China Seeks to Unleash Africa’s Potential

To China, the “Dark Continent” is a golden opportunity. Africa first became known as the “Dark Continent” because nineteenth century Europeans had not yet mapped its jungles. Today, the name still applies because, as Google founder Larry Page once pointed out, the lack of electricity throughout much of Africa makes it nearly invisible in satellite photos.

And where there’s no electricity, there’s no Internet usage, no economic growth, and no prosperity.

Africa’s desperate need to build a power grid and to attract other types of infrastructure investments makes it a perfect partner for China, which has billions in capital to invest. In recent years, those investments are growing swiftly. Data from the Chinese Ministry of Commerce show that privately owned Chinese companies made two investments in African manufacturing businesses in 2000; today, they’re making more than 150 investments a year. According to a Harvard Business Review article by Irene Yuan Sun, “The real figure is probably two or three times as large: Scholars doing fieldwork on the topic routinely encounter Chinese companies that have not been captured by government data.”1

Sun, who is an engagement manager at McKinsey, found several examples of Chinese entrepreneurs who have opened businesses in Africa, such as Sun Jian, who discovered that the heaviest product Nigeria was importing was ceramics, so he invested $40 million to build a ceramic tile factory in Nigeria with a workforce of 1,100. Even though electricity is unreliable and expensive, Sun’s profit margin in Africa is 7 percent, a significant increase over the 5 percent margin he earned when he located his plant in China.

As this example illustrates, Chinese investments in African manufacturing make sense because of rising consumer demand in Africa for cheap, mass-produced goods, even as demand for those products falls in China and throughout the developed world. In addition, China’s low-cost manufacturing advantage, which fueled its rapid economic growth earlier this century, is crumbling for a variety of reasons:

- China’s labor pool is shrinking because its shortsighted one-child policy lowered its birth rate to the point that China’s factories now face shortages of young workers.

- At the same time, increasing competition among employers for factory workers has driven wages up, with hourly wages rising 12 percent per year since 2001. After sixteen years of steady increases, factory labor costs are now significantly higher in China than in Vietnam, Bangladesh, Myanmar, and even India.

The result, according to former World Bank chief economist Justin Yifu Lin, is that “China is on the verge of graduating from low-skilled manufacturing jobs…. That will free up nearly 100 million labor-intensive manufacturing jobs, enough to more than quadruple manufacturing employment in low-income countries.”

While the birth rate is plummeting in most countries, Africa’s population is accelerating so quickly that it is expected to have more than two billion people by 2050, and most of them haven’t been born yet, which means they will be under thirty. As a result, Africa will represent the world’s biggest labor pool.

But there aren’t enough jobs for all of the potential workers today. According to Sun, “African nations have some of the highest unemployment rates in the world. The official unemployment rate in Nigeria is 12.1 percent, but the government recognizes an additional 19.1 percent of the working-age population as ‘underemployed.’ For young people, the situation is much worse: Youth unemployment is at 42.2 percent.”

All of these demographic and economic forces are colliding to create the perfect conditions for China to solve its own economic problems while creating jobs and infrastructure in Africa.

According to Forbes, in 2015 China pledged to invest $60 billion in major capital projects to help develop Africa’s economic capacity.2 Chinese president Xi Jinping described the program as an effort to create “real win-win cooperation” between Africa and China, while enabling investors to “do good while doing right.” And it wasn’t just talk: By September 2016, Chinese companies had already invested $14 billion.

The country’s investments in Africa’s infrastructure, economic development and industrialization have created a sense among many Africans that China’s intentions are good. A survey cited in Forbes of 56,000 people in thirty-six African countries found that two-thirds believe that China’s influence in their countries was “somewhat positive” to “very positive.”3

Meanwhile, findings from a variety of studies reveal that the perception in Africa that Chinese companies only hire Chinese workers is wrong. Between 78 percent and 99 percent of employees in Chinese-owned factories in Africa are African.

Manufacturing jobs are not the only benefit to the African economy. Every new manufacturing job creates 1.6 service jobs, because factory workers need to buy meals or pay for transportation to work. Moreover, economic theory suggests that as competition intensifies and productivity improves within a country, manufacturing in Africa will evolve to en- compass more complex, higher-end goods. As that occurs, and as margins increase, African workers will earn wage gains that will elevate their standard of living.

As Sun points out, “An analysis of 148 countries shows that as GDP rises, manufacturers within a country predictably move toward ever more complicated products. In another decade or two, factories in Africa will be churning out computers instead of ceramics and clothing. That’s why investment in manufacturing is the key to Africa’s development. Economists know that in the long run, the only way to create higher standards of living is to become more productive.”

However, it isn’t the “win-win” deal that Xi promised unless China benefits from its investments in Africa. According to some concerned observers, China is not only profiting from the arrangement, but it is doing so at a great cost to Africa’s environment and long-term prosperity.

As an article in the Harvard Political Review explains, “China relies on African markets for a steady flow of natural resources to sustain manufacturing.4 The African resources China imports are varied, covering everything from oil, to iron ore, timber, and copper. In exchange for broad access to resources, China exports cheap manufactured goods back to its trading partners, builds much needed infrastructure, provides foreign direct investments, and loans out billions of dollars….

“Though advocates of this inflow of money claim it spurs development, critics of China’s policies in Africa paint a picture of trade imbalances that are handicapping the nations involved, while grossly advantaging China at the expense of the African people. These critics believe that China seeks to establish itself as a new colonial power…. Chinese goods are also flooding African markets, overwhelming local producers with large volumes of cheap products that are difficult to compete with.”

Based on this trend, we offer the following forecasts:

First, Africa will present a lucrative export market for China, allowing it to offset declining domestic demand.

Rather than shutting down factories, China can export many of the low-end products that its increasingly affluent population no longer wants. At the same time, putting Chinese factories in Africa enables Chinese companies to compete with cheaper labor in Vietnam, Bangladesh, Myanmar, and even India. Western companies have been moving far less aggressively than China, and they risk falling behind as China taps into the world’s largest pool of labor.

Second, China’s economic investments in Africa will enable it to pursue its ambition of becoming a global superpower.

Although its investments seemingly focus on Africa’s economic development, they camouflage China’s goals of gaining global military dominance and political clout on the world stage. As United States Naval Academy professor Yong Deng told the Harvard Political Review, “China feels that it is entitled to a Great Power status, so maintaining that in a global world order is always a long-term foreign policy goal… Africa carries an enormous amount of diplomatic weight in [shifting] China’s diplomatic and political influence away from a U.S., Western dominated world order.”5 It’s no coincidence that as China’s investments began pouring into the country, it also began building its first military base in Africa in 2016, less than ten miles from the largest U.S. military base in Africa.

Third, China will use a policy of trading economic assistance to developing countries in exchange for political support.

The United States is among the Western countries that have poured more then $300 billion of developmental aid into Africa since 1970. But while the U.S. often requires countries to meet its standards for human rights in order to receive aid, China does not set such conditions. Instead, China’s aid appears to be based on whether the needy country aligns itself with China’s foreign policy strategy. For example, The Economist recently reported that Zimbabwe, Burundi, and Algeria voted against a United Nations resolution to condemn North Korea for human rights abuses, while Kenya, Mozambique, and Ethiopia abstained. African countries have learned that voting with China leads to more aid.6 Research by AidData at the College of William and Mary concludes that for every 10 percent increase in voting with China, an African nation receives 86 percent more aid.7 Rwanda, which votes with China 67 percent of the time, could increase its aid by 289 percent if it voted with China 93 percent of the time. If China is able to buy votes in this way, it will increasingly succeed in blocking U.S.-led resolutions that are contrary to its interests.

Fourth, regardless of China’s motivations, its investments will help to accelerate the arrival of an industrial revolution in Africa.

By industrializing its economy, Africa will evolve according to the same pattern that Japan, South Korea, Tai- wan, and China used. Factories will provide jobs for its expanding population and unleash a mass migration to cities. With steady wages, hundreds of millions of Africans will enjoy higher living standards and become consumers for manufactured goods. According to the Harvard Business Re- view, “If Africa could lift just half as many people out of poverty as China has in a mere three decades, it will eliminate extreme poverty within its borders. For nearly 400 million people, that would mean the difference between going hungry and being full, between scrounging for work and holding a steady job, between asking their children to do menial labor and sending them to school.”8 Reducing poverty and boosting literacy in one of the world’s poorest areas would unquestionably be a positive development for the global economy.

References
1. Harvard Business Review, March/June 2017, “The World’s Next Great Manufacturing Center,” by Irene Yuan Sun. ⓒ 2017 Harvard Business Publishing. All rights reserved. https://hbr.org/2017/05/the-worlds-next-great-manufacturing-center2. Forbes, March 14, 2017, “How China’s $60 Billion for Africa Will Drive Global Prosperity,” by Amy Jadesimi. ⓒ 2017 Forbes Media LLC. All rights reserved. https://www.forbes.com/sites/amyjadesimi/2017/03/14/how-chinas-60-billion-for-africa-will-drive-global-prosperity/-6700556238a33. iBid4. Harvard Political Review, February 3, 2017, “China’s Investment in Africa: The New Colonialism?” by Elizabeth Manero. ⓒ 2017 Harvard Political Review. All rights reserved. http://harvardpolitics.com/world/chinas-investment-in-africa-the-new-colonialism/5. iBid6. The Economist, April 16, 2016, “A Despot’s Guide to Foreign Aid.” ⓒ 2016 The Economist Newspaper Limited. All rights reserved. http://www.economist.com/news/middle-east-and-africa/21697001-want-more-cash-vote-china-united-nations-despots-guide-foreign7. iBid8. Harvard Business Review, March/June 2017, “The World’s Next Great Manufacturing Center,” by Irene Yuan Sun. ⓒ 2017 Harvard Business Publishing. All rights reserved. https://hbr.org/2017/05/the-worlds-next-great-manufacturing-center