Working Paper 126 - China’s Trade and FDI in Africa
AbstractThis paper analyzes the different impacts of China on Africa, quantifies the advantages and disadvantages, and policy suggestions necessary to maximize the development impact of China. One overriding consideration is that reaping the full benefits from Chinese trade and investment will require substantial improvements in governance in African economies. � China’s growth and its capacity to transform in thirty years from under-development and extreme poverty to an emerging global power and one of the largest exporters of manufactured goods has attracted the attention of many developing countries.� China has served as a development model for Africa and an alternative source of trade and finance from Africa’s traditional development partners. The impact of China on African economies has been diverse, depending on the sectoral composition of each country’s production.� Overall, China’s increased engagement with Africa could generate important gains for African economies. Despite various definitions, there is a consensus that governance encompasses institutions with the capacity to ensure the rule of law, respect for individual freedoms and a democratic political regime. In recent years, international organisations and bilateral aid agencies from traditional donors have made their assistance conditional on good governance. China, on the contrary, makes a clear distinction between economics and politics in its interventions in Africa. Trade and FDI in the natural resource sector tend to impair governance and efficiency, have harmed the environment, and often failed to lead to a reduction of poverty. Moreover, the oil sector’s demand for resources has often reduced manufacturing production (due to Dutch Disease effects) and has been associated with imprudent macroeconomic policies resulting in high levels of volatility. The sharp increase in revenues resulting from Chinese demand must be managed by increasing savings in times of economic boom and making provisions for social assistance, particularly for the unemployed, during downturns. African countries need to increase the value-added of their production and exports, irrespective of their partner countries. This implies developing specialisations that may justify limited protectionist measures. Trade growth can be associated with increasing inequality. There is evidence that trade with China contributes to an improvement in the terms of trade for resource-rich countries and deterioration for resource-poor countries. The same distributional effects can be seen within a country, where workers and firms in the oil and mineral sectors see increasing incomes while agriculture and manufactures sectors see reductions. � African countries may be able to reap significant benefits from furthering regional integration in respect to the rules governing Chinese investment. For example, collaboration among African governments could be useful in stipulating minimum levels of local employment in Chinese-owned firms. Economic policy suggestions can only be envisaged by taking into consideration the specific nature of individual countries. The influx of financial and human resources from China generate short-term mutual benefits and can enhance complementarities between China and Africa.
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Bibliographic InfoPaper provided by African Development Bank in its series Working Paper Series with number 297.
Date of creation: 23 Jun 2011
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