Nipate
Forum => Kenya Discussion => Topic started by: veritas on June 21, 2016, 11:17:11 AM
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https://washleestone.squarespace.com/the-african-story-of-chinese-investment
China has increased its investment into Africa substantially over recent years, but Africa has not experienced expected growth. From 2000-2005, Chinese trade with Africa more than tripled, reaching nearly $30 billion in 2004, so we would expect to see a consistent and positive growth rate. Many theories state that their lack of growth is merely another example of the ‘African story’; no matter how much money is poured in, Africa simply will not develop. While it seems that China’s Foreign Direct Investment (FDI) is not being used wisely in Africa, this is a surface-level analysis. We must consider the specific ramifications that China’s investment has had on the African State and specific industry sectors to arrive at why Africa has not developed. It is not China’s investment itself, but the way they are investing. This is not another typical African case of wasted FDI; China is keeping this globally destitute area underdeveloped.
The ‘African Story’
First we must explore why China began to invest in Africa, and the nature that their investment has taken, to provide context for Africa’s paradoxical growth pattern. China’s economic rise has largely resulted in an increased demand for minerals to facilitate their economy, thus they have become dependent on access to Africa over the past thirty years. As global resource scarcity increases, China is increasingly adamant about securing access to primary commodities and is now the world’s largest consumer of oil and copper. Many see this as an opportunity for Chinese FDI to turn Africa around. After all, African economies are so small that a few entrants into their markets can have disproportionately large effects. With this in mind, many considered it to be another typical story of African failure when Chinese investment failed to provide growth for Africa. For example, Zambia was the third-largest recipient of Chinese foreign investment in Africa in 2007, but they entered an economic downturn in 2008. Many say that this must be Zambia’s fault, not China’s.
However, Africa’s critics believe that much Chinese aid aims for Africa’s economic success. FDI can be directed specifically towards oil exploration, as China’s investment has become concentrated in the oil sectors of specific nations such as Nigeria and Angola. Although they have largely increased their investment in Africa, much has been in resource and infrastructure. Their investment is misleading and does not contribute to long-term growth. Africa is experiencing deep trade integration where volume, price, and direction of trade is changing instead of the structure. This type of FDI perpetuates an unsustainable economy that is directed to China’s growth, not Africa’s. The infrastructure it builds are pipelines and mines and the benefits are oil and minerals that are sent back to China while the African states are compensated with resource rents.
The resource rents given to African governments are unsustainable sources of economic growth, and they also accentuate the Dutch disease. When China demands more resources, African currencies appreciate and other export markets are crowded out. This makes imports cheaper from China, and Africa only gains comparative advantages in primary commodities. While China took advantage of globalization in the 1980’s and developed economies of scale, Africa has only further developed its natural resource sectors. For instance, Zambia’s currency had appreciated by 35% against the United States dollar in 2005, and as China has become even more involved, the currency gap has increased. It is the marginalizing nature of Chinese FDI that keeps Africa underdeveloped, not Africa itself.
With this context, we can now see that Africa’s inability to develop has materialized in distinct sectors. China’s investment has harmed the African State and three industrial sectors I will now explore mirror China’s level of involvement: natural resource extraction, manufacturing, and production of consumer goods. There are unique reasons behind why investment has failed with each level of progression of industry. No sector’s outcome is epiphenomenal; they all tie back to China’s investment.
The African State
We will first address the effect that China’s investment has had on Africa’s state structure. In many areas of Africa, states suffer from poor government quality, thus the state is often blamed for the failure of China’s FDI as well. However, Africa’s state structure is not mutually exclusive to Chinese investment. Many African governments lack high-quality governance, but China’s resource revenues reinforce the authoritarian and neopatrimonial states already in place. In Africa’s many authoritarian regimes, there is no incentive to develop relations with the public or to create a justifiable political arena. The extraverted and resource based economy that Chinese FDI perpetuates the traditional power of leaders, so control of the state is the primary source of empowerment and wealth.This empowerment brings entitlement to rulers and encourages the authoritarian systems already in place.
This encouragement of authoritarian systems has prevented Africa from developing modern democratic systems. Without natural resource surpluses, democracies often outgrow autocracies, as the government cannot rely on resource rents to function. With resource rents, governments do not depend upon the public for their personal well being. They have the ability to turn resource revenue, aid, and a minimalist state into their personal success, so the leaders in some of the poorest countries are paradoxically wealthy. Specifically, aid received by China has been used to fund Angola’s reelection campaign and the Democratic Republic of the Congo’s 2007 state budget was mostly used to pay elitist’s salaries. There is no incentive here for elitists to stop acting dictatorially and start acting democratically.
Those attracted to power are then inevitably interested in personal gain and gaining authority over resource revenues. Those in authoritarian regimes also have no checks on their power, so they are not held accountable when China invests in primary commodities. Those in power are making easy money, which leads to easy spending that correlates with the boom and bust cycle. Governments often do not save during booms, but increase spending rapidly when oil and copper prices soar. These surges in spending then cause debt in subsequent crashes. Developing countries are readily given loans while repayment is decided later, and interest rates are incredibly high by the time repayment is negotiated. Zambian small and medium sized businesses pay an average of 37% interest on loans while large firms pay about 20% and Chinese companies can often access state-subsidized credit so China keeps on lending. With surplus during booms and loans during busts, there is no faith in the market economy. This comes full circle, as debt cannot be stabilized by a functioning state or rainy day fund when the government has spent all of its revenue on salaries and campaigns. The original lack of an economic sector in authoritarian regimes increases when the state is receiving constant funding.
The argument for Africa’s state structure as the cause of its underdevelopment is thus incomplete. The state reinforces an underdeveloped economy, which in turn reinforces an authoritarian state. However, the scale of this cycle would be much smaller without the specific nature of China’s investment. Africa began with a lack of state quality, a fact that is perpetuated and accentuated by China’s investments in primary commodities and have negative repercussions in the economy. The primary commodity sectors are then the only ones that survive this volatile cycle, and Africa’s underdevelopment continues.
China’s Extraction Based Investment
China’s economic rise has led it to invest in primary commodity sectors in Africa. We must now address the specifically imperialistic qualities of China’s investment. Decolonization did little to develop capitalism (Mohan and Tan-Mullins 589), so while African states are free, they easily succumb to the neoimperialistic structure of Chinese investment. China has combined aid, trade, and FDI in a way that has reverted Africa to its colonial links rather than promoting Africa’s economic freedom (Kaplinsky and Morris 561). This combination forces Africa to rely on China for all three variables. While aid, trade, and FDI all have potential for bettering economies, the combination of these three locks Africa into dependence. Investment has the stigma of being economically transformative, but China’s investment readily became a reinstatement of a colonial-style economy (Carmody and Hampwaye 85). This colonial-style economy then has one revenue base: natural resources.
Resource-rich states are growing the most quickly from a strictly financial standpoint because they have an economy in a neocolonial region. Resource-rich countries have the highest returns on investment in times of boom, so many Chinese investors look at these statistics alone and place all of their funds in African resources. They invest in volatility rather than growth. China’s “tight bundling of investment with tied-aid” is then used to facilitate the export of natural resources directly to China (Kaplinsky and Morris 562), thus enhancing the imperialistic qualities. Africa’s dependence substantially increases when the very things being invested in are shipped out of the original area. All African countries gain are resource rents.
This process of bundling aid, trade, and FDI further encourages China’s investment, as it is easily done and highly lucrative. The specific resource sectors of mining and oil have attracted much investment, as they enable China to climb the global ladder without providing capital for actual industries (Lowe and Kenney 1435). Zambia currently has over 200 Chinese companies, mostly in mining, and China uses its established status in Africa to buy up other foreign investments in the mining sector (Carmody and Hampwaye 87). In oil, many Chinese companies “are state owned and subsidized” (Carmody 37), so China has an easy pathway into the resource sectors. Over 800 Chinese multinational companies are in Africa working on fixed-term extraction projects (Mohan and Tan-Mullins 595), so they are heavily invested, but primarily in fixed-term extraction. This drastic investment in extraction then crowds out other potential areas for growth and investment, and when these contracts end, there are no other areas for Africa to rely on.
These other areas are effectively the economies of African states, which are small to begin with and do not attract much investor interest aside from resource attraction. Many investors are not aware of their opportunities, so those that do invest in African states realize the vast monetary rewards they will gain and the lack of competition they will face (Carmody and Hampwaye 92). Once they are able to quantify their potential revenues, investors often have little interest in a domestic consumer base (Lowe and Kenney 1435). Domestic economies are much smaller than resource industries, so there is no incentive to develop the economy beyond resource extraction.
Companies are also not investing in infrastructure for fear of losing funds to an undeveloped economy. “Private investment…[has] been to finance the extraction of natural resources” (Collier 88) while private investment in middle income countries is often in manufacturing and goods production. Prices are thus higher for commodities than manufactured products in Africa, so China capitalizes further on resource extraction (Carmody 106). This has led to “Chinese stockpiling of copper” that has almost doubled copper prices since 2009 (Carmody and Hampwaye 87). Developing states are also prisoner to demand shocks and global prices for resources. The price of oil fell from $150 a barrel to $40 a barrel in only a year (Carmody 6), so revenue for petro-states varies highly. These volatile prices apply to other commodity sectors as well, as Zambia must rely on global copper prices, which are unsurprisingly driven by China (Carmody and Hampwaye 96). China driving prices further emphasizes Africa’s dependence that is created by China’s original bundling of services.
Increased dependence on China has led to massive exploitation, which is again indicative of recolonialization. “The development of the continent’s oil resources” should create stability in global oil markets (Carmody 76), but merely developing physical infrastructure does not create stability. Physical structures are indeed necessary for economic development, but they are the first step on a trajectory. China only develops physical infrastructure without the necessary industry to surround it. Everything but the nation’s primary resource is imported, thus domestic economies do not develop. Africa then only has primary commodities to trade, and trade based in commodities produces financial growth without economic growth in neopatrimonial states. These two components reinforce each other: commodity investment encourages commodity trade, which enforces the original commodity sectors.
These natural resources are not only the main revenue for African states; they are increasingly commanded by China. China has major infrastructure projects in 35 African countries, but they are mostly funded by natural resource deals (Mohan and Tan-Mullins 595). This produces a risk born primarily by African countries, and this risk will only continue to grow as China takes more control over the resources themselves; this risk is synonymous with exploitation. Additionally, “the exploitation of developing countries by the mining and oil companies is perfectly legal” (Stiglitz 140), so there is no incentive to stop when foreign companies risk little. African countries risk their security and economy when they are exploited, but foreign countries do not. African countries are then marginalized when foreign companies invest heavily in specific industries while the African economies bear the risk of volatile commodity industries.
As natural resource extraction continues to build, China and other rising economies have realized the potential value they can add to resources. China demands that exports are “unprocessed, meaning value is added primarily in other economies” (Carmody 54). Primary commodities are now 80% of sub-Saharan Africa’s commodity exports (Carmody 39); here is the epitome of deep trade integration. A focus on natural resources not only stagnates African economies. It also develops China’s economy and enables them to exploit Africa even further.
Read more: https://washleestone.squarespace.com/the-african-story-of-chinese-investment
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I think first he/she need to explain why he think Africa has not developed when during this chinese period it has had unprecedented economic growth rate of 5-6% beating any other sub-region.
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(http://gadocartoons.com/wp-content/uploads/2016/05/NA.May_.2016.African.Leaders.and_.China_.jpg)
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I think first he/she need to explain why he think Africa has not developed when during this chinese period it has had unprecedented economic growth rate of 5-6% beating any other sub-region.
Quote: but Africa has not experienced expected growth
referred to the past and not the present, at present:
While it is positive that the elevated current account deficit narrowed somewhat last year, the fiscal deficit ballooned and the large twin deficits remain worrisome.
http://www.focus-economics.com/countries/kenya
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(http://gadocartoons.com/wp-content/uploads/2016/05/NA.May_.2016.African.Leaders.and_.China_.jpg)
:D
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I fear they'll strengthen more nefarious connections like organ trafficking...
The Taiwanese residents that were deported from Kenya to the mainland will be prosecuted in China for telecommunications fraud, the Chinese government announced yesterday.
This is despite the fact that they were already acquitted of the same charges by a Kenyan court earlier this month. China's Ministry of Public Security explained that the 32 Chinese citizens and 45 Taiwanese were suspected of defrauding victims in the Chinese mainland and were wanted in China.
According to a Xinhua report, the deportees had called up victims in the Chinese mainland and presented themselves as law enforcement officers to extort money. In total, the Nairobi-based group had managed to cheat mainland Chinese victims out of millions of yuan in nine different provinces. Some of their victims even committed suicide after losing their life savings, the report added.
The suspected Taiwanese scammers were deported to the mainland in two groups, with the first eight leaving Nairobi on a China Southern Airlines flight last Friday, and another group of 37 being deported earlier this week.
Taiwanese officials were outraged, saying that the Taiwanese had been victim of an “uncivilized act of extrajudicial abduction,” by China, and accusing Kenya of breaking international law in order to strengthen ties with the mainland. On Tuesday, Taiwan's Foreign Ministry said that some of the Taiwanese had tried barricading themselves in their Kenyan holding cell to avoid deportation to the mainland and that Kenyan police used tear gas and guns to get them on the plane.
Talk about a corrupt judiciary.
http://shanghaiist.com/2016/04/14/china_prosecute_taiwanese_deportees_kenya.php
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Loan sharking leads to all sorts of micro economic collapses, prevalent when this country lends this country etc. like that domino effect from Hungary across Eastern Europe and the collapse of communism... this drama summarizes loan sharking in Korea.. http://myasiantv.se/drama/my-beautiful-bride/episode-1/