Investment in Africa: Can India Pick Up from China?

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In recent years, there has been international concern over growing Sino-African relations. Spearheaded by the United States, such concern is focused on two main issues: whether China will win over African elites to its governance model, and whether Chinese investments are exploitative. This paper will focus on the latter question. It suggests that while China cannot be accused of flagrant neocolonialism, its leveraging of foreign aid programs in Africa undermines its claim to moral superiority over the West.
The paper also argues that China’s main Asian rival, India, cannot provide a democratic alternative to Sino-African trade. Indian businesses lack the financial might to displace their Chinese rivals from sectors where the latter are already well-entrenched. However, displacement might not be a desirable objective for Africa, India or the West. From available evidence, it appears that close economic ties might lead to political distancing. Even as China buys influence among elites, it risks losing goodwill among electorates.
A troubled political subtext
Chinese engagement with Africa pre-dates ‘resource diplomacy’ and goes back to the late 1940s, when China and Taiwan were locked in a struggle for international legitimacy. Seeking to isolate Taiwan diplomatically, China reached out to Africa through the following decades, under the rubric of South-South (ie., anti-Western) solidarity. Newly independent African states were cultivated with a view to persuading them to withdraw recognition of Taiwan, whose cause was being championed by the US.
During this period, Chinese intelligence operatives were active across the continent, particularly Central Africa, identifying personalities and locations which might be of strategic value to China. Overtly, diplomatic relations were friendly but low-profile. Beijing spent $500 million building a rail link between Zambia’s Copperbelt region and the Tanzanian port of Dar-es-Salaam. Opened in 1976, the Tanzania-Zambia Railway (TAZARA) line aimed to reduce Zambia’s economic dependence upon white-ruled Rhodesia and South Africa, and became a major symbol of Sino-African ties.
Until 1989, such ties excited little comment internationally. It was the Tiananmen Square massacre that triggered a change. Even as the Chinese state was condemned by Western liberal democracies, African governments signaled their neutrality or even sympathy for Beijing. Their diplomatic stance was motivated partly by pique at what they perceived as Western high-handedness, and partly by an expectation of developmental aid from China, whose growing economic profile had already been noted in African capitals.
The expectation was not disappointed. China intensified its engagement with Africa as even as the United States, in a remarkably short-sighted move, downgraded its relations with the continent post 1989. With the Soviet Union collapsing, Washington felt there was no need for a substantial diplomatic presence in the Third World. Access to natural resources could always be obtained through the international market, it was thought, since the US looked set to be the heaviest bidder. Furthermore, the American political establishment was keen to promote democracy in Africa. This meant marginalizing regimes which had previously been courted as possible anti-Soviet allies.
China rushed to occupy the diplomatic space vacated by the US during the early 1990s. In places like the Democratic Republic of Congo (DRC), Ethiopia, Sudan and Zimbabwe, the displacement effect was obvious: China positioned itself in these countries as an all-weather friend whose concern for its partners was not motivated by self-interest (like the US) but by common interest. With the US having retreated into isolationism after its ill-judged Somali intervention in 1992-93, Beijing had a free run of Africa.
Towards the latter half of the 1990s, the political capital that China had purchased began turning into economic clout. In 1998, Chinese firms acquired an 85% stake in the Chambishi copper mine in Zambia, becoming a key player in the commodities market. Over the following 13 years, African exports to China increased 60-fold while exports to the US and European Union increased just five-fold and three-fold respectively. 80% of exports to China consisted of four products: oil, iron ore, wood and diamonds.
Given American indifference and the sheer scale of Chinese demand for raw materials, (China is the world’s largest consumer of copper, for example) any African state with mineral deposits had good reason to solicit Chinese investment. By 2009, China had become Africa’s largest trading partner, overtaking the United States. Yet, the total value of Sino-African trade was less than half the value of trade between China and South Korea. In other words, although China’s economic footprint on the African continent grew at a phenomenal rate, it started from a very low base level.
More than the commercial aspect of Chinese trade, it has been the political aspect that has worried some Western commentators. Beijing has been an ally of despotic regimes that bait the West and have a dubious record of respecting human rights. By strengthening their financial viability, it has indirectly weakened international efforts to improve governance standards. During 2001-08, China ignored a United Nations embargo on arms sales to Sudan, contributing 72% of the government’s light weaponry. Roughly 17% of all firearms recovered by UN peacekeepers in the DRC have been found to be of Chinese origin. On the non-military front, China extended a loan to Angola in 2004, effectively sabotaging IMF negotiations that aimed to increase business transparency in the country.
By partnering with corrupt local elites, China has left itself vulnerable to accusations that it is grabbing African resources with no concern for indigenous populations. In response, Beijing can point out that Western powers might have an even worse record. In 2009, 29% of Chinese FDI in Africa went into the mining industry, as opposed to 60% of Western FDI. One estimate suggests that only 7% of Chinese investment in the continent is expressly aimed at the exploitation of natural resources. Given this mixed picture, and politically-motivated claims from Western and Chinese analysts, ascertaining the impact of Chinese economic policy on Africa requires first understanding its dynamics.
The Angola Model
China aims to avoid competing for natural resources in the open market, where competitive bidding will drive up prices, and instead own them indirectly. As part of this process, it has set up alternative trading hubs where commodities can be transacted outside of Western-controlled pricing mechanisms. These include a diamond exchange at Shanghai which is intended to rival the existing hub at Antwerp. Beijing’s modus operandi is to confer prestige gifts upon African elites, in the form of highly visible infrastructure projects. In return, it seeks privileged access to mining concessions and oilfields. This ‘infrastructure for resources’ tradeoff is called the Angola model, since it was first applied in Angola, which is China’s biggest supplier of crude oil.
The model addresses a key weakness of African states. According to one assessment, the continent has an annual deficiency of about $31 billion in infrastructure funding. Capacity shortfalls are thought to depress GDP growth rates by an average of three percentage points annually. Considering that China is by far the most active infrastructure investor on the continent, it should come as little surprise that many African governments are eager to receive its largesse. It is believed that Chinese companies bankroll as much as 20% of all infrastructure projects in Africa.
With many African countries having lost over half their road infrastructure in the decades following independence, their governments do not have the luxury of choice. Poor maintenance of even the existing infrastructure is creating governance deficits and fostering domestic unrest. While Western firms usually undertake projects in the expectation of a 15% profit margin, Chinese firms, flush with government subsidies from Beijing, are prepared to do the job for profits as low as 3%. The cost differential of Chinese material and labour, versus Western and/or local material and labour, means that Chinese-backed projects can cost up to 50% less than those of the nearest competitor.
Owing to this, China has bagged lucrative contracts, which include paving 80% of Rwanda’s roads and constructing ten hydropower projects which together, could boost Africa’s hydropower usage from the current level of 7% to 30%. In the process, roughly 750,000 Chinese nationals have moved to Africa in the last decade. Their emigration marks the continuation of a trend first seen with the TAZARA line in the 1970s. Over 13,500 Chinese labourers moved to Tanzania and Zambia as part of that project, setting in motion a process of demographic change which has since angered many Africans. With sub-Saharan Africa facing unemployment levels averaging 20%, the influx of low-skilled Chinese workers has not been welcome. Yet, their presence is an inescapable feature of China’s economic penetration of Africa and a source of much controversy.
Even more than the low cost of Chinese infrastructure projects, it is behind-the-scenes pressure by Beijing which has tied many African governments to China. The real source of China’s politico-economic leverage is developmental aid. In public, Chinese diplomats proudly proclaim that their country, in contrast to the West, provides unconditional aid to needy states. In backroom negotiations however, it becomes clear that conditions do in fact, exist. They include the proviso that project implementation should be left to Chinese firms, using a mostly Chinese workforce. Unofficial studies suggest that on average, 70% of the manpower allocation to infrastructure projects is reserved for Chinese nationals. In Angola, the estimates are even higher: 85% of the personnel employed by Chinese oil companies are freshly-arrived immigrants from China. In contrast, Western companies import only 10% of their manpower from overseas, thus ensuring that their African operations have a much greater trickle-down effect among local economies.
The most obvious case of Sino-African societal tension is Zambia, which between 1979 and 2002, received the largest share of Chinese developmental aid in sub-Saharan Africa. Popular anger over Chinese investors crowding out local entrepreneurs, and compelling workers to accept poor employment conditions, and also violating environmental laws, has become an election issue. Sensing the mood, the current president, Michael Sata, based a large portion of his campaign rhetoric in the 2006 and 2011 general elections on anti-Chinese sentiment. Despite failing to win the presidency in 2006, Sata persisted with his relatively uncompromising approach and got lucky the second time around.
Although the Zambian case is extreme, it highlights the grievances that have led to China being accused of ‘neocolonialism’. In the DRC, wage discrimination and violations of health and safety regulations and environmental laws, have stoked resentment in precisely those demographic segments that have worked most closely with the Chinese. This resentment is two-pronged: focused on the Chinese for not observing local laws, and on the authorities for not enforcing these laws. Across Africa, anti-incumbency fuelled by socio-economic grievances is a political trend which cannot be ignored by those governments that are democratically elected. If Chinese investment is perceived as being the cause of such grievances, even if only partially, then African leaders would risk losing power if they are perceived to be too subservient to Beijing’s demands.
India is not an alternative
It is in this context that questions have been raised as to whether India might provide a more benign trade and investment model than China. New Delhi, like Beijing, espouses a maximalist definition of national sovereignty which reassures African audiences against foreign interference. Moreover, unlike China, India shares a common problem with most post-colonial African states: appalling infrastructure deficits and governance incapacity. Despite this, it has chosen not to adopt the Beijing consensus and sacrifice democracy for the sake of development. The Indian economic model, though less impressive when compared to China’s, might be more applicable to the African context.
Unfortunately however alluring such logic sounds, it suffers from key flaws. For a start, India is in no position to compete with China in Africa, since the two countries have different economic strengths. The Chinese focus on mineral extraction and infrastructure creation, sectors where Indian firms are simply too weak to pose a serious challenge. India’s position is relatively better when it comes to commercial agriculture, telecommunications and car assembly. Even on this count however, Indian firms are at an overall disadvantage since they lack the institutional support of New Delhi, being essentially private enterprises. Chinese firms on the other hand, can count on Beijing’s financial and diplomatic support when seeking to obtain contracts in Africa.
The Indians have other problems: for too long, New Delhi confined its relations with Africa to meaningless homilies about South-South solidarity, as did Beijing. Unlike China however, India did not recognize the strategic importance of Africa until quite late, when it began to push for a permanent seat on the United Nations Security Council. By the time India’s foreign policy mandarins had woken up to Africa’s economic prospects, their Chinese counterparts were strides ahead in cultivating relationships on the continent. The gap might now be simply too big to be closed. For example, while an estimated 250 Indian companies invested in Africa during 2001-11, the equivalent figure for Chinese firms was over 800. New Delhi held its first multilateral summit with African governments in May 2008, while Beijing had done so nearly eight years earlier, in October 2000. Over the intervening period, India signed FDI promotion treaties with seven African countries, even as China entered into similar agreements with 28 partners.
Moreover, it is not certain that at the public level, Indian businesses would be much better received in Africa than Chinese ones. While the Indians do have the advantage of a large diaspora on the continent, speak a shared language (English), and are reportedly much fairer in their wage scales than the Chinese, that is where the advantages end. Anecdotal evidence suggests that Indian employers are as likely to flout local laws as the Chinese, and their interpersonal relations are not much better. Both China and India remain essentially racist societies, and this is reflected in their treatment of Africans.
This has not prevented some in India from speculating, over-optimistically, that Beijing’s growing unpopularity might provide an opportunity for New Delhi in Africa. In talks with their African counterparts, Indian officials tend to emphasize their country’s democratic credentials and experience in human resource management. However, beyond these fine words, the fact remains that Indian officialdom has of late, woken up the vast natural resources of Africa and is keen to tap into this. India is desperately short of fuel to feed its economy. It already imports 75% of its oil – a figure which will rise to 90% by 2025. Its coal reserves, which account for the bulk of its electricity production, will be exhausted within 40 years. Thus, the country needs coal from Mozambique, uranium from Malawi and Niger, and oil from West Africa. That is of course, in addition to rough gemstones to support its thriving jewelry industry.
Building relationships with African governments, that are not merely confined to top-level policymakers who can be toppled or voted out of office, has now become the thrust of India’s approach. Whereas in 2010, the country gave just $25 million in aid to Africa, in May 2011, the Indian prime minister announced that it would provide $5 billion in easy loans to African trade partners and invest another $1 billion in education and railway infrastructure. New Delhi has also announced a $700 million scheme to provide vocational training across the continent, and has launched a Pan-African communications project, the e-Network, which aims to provide real-time connectivity between the leaders of all 54 African states. It has been helped in this endeavor by the fact that Indian telecommunications firms have considerable experience of operating overseas, even more than their Chinese counterparts. From present trends, it appears that India’s main advantages over China in Africa are language and a much smaller economic footprint, which does not cause as much political controversy as that of China. Should New Delhi attempt to compete openly with Beijing, it would rise losing both access to natural resources, and the limited influence it has managed to cultivate in Africa of late.
Options for Africa
China’s economic dominance in Africa is a reality that should not be condemned merely on ideologically partisan grounds. If Chinese investment has a net positive effect upon living standards in the long term, that can only assist international efforts to foster better governance and reduce conflict. By injecting money into historically troubled regions, Chinese companies can introduce a moderating influence on civil wars. At the same time, Beijing’s policy of using developmental aid projects to obtain contracts for Chinese firms is short-sighted and dangerous. The one eventuality that African leaders cannot afford to countenance is persistently high employment exacerbated by an influx of low-skilled foreign workers, imported under a bilateral arrangement with Beijing.
African governments need to develop a more assertive negotiating policy when dealing with China. Specifically, they need to point out that its demand for the use of Chinese labour in infrastructure projects is an infringement upon their national sovereignty. It also undermines China’s claim to be morally superior to the West, which previously used its stronger economic position to export manpower to Africa and thereafter extract rents in the form of grossly inflated salaries. China can only go so far in claiming that it wishes to help Africa, if it seems to give a much greater priority to helping itself to Africa.
The African continent is a frontier of global economic growth, having averaged a 5.1% GDP expansion rate during the last decade, as opposed to a world average of 2.9%. African governments are in a strong negotiating position, but they will not able to leverage this unless they develop a common policy towards trading with external partners. China is at present, fully exploiting the advantages that come with dealing with a fragmented Africa where each state seeks a narrowly defined interest in global markets. It would be forced to be far more responsive to African concerns if presented with a unified trading bloc. For this to happen, African leaders have to stop looking abroad for assistance and be prepared to extend support to each other first.

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Author: Prem Mahadevan Senior Researcher, Center for Security Studies, ETH Zürich