In line with Agenda 2063 and its ten-year implementation plan as well as Sustainable Development Goals (SDGs), African countries are expected to speed up the industrialisation process. However, Africa accounts for less than two percent of the global manufacturing exports, writes Gedion G. Jalata.
In the near past G-20 meeting, scheduled to take place 4-5 September 2016, in Hangzhou, China for the first time brought an agenda on promoting industrialisation in Africa and low-income countries. Indeed, in the 6th Summit of the Forum on China-Africa Cooperation (FOCAC) in Johannesburg, South Africa, in December 2015, leaders agreed to a comprehensive strategic and cooperative partnership based on five pillars of mutual trust (in politics, economic cooperation, mutual learning in civilization, security as well as cooperation in international affairs), and ten major cooperation plans. One of the ten major cooperation areas was industry partnering and industrial capacity cooperation. Other cooperation areas of the Forum also have explicit and implicit linkages with industrialisation. These are agricultural modernisation and food security, infrastructure development, energy and natural resources, investment and economic cooperation, environmental protection, tackling climate change, peace and security cooperation, ocean economy, tourism and poverty reduction.
China’s industrial policy in Africa
China’s industrial policy in Africa aims to boost the industrial connection and production capacity cooperation between the two sides; Chinese investment, building and upgrading industrial parks in Africa; address major bottlenecks of the industrial sector in Africa such as poor infrastructure and human capital. To support China-Africa industry partnering and industrial capacity cooperation, China also pledged 10 billion in funds. China has listed a number of African countries as a demonstration and pioneering countries for the industrialisation cooperation. Ethiopia, Kenya, Tanzania, Congo-Brazzaville, and South Africa are chosen to act as the base in Africa’s industrialisation efforts. Egypt, Angola and Mozambique are chosen as priority partners for production capacity cooperation.
These countries serve to develop demonstration zones and to guide industrial alignment and cooperation. In this regard, China pool resources to build demonstration zones; combine the construction of large infrastructure projects such as railway, roads and ports with the building of industrial parks and special economic zones; build industrial belts along the routes and integrate large-scale infrastructure projects with industrial development. This is also part of the One Belt, One Road Initiative (figure I below), which aims to create closer connections between China and more than 60 countries in Asia, Europe and Africa.
Chinese FDI in Africa: facts and features
Chinese investment in African countries is backed by China-Africa Development Fund. As the overall trend indicates Chinese FDI is growing faster than Western FDI. Official China White Paper indicated cumulative FDI in Africa at end of 2012 totalled USD 22 billion. The recent Forum on China-Africa Cooperation (FOCAC) held in South Africa unveiled that China’s investment in Africa increased to USD 32.35 billion in 2015 with over 3,000 Chinese companies operating across the continent. China expects to raise its direct investment in the continent to USD 100 billion in 2020.
The principal target of Chinese FDI in Africa is the construction sector followed by transportation, storage and postal service, manufacturing, mining, finance, leasing and business services, agriculture, forestry, animal husbandry and fishery and others (see figure II below). Agriculture constitutes a very minimal percentage i.e., 4.1 percent in Chinese foreign direct investment stock in Africa.China’s FDI in Africa mainly concentrated in Algeria, Zambia, Kenya, Congo (Brazzaville), Nigeria, Central Africa, Sudan, Tanzania, Egypt, and Ethiopia.
Could African countries seize the moment?
In line with Agenda 2063 and its ten-year implementation plan as well as Sustainable Development Goals (SDGs), African countries are expected to speed up the industrialisation process. However, Africa accounts for less than two percent of the global manufacturing exports. The share of manufacturing in GDP also declined from 15.4 percent in 1990 to 11 percent in 2013 in Sub-Saharan Africa. Consequently, most African countries are not active in the global manufacturing value chain. Even in the existing China-Africa trade relationship 90 per cent of Chinese export to African countries is industrial products while 87 percent of African export to China is raw materials. Yet as China’s growth slows and its economy shifts toward a more consumption driven model, it is likely that global demand for resource imports will slow as well. This adversely affects mineral rich African countries. One of the strategic measures to mitigate such impacts of negative terms of trade shocks is promoting industrialisation.
Opportunities are still knocking at African countries as China aims to restructure its economy to domestic consumption and relocate its light manufacturing. The economy is, thus, expected to shift from the previous high- speed growth to a medium growth path to be driven by innovation instead of input and investment. The overall aim is to move up in the global value chain. In this regard, as China upgrades its capabilities to make high-tech products, lower-end manufacturing will shift to other countries. This move helps Chinese companies to come to African countries in search of cheap labour and production cost. For instance, in the years from 2004 to 2014, labour cost increased three times in China.
African countries must be well positioned to exploit emergent opportunities of investment in export-oriented manufacturing. As reflected by the Chinese economist, Justin Yifu Lin, China currently employs 85 million workers, which will be relocated to other low-income countries. He further argues that the Asian Tigers (South Korea, Taiwan, Hong Kong and Singapore) succeeded in structural transformation by seizing opportunities while light manufacturing was relocated from Japan in the 1960s. Likewise to China from Asian tigers in the 1980s.
Commendable emerging experience from a few African countries
African countries that have the most projects in Chinese manufacturing investment are Nigeria followed by Ethiopia, and South Africa. Several factors can be cited for Chinese and other Asian investment in the manufacturing sector in Africa. These are untapped local consumer markets; fewer competitions than China; access to Western markets under preferential trade agreements for African countries such as African Growth and opportunity Act (AGOA) and Everything but Arms (EBA), and proximity to Europe (for North and East African countries) and US (West African countries like Senegal).
Chinese investors are attracted to invest in Ethiopia because of low production and energy cost, government and policy stability, the growing size of the local market, cheap labour cost and proactive government effort to attract Chinese investors including through the establishment of industrial parks, and the country’s comparative advantage to provide high-quality leather. External opportunities like AGOA and EBA are also available in the country. Vision 2025 of Ethiopia aimed to make the country the leading manufacturing hub in Africa by increasing the share of the manufacturing by four folds i.e., 25 percent, and generating a yearly employment opportunity for 200,000 Ethiopians.
At the moment the manufacturing sector is contributing 12 percent of Ethiopia’s export. Chinese investment in Ethiopia constitutes 20 percent of the overall investment in the country. Unlike other African countries, 65 percent of Chinese investment in Ethiopia is in the manufacturing sector. Most companies in this sector are from private companies unlike the construction sector, which is dominated by state-owned companies.
The Huajian Group in Ethiopia is among the well-known Chinese shoe manufacturing success stories. The factory was opened in 2012. Currently, the factory created more than 3500 jobs and managed to export shoes from Ethiopia to the global market-Europe, the US and Asia. Following Ethiopian success story, Rwanda engaged in active investment promotion. As a result, the country managed to attract a garment factory from China with a total of 500 workers, which is the largest employer in Rwanda.
Challenges and ways forward
The most notable challenges in promoting industrialisation in Africa are weak infrastructure and human capital resulting in higher production and transaction cost; absence of effective industrial policy frameworks with high-level leadership commitment, determination and support; lack of embedded autonomy of the bureaucracy and effective regulatory system. There is also political instability and security risks, ill-advised industrial policies, and suspicion towards Chinese FDI.
To secure more investment in manufacturing industries African countries must adhere to developmental State model. In this regard, leadership commitment and determination to promote industrialisation is timely and pertinent. Moreover, African countries must develop a vision for the sector, build a competitive economy and promote a supportive policy framework to create linkages in the industrial value chain, develop the infrastructure both hard (roads, ports and rail facility) and soft (logistics, bureaucracy, and human capital), eliminate formal and informal barriers, increase the flexibility of labour markets and ensure effective competition policies. These approaches helped China to attract investment in the industrial sector than India and other Asian countries in the 1980s.
Ed.’s Note: Gedion G. Jalata is Program Manager, Africa-China Dialogue Platform
Oxfam International Liaison Office to the African Union. The views expressed in this article do not reflect the views or policies of Oxfam and The Reporter. He can be reached at Gedion.Jalata@oxfaminternational.org, firstname.lastname@example.org.