Sunday, 5 September 2010

China - Africa's Friend or Foe?

China’s hunger for natural resources in Africa is reminiscent of the Scramble for Africa by European powers during the New Imperialism period between the 1880s and World War 1 in 1914.

Arguably, China is Africa’s friend, as a potential source of Foreign Direct Investment (“FDI”) and engine of growth: As the world’s fastest growing economy, China’s increasing demand for resources is a key feature of the global landscape, and is predicted to persist in the future. Recent deals include construction of roads, railways and buildings from Lesotho to Cairo, investments in the oil sector in Nigeria, and the coal sector in Mozambique. Chinese economic activity is expected to have a positive externality on the wider African economy, due to much needed improvements in infrastructure.

Recent literature, however, have questioned China’s true incentive for collaborating with Africa, often espousing views that China’s business practices are often to Africa’s detriment. The main concern is that the increasing exploitation of natural resources will give rise to “Dutch Disease”. This supposes that an increase in profits from natural resources will cause de-industralisation, as the domestic exchange rate appreciates. Consequently, making the manufacturing sector less price competitive.

True, China assists in financing infrastructure projects in resource rich countries, often however, criticism also surrounds the transparency in loan contraction processes. Loan contracts are often made at the highest political level, and due to lack of transparency, the agreements are not available to parliament, civil society or media, as in Zambia.

Zambia is an example of an undiversified economy with a heavy dependence on commodity exports. Following the oil crisis in 1973, Zambia’s economy was devastated by a global decline in commodity prices, and borrowed its way through the crisis, with peak debts of $7 billion. Cancellation of up to $6.6 billion as well as a demand for copper particularly by the Chinese spurred the economy. Despite this, there has been an increasing prevalence in anti-Chinese sentiments amongst Zambians. Concerns surround the lack of transparency in loan contraction processes, meaning that political leaders can exploit capital inflows with little accountability.

Our political leaders ought to take a more active role in monitoring FDI, in order to ensure that the wealth generated “trickles down” to benefit everyday Africans. Stringent policies need to be implemented to ensure that FDI is only encouraged in sectors of the economy requiring investments, to prevent crowding out of local African producers. Taking a lesson from China’s “Provisions for Guiding Foreign Investment and the Industrial Catalogue for Foreign Investment”, these set out activities that are prohibited by foreign investors, and also only encourages activities that are “in accordance with the development and needs of the national economy”.

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