What Nigeria, Africa can gain from China

Is Nigeria right to look up to China for economic succour? Immediate past British Secretary of State for Business, Innovation and Skills Sir Vince Cable, in a paper delievered at the Africa Today summit in Abuja last week, laid bare what Nigeria and Africa stand to gain from its relationship

with China. 
Below is the full text of his paper:

One of the people that inspired me to go into journalism exactly 40 years ago  this year, was the famous Sunday Times editor Gbolabo Ogunsanwo. Some of you, old enough, will know him.

He was to me a role model. He made a strong impact in me with an article he wrote in his column Sunday after the coup that toppled General Yakubu Gowon as head of state.

It was such a very power article, so powerful that over 40 years after I still remember and can quote its introduction almost accurately – as if he wrote it only yesterday.

He said: “These are not the times we used to know. Whoever thought that these leaders ruling us today ever existed. Or that circumstances could combine to produce what we are witnessing today. This is the first revolution, the beginning of many to come.”

Distinguished Ladies & Gentlemen, I decided to quote the illustrious Gbolabo Ogunsanwo in my short remarks to welcome you all to this our 2016 Africa Today Summit today because of the current state of our nation, Nigeria.

We have a new government led by President Muhammadu Buhari that is grappling with enormous economic, security and numerous other problems and challenges, which they inherited from the immediate past Jonathan’s administration. An economy that has been run so recklessly – that to continue as if business should be as usual could certainly not be an option for this new sets of leaders we now have in Nigeria today.

Therefore, like Ogunsanwo, these certainly are not the times we used to know. Things have to change. Attitudes have to change. We must put a stop to reckless spending, we must hit corruption head-on and tough decisions have to be taken by the government we have elected led by President Buhari and his Vice President Yemi Osinbajo.

I have heard people saying to me that Buhari was God-sent. That if he had not won the last election and Jonathan had continued as president, Nigerians would not have known about the enormity of the damage that had been done, especially to the economy. And that the country would suddenly have just come to a halt one day with the level of corruption that was going on.

Therefore, it doesn’t need much convincing to accept that the new Buhari-Osinbajo government has a choice to make: it is either their own administration continues with the spend and burst style of the Jonathan government or it charts a new course for Nigeria of taking the tough decisions, and encouraging Nigerians to fasten their belts to make the necessary sacrifices that will help the country bring its economy back on track.

With what we have seen so far, in almost one year of this administration it would seem this government has taken the later option of doing things differently no matter how painful it could be to the people and the nation on the short term.

China’s rapid emergence (or re-emergence) as an economic super power has caused controversy in Africa as in the UK and elsewhere.  The former governor of the Nigerian Central Bank, Lamido Sanusi, has talked about “a new form of imperialism”.  But others, perhaps more cynically, take the view that this is a band wagon Africa should be on; Victor Kasongo, former mining minister of the Congo observed “if China wants to dominate the world, it is not our business to stop them”.  The Chinese, themselves, seem anxious to play down the difficulties; the foreign minister, Wang Yi, says “we absolutely will not take the old path of western colonialists” while the prime minister, Li Keqiang acknowledges “growing pains”.

Revealingly the African public take a very positive view of the Chinese; 70% according to the Pew Global Attitude Survey last year, as against 40% in Europe and 57% in the rest of Asia.  And most objective academic studies of the impact of Chinese trade and investment in Africa have been positive, though they were conducted before the collapse of commodity prices caused primarily by the Chinese economic slowdown.

I approach this issue in a neutral frame of mind.  I have been involved with, and supportive of, African development for half a century: my first professional job was in the Treasury, the Finance Ministry, in post-independent Kenya.  We didn’t see much of the Chinese then, though they built a railway in neighbouring Tanzania, to the Zambia border, which sadly failed to generate the traffic and the development expected of it.  I visited Nigeria several times in the 1990’s, during the rule of the military dictator Abacha, and had the dubious honour of presenting to him Shell’s Nigeria scenarios which I had developed as the Group’s Chief Economist.  My pessimistic scenario, the Road to Kinshasa, caused considerable upset amongst the Presidents’ aides, though it seemed plausible at the time.  I am pleased to note that modern Nigeria is a different country: democratic, much reformed and more optimistic.

I was also, until my party lost office a year ago, responsible in the Coalition government as Secretary of State for the UK’s trade and business policy and I took a positive view of China’s role.  We welcomed Chinese investment in the UK even in sensitive fields like telecommunications and nuclear power.  China has become the main source of overseas students in UK universities.  And we gave top priority to building trade links with China and India.  It is important to be tough where there has been ‘unfair’ trade practice – as with the alleged ‘dumping’ of Chinese surplus steel  – but, overall, I see trade and investment links with China as, on balance, a force for good.  Following the visit of President Buhari to China I can see that the same essentially positive assessment has been made here.  I am sure that is right but we need to examine the criticisms including from Nigerians who fear that the relationship is one-sided and not obviously beneficial to Nigeria.

What surprises me about the debate in Africa is that people are surprised by the growing role of China.  After all, China is now an economic superpower comparable in scale to the USA (and on some measures is bigger economically), with India now number 3 in the league table ahead of Japan and Germany.  Of course, if we treat the EU as a unit, it dominates the world economy, but it isn’t yet – to my regret – a unit.  As an economic superpower China is returning to a position it occupied in the centuries before the UK, then wider European, industrial revolution: the world’s dominant economy and trading power (followed by India).

China isn’t just, any longer, an inward looking economic superpower.  Following the reforms introduced by Deng, incorporating key elements of a capitalist economy, and opening China to foreign investors and to liberalised trade, China has experienced not only a remarkable transformation in living standards but has made a massive impact on the world economy.  It is the world’s largest exporter – mainly manufactures- and importer of raw materials and capital goods.  And its excess of savings over (very high levels of) investment has spilled over into the rest of the world.  Many of the defining phenomena of the world economy in the last two decades originate in China: the disinflation in manufacturing prices and arguably the compression of wages in rich countries as a result; the boom in commodity prices notwithstanding economic weakness in the developed world; the flood of capital into western banks pre-crisis looking for high yields in highly leveraged lending.  And more recently the sharp fall in oil and commodity prices generally.

The impact on Africa is reflected most obviously in the growth of trade. Two way trade flows (China and sub-Saharan Africa) increased from a miniscule $1bn in 1980 to $10bn in 2000, $114bn in 2010 and $169bn in 2015. China is by some way Africa’s largest export market ahead of the EU. Nigeria specifically imports more from China than from its second and third largest suppliers- USA and India- combined (though Nigeria exports little in return).  The growth of China and Africa’s exports to China is credited with at least some of the acceleration of African growth-from 0.6% per capita in the 1990’s to 2.8% in the 2000’s- though improved economic policy in Africa and better governance must have been the dominant factor.

On the other hand, various claims are made about the negative role of China in African development.  Some careful analysis by, among others, Deborah Braugtigam, has shown some of these claims to be, at best, only partially accurate.  The most substantial of these is that China’s main interest in Africa is raw material extraction.  Up to a point this is true.  85% of Africa’s exports to China by value are of oil or other raw materials though the latest figures will be lower because of falling commodity prices..  The share of agricultural produce has fallen sharply by contrast (from 12 to 6% over a decade).  But the interest in raw materials is not unique to China; the pattern of trade with the US and the EU is similar.

But there is another side to this story.  Although there are some important and well publicised mining projects involving Chinese state or private companies -Sicomines in the DRC featuring iron ore and cobalt; the CNPC gas project in Mozambique; the Sinopec investment in oil production in Angola- the overall profile of Chinese investments is quite different, Under a third of Chinese direct investment in Africa is in the natural resource sector. Around 16% is in construction including infrastructure projects quite separate from the mining sector; indeed there appears to be a conscious effort to use China’s formidable capacity to execute large infrastructure projects efficiently and quickly at a time when demand for such projects is weakening in China itself.  Around 15% of investment is in manufacturing including, in Nigeria, building materials, ceramics, steel recycling and telecommunications as with Huawei.  Again, the slowdown in China is creating a demand for manufacturing opportunities overseas.  And In Nigeria around 60% of Chinese investment is in services.

The worse that can be said is that African exports to China perpetuate a traditional, commodity based, structure of trade.  While this has helped to fuel a major boom in extractive industries it has also left many African economies vulnerable to commodity price volatility and, as now, seriously depressed markets when Chinese demand slows. The vulnerability is also two-way.  China has to organise evacuation of its nationals from the ill-fated oil developments in Southern Sudan on top of the disastrous collapse of oil interests in Libya.

There is less substance to the claim that the Chinese are involved in a giant ‘land grab’ mainly for supplying Chinese markets.  There are some examples of major Chinese investment in countries, like Zambia and DRC, which have welcomed foreign investors in commercial agriculture.  But Brautigam found that the claims were greatly exaggerated.  Of the 15 million acres of land reportedly acquired only 700,000 had actually happened and none were for export to the Chinese market.

There is also little evidence that the Chinese invariably use Chinese nationals on their projects.  There are some examples of large numbers of Chinese workers involved in big infrastructure projects and some African governments have welcomed them (as in Angola).  But a survey by Sautman and Hairong of 400 Chinese companies in 40 African countries found that over 80% of workers were local.  Senior management and technical personnel were often Chinese – to a greater extent than in most western companies – but there is a general understanding of the need for localisation and there are several cases, in Ethiopia particularly, of exemplary investor behaviour.  And where Chinese workers or sub-contractors have behaved illegally, as in mining ventures in Ghana and Zambia, the host governments have been able to take appropriate action. This said, Howard French has identified around 1 million Chinese now living and working in Africa and some worry-perhaps needlessly- that there are parallels with earlier European settlement.

Another myth relates to the scale of Chinese activities.  Although China looms very large in terms of trade and is a rapidly growing source of foreign investment its stock of foreign investment in Africa is only around 5% of the total.  It has an embryonic and rapidly growing aid programme but it accounts for only around 4% of development assistance to Africa (but 12% of commercial loans).  Much higher figures are flying around but these tend to be compilations of newspaper stories aggregating official announcements and communiqués and these figures are largely meaningless. The $6bn loan offered by China to Nigeria during President Buhari’s visit is a line of credit which will only be drawn upon as viable projects emerge.  The terms appear to be more generous than market borrowing at present in sovereign debt markets but less generous than, say, loans from the World Bank’s IDA facility for low-income countries

The evidence also suggests that flows of Chinese capital to Africa go to much the same places as western capital: to large markets (Nigeria, South Africa, Ethiopia) and national resource wealth (Nigeria again, Angola, DRC). They are largely profit driven reflecting the commercial nature of most Chinese state as well as private entities. If there is a difference it is that Chinese investors are more likely to venture into countries where there is judged to be political stability but the rule of law and property rights are weak – DRC, Angola, Zimbabwe – and where standards of governance are generally poor.  This may be in part because that is the environment in which companies operate in China itself and partly because Chinese entities have the implicit or explicit backing of the Chinese state while western companies have to worry more about contractual risk, challenges from shareholders and NGO campaigners.  These considerations help to explain why Chinese investment in Africa is relatively high in relation to investment in western countries (China has more investment in Africa than in the USA); though it must be said that with some exceptions, like the UK, Chinese investors have been treated with suspicion in the West, especially in sectors like telecoms and energy.  There is some evidence that Chinese companies struggle however to cope with environments in which robust legal and democratic processes are unexpectedly strong in Africa, as in the fierce defence of land holdings on the line of the China-built railway in Kenya, and this may prove a problem in Nigeria.

A more general but related point is that Chinese traders and investors are often accused of exploiting weak governance to tolerate or generate corruption, especially in big national resource contracts and to undermine the protection of endangered species and sustainable timber certification.  This trend may however merely be a matter of time as Chinese entities adjust to global norms and seek to build global brand reputation.  China has recently played a positive role in a package of measures designed to stop the flow of ivory to China.  And in some major global governance issues, like climate change, China has been much more constructive than – say – India or Saudi Arabia. Nonetheless in countries where there is a growing appetite for transparency, as in Nigeria, Chinese companies may well find that there is a serious challenge to their traditional ways of working.

There is one particular sensitivity which is the role of Chinese manufacturing exports in undermining fledgling industrial sectors in countries like Nigeria, Ghana and South Africa.  The current adjustment in China away from growth based on investment and export demand rather than domestic consumption has created serious problems of surplus capacity in Chinese manufacturing resulting in attempts to off-load these products onto world markets often at very low prices.  There is considerable tension at present in the EU, especially the UK, and the USA over Chinese steel.  In African markets attention is focussed, rather more, on textiles and footwear. In Nigeria, trades unions and manufacturers complain bitterly of tens, if not hundreds, of thousands of jobs lost mainly in the garments industry. It may be that Chinese imports are simply the scapegoat for poor economic policy which perpetuates, for example, a seriously over-valued currency as is currently the case in Nigeria where the ‘curse of oil’ is particularly debilitating for agriculture and industry.  But the politics are toxic.

There are several mitigating factors.  The first is that while workers may be threatened by import competition, millions of consumers, many of them poor, will benefit from access to cheap imports.  Research on a variety of sectors threatened by Chinese imports suggests that the Chinese prices were, on average, around a half of the prices of local producers.  Where African governments do respond by (hopefully) temporary tariff measures, it may be possible to attract Chinese firms to invest in Africa creating employment locally.

When we look at these factors taken together it is clear that the impact of China on African development is often exaggerated in scale and that the negative rhetoric is based, at least in part, on myth.

Nonetheless, China’s emergence or re-emergence, as an economic superpower has major implications for Africa not least because Africa is a major commodity exporter.  When China is the motor driving along the world economy, Africa is pulled along.  (To mix my metaphors) when China sneezes, Africa catches cold, as is happening now.  Like the rest of the world Africa’s immediate future depends critically on China’s ability to manage its currently challenging policy dilemmas around debt, the exchange rate and sectoral adjustment on a massive scale.  Plausible modelling suggests that every 1% movement in Chinese growth, up or down, has a 0.5% growth impact on Africa.  So the slowdown in Chinese annual growth from 10% to 6% cuts African growth from 6% to 4%.  The lesson is clear.  For Africa’s sake, and the rest of us, we must hope that China is successful in stabilising, rebalancing and growing its economy.

Source: thenationng