Africa s s Silk Road China and India s s New Economic Frontier Harry G. Broadman Economic Advisor, Africa Region The World Bank Group The Lowy Institute for International Policy October 9, 2007 Sydney
Historical Context Recent rise of Chinese and Indian-African trade and investment epitomizes longer historical trend of South-South economic relations. Indian-African commercial relations well-known. But Chinese trade and investment in Africa actually dates back decades There s been an evolution in China s economic involvement in Sub- Saharan Africa: from the early investments gifts, to concessional loans to non-concessional loans to debt forgiveness Observers often forget that China and India are developing countries; albeit ones with rapidly modernizing industries and burgeoning middle classes with rising incomes and purchasing power They have growing demand not only for Africa s natural resources, but also non-traditional goods: processed commodities, light manufactures, and now services, where Africa has the potential to export Today s policy challenges and opportunities need to take into account this historical context and shift in the development process 2
Africa in the Global Economy Sub-Saharan Africa s development pattern is increasingly diverse, with more and more success stories: a normal continent 1/3 population in non-oil countries with growth at least 4.5% 1/5 population in non-oil countries with growth under 3.0% Equatorial Guinea Chad Angola Sudan Nigeria Congo, Rep. Gabo n Mozambique Rwanda Uganda Mali Botswana Cape Verde Tanzania Sierra Leo n e Ethiopia Mauritania Mauritius Ghana Benin Burkina Faso Senegal Cameroon Gamb ia, Th e Namibia Zambia Gu inea Togo Niger Malawi So u th A frica Madagascar Sao Tome and Principe Lesotho Swaziland Eritrea Kenya Se y c h e lle s Comoros Cote d'ivoire Cen tral A frican Rep u b lic Guinea-Bissau Burundi Congo, Dem. Rep. Zimbabwe Percent of total Africa population Source: (2007) 27% 34% 19% 20% O il co untries -10-5 0 5 10 15 20 25 Average GDP growth rate 1996~2005 Growth 4.5% or higher Growth 3~4.5% Growth < 3% 3
Africa in the Global Economy Yet Africa s share of world exports has been declining 4
Africa in the Global Economy Africa s Exports Are Still In Raw Form, Resulting in Little Value-Added Being Extracted on the Continent 5
Country-Level Trade and Investment Patterns New opportunities? The steady, dramatic rise of Asia as destinations/sources of African exports/imports Percent Average annual merchandise export growth rate, Africa to Asia 60% 50% 40% 30% 20% 10% 0% 20% 1990-94 48% 1999-2004 1990-94 7% 1999-2004 1990-94 1999-2004 14% 14% 13% China India Rest of Asia Million $ Africa's Merchandise Imports from China and India 12000 10000 8000 6000 4000 2000 0 China India 2002 2003 2004 Source: (2007) 6
Key Trends & Observed Patterns Country-Level Trade and Investment Patterns The volume of African exports to Asia is accelerating. It grew by 15% between 1990 and 1995, it has grown by 20% during the last five years (2000-2005). As of 2005, Asia s share of African exports (27%) is on par with the EU (32%) and the US (29%). Despite this growth, Africa still remains relatively small from perspective of Asian economies. African exports to Asia account for only 1.6% of total global imports of Asian economies. Asian exports to Africa are equally growing rapidly. During the last five years, they have grown by 18%--higher than exports from any other region, including the EU. 7
Key Trends & Observed Patterns (cont d) Country-Level Trade and Investment Patterns China and India --- though still only 13% of all of Africa s exports -- have been one of the most rapidly growing destination markets: 1.7 times the overall growth for African exports As between India and China, it is China that is the most dynamic segment: Africa s exports to China grew by 48% annually 1999-2004 compared to 14% for India; today 10% of SSA exports are now to China and some 3% are to India 86 percent of Africa s exports to China and India are oil, metals, and agricultural raw materials. 5 oil and mineral exporting African countries account for 85% of exports to China, and South Africa alone accounts for 68% of exports to India. 8
Country-Level Trade and Investment Patterns Current Chinese FDI outflows to Africa are largely, but not exclusively, resource-oriented Sudan Nigeria South Africa Guinea Benin Madagascar Congo, Rep. Cote d'ivoire Sierra Leone Gabon Rest of Africa Kenya Zambia Togo Equatorial Guinea Tanzania Niger Chinese 2004 FDI Outflow, Million $US 0 50 100 150 Source: (2007) 9
Main Questions What has been the recent evolution of the cross-country pattern and performance of trade and investment flows between Africa and Asia? Which factors are likely to significantly condition these flows in the future? What have been the most important impacts on Africa of its trade and investment relations with China and India? What reforms can be taken to help shape these impacts to enhance Africa s economic development prospects. 10
Four Hypotheses At-the-border trade and investment policies: Market access (tariffs and NTBs); FDI policy regimes; and bilateral, regional and multilateral trade agreements. Behind-the-border (domestic) market conditions: Competitiveness of market structure; disciplines on governance; market institutions; flexibility of labor and capital markets Between-the-border trade facilitation factors Cross-border logistical and infrastructure regimes; quality of market information; product/technical standards Complementarities between investment and trade Do investment and trade flows leverage one another? horizontal/multi-plant integration across markets; global production networks and value chains 11
New Evidence Analysis of new data on the business operations of 450+ firms with Chinese and/or Indian affiliation in four African countries Ghana, Senegal, South Africa, and Tanzania (Summer 2006) Analysis of original 16 individual Business Case Studies developed in the field in the four countries, focusing on four sectors construction, food, textiles and apparel, and general manufacturing (Summer 2006) Gravity model analysis of all African countries global bilateral trade flows to assess relative weights of barriers to trade with China and India Also: Analysis of existing firm-level micro data from World Bank Investment Climate Assessments (ICAs) and data from World Bank Doing Business in African and Asian countries, special emphasis given to China and India Analysis of trade data from UN COMTRADE, UNCTAD TRAINS, and IMF Direction of Trade Country-specific qualitative data from existing resources, incl. DTIS 12
What Determines Bilateral African-Asian Trade Flows? Relative Roles of At-the-Border, Behind-the-Border, and Between-the-Border Factors Formal Trade Policies Between-theborder factors Behind-theborder factors Determinants of Africa-Asian Trade Flows All Merchandise Trade Exp. from Africa Imp. to Africa Manufactured Trade Exp. from Africa Imp. to Africa Importer Trade Restrictiveness n.s. n.s. n.s. Regional Trade Agreement + + + n.s. Preferential Market Access n.s. n.s. + n.s. Customs Procedure - Exporter n.s. n.s. Customs Procedure Importer + n.s. n.s. n.s. Internet Access Exporter + + + + Internet Access Importer n.s. n.s. n.s. n.s. Port Quality Exporter + + Port Quality Importer + + + + Domestic Business Procedure Exporter n.s. n.s. Power Infrastructure Quality Exporter n.s. n.s. + n.s. Note: Only the signs of significant coefficients are shown (level of significance above 10%). n.s. represents a coefficient not statistically significant. Source: Africa s Silk Road (2007) 13
At-the-Border Policies 14
Role of At-the-Border Policies Market Access Problem: Africa s Leading Exports face Escalating Tariffs in China and India Africa Imports China India Japan Asia Average 211 Raw hides 6.5 0.1 0 0.8 611 Leather 8.8 14.7 0.7 4.6 612 Manufactures leather 14.6 15 1.9 7.9 222 Oil seeds 5 30 0.4 2 423 Vegetable oils 10 45-27.7 07111 Coffee, not roasted 8 100 0 2.3 07112 Coffee, roasted 15 30 9.1 9.1 0721 Cocoa beans, raw 8 30 0 2.8 0722 Cocoa powder 15 - - 0.2 333 Petrol.oils, crude 0 - - 0.2 334 Petroleum products, refined 7.4 15 2.1 0.3 66722 Diamonds, sorted 3-0 2.2 66729 Diamonds, cut 8 15 0 6 6673 Oth. Precious/semi-precious stones 7.3 15 0 9 897 Jewelry 26.8 15 0.9 15.7 263 Cotton 27 10 0 14.8 6513 Cotton yarn 5 15-5 652 Cotton fabrics, woven 10 15 1 5.6 84512 Jerseys, etc. of cotton 14-5.7 6.8 8462 Under garments, knitted 14.1 15 6.9 5.2 Note: Darker shades represent higher levels of processing. Source: (2007) 15
Role of At-the-Border Policies But Even At Home, Trade Policy Not Fostering Exports: A Spaghetti Bowl of Regional Trade Agreements ECCAS AMU Algeria Libya Morocco Mauritania Tunisia ECOWAS Ghana Nigeria Conseil de Nigeria Cape Verde Chad L Entente Gambia Gambia Benin Niger Togo Burkina Faso Cote d Ivoire Cote d Ivoire Senegal Guinea -Bissau Mali Senegal Liberia Sierra Leone Leaone Guinea WAEMU Mano River Union CLISS CILSS AMU: Arab Maghreb Union CBI: Cross Border Initiative CEMAC: Economic & Monetary Community of Central Africa CILSS: Permanent Interstate Committee on Drought Controlin the Sahel COMESA: Common Market for Eastern and Southern Africa EAC: East African Cooperation ECOWAS: Economic Community of Western African Studies IGAD: Inter-Governmental Authority for Government IOC: Indian Ocean Commission SACU: Southern African Customs Union SADC: Southern African Development Community WAEMU: West African Economic & Monetary Union COMESA Nile Basin River Basin Initiative IGAD IGAD CEMAC Somalia Sao Tomé & Principe Egypt Cameroon Central African Rep. Gabon Equat. Guinea Djibouti Rep.Congo Burundi* Ethiopia Rwanda* Eritrea Sudan DR Congo Kenya* Angola Uganda* Algeria AMU Tunisia EAC Libya Mauritania Morocco Tanzania* Malawi* Mauritius* Zambia* Syechelles Seychelles * SACU Zimbabwe* Comoros* Madagascar* South Africa Namibia* Botswana Swaziland* Lesotho Namibia Reunion Mozambique *CBI *=CBI SADC IOC Source: Africa s Silk Road (2007) 16
Behind-the-Border Factors 17
Behind-the-Border Factors More Fundamentally, Africa s Domestic Markets Are Not Structurally Competitive Average Domestic Market Share, by Sector and by Country (Percent) Sector Ghana Senegal South Africa Tanzania All Four Countries Agriculture and Food 32 49 52 41 42 Chemicals 22 78 62 46 47 Construction 28 28 40 26 31 Machinery 34 67 43 38 41 Non-construction Services 22 55 34 25 36 Nondurable's 27 50 45 40 39 Non-oil Minerals and Metals 30 50 59 29 36 Textiles 17 66 44 43 44 All Sectors 26 57 42 34 39 Source: Africa s Silk Road (2007) 18
Behind-the-Border Factors Does the Entry of Asian Foreign Investors Foster Competition in African Markets? Average Foreign Investment Share (%) 80 70 60 50 40 30 20 10 0 0 20 40 60 80 100 Average Domestic Market Share (%) Source: (2007) 19
Behind-the-Border Factors Exporters in Africa Tend to be Those Who Face Less Interruption in Electricity Service from the Public Grid 30 25 percent of time 20 15 10 5 Non exporter Exporter 0 Ghana Senegal South Africa Tanzania Total Source: (2007) 20
Behind-the-Border Factors Factor Markets in Africa Need Greater Flexibility Country Rigidity of Employment Index Hiring Cost (% of Salary) Firing Cost (weeks of wages) Sub Saharan Africa 53.1 11.8 53.4 East Asia 26.2 8.8 44.2 South Asia 39.9 5.1 75 Source: Africa s Silk Road (2007) 21
Between-the-Border Factors 22
Between-the-Border Factors Trade Facilitation Infrastructure and Institutions: High Transactions Costs Port and Customs Inefficiencies Export Import Sub-Saharan Africa Average Documents for export (number) Signatures for export (number) Time for export (days) Documents for import (number) Signatures for import (number) Time for import (days) 8.5 18.9 48.6 12.8 29.9 60.5 Ghana 6 11 47 13 13 55 Senegal 6 8 23 10 12 26 South Africa 5 7 31 9 9 34 Tanzania 7 10 30 13 16 51 East Asia & Pacific Average 7.1 7.2 25.8 10.3 9 28.6 China 6 7 20 11 8 24 South Asia Average 8.1 12.1 33.7 12.8 24 46.5 India 10 22 36 15 27 43 Source: Africa s Silk Road (2007) 23
Imperfections in the Market for Information: High Transactions Costs Between-the-Border Factors African Exports are Constrained Because Domestic Firms Do Not Meet International Technical Standards Quality Certifications (ISO 9000, 9002, 14000) 100 Received ISO Did Not Receive ISO % of firms 75 50 25 0 Benin Eritrea Ethiopia Madagascar Mali Mauritius Mozambique Senegal South Africa Tanzania Zambia Source: Africa s Silk Road (2007) 24
Investment-Trade Complementarities Chinese Firms Are Less Integrated Into Africa s Microand Socio-Economy Than Their Indian Counterparts Remedying Information Market Imperfections Nationality of Owner Ethnic Origin of Owner African Chinese Indian European African 100% 4% 48% 51% Chinese 0% 93% 0% 1% Indian 0% 0% 45% 0% European 0% 0% 4% 41% Other 0% 4% 3% 7% Source: World Bank (2006) Source: Africa s Silk Road (2007) 25
Complementarities Between Trade & Investment 26
FDI-Trade Complementarities and Network Production-Sharing Opportunities Are African FDI and Exports Complements? The correlation coefficient between FDI as % of GDP and merchandise exports as % of GDP 120% Merchandise exports as % of GDP, 2005 100% 80% 60% 40% 20% 0% Oil countries Non-oil countries 0% 5% 10% 15% 20% 25% 30% 35% 40% FDI as % of GDP, 2004 Note: Oil countries include Angola, Chad, Republic of Congo, Equatorial Guinea, Nigeria, and Sudan. Source: (2007). 2 27
FDI-Trade Complementarities and Network Production-Sharing Opportunities Extent of Scale and Geographic Spread: Number of Separate Firms Belonging to Holding Companies/Group Enterprises African Chinese Indian European Domestic 8 1 2 3 Other Africa 2 4 1 8 Outside Africa 2 16 5 58 Note: Data pertain to median values. Source: Africa s Silk Road (2007) 28
Investment-Trade Complementarities Asian Firms Are Engaging in Greater Pan-African (Horizontal) Integration Than Are African Firms Domestic Other Africa Europe North America India Other South Asia China Other East Asia Other African Chinese Indian European 85% 78% 89% 76% 8% 14% 10% 11% 4% 0% 0% 1% 1% 0% 0% 0% 0% 0% 0% 0% 0% 1% 0% 0% 0% 3% 0% 0% 0% 0% 0% 2% 1% 1% 1% 2% Note: Data pertain to 2005 mean annual sales. Source: Africa s Silk Road (2007) 29
FDI-Trade Complementarities and Network Production-Sharing Opportunities Purchases of New Machinery by Import Origin and Firm Nationality Nationality African Chinese Indian European Domestic Other Africa China India Other 55% 32% 15% 28% 3% 1% 7% 12% 6% 60% 13% 1% 5% 0% 22% 2% 31% 8% 44% 56% Note: Data pertain to 2005 median values. Source: Africa s Silk Road (2007) 30
FDI-Trade Complementarities and Network Production-Sharing Opportunities Distribution of Material Input Purchases by Origin Market and Nationality Domestic Other Africa Europe North America India Other South Asia China Other East Asia Other Note: Data pertain to 2005 median annual purchases. African Chinese Indian European 60% 31% 27% 40% 7% 4% 9% 9% 13% 1% 13% 34% 3% 5% 1% 6% 5% 2% 26% 3% 3% 1% 4% 1% 4% 55% 7% 3% 2% 1% 3% 3% 2% 0% 11% 1% Source: Africa s Silk Road (2007) 31
Investment-Trade Complementarities Asian Firms are Creating More Value on the Continent With More Processed Exports than African Firms Firm Nationality African Chinese Indian European Domestic Sales Product Finished Assembled Partially Finished 88% 90% 90% 89% 5% 9% 4% 4% Raw Material 6% 0% 5% 6% Sales to Other African Countries Export Sales Outside of Africa Finished Assembled 83% 89% 100% 78% Partially Finished 8% 11% 0% 15% Raw Material 9% 0% 0% 7% Finished Assembled 77% 75% 100% 90% Partially Finished 10% 25% 0% 10% Raw Material 13% 0% 0% 0% Note: Pertains to sales to private firms. Data pertain to 2005 median values. Source: Africa s Silk Road (2007) 32
Summary of Key Findings China and India s new-found interest in trade and investment with Africa can present a significant opportunity for growth and international integration for Africa China and India s South-South commerce with Africa is about far more than oil, opening the way for Africa to become a processor of commodities and a supplier of goods and services to these Asian countries Growing number of Chinese and Indian firms in Africa are on a global scale with world class-technologies; they are fostering global and regional integration of African businesses But there are major asymmetries in this South-South commerce; without addressing them, potential benefits will not materialize; e.g., while Asia is a significant part of Africa s trade flows, Africa is a very small part of Asia s trade; or Africa could remain only a raw material exporter to Asia Trade policy reforms are less important than reforms behind the border, between the border, and actions that leverage trade-fdi linkages For Africa as well as Asia to benefit, all sides must pursue reforms 33