If Africa as a continent does not have strategic objectives of its own, the history of impediments to African economic development will be repeated in its engagement with China, says Ethiopia’s Alemayehu Geda
April 8, 2019 Produced by Lynn Fries
LYNN FRIES: It’s The Real News. I’m Lynn Fries. My guest on today’s show is Ethiopia’s Alemayehu Geda, who is a Professor of Economics at University of Addis Ababa. We are meeting at the UN Geneva, where Professor Geda just presented at an experts meeting. Professor Geda, welcome.
ALEMAYEHU GEDA: Thank you very much
LYNN FRIES: The formal title of your presentation was THE ELUSIVE QUEST FOR STRUCTURAL TRANSFORMATION & JOB CREATION IN AFRICA – WILL CHINA MAKE A DIFFERENCE. Start by commenting briefly on the underlying topic, that the reshaping of the global economy has major implications for Africa.
ALEMAYEHU GEDA: Historically Africa has been trading and in terms of finance engaging with today’s developed countries, the western economies of Europe, North America, and Japan, so basically OECD countries. But in the last 15 years the pattern of African trade and African finance is changing from the traditional partners to new partners, China, India, Brazil, and to some extent also Russia. So this is an emerging pattern, and it’s very important for African countries to understand it and also strategically think about it.
LYNN FRIES: Here’s a clip from some of your opening comments at the expert meeting where you provide some context on all this.
ALEMAYEHU GEDA: In the last decade African growth has been very good, over 5 percent per annum for nearly a decade. This growth is primarily driven by high commodity prices. And the demand for that comes from emerging economies in general, and China and India in particular. It has obvious significant implications for structural transformation in the continent. Starting in 2003 up until 2013, for the first time the terms of trade of Africa is getting better, reversing, perhaps, the 100 years of deterioration of terms of trade by about 0.8 percent per annum thanks to this commodity price. And in particular the engagement of China in Africa became huge. Like if you compare from mid-1990s to 2016, the trade between China and Africa increased by about 66 times, from $3 billion to over $200 billion now. And in terms of finance also, Chinese finance is overtaking traditional financiers in Africa. This takes both foreign direct investment (FDI) and also credit from EXIM (Export/Import) bank of China. FDI is not that important compared to traditional financiers. Chinese FDI in Africa in terms of stock is not more than 4 percent. Still, the Western economies are dominant in terms of stock of FDI. However, in terms of credit finance coming from the EXIM bank of China is becoming very important. It is estimated it could be about over $100 billion right now. And this is going invariably to the infrastructure sector, and the resource sector, and not only that, it is focused also in a few countries.
LYNN FRIES: What are some of the main characteristics, as you see it, in this engagement between Africa and China?
ALEMAYEHU GEDA: There are three channels through which African countries are engaging within China. One is trade, basically. Africans in general sell primarily commodities, unprocessed primary commodities like oil, copper, and what have you, this kind of mineral resources, and the Chinese are selling manufactured goods. So basically one of the characteristics of this trade is the Chinese are selling manufactured processed commodities, manufactured goods, while the Africans are selling primary commodities. Second characteristic is there is a significant inflow of capital from China to Africa. And you know, traditionally with the industrialized countries of the West it used to be foreign direct investment. Foreign direct investment means, you know, a company from Europe or North America comes to Africa, sets up a company, and they control the management and do their business. But with China it is different. Although they have foreign direct investment it is not that important. Like, from the total stock of foreign direct investment in Africa, which is over $557 billion, the share of China is just $17 billion, which is about 4 percent.
But there is a different finance coming from China. We can call it quasi-FDI. It is not really foreign direct investment. It is quasi-FDI, or credit financing, or sometimes they call it vendor financing, which means basically it is the African country who is doing the job or the investment. But the money for that comes from China, EXIM bank, usually. But there are also other development banks from China, but the EXIM bank is the dominant one. And how different is this from foreign direct investment? Well, the investment, to begin with, is owned by African countries. Second, relative to traditional finance that we used to get from development partners, it is a little expensive. I think that’s what characterizes the finance and trade.
LYNN FRIES: On the issue of how credit finance from the EXIM bank of China is becoming very important in Africa, what do you mean when you talk about bundling in the context of Chinese transnational corporations and the export-import bank of China?
ALEMAYEHU GEDA: The Chinese government has a policy for its companies, multinational companies. As you know, Chinese have both private and public multinational companies. And their strategy was what they call it – going global. They have a strategy called going global. That means the government of China encourages its firms to go global, strategically engage with any country. And as part of that incentive, these companies can get money from the Chinese government to do their business. Now, therefore, when they came to a particular African country, they could be interested in trade. Say they can come to South Sudan or Sudan and then they want to trade oil. For instance, Sudan, before it split into two, used to import 90 percent of its oil to China. OK? So basically they came with trade. But that trade could be facilitated if there is finance for the firms that extract oil. Therefore the EXIM bank of China will give them that finance that is required to do this trade.
And sometimes, although it’s not significant, that finance could have also some aid part. It’s not significant. We did a study on Madagascar and Ethiopia and the share of pure aid is just less than 1 percent in this country. So it’s not significant, but there is aid in it. So there is credit finance in it. But primarily it’s coming to support the Chinese multinational while engaging, say, in the Sudanese oil sector. That’s why I say that now trade, finance, and aid is bundled to have the strategic objective of going global from China’s point of view. That’s what I mean when referring to bundling.
LYNN FRIES: In the case of Africa, what do you see as key challenges and opportunities that have been put into play on the back of China’s strategic objectives of going global?
ALEMAYEHU GEDA: The coming of China to Africa is an opportunity in the sense that the Chinese way of growing in the last 20 years by close to 10 percent per annum, and that creates a huge demand for resources, which Africa is capable of supplying. And as a result, from 2002 until 2013 the global commodity price has increased, primarily because of the Indian and Chinese demand for these commodities. And this is an opportunity because the terms of trade of Africa, African primary commodity prices if you compare it with manufactured goods that Africa is importing, had been deteriorating for the last hundred years. It’s only starting in 2002 that it started to go up, and this is because of China. So this is a good opportunity.
Second opportunity, the Chinese are building a lot of infrastructure in Africa, and Africa has a huge infrastructure deficit. And this is an opportunity. The third opportunity is that the Chinese have a new policy called rebalancing, which means they want to focus now their growth to be based domestically instead of the export orientation they had before, or outward orientation they had before. Now they want to do it more domestic, depend on domestic investment, depend on domestic consumption growth. So this is what they call rebalancing. And also they want to go up on the manufacturing ladder to more skill-intensive, technological-intensive production of goods and services. Also there is a possibility that some of the low labor-intensive goods producing firms might be relocated to other developing countries, because wages in China are growing. Now the average wage in China is becoming about $500-$600 dollars. And if you happen to move to Ethiopia, for instance, the average wage that you pay is about $40. So this huge opportunity for the Chinese. But for Africa this is also a good opportunity, because it is estimated about 85 million jobs, firms that created about 85 million jobs in China are moving to developing countries, and Africa can have a part of that share. So these are the opportunities. Shall I go to the challenges?
LYNN FRIES: Please do. Yes.
ALEMAYEHU GEDA: Yeah. The challenge is that the Chinese, when they come to Africa – for that matter, when the Chinese go to developed countries or developing countries – they have a strategy. They know what they want. But when it comes to Africa we do not have a strategy on how to engage with them. Can we leverage this deal for our benefit? Can we tell them to go to a particular sector in which we have a comparative advantage, and in which we can create a lot of jobs, and after this we can reduce poverty? Not really. Why? Because we don’t have the institutional and human capital to do that. To do research, to negotiate with them, to direct them, to follow them during implementation to make sure that there is technological transfer during this process. So I mean, to my knowledge, except probably in South Africa, we don’t have that kind of systematic engagement with China. That is, I think, the danger, the challenges that Africans are facing.
LYNN FRIES: What kind of strategic policy response do you think should be pursued by Africa in relation to China?
ALEMAYEHU GEDA: It should be multifaceted to begin with. It shouldn’t be locked to a particular country. It should be coordinated. I can think of two channels. One is the African Union, the Economic Commission for Africa. These are continental organizations. They were supposed to do research, engage African governments to strategically think about engaging with emerging economies in general, and China in particular. Or for that matter, even with the West in general. So probably one channel I can think of to use is the A.U., the African Union, the Economic Commission for Africa, to have a collective, coordinated, continental strategy.
The second channel is using the building block for the African economic community that the AU is envisaging, is what we call a Regional Economic Community. So the West African have the West African Economic Union. If you come to East Africa we have the East African Economic Community. If you go to Southern Africa we have the SADC, or the Southern Africa Development Community, and in North Africa we have the Maghreb Union. So probably each of these RECs, or Regional Economic Communities, need to come up with a regional engagement strategy. And their individual countries need to pay homage to this agreed strategy when they design their own policy. Otherwise, you know, if every country is competing for the resources and markets and opportunities coming from China, it will definitely lead to a race to the bottom. And for that, probably, my suggestion is to first have an engagement strategy. Do it in a coordinated manner. If you want to use the existing institution one possibility is to use the African Union and Regional Economic Communities.
LYNN FRIES: We should note that in Q&A at the expert meeting, the notion of ‘kicking away the ladder’ that’s been climbed to economic success, not only in the United States and every other developed country throughout history, but by China, was raised as an example of the kind of impediments to economic development facing African and other developing countries today.
ALEMAYEHU GEDA: Actually, you don’t even have to go to history. You just can think of the Trump administration, which basically has this protectionist stance in its policy. So definitely if you go in the history books, we knew that when Europe developed and when the Americans developed their economy they were protectionist. And a famous American economist called Carey was against the import of commodities from the British. And he explicitly said – he was an adviser of one of the American presidents [Chief Economic Adviser to U.S. President Abraham Lincoln] 150 years ago – and he said if we don’t protect the American economy we end up being primary commodities forever for British interests. But see, once they pass that stage, they don’t allow us, they don’t allow African countries, to do it because the West wants the African countries to liberalize.
Now, come to China. I mean, for me there is no fundamental difference between the East and the West. Every nation has its own interest. So it’s not their fault, actually, the Chinese or the Americans or the Europeans. It’s not their fault. It’s the Africans’ responsibility, because we have to see that history, that when these guys developed they have interventionist governments, they have protectionist governments, they were planning everything. And I think Africans also need to do that. Now, these days we have to do it in a coordinated manner, because you cannot do it by yourself. So be it China, or dealing with China or the East or the West, I think the market cannot deliver what you want. Free market cannot deliver what you want. You have to guide the market. That basically means you have to have a government that strategically thinks. And to do that you have to have, as I said earlier, the human and institutional capability to do that. If you don’t do that you end up repeating … the relationship that Africa has with the West will be repeated with China, probably.
LYNN FRIES: Specifically drawing from Ethiopian history and the seminal thinkers among Ethiopia’s economists, whose shoulders can you stand on today as a contemporary Ethiopian economist?
ALEMAYEHU GEDA: Historically in 1920 there was this famous economist, it’s my favorite, called Gebrehiwot Baikedagn. A hundred years ago he did an empirical analysis of the relationship between Europe and Ethiopia. And he showed a hundred years ago that the terms of trade of Ethiopia vis-a-vis Europe is deteriorating because Ethiopia is selling primary commodities while importing manufactured goods. And he said unless we industrialize by protecting our markets, we will end up poor for the foreseeable future. And it was prophetic. A hundred years down the line, we still didn’t manage to realize his policy recommendations.
And there were great economists in Ethiopia. We call them actually – in the ‘30s there were about four or five of them – we call them the “Japanesers” in Ethiopia. That’s in 1920 to 1930. Because they were advocating for a Japanese way of developing, which means basically take the knowledge, the skill from Europe and North America, from the West, but domesticate it to your own interests, within your cultural setup. And they usually take Japan as their model, and in Ethiopian economic history we usually call them the Japanesers.
LYNN FRIES: Alemayehu Geda, thank you.
ALEMAYEHU GEDA: You’re welcome. I enjoyed it.
LYNN FRIES: And thank you for joining us on The Real News Network.
Alemayehu Geda is currently Professor of Macroeconomics and International Economics at the Department of Economics, Addis Ababa University, Ethiopia. He is also a Research Professor at the University of London, SOAS, where he had served as Senior Lecture between 2003-2005. His Research interest areas include International Trade; Development Finance, Macroeconomics Policy and Poverty, Macro Econometric Modelling and the Political Economy of Conflict in African context. He is author of over 40 research journal articles and book chapters, and five books on African Economies published, among others, by Palgrave-Macmillan, Addis Ababa and Nairobi University Presses. Professor Geda’s most recent book is The Historical Origin of the African Economic Crisis: From Colonialism to China (2019, Cambridge Scholars Publishing). He has also worked as a consultant for a number of international organizations and African governments that includes the governments of Ethiopia, Kenya, Uganda, Zambia, Sudan and South Africa. Among other expert services, he has served as Macroeconomic expert for African Union (AU) high level panel on the economic negotiation between the North and South Sudan which was led by the former South African president Tambo Mbeki.