Emerging Markets

Recolonizing Africa: A modern Chinese story?

Mark Esposito, Terence Tse and Merit Al-Sayed
Wang Shao | AFP | Getty Images

China, one of the world's largest 'emerging' investors, is ramping up investment in Sub Saharan Africa as it searches for natural resources, but whether the benefits are mutually beneficial is questionable.

China's economic growth has been a key narrative in the story of economic miracle over the past two decades. (Its foreign direct investment) FDI in particular has played a prominent role in economic interactions with many developing countries. Once a major recipient of FDI, it's now one of the largest 'emerging' investors, especially in Sub Saharan Africa countries, it has investments being in Nigeria, Sudan, South Africa and Angola among others.

The Asian economic super power is in pursuit of oil, gas, precious metals and mining to diversify its energy resource import's pool; it requires other resources to sustain its manufacturing capabilities. Africa can offer all of these things to the world's second largest economy: about 40 percent of global reserves of natural resources, 60 percent of uncultivated agricultural land, a billion people with rising purchasing power and a potential army of low-wage workers.

A fast-growing market

Like many emerging markets, African countries are one of the fastest growing markets and profitable outlets for exported manufactured goods. In the past, the U.K. and France were the prime trade partners for Africa, however, today, China is Africa top bi-lateral trading partner with trade volume exceeding $166 billion. Between years 2003 and 2011, its FDI in the continent has increased thirty fold from $491 million to $14.7 billion.

This is more than just a trend.

Not a long time ago, China eyed areas in Africa where resources were abundant and easy to extract. It focused on resource-rich countries such as Algeria, Nigeria, South Africa, Sudan and Zambia. Today, Sino-African investment focus has become broader. China is branching out into non-resource-rich investments, focusing on countries such as Ethiopia and Congo. Higher margins have attracted many state-owned enterprises and private companies to compete on gaining dominion in the vast continent. Oil, gas, metals and minerals constitute three-quarters of African-exports to China. Chinese Imports to Africa are more diverse, mostly comprised of manufactured goods.

Investment opportunities in Africa
Investment opportunities in Africa

To illustrate, China has made considerable investments in the fields of infrastructure targeting key sectors including ports refurbishments, telecommunications, transport, construction and water disposal categorically. Geographically speaking, China has become an important partner of East Africa with some of its biggest projects in Uganda with an estimated total investment of $596 million in 2012 alone.

Development concerns

China's increased presence in East Africa has gradually raised concerns about the economic development of these countries as well as the environmental and social sustainability of their natural resources; what remains unclear is whether China's recent foray in East Africa has any real intention in helping to promote economic growth and development in these countries.

China's rush for natural resources in Africa's energy and mineral resources wealth has driven the prices of these commodities. In recent times, China has undertaken multiple investments in Sub Saharan Africa that most people believe are due its search for natural resources to feed its industrial output. But it has not always been the case. Recently, the Bilateral Sino-African partnership has not yielded much competitiveness to Africa. There was no significant skill set development, nor adequate technological transfer or any measurable upgrade to the productivity levels in Africa.

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The dark reality is that the Chinese entry to the African market has collapsed the already frail and small and medium enterprises under increasing pressure from cheap Chinese Imports. According to one recent study, the Chinese growing presence in Africa has accrued a cost to the South Africa's economy in the range of 75,000 jobs in the years 2000-2011.

Mutual benefit?

Until a decade ago, China's influence in Africa was very limited. Between the 1980's and 1990's, there was a great economic change in the East African region as a result of the adoption of economic liberalization policies. These changes were brought about by the governments of various countries in the region resolving to use the private sector as its main catalyst for economic development. Since allowing access, China's involvement in Africa has increased significantly.

In recent times then, China's economic reawakening – especially in foreign markets – has demonstrated that the epicentre of what used to be the geopolitics of the region had shifted.

Given the impressive scale and scope of its engagement, China's return to Africa may turn out to be one of the most significant catalysts for developments for the region.

Indeed, China's relationship with Africa has always been a controversial topic of discussion among world leaders. China's relationship with Africa has often been described as "colonial", in which most of the benefits are far from mutual and often accrued to China. FDI, if allocated properly, is a method of financing domestic investments especially for countries that have inadequate capital. It also promotes advanced technology and management that indirectly stimulate growth in an economy.

But whether China's recent investment activities have had a positive impact on the selected East African countries is perhaps debatable. Arguments have been made for and against this growing trade and investment relationship between China and Africa. In some cases, China has seemingly created a dependency for the African countries, without providing real structural help to show integration in the local communities. Exploitation of labor, protectionism of technologies and distance from the interests of a real wish for inclusion, the current activities of China in Africa, raise pressing doubts.

Terence Tse is an Associate Professor in Finance at ESCP Europe Business School in London. Mark Esposito, Associate Professor of Business & Economics, Grenoble School of Management & Harvard University Extension School. Merit Al-Sayed is an economist and Strategic Projects Implementation Manager at the Arab African International Bank in Cairo.