The Ghanaians did the right thing. There was clearly no need to go down the aid path yet again, and there was a lot of upside to issuing the bond. Although small this time round relative to the investor demand, their approach was prudent – and for this they will be rewarded. In particular, their initial success can be the launch-pad for them to win favour from investors and return to the market regularly in future years.
Tanzania and Uganda’s MDG financial needs are far less modest (US$2.5 billion and US$1.6 billion per year, respectively) but no less unachievable. Although they are both in a position to issue bonds (Uganda has a B credit rating from the Fitch rating agency) towards meeting their MDG needs, they have yet to take the plunge.
Depressingly, and maintaining the status quo, the Sachs estimates all require a doubling of aid for each country.
7. The Chinese Are Our Friends
In the summer of 2005, Lukas Lundin, an intrepid mining entrepreneur, rode his 1200cc BMW motorcycle the full length of Africa – from Cairo to Cape Town (three times the distance of New York to California). The journey would take him five weeks and cover 12,000 kilometres (roughly 8,000 miles), through ten African countries. His expedition took him past the pyramids of Egypt, through the dusty and arid terrain of Ethiopia and Sudan; through the scenic savannahs of Kenya, and past Mount Kilimanjaro in Tanzania. He rode past Lake Malawi, past the Victoria Falls in Zambia, past the Okavango swamps of Botswana, and through the Namib Desert of Namibia; concluding the treacherous ride in South Africa.
At the time, 85 per cent of the roads he travelled on were tarred – of the highest quality, no different from the ones he rode on in California. He was astonished – this was not what he had expected at all. Along the roads, in country after country, there were clues as to how this had come about: signposts proclaiming ‘this road constructed with the grateful assistance of the Government of the People’s Republic of China’.
As this story illustrates, there has recently been a surge of foreign direct investment aimed at Africa. It’s been a long time coming, but in terms of what capital is available it barely scratches the surface.
Some figures to think about: in 2006, global flows of foreign direct investment (FDI – defined by the United Nations Conference on Trade and Development as ‘an investment made to acquire a lasting interest in an enterprise operating outside the economy of the investor’) soared to a record US$1.4 trillion. FDI into developing countries (globally) approached almost US$400 billion. During this period, FDI flows to the whole of sub-Saharan Africa reached a meagre US$17 billion. The continent as a whole continues to disappoint and has failed to capitalize on the phenomenon of global FDI growth. In 2006, the US$37 billion that Africa received as official foreign aid was more than twice the continent’s foreign direct investment, and today Africa attracts less than 1 per cent of global capital flows, down from almost 5 per cent a decade ago.
The disappointment is justifiable. In theory, foreign capital should flow from richer countries to poor. The marginal product of a unit of capital should be higher in poor countries than in rich (in a rich country US$1 can produce only one pair of shoes, whereas in a poor country US$1 can produce ten pairs – more bang for your buck). Typically in these countries labour is more abundant and cheaper, thus increasing its appeal to FDI.1 Japanese car markets have invested in Eastern Europe, where labour costs are low. So too have low production costs in the textile industry attracted Asian and Chinese investors to Africa – seeking both low overheads and the opportunity to use the African countries’ export quota.
Yet Africa, which should on this basis be the prime target for FDI, continues to be broadly ignored. More figures: in 2006, FDI of US$200 billion accrued to only ten emerging economies (in descending order, China, Russia, Turkey, Mexico, Brazil, India, Romania, Egypt, Thailand and Chile – none in the top ten are in sub-Saharan Africa); 52 per cent of FDI went to Asia; FDI to China alone was roughly US$80 billion – five times the amount for the African continent as a whole.
So why, then, given Africa’s level of development, is it that most of the capital flows have by-passed the most needy of continents?
Why FDI does not flow to Africa
Few would dispute the fact that Africa is, a priori, ready-made for FDI. Its labour costs are low, its investable opportunities are high, and even theoretically, as home to some of the poorest countries in the world, Africa should be FDI’s natural suitor.
Truth be told, there are hurdles for investors to overcome. For the most part infrastructure (roads, telecommunications, power supply, etc.) is scant, and of poor quality, making the costs of overall production of goods and services (when transport costs are figured in) steep – which explains why it is cheaper to make almost anything in Asia and ship it to Europe, than produce it in Africa, although the continent is much closer.
However, physical constraints are nothing when compared with man-made disincentives: widespread corruption, a maze of bureaucracy, a highly circumscribed regulatory and legal environment, and ensuing needless streams of red-tape.
Doing business in Africa is a nightmare. The World Bank’s annual ‘Doing Business’ survey provides data on the relative ease (or difficulty for that matter) with which business can be conducted around the world. The results are all too revealing, and do much to explain why Africa remains at the bottom of any FDI investors’ list.2
In Cameroon, it takes an investor who seeks a business licence on average 426 days (that is almost a year and three months) to perform fifteen procedures; whereas in China it takes 336 days and thirty-seven procedures, and in the USA, only forty days and nineteen procedures. What entrepreneur starting a business in Angola wants to spend 119 days filling out forms to complete twelve procedures? He is likely to find South Korea a much more attractive business culture, as it will take him only seventeen days to complete ten procedures.
It’s not only the red-tape. It’s also the opacity. Investors don’t know where to go, or who to ask. In a number of mining-dependent countries, rather than the government offering parcels of land in open auction, prospective investors are expected to provide the government with specific land coordinates. The geological survey offices know where the ore lies, but they just can’t be bothered to help the investors along. Though the countries’ livelihoods depend significantly on such entrepreneurs coming in, given the nature of doing business it is hardly surprising that this much-needed investment stays away.
It may all sound insurmountable, but just like a click of a switch it is perfectly possible (and easy) for an enterprising government to reduce the paperwork, supply the coordinates, and speed up the process. Unfortunately, the reality may not be as simple as that, but it is has been shown that improving regulations for business could lift GDP by 2.3 per cent a year (Djankov, McLiesh and Romalho). The Commission for Africa notes that Uganda’s economy grew by around 7 per cent between 1993 and 2002 when the country improved its regulatory climate. It also reduced the number of people living on less than a dollar a day from 56 per cent in 1998 to 32 per cent in 2002 after the government introduced measures to attract investors.
Africa continues to have a bad reputation. The former UN Secretary-General, Kofi Annan, put it this way: ‘For many people in other parts of the world, the mention of Africa evokes images of civil unrest, war, poverty, disease and mounting social problems.3 Unfortunately, these images are not just fiction. They reflect the dire reality in some African countries, though certainly not all.’
Unless Africa does something about it, this image is bound to remain fixed in the minds of investors. Continent-wide economic growth won’t accelerate unless African governments improve conditions for investment. African policymakers would do well to remember that there are other developing regions where it is much easier to generate similarly attractive returns with considerably less hassle. This is probably not accidental – their leadership just happens to care more.
What does Dongo need to do to attract FDI?
As
a first port of call, Dongo needs to recognize that FDI is an engine for economic growth. Besides the welcome cash raised to support development initiatives, there are other benefits that FDI will bring: it will create more jobs, assist in the transfer of new technology, help stimulate the formation of Dongo’s capital markets, improve management expertise, and aid indigenous firms to open up to the international markets. Furthermore, satisfied FDI investors would be happy to introduce the country to other forms of capital – bank lending and venture capital.
The more foreign cash Dongo can attract, the more foreign cash Dongo will get.
But Dongo has some work to do. It needs to give its moribund legal and regulatory system teeth. Investors need to know and believe they have some means of recourse – somewhere to go if and when their contracts falter.
Dongo also needs to recognize that it must woo FDI investors, who are used to being courted by all manner of other emerging nations. Attractive tax structures are a great way of luring investors in. For example, in order to bring in foreign mining investment in the late 1990s, the Zambian government reduced royalties to a minuscule 0.6 per cent. (Although on the back of the surge in copper prices the tax rate was raised to 3 per cent.) Beyond this, because FDI investors perceive their capital differently from bank capital – the former looking to invest in a country over longer periods of time than the latter – they will look to countries that are keen, and that are seen, to invest in their infrastructure (economic, political and social – notably education).
Although spasmodic, Africa’s FDI news is not universally bad. The UN Conference on Trade and Development (UNCTAD) has reported that ‘from the viewpoint of foreign companies, investment in Africa seems to be highly profitable, more than in most other regions.’ Japanese companies said in 1995 that they made more profit from their African investments than from those in South-East Asia, the Pacific, North America and Europe.4 American investors have said that they made a return on their African investments of 25 per cent in 1997. This is two thirds more than they made from their investments in Asia and the Pacific, and 50 per cent more than their return on capital invested in Latin America and the Caribbean. UNCTAD reports that British direct investment in Africa, excluding Nigeria, increased by 60 per cent between 1989 and 1995.
The Chinese are our friends
In the last sixty years, no country has made as big an impact on the political, economic and social fabric of Africa as China has since the turn of the millennium. It’s not the first time China has been there. One of the lasting monuments to its former presence is the 1,860-km (1,160-mile) railway, built in the 1970s for US$500 million, that connects Zambia, through Tanzania, to the Indian Ocean.
More recently, China (both public and private) has launched an aggressive investment assault across the continent. China is growing at a phenomenal rate. Its economy has grown as much as 10 per cent a year over the past ten years, and it desperately needs the resources that Africa can provide. The US Energy Information Administration calculates that China accounted for 40 per cent of the total growth in oil demand over the past four years. In 2003 it overtook Japan to be the world’s second-biggest consumer of petroleum products after the US.
But rather than conquer Africa through the barrel of a gun, it is using the muscle of money. According to its own statistics, China invested US$900 million in Africa in 2004, out of the US$15 billion the continent received, up from US$20 million in 1975. Roads in Ethiopia, pipelines in Sudan, railways in Nigeria, power in Ghana – these are just a few of the torrent of billion-dollar projects that China has flooded Africa with in the last five years, each one part of a well-orchestrated plan for China to be the dominant foreign force in twenty-first-century Africa.
The evidence is overwhelming. In November 2006, more than forty African leaders gathered at the first Sino-African summit – the Forum on China–Africa Cooperation – in Beijing.5 Very nearly every African leader was there: the big, the small, the credible and the not so credible. Amidst the fanfare (the Chinese had imported giraffes and elephants as part of the revelry to make the African delegates feel more at home, and lined the streets with fifty African flags), the Chinese government unveiled its African strategy.
In his opening ceremony address, the Chinese President, Hu Jintao, told his audience: ‘In all these years, China has firmly supported Africa in winning liberation and pursuing development . . . China has trained technical personnel and other professionals in various fields for Africa. It has built the Tanzam Railway and other infrastructure projects and sent medical teams and peacekeepers to Africa.’
The Chinese President went on: ‘Our meeting today will go down in history, we, the leaders of China and African countries, in a common pursuit of friendship, peace, cooperation and development, are gathered in Beijing today to renew friendship, discuss ways of growing China–Africa relations and promote unity and cooperation among developing countries.’ With this, he launched China’s new multi-pronged assault on Africa, which would focus on trade, agricultural cooperation, debt relief, improved cultural ties, healthcare, training and, yes, even some aid (but thankfully only a small component of their strategy).
In an effort to help fast-track Africa’s development, China has in recent years pledged to train 15,000 African professionals, build thirty hospitals and 100 rural schools, and increase the number of Chinese government scholarships to African students from the current 2,000 per year to 4,000 per year by 2009. In 2000, China wrote off US$1.2 billion in African debt. In 2003 it forgave another US$750 million. In 2002, China gave US$1.8 billion in development aid to African countries. In 2006 alone, China signed trade deals worth almost US$60 billion.6
The Chinese are moving in, and they are moving in in a big way. As well as many visits to numerous African countries by the Chinese leadership (including by the Chinese Premier, Wen Jibao), Chinese entrepreneurs, technical experts, medical staff and simply prospectors looking for that pot of gold are found everywhere.
An excerpt from an article in the Economist magazine in 2006 illustrates the point wonderfully well:
In his office in Lusaka, Xu Jianxue sits between a portrait of Mao Zedong and a Chinese calendar. His civil-engineering and construction business has been doing well and, with the help of his four brothers, he has also invested in a coal mine. He is bullish about doing business in Zambia: ‘It is a virgin territory,’ he says, with few products made locally and little competition. He is now thinking of expanding into Angola and Congo next door. When he came in 1991, only 300 Chinese lived in Zambia. Now he guesses there are 3,000.7
One of the most impressive aspects of the whole Chinese package to Africa is its commitment to FDI. This is achieved both directly through the government and, indirectly, by encouraging private Chinese enterprises to invest in Africa, usually through preferential loans and buyer credits.
Between 2000 and 2005, Chinese FDI to Africa totalled US$30 billion. As of mid-2007, the stock of China’s FDI to Africa was US$100 billion.
China has invested billions in copper and cobalt, in the Democratic Republic of Congo and Zambia; in iron ore and platinum in South Africa; in timber in Gabon, Cameroon and Congo-Brazzaville. It has also acquired mines in Zambia, textile factories in Lesotho, railways in Uganda, timber in the Central African Republic and retail developments across nearly every capital city. However, oil is the gusher.
Almost consistently over the last decade, Nigeria and Sudan have been the largest beneficiaries of FDI in Africa. In 2004, they received more than half of Africa’s FDI – Nigeria over US$4 billion and Sudan almost US$2 billion, while the rest of Africa got around US$4 billion. China’s part of this has been extensive. In January 2006, the state-owned Chinese energy company, CNOOC, paid almost US$3 billion for a 45 per cent interest in a Nigerian oilfield. China has built a 900-mile pipeline and invested at least US$20 billion in Sudan.
Angola has now overtaken Saudi Arabia as China’s biggest single provider of oil. In the first half of 2006, Angola al
one supplied almost 20 per cent of oil imports to China, and, in total, African countries provided roughly 30 per cent of China’s crude oil imports. China has shown similar interest in other producers such as Sudan, Equatorial Guinea, Gabon and Congo-Brazzaville, which already sells almost half of its total crude exports to Chinese refiners. In 2006, 64 per cent of Sudan’s oil exports went to China.
While it is true that China’s African investments have, for the most part, been directed towards resource-rich countries, and thus the mining sectors, over time a much broader investment approach is becoming evident. In the last few years, for example, Chinese FDI to Africa has diversified into sectors such as textiles, agro-processing, power generation, road construction, tourism and telecommunications. Furthermore, the Chinese government has pledged to step up China–Africa cooperation in transportation, communications, water conservancy, electricity and other infrastructure. Among other transport contracts, Chinese companies are rehabilitating the legendary Benguela railway, from the coast to the borders of Zambia and the Democratic Republic of Congo, originally completed by the British in the 1920s. And in Nigeria, an US$8.3 billion deal was recently reached with a Chinese contractor to rebuild the dilapidated colonial-era railway between Lagos and the northern Nigerian city of Kano, as the first stage of a twenty-year rail modernization plan. Financial services and banking have also been in China’s sights. In a move that confirmed the depth of its commitment, the Chinese state-owned Industrial and Commercial Bank bought a 20 per cent stake in Standard Bank (for US$5.5 billion), Africa’s largest indigenous bank in 2007.
Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa Page 12
