rates for African exports

Tariff escalation on African exports to China/India

Lack of capacity limits benefits from relatively low tariffs on the few intermediate & final African exports

African tariffs on Asian exports still relatively high - Average 30% on Agric. products in East Africa

3. ASSESSING IMPACT OF NEW RELATIONSHIP 3 primary channels of Impact transmission: Trade (direction and volume) FDI & Production Aid In all cases, takes direct and indirect forms: Direct - Usually obvious and clear Indirect - Less obvious, result from China/ India trade relations with other economies, then working out to impact on SSA economies.

3 primary channels of Impact transmission:

Trade (direction and volume)

FDI & Production

Aid

In all cases, takes direct and indirect forms:

Direct - Usually obvious and clear

Indirect - Less obvious, result from China/ India trade relations with other economies, then working out to impact on SSA economies.

Trade Channel - China and India are now major outlets for African commodities –creating more diversified export destinations - Higher global demand for African exports pushing up prices, thus improved terms of trade - Factor endowments, other economic resources yielding strong country-level complementarities (also suggesting sustainability of observed trade boom) - significant opportunities for greater African participation in network trade in Tourism and services exports (outsourcing – Ghana, Senegal & TZ)

- China and India are now major outlets for African commodities –creating more diversified export destinations

- Higher global demand for African exports pushing up prices, thus improved terms of trade

- Factor endowments, other economic resources yielding strong country-level complementarities (also suggesting sustainability of observed trade boom)

- significant opportunities for greater African participation in network trade in Tourism and services exports (outsourcing – Ghana, Senegal & TZ)

Lower priced manufactured imports from China and India are pushing African manufacturers out of business; e.g. - job losses and collapse of manufacturing industries in Nigeria, Zambia and Ethiopia; Growing calls for protection in African countries with governments torn between producers and consumers.

Lower priced manufactured imports from China and India are pushing African manufacturers out of business;

e.g. - job losses and collapse of manufacturing industries in Nigeria, Zambia and Ethiopia;

Growing calls for protection in African countries with governments torn between producers and consumers.

FDI /Production Channel Relative to trade, FDI more modest Contrary to traditional FDI flows, Chinese FDI involves long term extensive state investments Investments propelling African trade into cutting-edge multinational corporate networks plus spill-over effects from technology & skills transfer Aid/concessional loans rather than direct investment in major projects - stadiums, dams, etc. Ultimately aimed at specific economic and political interests

Relative to trade, FDI more modest

Contrary to traditional FDI flows, Chinese FDI involves long term extensive state investments

Investments propelling African trade into cutting-edge multinational corporate networks plus spill-over effects from technology & skills transfer

Aid/concessional loans rather than direct investment in major projects - stadiums, dams, etc. Ultimately aimed at specific economic and political interests

Aid flows Different patterns of Chinese assistance to SSA: - FDI/Aid partially or wholly flow from state-owned companies - Investments usually linked to pursuing strategic long term objectives like long-term access to raw materials & energy resources - FDI/Aid indistinct and limited data Examples of China Aid flows: 1. Official Economic Support -$1.2 billion (2002) 2. Ex-Im Bank loan for Infrastructure -$12.5 billion (2004) 3. Debt relief facilities and concessional loans, etc 4.Technical cooperation & HR development, etc

Different patterns of Chinese assistance to SSA:

- FDI/Aid partially or wholly flow from state-owned companies

- Investments usually linked to pursuing strategic long term objectives like long-term access to raw materials & energy resources

- FDI/Aid indistinct and limited data

Examples of China Aid flows:

1. Official Economic Support -$1.2 billion (2002)

2. Ex-Im Bank loan for Infrastructure -$12.5 billion (2004)

3. Debt relief facilities and concessional loans, etc

4.Technical cooperation & HR development, etc

4. AFRICA STRATEGIZING FOR THE FUTURE Emergence of China/ India – an opportunity requiring effective management for sustained growth Particularly, a whole new, well thought-out “game-plan” to ensure stable structural transformation of the economies based on rent income & capital accumulation from continued trade with China/India Short-Term: SE & NE Asian NICs experience suggests Africa must engage actively in global trade/investment, accumulating foreign exchange and rent income

Emergence of China/ India – an opportunity requiring effective management for sustained growth

Particularly, a whole new, well thought-out “game-plan” to ensure stable structural transformation of the economies based on rent income & capital accumulation from continued trade with China/India

Short-Term:

SE & NE Asian NICs experience suggests Africa must engage actively in global trade/investment, accumulating foreign exchange and rent income

Medium to Long-Term: Form capital and support rapid industrial growth/ development for: technological upgrade of industries; nurture infant industries; build export competitiveness; improve sector productivity and efficient application of rent income, among others Pragmatic functional and selective policy interventions focused on structural transformation of economic system for more diversified, competitive industrial base

Medium to Long-Term:

Form capital and support rapid industrial growth/ development for:

technological upgrade of industries;

nurture infant industries;

build export competitiveness;

improve sector productivity and efficient application of rent income, among others

Pragmatic functional and selective policy interventions focused on structural transformation of economic system for more diversified, competitive industrial base

Complementing Requirements ‘ Capacity is not destiny’, thus African governments must strengthen capacity of both national and regional institutions for effective management and negotiations deploy more potent economic diplomacy in engaging the support of international FIs, trade blocs and global governing bodies such as the WTO, UNCTAD Re-examine own trade policies, eliminate disharmonies and accelerate economic integration processes alongside other political arrangements APRM, a strategic tool to entrench political stability & good governance, for strong states & democratic regimes

‘ Capacity is not destiny’, thus African governments must strengthen capacity of both national and regional institutions for effective management and negotiations

deploy more potent economic diplomacy in engaging the support of international FIs, trade blocs and global governing bodies such as the WTO, UNCTAD

Re-examine own trade policies, eliminate disharmonies and accelerate economic integration processes alongside other political arrangements

APRM, a strategic tool to entrench political stability & good governance, for strong states & democratic regimes