China and Africa: an enduring partnership
Hippolyte Fofack - September 2018
Lin Wang, China Business News interviewed Dr Hippolyte Fofack, Chief Economist of the African Export-Import Bank and a regular contributor to World Economics, about the China-Africa Cooperation (FOCAC) Forum held in Beijing hosted by the Chinese government. FOCAC is a triennial meeting between senior Chinese leaders and their counterparts from across Africa. At the Forum Chinese President Xi Jinping has announced a $60 billion package of aid, investment and loans to Africa, against a backdrop of growing concern about rising debt distress on the continent.
1. What’s your expectation for the Forum on China-Africa Cooperation (FOCAC) summit in Beijing?
The third triennial Forum on China-Africa Cooperation (FOCAC), hosted by the Chinese government in Beijing this week, is organized at a time when trade is increasingly viewed as a zero-sum-game transaction under rising beggar-thy-neighbour nationalism. The unilateral imposition of punitive tariffs to correct structural trade imbalances—outside of the rules-based framework of the World Trade Organization (WTO)—has led to retaliations and set the world’s two leading economies on a trade collision course. These changing dynamics in the world economy are occuring when FOCAC, and more generally the growing intensity of trade and investment between Africa and China, have contributed to a significant increase in South-South trade. Developing economies now account for more than 42 percent of world trade, up from about 29 percent in 2000, when the first ministerial conference between African and Chinese authorities was organized in Beijing.
The deepening trade ties in the South have reduced the exposure of developing countries to global volatility and uncertainty triggered either by rising protectionism or by other adverse global shocks. Beyond major declarations of intent and pronouncements, the third FOCAC will provide the opportunity to consolidate and further deepen the trade and investment relationships between two partners with a shared history at a time when recent developments around the world might have helped them realize both how much they depend on each other and the role that their partnership could play in sustaining the process of structural transformation of their respective economies. Reflecting that global context and mutual aspiration, it is not at all surprising that this year’s FOCAC summit has the theme, “China-Africa: Toward an Even Stronger Community with a Shared Future, through Win-Win Cooperation
2. How do you foresee the African Export-Import Bank’s cooperation with its Chinese counterparts?
The cooperation between the African Export-Import Bank and its Chinese counterparts has been extremely fruitful and impactful. The cooperation has sustained and financed the impressive growth and expansion of trade and investment between Africa and China. From a relatively low base of 2.7 percent of total African trade in 2000 trade with China has increased significantly and now accounts for more than 14 percent of total African trade. In the process, China has become Africa’s single largest trading partner.
As more steps are taken to deepen the trade and economic partnership between the two historical partners, the cooperation between the African Export-Import Bank and its Chinese counterparts is likely to grow stronger, especially in light of the impact achieved thus far, in terms of both trade intensity and development outcomes. In this context and reflecting a mutual commitment to increased relevance and development impact, the African Export-Import Bank will be working even more closely with its Chinese counterparts to support the process of industrialization and structural transformation of African economies that was articulated under the African Union Agenda 2063—the Africa we want - and outlined in China’s current Africa strategy. Indeed, promoting and financing the transformation of African economies will be critical to sustaining the growth of China-Africa trade and to achieving the win-win partnership sought by both African and Chinese officials.
3. There is a big gap between the China-Africa trade goal for 2020 ($300 billion) and the current situation ($170 billion in 2017). How can trade finance or other measures boost China-Africa trade to a new level?
Although trade between China and Africa has increased significantly in the last two decades, from $6.4 billion in 2000 to more than $116.5 billion according to most recent estimates (after reaching a high of $170 billion in 2011), the gap from the $300 billion target for 2020 remains important. In part, the large gap reflects the nature of trade—and especially African trade—which is still largely dominated by natural resources and primary commodities that account for more than 90 percent of total African exports to China. These trade patterns that are skewed toward natural resources have exposed the region to the deterioration of commodity terms of trade and in the process, undermined the prospect of sustainably growing African trade, including China-Africa trade. The value of this trade fell from $170 billion in 2011 to about $116.5 billion in 2014, after the end of the commodity super-cycle and the collapse in oil prices.
Closing the gap to achieve the trade target, and eventually sustaining the growth of China-Africa trade, will perhaps require diversifying the sources of growth and accelerating the process of export diversification within the Africa region. In this regard, one of the most important measures should be to position Africa as the prime destination for the outsourcing of light manufacturing industries from China. More than taking advantage of low labour costs in Africa to sustain high returns on investment, the outsourcing option has the potential to sustain the growth of employment opportunities and to accelerate the expansion of both China-Africa trade and intra-Africa trade. The latter is promoted by both the African Export-Import Bank and the African Union and will be enhanced by the process of structural transformation in a region where industrial production and manufactured goods account for the lion’s share of cross-border trade.
Another important measure could be investing in the development of regional value chains to support and sustain the growth of China-Africa trade, by linking emerging Africa-based regional value chains to China-based chains, and ultimately to global value chains. For instance, Africa could enter the China-led global value chain of new energy vehicles by establishing regional value chains that draw on Africa’s excess natural resource endowment to manufacture lithium batteries within Africa for export to China and other parts of the world. A further step could be raising infrastructure investment to modernize and accelerate the development of infrastructure, especially in the power and transport sectors, which have been key constraints to productivity growth and cross-border trade within Africa. Also, investment in trade information by both partners could further expand the scope of trade and investment opportunities available in Africa and China to potential investors and consumers and in the process, raise demand and boost trade.
4. China is transiting from “Made in China” and “World Factory” to “Make for China” and “World Market.” It will host the initial China International Import Expo in Shanghai this November. How do you think African products can benefit and be competitive in entering the Chinese market?
Indeed, China is undergoing two important transitions. The first one—economic rebalancing—has two critical paths: switching from external to domestic demand in generating growth, or external rebalancing, and achieving the same objective by switching from investment to consumption-led-growth, or internal rebalancing. The second transition—Made in China 2025—¬ is related to the first one and involves upgrading Chinese industries, in part to meet the changing nature of domestic demand, which is shifting toward increasingly more sophisticated products and calling for investment in high-tech industries and promotion of innovation-led growth strategies.
These developments, undertaken by the leading trading nation in the world, are important and likely to have significant implications for global value chains and supply chains, as well as for the global trading and industrial landscape. For instance, as China moves up the technological ladder, the race to competitively produce light manufacturing goods for the global market in other regions of the developing world will intensify. Estimates suggest that China could outsource as much as 85 million jobs during that industrial and technological transition.
Africa, which still has low labour costs, is well positioned to compete and take advantage of ongoing economic rebalancing and technological transition in China. Africa’s lower-labour-cost economies could also draw on their excess natural resource endowment and on emerging growth opportunities associated with growing economies of scale under the African Continental Free Trade Area to become the next world factory for light manufacturing goods, exporting to China and the rest of the world. This would sustain the expansion of China-Africa trade beyond the initial target, while at the same time realize the highly sought win-win cooperation between the partners.
5. Some international media contain the criticism that China’s loans to African countries, especially in infrastructure, have increased Africa’s debt burden and hindered the sustainable development of Africa.
Q: How do you evaluate the debt burden of African economies?
Indeed, criticism of China’s loans to African countries has been voiced in the past, not just by the global media and financial news outlets, but also by a few development finance institutions. The critics have argued that China’s extension of loans outside the multilateral system could undermine the debt sustainability framework that emerged from the Heavily Indebted Poor Countries (HIPC) initiative and raise the risk of debt distress—when a sharp increase in external liabilities raises debt service to unsustainable levels and in the process, diverts resources from much-needed spending in critical areas such as infrastructure and education, while at the same time undermining the ability of governments to honour their future financial commitments.
However, the recent increase in and changing profile of debt is not specific to Africa. Since the 2007-2009 global financial crisis, debt and budget deficits have risen significantly in both developed and developing economies. Expressed as a percentage of gross domestic product (GDP), the global average of government debt has climbed to 47 percent, from about 35 percent in 2007, in part reflecting the fact that economic downturns tend to result into higher debt even when macroeconomic policies are sound. In Africa, the lingering effects of the global financial crisis on debt profiles were sustained and even exacerbated by adverse shocks emanating from the end of the commodity super-cycle which had the combined effect of raising the level of external liabilities to meet the financing gaps associated with growing twin deficits, exactly when GDP was contracting, especially in the most natural resource-dependent economies. Preliminary estimates suggest that the fall in the region’s nominal GDP from $2.5 trillion to $2 trillion between 2014 and 2017 was correlated with a concurrent rise in the average debt-to-GDP ratio, which increased from 46 percent to 56 percent during the same period.
While a few African countries have crossed the more restrictive solvency threshold of 60 percent for debt-to-GDP ratios, the overwhelming majority of countries in the region are still benefitting from the post-HIPC debt relief and sustainability framework. Moreover, in the group of countries with accelerating rates of external liabilities, some are among the fastest growing economies in the world, perhaps suggesting that external loans are directed toward productive investment that supports growth and therefore strengthens the ability of these countries to honor their external commitments and debt relative to the interest that is being accumulated on it in the medium and long terms. Therefore, recent developments, and specifically the link between debt sustainability and growth, point to the need for adopting an intertemporal and long-term approach to debt sustainability analysis, whereby medium- to long-term growth could justify an increase of external liabilities in support of productive investment for structural transformation.
Q: What’s your understanding of the relationship between debt and development?
Whether in the sovereign or corporate setting, debt has always been the lifeblood of economic growth and balance sheet expansion. Empirical evidence has supported the positive correlation between debt and growth, with countries in which there is large amounts of domestic credit available to the private sector consistently enjoying higher rates of economic growth. This causality would point to the economic dividends of debt, in terms of both growth and economic development. However, the relationship between debt and development is probably not linear. Beyond a certain threshold and turning point, rising public debt-to-GDP ratios could have a deleterious impact on long-term growth, specifically when the implicit tax on domestic investment deriving from a higher debt burden could create a debt overhang that reduces the incentives to invest and generate the surplus value required to repay the contracted debt in the future.
The relationship between debt and development in Africa and around the world will therefore largely depend on the productivity and returns on investment financed through debt or accumulation of other forms of external liabilities. In such a framework, where countries are relying on external debt to close financing gaps, raising the level of external liabilities to finance investments with high returns in support of growth is less likely to undermine debt sustainability indicators in the long run. In line with this argument, a growing number of governments have been following the golden rule in their debt contractual arrangements and increase of liabilities—only borrowing to invest, not to finance existing spending and recurrent expenditures.
6. Have you sensed or observed some new changes in the China-Africa relationship? How do you foresee its future?
The China-Africa relationship goes back several centuries and has been punctuated by important milestones. After China’s accession to the UN Security Council as a permanent member with veto power, Chairman Mao Zedong made an important statement of recognition and appreciation: “It is our African brothers who have carried us into the UN.
” China has a long history and is very committed to and informed by its history, which in part teaches us that China shares the same history with Africa. Recently, that long relationship has perhaps informed the deepening ties between the two partners, which may have realized the extent to which their future is intertwined in the increasingly competitive and challenging global economic environment. More than trusted economic partners, China and Africa increasingly depend on the strength of their relationship to sustain growth and economic development, especially at a time of rising beggar-thy-neighbor nationalism.
The deepening economic and political ties between the two historical partners partly reflect that increasing degree of codependency. The African continent is just about one state away from a full and uniform commitment to a “One-China Policy
.” In China, Africa has been elevated from a “new type of strategic partnership
” status in 2006, to a “comprehensive strategic and cooperative partnership,” which is a notch higher in China’s foreign policy pecking order. The commitment of China to support and accelerate the process of industrialization of Africa through both infrastructure development and technology transfer, which has eluded Africa for decades, will help the China-Africa relationship take a major leap forward and also achieve the win-win partnership that underpins the new level of cooperation.
Dr Hippolyte Fofack
Hippolyte Fofack is the Chief Economist and Director of Research and Knowledge Management Department at the African Export-Import Bank. In that capacity, he directs theoretical and applied economic research activities and advises the President and Executive Vice Presidents on matters relating to research, policy development and strategic directions. He is a Fellow of the African Academy of Sciences, member of the Board of Trustees of the African Academy of Sciences, Editor-in-Chief of Contemporary Issues in African Trade and Trade Finance, Associate Editor of the Journal of African Development as well as a member of the Editorial Advisory Board of the Journal of African Trade.
China Business News
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