Reports

Africa's Silk Road: China and India's new economic frontier?

30 November 2006


Harry Broadman, World Bank Economic Adviser in the Africa Region, outlining the conclusions of the new World Bank study Africa’s Silk Road: China and India’s new economic frontier?, explained that it set out to address four main questions: what is the recent pattern of trade and investment flows between Africa and Asia (especially China and India)? What factors would influence these in the future? What has the impact on Africa been? What should be done to enhance Africa’s economic development prospects from this relationship?

The study assesses the respective influence of four key factors: trade and investment policies (at-the-border), African market conditions (behind-the-border), trade facilitation factors (between-the-border) and the extent to which investment and trade flows leverage each other.

Mr Broadman emphasised that Chinese and Indian interest in Africa was not a recent phenomenon, although the continent is far more diversified economically than it was 20 years ago. There are genuine success stories: one-third of its inhabitants now live in non-oil producing countries which are achieving growth of at least 4.5%, although, in contrast, the figure is less than 3% for one-fifth of the population.

Trade

Africa’s share of overall world exports has been declining over the past 60 years and it is virtually the only region in the world that has not increased its share of non-oil exports. However, the volume of the continent’s exports to Asia is accelerating: it rose by 15% between 1990 and 1995 and by 20% over the past five years, and China and India now represent 13% of all Africa’s exports.

Asian exports to Africa are also on the rise, growing by 18% since 2000 – an increase that no other region, including the EU, could match. Despite these performances, Africa remains a relatively small market from an Asian trade perspective, accounting for only 1.6% of global Asian imports.

Behind these headline figures lie significant disparities. Overall African exports to China grew by 48% annually between 1999-2004, compared to 14% for India. But 86% of the continent’s exports to China and India consist of oil, metals and agricultural raw materials, and 85% of African exports to China come from just five oil and mineral exporting countries.

Factors affecting bilateral African-Asian trade

From an African perspective, escalating tariffs in Asia create serious market-access problems. Mr Broadman gave the example of raw cashew nuts, which are subject to relatively low tariffs in India, whereas tariffs are considerably higher for processed ones, which restricts Africa’s opportunities for value-added exports. In the other direction, the plethora of African regional trade agreements and the absence of any coherent framework are not conducive to Asian investment.

The absence of suitable infrastructure within and between individual African countries, and the inefficiency or corruption of customs and administrative officials, hamstring exports, said Mr Broadman. Similarly, African companies’ refusal or inability (because of a lack of information) to use international technical standards restricts their export potential.

The study confirms that the sectors in Africa that face more competition are not only able to attract more foreign direct investment, but are more successful in exporting their products. Domestic competition and international integration reinforce each other as this helps fuel an increase in non-oil exports.

Policy implications

Mr Broadman said the picture provided by the study prompts several policy responses. Africa’s heterogeneity rules out any one-size-fits-all approach, so reforms should take account of country-specific circumstances, with their speed and implementation tailored to individual situations.

However, certain basic principles can be applied to the trade and investment environment. China and India need to eliminate the escalating tariffs which stifle African exports, while Africa should rationalise its many free trade agreements, and individual countries should eliminate non-tariff barriers to trade, strengthen the role of Investment Promotion Agencies, and ensure export and investment incentives comply with World Trade Organization rules.

Internally, African countries should encourage domestic competition, promote labour market flexibility and improve governance by ensuring that public officials’ conduct is more transparent and accountable, and by using effective commercial dispute mechanisms.

The study stresses that to overcome the fragmentation of national markets and promote regional integration, it is important to improve transport and telecommunications infrastructure, modernise customs procedures and improve the general environment for foreign direct investment.

The international community, China and India, and African countries themselves each have a role to play. The first can provide assistance on issues ranging from governance to technical standards. The second can take steps to remove market-access obstacles to African exports. But it is the third category - the African countries - which can do most by promoting more competitive economies within their borders.

Key conclusions

The study, which contains a wealth of up-to-date data and specific business case studies, drew the following six key conclusions:

  • Chinese and Indian trade and investment in Africa offers significant opportunities for the continent’s economic growth and integration;
  • Trade is not limited to raw materials and opens the way for Africa to process commodities for export to the Asian market;
  • The growing number of global-scale Chinese and Indian firms in Africa is fostering regional and global integration of African businesses;
  • Potential benefits may not materialise unless major asymmetries are addressed: Asia is assuming a significant share of African exports, but represents only a small percentage of Chinese and Indian exports;
  • Reforms are needed if all partners are to benefit;
  • Reforms to market conditions within and between African countries are potentially more important than changes to purely-trade arrangements at borders.

Benefits of South/South cooperation

Jiang Yu, Second Secretary at the Chinese Mission to the European Union, pointed out that South/South cooperation was one of the most significant developments in today’s global economy. He suggested that one reason why there was not greater awareness of Chinese/African relations in the past was because they were less extensive than the continent’s contacts with Europe, but now both partners had increased in importance.

He added that it was not in the Chinese nature to publicise the contributions which the country’s medical staff, agricultural engineers and others had made to Africa: “When you consider someone your friend and give them a gift, you do not tell everyone.”

He also pointed out that China, whose per capita income was below that of many African countries, had much to learn from the continent.

Uwe Wissenbach, the Coordinator for Africa-China relations in the European Commission’s Development Directorate-General, complimented the publication on its analytical rigour, contrasting it with media reports that “do not capture the depth of analysis needed”. He said the study confirmed that there are many opportunities to move away from a negative image of Africa to one of hope.

He suggested that the stronger Chinese and Indian presence in Africa did not require any concrete change in the EU’s approach towards the continent. This approach is set out in the Union’s Strategy for African, adopted last year, which confirmed a new focus on working with the African Union and regional bodies, in contrast to China’s tendency to focus on bilateral rather than multilateral relationships. The strategy promotes the concept of good governance, but one that is owned by the country concerned.

Mr Wissenbach also pointed to the direct contacts the EU is developing with China on issues ranging from climate change to development policies.