Giraffe in city street [News]The recent issue of the Japan Center for Economic Research (JCER) Asian Economic Policy Review (AEPR) focused on the impact of China’s interaction with the rest of the world. In the words of the AEPR editors:

“The single biggest development in the global economy over the past generation has been China’s opening up from self-imposed isolation and its reintegration with the world economy. This process, which began 35 years ago, is still incomplete and will continue to shape the world economy for some time to come.”

Peter Draper, Director of Tutwa Consulting, Dr Martyn Davies, CEO of Frontier Advisory, and Hannah Edinger, Director of Frontier Advisory, in their article Changing China, Changing Africa: Future Contours of an Emerging Relationship”, examined the impact of China’s interaction with Africa and how changes in China will shape changes in Africa.

The paper focuses on the changes in the domestic political-economy environment in China and how these changes can impact its relations with Africa. Historically China’s interest in Africa has been carefully planned, with the Forum on China–Africa Cooperation (FOCAC) serving as the umbrella, and State Owned Enterprises (SOE’s) underpinning China’s commercial ties with the continent. But as China gears up for economic reforms towards a domestic consumer based market, the historic shift has implications for African growth and development strategies that are as yet not fully appreciated.

China’s political and security policy concerning Africa is anchored in non-intervention and unconditional aid. Critics argue that this legitimates persistent human rights violations and international crimes. However with China’s increasingly younger top leaders a natural shift towards liberal policies can be expected in time, specifically concerning human rights and the environment.

In this regard, two regulatory documents were recently drafted and implemented to address the social and environmental impact of Chinese SOE’s. The Corporate Law of China provides a legal framework for Corporate Social Responsibility (CSR) while the Guidelines for Central State-Owned-Enterprises lays down best CSR practices or “human oriented” policies for SOEs. Nonetheless, while Chinese CSR undertakings are being implemented across the social sphere, (education, health and infrastructure) critics argue that the reported contributions have been superficial and for Chinese firms CSR is a non-essential business endeavour.

The prevailing China-Africa economic interaction consists of resource extraction, mainly commodities, from Africa in exchange for infrastructure development and Chinese manufactured goods. While infrastructure investment addresses Africa’s supply side shortcomings it could also be argued that the increased infrastructure derived from investment could increase China’s rate of extraction, furthermore the influx of cheap Chinese consumer goods is having a detrimental effect on Africa’s efforts to develop manufacturing value chains. This argument is validated when considering that the majority of trade and investment from China flows towards resource rich countries.

The environmental impact of China’s entry into Africa mirrors China’s domestic attitude “which has prioritized economic development over the environment”. Efforts are being made to decrease China’s environmental impact on the continent but the effectiveness of these efforts is debatable.

Considering the details of China’s expansion into Africa, dominated by SOE’s and mostly perceived as self-serving, the new wave of economic rebalancing “offers the prospect of a structural shift in the patterns of China’s economic engagement with Africa.” Beijing’s pursuit of “growth at all costs” is being swept aside for a new focus on developing the domestic consumer market, aiming for quality and sustainable growth. This reform should cause China’s economy to cool down; as China’s growth slows so will gross fixed capital formation by the state which in turn should mean a relative decrease in the state’s ability to influence SOE’s and direct its interests into the global economy. Private firms, under this new consumer driven economy, should find the domestic market increasingly crowded and look for greener pastures outside the borders. China’s light industrial manufacturing sector is also reaching a point where the rising cost of production is outweighing increases in productivity and, in the medium term, would need to relocate these functions offshore to remain competitive.

Peter Draper presenting the paper at the WTO public forum 2 October 2014 – Geneva, Switzerland

Therefore, the new economic rebalancing wave is expected to compel private Chinese firms, representing real competitiveness, to follow the SOE’s move into Africa. A shift from resource extraction to manufacturing, forged by market forces, is expected as Beijing pursues this reform. Tendencies to offshore labour intensive manufacturing to Africa and other regions should increase. East Asia’s growth model, referred to as the flying geese pattern, will most likely flock initially to lower cost production countries like Vietnam, but down the line could include African countries experiencing the same political economic impacts as previous goose nests. The move is inevitable as Africa has the advantage of being rich in natural resources, has relatively low labour costs, rapidly growing, youthful populations, and is in close proximity to global markets.

This being said geographically closer states (Bangladesh, Indonesia etc.) will enjoy nesting before Africa does not only due to their proximity to China but also due to their comparative advantages: having higher literacy rates, larger young populations, and lower labour costs than most sub-Sahara African states.

For Africa to enter Global Value Chains (GVC’s) openness towards investment from Multinational Corporations (MNC’s) is imperative, but for MNC’s to invest African countries would need to embrace less restrictive/protective trade regimes, develop strong infrastructure backbones, improve the quality and quantity of available human capital, improve global and domestic logistic capacities, enhance customs and standards procedures, and provide safe investor environments.

The paper is available on the Wiley Online Library for registered users here, and the presentation on the paper is available for download here.

For further insight listen to this Classic FM interview – a preview of Frontier Advisory’s recent China-Africa Forum – in which Peter Draper discusses China’s strategic game, what the upshot for Africa’s businesses will be, and the move from SOE’s to private firms.