East vs West – Who is winning in Africa?

The accepted wisdom is that for Africa, there has been a momentum shift away its traditional trade and investment partners in the West towards the East, particularly China and to a lesser extent, India and Malaysia. But, is the West really losing ground in Africa and if so, how quickly? Neil Ford presents an intriguing take on this question.

It is true that China overtook the US to become Africa’s biggest single trading partner in 2009, accounting for 13.9% of all African trade, ahead of the US with 13.1%. Yet the European Union (EU) remains Africa’s largest single trading partner, with 44.3% – the equivalent of $256bn – shared among the EU 25 member states, so the page has hardly been closed on European post-colonial domination of Africa. As usual, the figures can be interpreted to support either side of the argument.

Yet it is important not to see this as an economic Cold War, with Western companies lined up against their Eastern competitors. While there is some coordination of action between Chinese companies, Asian firms often compete with each other as much as with their Western counterparts. The agricultural ‘land grab’ strategy of many Asian investors demonstrates this. By the same token, companies from other countries, such as Brazil and Turkey, which are not traditionally aligned with either the West or the East, are becoming heavily involved in Africa. Ultimately, there is no difference between what motivates Western, Eastern and non-aligned interest in Africa: profit.

While it is possible to exaggerate the pace of change, there is little doubt that Asian investors are now playing a far more substantial. Table 1 demonstrates, all emerging market partners taken together accounted for just 23% of African trade in 2000 but this figure had jumped to 36.5% by 2009, the most recent year for which complete figures are available. There is little doubt that this proportion has increased further over the past three years, perhaps at an even faster pace, because the world’s biggest emerging economies have gained ground rapidly at the expense of the industrialised nations during the global economic crisis.

Beijing surpasses Washington

China’s share of African trade jumped from 4.7% in 2000 to 13.9% in 2009, still a smaller proportion than its huge population would justify but a massive increase in the space of a single decade. India enjoyed similarly strong growth, pushing its share from 2.3% to 5.1% over the same period, but it is interesting to note that the other Asian economies listed in our table did not experience anything like the same success. Some, such as Singapore and Taiwan, actually saw their share of trade decline.

The figures for foreign direct investment (FDI) flows into Africa, which are given in Table 2, are far less conclusive, giving all emerging markets a combined 10.2% share of FDI into Africa over the period 2005–10. However, these figures from the African Economic Outlook are based solely on African states for which there are complete statistics and it seems likely that they under represent Asian influence in total African FDI. As the 2011 African Economic Outlook argues: “As African countries strive to make the most of growing relations with the new economic forces, they need to be aware that their older partners remain a very solid and growing base. In terms of foreign direct investment, the continued dominance of traditional partners is striking. One must be careful, however, when comparing investment data between traditional and emerging nations. Assembling reliable data on African FDI is difficult, particularly for the emerging powers.

There are large gaps in reported data and large discrepancies between different sources that are hard to explain as it is difficult to access the complete methodology used.” Nevertheless, the available figures indicate that Western companies will continue to play a bigger role than Asian firms in Africa, in the short term at least. It would therefore be wrong to paint too definite a picture of the West losing out to the East.

Seen within the much longer time span of human economic history, current developments make perfect sense. From the earliest urban archaeology until about 250 years ago, GDP went roughly hand in hand with population. As a result, China and South Asia each held about 20% of global GDP, as approximately 20% of the world’s population lived in those two areas. Western industrialisation, urbanisation, colonialism and a succession of Chinese wars changed this equation, resulting in huge variations in per capita GDP across different regions of the world. Now, however, the situation is beginning to revert to type.

An economic landscape of a rich West and poor mainland Asia only looks unexceptional from our point of view. China and India are now closing the gap, both on Western Europe and North America, but also on stronger economies in their own region, such as Singapore, Japan and Taiwan. Given the process of economic and technological globalisation, such a gap seems relatively unlikely to reemerge in the future.

Sector by sector

The situation obviously varies from sector to sector. Western firms remain dominant in the telecoms and banking sectors, with Vodafone, France Telecom, Standard Chartered and Barclays Bank active in many countries. By contrast, Indian pharmaceutical companies are eroding the market share of Western firms. However, it is in the mining and oil and gas sectors that competition has become fiercest for established players including Exxon-Mobil, Shell, BHP Billiton and Rio Tinto. In the oil and gas sector, China National Petroleum Corporation (CNPC), GAIL India, Malaysia’s Petronas and PTT of Thailand all have active African operations.

A growing proportion of African oil and gas production is shipped across the Indian Ocean and so Asian firms have been keen to take equity stakes in new projects. New liquefied natural gas (LNG) production in Mozambique and Tanzania is expected to be mainly marketed in Asia, while one of the world’s biggest coal mining companies, Coal India, has selected Mozambique for much of its planned overseas investment. Asia has already overtaken the North Atlantic Basin as the main destination for South African coal and so Mozambique – which is the world’s biggest emerging coal producer – is geographically well placed to target energyhungry India and China.

Speaking in late March, the chief executive of the Botswana Chamber of Mines, Charles Siwawa, said: “Two weeks ago, I was in India where I gave a presentation about Botswanan coal.

After the conference, delegates were asking how they could help to get the coal out. They were not saying they want the coal tomorrow, they were saying they want it yesterday and lots of it.”

Partly because of Beijing’s investment diplomacy, Chinese companies such as China Railway Construction Corporation, Sino Hydro and China Machinery Engineering Corporation now dominate large project construction and engineering in many countries. Many European and North American construction giants reduced the scale of their African operations about a decade ago and this strategy now looks to be a mistake. Yet much of the funding for the current construction boom comes from Beijing and so Western firms would be unlikely to have benefited greatly from this investment in any case. China’s Export-Import Bank is now the biggest lender to sub-Saharan Africa, ahead of the World Bank, providing loans such as a $292m buyer’s credit facility for the 400 MW Bui hydro scheme in Ghana and $1.24bn for Tanzanian gas projects.

African benefits

The big question is how much benefit Africa and Africans can accrue from all this economic activity. The world has been waiting for the continent’s economic takeoff since the 1960s, yet African nations must ensure that they benefit from increased East-West competition over African economic interests if this is to be achieved.

African oil, gas, copper, iron ore, bauxite and coal are all in great demand but Asian, European and North American companies need to see the continent as more than a bountiful source of raw materials. African nations must also be considered as markets for goods and services; destinations for FDI; sources of innovation and entrepreneurship; and, increasingly, as suppliers of services and manufactured goods. Economic rivalry drives down the cost of African imports and boosts the value of exports but the benefits of East-West jousting are not restricted to competition.

At present, Western and emerging market exporters to Africa offer very different products. Western Europe and North America has basically exported much of its manufacturing capacity to China, so Chinese companies now export low cost goods to Africa, often at spectacularly low cost. By contrast, Western manufacturing capacity is becoming increasingly concentrated in high value luxury products that remain highly sought after in Africa.

China’s export-led economic model does deter the emergence of African manufacturing companies but this pattern may not last for long. Chinese labour costs are rising quickly and the current pace of migration into Chinese cities cannot be sustained for much longer.

Factories based in Africa and poorer parts of Southeast Asia may eventually be able to out-compete their Chinese competitors. At the same time, in certain sectors, such as seed and tool production, low-cost Indian and Chinese imports can actually improve African productivity right now. Qu Xing, the president of the China Institute of International Studies, says: “With its rising labour costs, China’s manufacturing sector has started to relocate to other countries. African countries, as well as many other states, all hope to take advantage of this trend. Frankly speaking, if African countries fail to provide competitive investment incentives and skilled labour forces, they will probably miss another good development opportunity.”

Chinese investment diplomacy takes a very different approach to Western development assistance but this is probably a good thing. Western state assistance is heavily weighted towards poverty reduction, improved governance, health and education; while Chinese support centres on infrastructural projects. State-driven investment diplomacy by Beijing and other Asian governments is seen as something new. Roads, railways, power plants and other forms of infrastructure are being funded by Beijing in particular and are usually tied explicitly or implicitly with Chinese economic interests.

Western governments have pursued a similar policy for many years through their aid budgets, with even the most generous donors often tying financial largesse to contracts for companies from their own countries. The biggest Western companies also fund infrastructure projects to sustain influence. Yet Chinese companies are developing infrastructure on an entirely different scale and normally with little political motivation. For better and for worse, China makes no attempt to impose ethical standards on African countries. Many commentators identify an ulterior motive in Chinese investment. The executive director of rights group Probe International, Patricia Adams, says:

“All of China’s power companies are public institutions, even though they may be selling shares on a stock exchange. Their first priority is to their political masters, and their political masters have a political agenda, not a business agenda.” Yet this political agenda is principally about supporting Chinese economic interests. It is not an altruistic approach but it is hardly underhand.

Beijing’s approach is more pragmatically economic than the West. Its policy of noninterference in the domestic politics of other countries is well known. Despite claims to the contrary in the West, Beijing has never viewed Khartoum, for example, as a political ally but rather as a source of crude oil. Once South Sudan had secured an independent future –plus the lion’s share of Sudanese oil – Chinese diplomats were quickly on their way to Juba. African governments should know what they are getting with Chinese investment and Chinese trade. They bear much of the responsibility to make the most of the opportunities created.

On balance, it is fair to say that the East is gaining in relative terms in the scramble for African trade, but both the East and the West are gaining in absolute terms because of strong economic growth across the continent. Everyone now wants a piece of the African pie; it is just that the pie is getting bigger every year.