Africa’s Emerging Partners: Friend or foe?

By By Nicholas Norbrook in Tunis and Marshall Van Valen in Libreville

Posted on May 30, 2011 07:50

Land grabs and exploited workers dominate the headlines, but Africa’s relationship with emerging partners is more complex and will boost the continent – if states negotiate wisely

Land grabs and exploited workers dominate the headlines, but Africa’s relationship with emerging partners is more complex and will boost the continent – if states negotiate wisely.

Fact or fiction? African mineworkers toil for peanuts, under the watchful eye of the gun-toting Chinese overseers. Guinea’s green savannah is etched ragged with intensive palm-oil plantations. Madagascan communities are pushed off their land as South Korean land merchants order the island’s ancestral earth to be ploughed up for export crops. Asian banks rush to sign up African governments for new loans they can ill afford, in exchange for poorly constructed buildings. Indian gem merchants bribe politicians to gain access to huge diamond reserves, with profits spirited out of the country via anonymous Mauritian front companies. Taxes avoided, workers exploited, environments despoiled, resources bled, countries indebted. The dream deferred.

The bogeymen raised by the advance of Africa’s emerging partners are projections of post-colonial guilt. After decades of achieving little for Africa, the West has been shaken by the arrival of powerful emerging economies on the continent. Self-appointed Africa saviour Sir Bob Geldof says: “China is engaged in an entirely mercantilist expedition in Africa. They are driving huge amounts of growth. But at what cost?” Chinese officials deny the charge. “For China to sustain its development, we need to have a stable supply of energy and minerals. I don’t think that is something bad, or something evil,” says Liu Guijin, China’s special representative for Sudan. Geldof is currently raising $1bn to launch a private equity fund aimed at Africa.? A new report from the OECD and the African Development Bank (AfDB) is more measured.

There are three major reasons to celebrate the arrival of new partners. The first is the basic mechanical effect of competition: when you multiply competitors, you bring down transaction costs. This has fundamentally altered Africa’s ability to access goods and services at reasonable prices.

The second is experience. Turkey, Malaysia, South Korea, China, Brazil and India have all dragged their populations into middle-income status in the past few decades. The relevance of their experience – be it in agriculture, low-tech manufacturing, or urbanisation – is golden for African policy-makers.

Lastly, these emerging partners provide a huge boost to African economies and are helping to kick-start industrialisation across the continent. There is more revenue from the sale of commodities, but also new financing mechanisms, new infrastructure and new markets for African produce.

Concerns remain about environmental issues, the way opaque deals are being cut with African elites, the risk of a new collection of white elephant projects, and new avenues for capital flight. However, these are dwarfed by the benefits brought by Africa’s emerging partners. The numbers are astounding. Africa’s total trade went from $247bn to $673bn between 2000 and 2009. While traditional partners from Europe and North America doubled their stake, emerging partners expanded exponentially, with China eclipsing the US as a trade partner to Africa in 2008.

Behind the numbers lie two different paths for Africa’s relationship with emerging partners. The more positive direction is taken by Gabon, where the government has managed to bring several partners to bear on different sectors, working together and also in competition. There is a joint Singaporean-Indian fertiliser plant under construction, a Singapore-backed export processing zone, a huge Chinese-financed iron ore mine and rail project, and an Indian road and social-housing construction, with the South Korean national oil company wanting to build a new refinery and help create a Gabonese national oil company. Angola, too, is a good model. Despite the oft-quoted example of the cracked walls of a hospital built by Chinese contractors, there is a ruthlessness with which Angolan oil sector management has refused to be pushed around: a Chinese company that demanded an exorbitant fee to build a refinery came crawling back with a better offer. President José Eduardo Dos Santos loudly speaks of having “other partners”. The Luanda government brought in the IMF and is launching a eurobond to diversify funding sources.

Another path is followed by Zimbabwe. President Robert Mugabe’s government has handed diamond fields to Chinese businessmen and sends much of its tobacco to Asia, but instead of holding its emerging partners to the same standards as Gabon and Angola, it is giving investors from China and India a free ride.

African governments are slow to put pressure on foreign companies to get them to respect labour regulations or transfer technology. Zambia’s deputy minister for Southern Province, Elijah Muchima, paid a visit to the Collum coal mine in December 2009 and condemned the mine’s owners, saying, “We would rather be poor than to subject our citizens to inhuman conditions. Government will not tolerate such attitudes of enslaving our own people.” After the mine owners shot at workers who were protesting working conditions in October 2010, Muchima meekly said: “Zambia cherishes Chinese investment.” Government regulators have done little to hold the company to account.

AfDB president Donald Kaberuka thinks that the failure to provide safety nets – and jobs – for the most vulnerable in society is African governments’ responsiblity. “Before we go and blame the Chinese, we should blame ourselves. We need activist policies of social inclusion as governments, to ensure this economic growth gives equal opportunities for people to grow.

“Brazilian companies, in an attempt to set themselves apart, largely hire local staff for jobs. But aside from employment, it is the perceived lack of quality in Chinese infrastructure – roads in Zambia being washed away, for example – that feeds the negative stereotype of emerging partner engagement.

Tied aid and other incentives can lead to the appearance of impropriety. In late April, the Uganda legislature called on works minister John Nasasira to explain why the China Communications Construction Company was awarded the contract for the Kampala-Entebbe road without competitive bidding. Corruption has led to Chinese road contractors being banned from World Bank-financed projects in Africa, and corrupt rice deals with African countries have led to scandals in India and Vietnam.

Rapid economic development puts people in the path of progress. However, Craig Bond, who runs Standard Bank’s operations in China, says he has seen a real change in the mindset of major Chinese corporations over the past few years. “All their questions are on how do we get this transaction over the line, how do we win this tender, and so on. But very shortly thereafter they ask: What are the issues we need to be aware of from an environmental perspective? What are the labour laws? Will we be expected to use local labour exclusively or can we bring some Chinese labour? Honestly, three years ago those issues weren’t even on the table.

“Chinese academic Zhu Ming of the Shanghai Institute for International Studies says that too much attention is focused on the role of the Chinese Communist Party, and that the drive for more corporate social responsibility is coming from civil society and companies interested in their long-term bottom line. There is also the phenomenon of the ‘A-Team’ of Chinese infrastructure – the best engineers, crew and developers – who hitherto had been busy in China but now have spare capacity to pitch for bids in Africa. These developers, such as Guangdong Nuclear, which is pushing hard for entry into South Africa, also have the advantage of access to the balance sheets of China’s biggest banks.

This ability to bring financing is a huge advantage, especially with the current funding difficulties in Europe and the US. This finance comes in different forms. In April, India followed China’s lead in providing large export credits, with a long-term concessional credit scheme to help build export infrastructure in Africa, the Gulf and neighbouring countries. Not everyone is comfortable with the growth of easy credit. Standard Bank Namibia managing director Mpumzi Pupuma wonders if African countries are not rushing too fast into another cycle of debt. Kaberuka is more serene: “There are several countries, like Ghana, Nigeria and Zambia, who are what I would call sub-optimally in debt, and who should probably be looking to tap the capital markets.”

Standard Bank’s Craig Bond underlines that African countries now realise they have two attractions for emerging partners: their resources, but also their growing consumer markets. Africa will be a $1.4trn consumer market by 2020, according to McKinsey & Co. The fear remains that, as in the past, Africa will remain stuck at the level of raw-materials supplier. Cheap counterfeit ‘Dutch wax’ cloth from Asia is crippling the local textile industries in Côte d’Ivoire and Nigeria.

But there is also the new phenomenon of the special economic zones China has set up across the continent. With sharply rising labour costs at home and a desire to move up the value chain, China is searching to outsource industries such as textiles and leather goods. In Ethiopia, the resilience of the local shoe industry has been rewarded with the arrival of Chinese factories in the leather sector. Friendship Tannery is starting production in April with a capacity of 16,000 skins per month and plans to open shoe and glove factories next.

In what is perhaps the shape of things to come, a handful of Chinese and Indian automobile manufacturers have announced projects across the continent. In late April and early May, China’s Brilliance Auto said it would set up a 50,000-car-per-year factory in Benin, while China’s Great Wall discussed plans for operations in South Africa. Meanwhile, India’s Mahindra said it was considering establishing tractor assembly plants in Ethiopia, Kenya, Morocco, South Africa, Tunisia and Zambia.

According to the OECD, Africa’s production of manufactured goods has doubled over the past decade, with Tunisia, Egypt, South Africa and Morocco in the vanguard. But the share of manufactures in GDP has steadily declined.

Perhaps Africa’s greatest challenge with regard to its emerging partners is foreshadowed by Brazil, whose economic development is profoundly marked by the rise of China as a trading partner. In an analysis of the presidency of Luiz Inácio Lula da Silva, historian Perry Anderson argues that the sale of agricultural and mineral commodities to China pulled the country backwards, “taking Brazil back to earlier cycles of reliance on primary commodities for growth.” Between 2002 and 2009, the share of manufactures in Brazilian exports fell from 55% to 44%, while the sale of raw materials rose from 28% to 41%.

The answer, say economists urging countries to move up the value chain, is investment in research and education. Ethiopia’s leather industry renewal was no accident – the Leather Industry Development Institute of Ethiopia helped local manufacturers up their game. The lessons for a country like South Africa, whose agriculture, mining and finance-led economy bears a close resemblance to Brazil’s, are clear.

Beyond manufacturing, which is still in its infancy in Africa, agriculture holds the greater prize. The Chinese model has inspired Ethiopia to rewire the way agricultural know-how is spread through farming communities. China pushed businesses and research institutions to work together, spinning off successful companies in the process. Government contracts reserved for these hybrid research businesses have created massive incentives. Calestous Juma, a Kenyan academic at Harvard and author of The New Harvest, says: “Vast improvements were seen immediately: from 1997 to 2000, university-affiliated enterprises experienced annual sales income growth of 32.3%, with 2,097 high-tech ones emerging in China with a total net worth of $3.8bn by 2000.

“At the field level, emerging partners bring new plant hybrids to boost yields and produce hardier crops. Taiwanese scientists provided Ugandan farmers with a cure for banana xanthomonas wilt disease, which was wasting a third of the country’s banana crop. The father of China’s hybrid millet programme, Zhao Zhihai, has developed a variety that is already producing a bumper crop in several countries across Africa.

As agriculture goes industrial, Brazil’s experience in tropical agribusiness will be invaluable, especially in sugar cane-to-ethanol and cassava processing. The Brazilian agricultural research institute EMBRAPA set up a branch in Ghana in 2008. The case study of how the cerrado was turned from an area of poor, acidic soils into a powerhouse of export agriculture should sit on the desk of every African agriculture minister.

Traditional partners have a role here. Despite much handwringing in Brussels over Europe’s role in the world, the EU has had a huge impact by exporting its guidelines and regulations. Addax & Oryx Bioenergy, for example, has launched a $275m project to export ethanol from Sierra Leone. It is shaping up as a global benchmark for how agribusiness investments should be made. African countries should use traditional partners as leverage in their bargaining with new investors. Beyond their role as a negotiation counterweight, traditional partners have other strengths that African policy-makers can use to their advantage, such as in institutional capacity building. Business law harmonisation in the East African Community, for example, is partly carried out by Eversheds, a law firm from the UK.

The key, then, is knowing how to strike smart bargains with emerging partners. The increasing number of African countries tapping into the African Legal Facility of the AfDB shows that many of them realise they want the best brains on their side of the table. Researcher Lucy Corkin of London’s School of Oriental and African Studies explains that most African countries make the mistake of not realising the value of the assets they have: “Perhaps through their years of engagement seeking western aid, they are not too geared up to understand the business side of things.

“The rise of the emerging global players signals the most important shift for years to come. “If Washington and Brussels have still not succeeded, eight years later, in imposing their will on the less-developed world through the abortive Doha round, credit must first of all go to Brazil,” says Anderson.

The economic and political potential of the billion-strong populations of China and India have also only begun to reshape the balance of power and influence, in ways that will both help and hinder African countries.

All the more reason to celebrate the accession of South Africa to the BRICS grouping, bringing with it the prospect of Africa – representing a continent of more than a billion people – taking a more robust role in global structures of political and economic influence. The future will be determined by how well African governments play their cards with new and old partners alike.

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