China’s Investment in Africa

In the 1970s, China began to open her previously steel plated borders to the world and all of its influences and interests. This historic move shifted the trajectory of the country for the better, transitioning one of the poorest, least industrialized countries into one of the major world political and economic powers. Foreign industries were attracted to China’s cheap and enormous pool of labor, governmental investment, and their strong centralized government that could push and effectively complete initiatives that a more dispersed market economy or smaller government could not. As China has successfully ridden on 5% or more GDP growth since the market reform, the economy is now changing to be more similar to the economies that once outsourced jobs to their borders, the Asian giant is now wishing to do the same.

As a result, Africa is now seeing an enormous influx of direct foreign investment, spearheaded by the Chinese. As Journalist and expert Howard French describes their opportunism, “Sensing that Africa had been cast aside by the west in the wake of the cold war, Beijing saw the continent as a perfect proving ground for some Chinese companies to cut their teeth into international business.” As of now, a common estimate is one million or so migrants have relocated to a variety of African countries to take advantage of the continent’s opportunity. China has increased their trade with the continent more than twenty-fold since the turn of the century now with an estimated $200 billion in 2012. The bulk of investment today is in a $1 trillion project known as the Belt and Road that is attempting to reinvent the famous trade route, the Silk Road. This initiative that will include 65 countries, over half the world’s population, and would connect China, the Middle East, Africa, and some of Europe through extensive maritime, air, and railway trade routes.

Despite decades of slow growth, wars, exploitation and poor governance, many African nations are beginning to grow and prosper. According to the International Monetary Fund, of the twenty countries projected to grow the fastest between 2013 and 2017, ten are located in sub-Saharan Africa. Much of this growth can be attributed to Chinese investment.

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However, this may not turn out to be all good for the unindustrialized nations of Africa. There are many potential consequences of this new phenomena. These possibilities include foreign reliance, pollution, abrupt disinvestment, massive public and private debt, and poor working conditions. This uncertainty but potential for continued African growth and the eventual industrialization of Africa could lead to much of the same for the continent or a boundless future for years to come.

Of course there are several important questions to determine what will happen. What are China’s intentions? Are they purely economic or are there underlying geopolitical motivations here? And how will that affect the lives and economies of Africa countries?

And perhaps the most important question, will this be good for Africa? Can Africa finally climb out of its trap of poverty? Or is this only another form of colonialism and exploitation?

Sources:

French, Howard W. China’s Second Continent How a Million Migrants Are Building a New Empire in Africa. Vintage Books, 2015.

World Bank Industrial Clusters

Huffington Post – China in Africa and Washington Post China in Africa.

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17 Responses to China’s Investment in Africa

  1. Chris DuPont says:

    This is a very interesting development for China. Historically, especially from a United States perspective, outsourcing labor often meant that the labor went over to Asia and specifically China, where it was much cheaper to produce goods. It’s very interesting to see China now increasing Foreign Direct Investment into Africa in hopes of outsourcing labor themselves. I think this is great for the economies of both China and Africa. China’s businesses will be able to produce many more goods for much cheaper and thus facilitates economic growth and development. Additionally, this move is beneficial for the economy of Africa, who will now have an influx of new jobs which helps the labor force and provides them with more capital to further improve economic activity, stimulating even more growth.

    • the prof says:

      OK, but if you poke into the details, much of the total is in natural resource extraction. Most of the rest are in businesses aimed at markets in the host country, such as commerce and construction. Light manufacturing is at best a small slice. The latter though potentially creates lots of jobs while natural resource extraction creates few.

  2. rietanob18 says:

    China’s investment in Africa is especially interesting considering their past history of having other nations investments in their own country. China, of course, has reaped the benefits of outside investment. However, perhaps they have experienced the positives of outside investment primarily as a result of their ability to offer cheap labor. African countries are expected to boast huge growth in the next few years, which is certainly a good thing for the continent and its countries. However, the cost (or benefit) of this growth will be cheap labor. While ‘cheap labor’ might actually mean that citizens of these nations are making more than they otherwise would have been able to, they are still likely not getting paid well. Regardless, in considering developing nations of SSA in which some people are living on less than $2 a day, this outside investment from China would probably be a great thing. While China may be exploiting Africa in a way, Africa may in the long term benefit from this potential exploitation.

  3. John Ahn says:

    I was surprised to learn that ten of the twenty countries the IMF predicted would grow the fastest between 2013 and 2017 were located in sub-Saharan Africa, particularly after learning about the severe education gap prevalent of the region (Sustainable Development Goal 4). Nevertheless, as the continent experiences surges in direct foreign investment and an influx of migrant workers, it’s promising to see nations break decades of stagnant growth. The potential externalities of this phenomena such as foreign dependence, divestment shocks, and vast amounts of public and private debt are risks that have deeply affected developing nations in Latin America. Although there are certainly numerous differences between economies in Latin America and Africa’s economies, I’m interested to see how an increase in globalization will both boost and stunt Africa’s growth. One major challenge nearly all developing nations in Latin America struggled with was the containment of foreign investment shocks; I wonder how effective Africa’s financial institutions will be in both facilitating capital and maintain its exchange rate regime.

    • the prof says:

      Well, our Solow framework suggests that poor countries can grow quite fast just by boosting domestic investment. That alone isn’t enough, but if it feeds into lower fertility and more government resources for educ & infrastructure, then TFP can get a boost, and that virtuous cycle can last 3 decades.

  4. John Gaugin-Rosenthal says:

    China’s investment seems to be infrastructure-oriented. In its effort to improve trade routes and facilitate the (cheaper) movement of goods across the continent, China will be significantly improving the African continent’s economy. However, just as in most free-market systems, the top percentiles will see the majority of the wealth. Without much human capital, it will be difficult for African citizens to see much of a reward. If there is any sort of geo-political strategy involved if China begins to assert its influence on the continent or dabble in the region’s political sphere), we will most likely see increased tension between the US and China.

    • the prof says:

      Is China just a new colonial power in its investment? Infrastructure to take oil from wells to the closest port to feed energy demand in the world’s largest economy?

  5. Ezequiel Piantoni says:

    China’s economic decisions have been extremely interesting. It is first incredible to see how they flipped their economy in just a couple of decades, and how now they are trying to become a more consumer economy. Companies like Alibaba growing endlessly every year represent the aggressive economic impulse China offers as a whole. With regards to Africa, I personally believe China’s investments are going to benefit the continents. As the author mentions there are some important costs that come with the Chinese interventions, but I would be surprised if the total costs surpass the total social benefits. China, unlike Europe, took a friendly approach when it came to investing in Africa. They talked to local governments and asked what they needed so that their investments could be a win-win situation.

    • the prof says:

      Can FDI be negative in its impact? The textbook discusses … what can go wrong? One way is if FDI is financed by foreign-currency loans and not equity. That increases the likelihood of a currency crisis. There are other effects, too. List?!

  6. mesisklism19 says:

    It’s fascinating to see China’s entrepreneurial upper class invest in such diverse areas. As China accrues capital, its revenues are consistently invested in land and assets abroad, and many economists think Africa is on the cusp of a boom-period. Micro-loans have stabilized small-scale commodities markets in Kenya and Nigeria and ever since the Green Revolution, Sub-saharan africa’s health has been on the rise. Although this speculative (relatively high-risk) investment has forced china’s credit rating to drop to AA- this year, seeing china invest in Africa is a double-edged sword from a realist view of politics.

    For one, it means China now has a vested interest in building up the world’s most impoverished region. On the other hand, this means that when Africa does inevitably hit an economic boom, Chinese banks and investors will hold significant global leverage from the return on investment.

  7. cashj18 says:

    If China were to recreate the Silk Road, the effect on Africa’s trade would be enormous. From a nominal standpoint, this effect will be hugely positive, although from a real/per capita standpoint, the effect is a little ambiguous The outcome here for Africa depends heavily on China’s intentions. If China is making these investments only for their own profits, Africa will probably only see minimal gain, and that gain will likely be focused almost entirely in the small upper class. On the other hand, if China has great intentions, this could be very good for Africa’s future. If China can influence these African countries to grow and to move forward in a productive way, it could significantly improve quality of life in the poorest region in the world.

    • the prof says:

      Several questions, extending comments above. If such investment is due to domestic Chinese entrepreneurs, then we can’t use “China” as the subject. That changes if these are large natural resource projects (energy, minerals) undertaken by Chinese firms in those sectors. In general such firms are owned by the Chinese government. While that doesn’t mean that management does what bureaucrats want, it does make it more likely that China is just another de factor imperialist. So is the phrase “if China has great intentions” reflect an inappropriate personification, with multiple actors pursing diverse interest, or is FDI (un)official national policy?

  8. nshimyumukizas18 says:

    One of the biggest challenge that affects Africa’s development is the lack of connection around the continent. The lack of great infrastructures such as roads, bridges, railroads, or airlines is one of the main reason why there is no connection around Africa or with other continents. Better infrastructure would see a huge boost to Africa’s economy and would also benefit China’s in the process. Many African countries are now opening the eyes to understand whether the China influence is good for them. In my opinion, despite a few countries, my African leaders understand how the game is played and there is no going back to any other form of colonialism. As Paul Kagame said : “Aid is political, markets are neutral”, which relate to this China situation to mean that this is not aid but bilateral investments which benefits both China and Africa. Thus, African nations don’t have to agree to these investments if they are political, and if they are, then it is also in the benefit of the African nations.

    • the prof says:

      I hope you’re right that this is not (merely) neo-colonialism. However, are the incentives for where to invest different for the Chinese than for the French, Belgian, Portuguese and British colonial powers of yore? Likewise, are the incentives for domestic political leaders different, so that their actions look little different from the British officials and corporate leaders whom they’ve replaced? I can make arguments on both sides…so I’m not fully convinced that local political autonomy necessarily leads to different (and better) policy.

  9. Banks Pflager says:

    African countries have struggled to generate economic growth for many years due to the fact that they have not created solid institutions that will allow the economy to thrive. China’s outsourcing along with the recreation of the silk roads is a strong way for Africa to be more connected to other countries and build a stable base for creating growth in the economy. With the support from China and others, Africa will be able to create government plans to allow industries to grow. Eventually, education systems in Africa will take the industries further. The potential for these countries to grow fast is very strong as noted by the IMF projecting 10 sub-saharan countries to be in the top 20 growing countries through 2013-2017. If these countries can respond in an economically strategic way to China’s efforts, the growth will occur.

    • the prof says:

      Does FDI enhance or undermine local institutions in Africa? That’s one implicit question in my comments above, and in most of yours. Banks makes it explicit.
      .
      We should not expect the answer to be the same in each country. Will investment in petroleum extraction in the Sudan and in South Sudan lead to an end of civil wars? How about investment in Kenya, which has no petroleum extraction (that I know of)?

  10. reamest18 says:

    As it relates to a more recent blog post, Africa has fundamental issues facing its infrastructure that could/might limit the extent to which China’s involvement is effective. South Africa, the continent’s #1 in terms of GDP (PPP) in 2017, is facing a major water crisis. With the scarcity of water, how effective/attractive will an investment in South Africa really be? Without clean water, the population will face greater health issues that could ripple over to labor markets and much more. Therefore, I ponder how much Chinese investment will be net beneficial versus harmful for a continent that is still in its infancy in providing basic needs.

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