Africa’s emerging partnerships

There are signs of a new, more confident and self-affirming Africa taking shape. As the 2011 edition of the African Economic Outlook argues, this newness is also evident in the continent’s relationships with emerging economies.

Africa is abuzz with talk of new investment, new cities, new airports, new refineries. It has weathered the global economic and financial crises and has shown signs of rebounding in 2010. There are political and economic headwinds to confront of course, but the new African Lions seem ready to take them on.

The transformation has been striking. The new millennium saw per capita incomes in Africa rise faster than high-income countries for the first time since the 1970s. Poverty and inequality remain, but for a score of countries the income gap has narrowed with wealthier OECD countries. One reason is the effect of emerging new markets, in particular China and India. Their influence has primarily been felt in rising raw material prices, with spin-offs in investment and trade, as well as jobs, wages and living standards.

Before the talk was in dollars. Now leaders speak equally of Chinese renminbi, Indian rupees and Brazilian reals. Are the last shackles of colonialism finally being broken? Or is another form of dependence taking over, this time based on commodityhungry emerging markets?

The answer largely depends on how Africa turns the sea changes that have occurred in its favour. Those changes have been across the board.

Take development aid. The traditional economic powers still dominate in official development assistance (ODA), with the countries that make up the OECD Development Assistance Committee (DAC) accounting for some 90% of the world’s bilateral assistance. But aid from emerging partners is growing fast, and a quarter of China’s aid now goes to Africa.

Trade is also shifting. True, Europe and North America still account for more than half of Africa’s trade and foreign investment stock, but the “emerging partners”, countries that do not belong to the club of traditional OECD DAC donors, have become more present on the African scene. Trade between Africa and its new partners is now worth US$673.4 billion a year, which is some 37% of the total.

As for foreign direct investment (FDI) to Africa, the share of non-OECD countries has risen, albeit to just 21% of the total in 2000-2008. Some three-quarters of Chinese FDI to Africa was concentrated in mineral and hydrocarbon-rich countries, such as Cameroon, Nigeria, Gabon, South Africa and Zambia, but also Algeria and Libya; indeed, some 30-50% of FDI goes to North Africa.

But as the Africa Economic Outlook shows, a closer look at countries for which data has been scant shows that while emerging partners still represented only around one tenth of FDI inflows to those destinations, their share has approximately doubled between the first and the second half of the decade.

Beyond these shifts in headline numbers, China has led the way in Africa in other ways too, particularly through its behaviour and generally positive discourse on the continent’s potential, a stance that has also revived interest among traditional competitors. This change in perceptions is aptly captured in the shift from the “hopeless” continent tag peddled by The Economist in 2000 to its upbeat “uncaging the lions” feature in 2010.

Most attention on the economic changes in Africa focuses on China, India and Brazil. China, for instance, appears to bring comparative strengths in infrastructure development, India in learning and services, and Brazil in agriculture and agroprocessing. Other new partners include OECD members Korea and Turkey, as well as non-OECD countries such as Argentina, Indonesia, Singapore, UAE and Russia. This diversity of partners is a tremendous opportunity for Africa to seize. Each wave of countries engaging with the continent brings with it a new array of products, capital goods, technology, know-how and development experience. For instance, imports of affordable consumer goods from Asia help African consumers increase their purchasing power and improve living standards.

What about the oft-decried scramble for the continent’s natural resources? There is clearly competition between the emerging and traditional powers for minerals, oil, gems and crops. The emerging powers have much to contribute, in the exploration and exploitation of reserves for instance, and in related investments in infrastructure, utilities and transport. They are enlarging Africa’s pool of exploitable resources beyond what the traditional powers alone could handle. And they bring resources into education and healthcare, too.

This is important for development: an African Economic Outlook survey of 40 country experts reveals that emerging partners are perceived locally as being more effective partners, particularly in agriculture and infrastructure. Moreover, emerging partners reach countries which have been neglected by traditional partners, such as Ethiopia, Guinea and Sudan.

Perhaps the biggest difference emerging partners have brought is in the mixes of financing it offers, often backed by export credits and “resource for infrastructure” credit deals, which are not defined as ODA under the OECD DAC’s strict norms. So when China’s Exim Bank issued Angola with credit lines worth $2 billion in 2004 and $2.5 billion in 2007 for the construction of railways, roads, hospitals, schools, social housing and more, the credit lines were secured by crude oil exports. In 2010, China struck a $23 billion deal with Nigeria to construct three oil refineries and a petro-chemical complex on a similar basis.

Emerging partners other than China also mix aid and investment, albeit on a smaller scale. For instance, in 2007, Senegal struck a $2.2 billion agreement with the Indian government and Arcelor Mittal to launch an iron ore extraction project, along with plans to build railway lines and a port.

The jury is still out on how this development approach compares to the path preferred by the traditional partners, of separating investment from official aid (that is generally not tied to contracts from donor countries) and institutional capacity building. The wider range of finance from emerging partners appeals to resource-rich countries, and leads to projects that private investors otherwise shun, such as building 6,000 km of new roads in the Democratic Republic of Congo. Moreover, it incites African countries to re-invest part of their revenues into wider national development.

Both approaches struggle with the likes of project coherence and management. But emerging partners are viewed as delivering “turn-key projects” faster than traditional partners, and are said to be less bureaucratic. However, they can be very demanding about implementing credit lines, which leads to problems akin to those of tied aid.

There is no clear evidence that either approach improves development more than the other. Proponents of the traditional donors have shown concern that the intense nature of the new partner relationships could cause Africa to overspecialise in unprocessed raw materials. However, African manufacturing output of machinery, transport equipment and processed commodities roughly doubled in the last decade, mostly aimed at a few emerging markets. And though diversification and productivity challenges remain, African firms now have access to more affordable goods than before. Moreover, emerging partners are becoming major sources of innovation, not least for adapted advanced technology, such as affordable solar-powered mobile phones and LED lighting for homes, workplaces and schools.

What about governance? Interestingly, there are signs that the emerging-partner approach to Africa has not worsened governance as some feared, but may have improved it in some cases. For instance, while Chinese aid for infrastructure is often tied to contractors, it is not explicitly bound to policy conditionality. This may be one reason why co-operation with emerging partners is popular among African nations. Moreover, some African countries say their power to renegotiate assistance with OECD countries has been boosted by the presence of emerging partners, so improving overall ownership of policies.

The shift in global wealth may spell the end of post-colonialism, though as the African Economic Outlook says, the key for Africa is to harness the complementarities in the traditional and emerging partner approaches, while devising home-grown development policies, and in particular boosting its own internal integration. Then, Africa will become more cohesive, and its bargaining power, as well as its partnerships, will strengthen.

References

African Economic Outlook 2011. The African Economic Outlook is produced in partnership by the African Development Bank (AfDB), OECD Development Centre, UN Development Programme (UNDP) and the UN Economic Commission for Africa (UNECA).

The Economist (2010), “Uncaging the lions: Business is transforming Africa for the better”, Schumpeter column, June. See http://www.economist.com/node/16317978

For queries on this article, contact Jean-Philippe Stijns.

©OECD Observer No 285 Q2 2011




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