AFRICA/ASIA: Growing links bring challenges and gains

Analysis

The World Bank report, Africa's Silk Road: China and India's New Economic Frontier, notes that the dramatic pace of growth in Africa-Asia trade has engendered a reorientation of Africa's merchandise trading relationships away from its traditional developed-country trading partners:

• Asia absorbed 27% of Africa's exports in 2005, up from 9% in 1990. This was largely at the 'expense' of the EU (down from 48% to 32%), where export growth was slowest. The US share fell slightly to 29%.
• Similarly, Asia accounted for 33% of Africa's absorption of imports, compared with 23% in 1990, again contributing to a reduction in the EU's share from 63% to 43%. The US share remained steady (9-10%), while Africa's own share rose from 4% to 15%.

Zoom

Fundamental flaws. However, despite this important degree of geographical diversification, the rise of Asia as a major trading partner has not (yet) altered the fundamentals of Africa's trading relationships in desirable directions:

• Despite the steep commodity price rises of recent years and the rapid growth in global trade, Africa's share of total world exports has continued its long- term secular decline from over 7% in 1948 to 1.5% in 2004.
• Eighty-six percent of African exports to Asia in 2004 comprised primary commodities (47% for oil and gas), compared with 76% (42% oil and gas) for all African exports (see CHINA/AFRICA: Is China helping Africa's development? - August 21, 2006).
• Manufactured and processed goods accounted for 14% of exports to Asia versus 23% for all exports. Moreover, Africa is the only global region that has failed to register an increase in the proportionate share of non-oil exports, relative to GDP, in the past 20 years.
• Sixty-one percent of Africa's 2004 imports from Asia were manufactured goods, against 75% globally. However, Asian textiles, apparel and footwear were a significantly larger proportion of the Asia total.

Geographic concentration. Moreover, Africa's exports to Asia are far more geographically (as well as sectorally) concentrated than its imports from Asia:

• Over 80% of value-added Sub-Saharan exports originate from only three countries: Nigeria, South Africa and Swaziland.
• Five countries -- not including Nigeria and South Africa -- supply 85% of Africa's exports to China, while South Africa alone supplies two-thirds of African exports to India.

New firm-level data. A major feature of the report is its incorporation of new data from a recent Bank survey of a representative sample of some 450 businesses (excluding petroleum-related firms) in four countries (Ghana, Senegal, South Africa and Tanzania), together with 16 detailed case studies. The data was used to analyse four sets of factors determining Africa-Asia trade and investment links:

1. At-the-border policies. These reflect market access, FDI regimes, and international trade agreements:
   • Trade restrictions. Despite recent liberalisation moves, many Chinese and especially Indian tariffs on African products are still generally high, and for several key African exports, tariff escalations discourage value-added processing. Non-tariff barriers, including technical standards, further constrain African exports. African tariff rates on imports of light manufactures remain high, thereby imparting an anti-export bias to local production.
   • Trade/investment agreements and preferences. Although African states are involved in a multiplicity of regional trade and investment agreements, as yet there is no bilateral Asian-African free trade area (FTA) agreement. Moreover, the confusing proliferation of African arrangements is not conducive to increased trade. The EU's Everything-But-Arms initiative and the US's AGOA (Africa Growth and Opportunity) scheme provide limited -- but probably diminishing -- encouragement for Asian investment in Africa (see US/AFRICA: Oil exports inflate AGOA impact - July 25, 2005). The range of other public and private African-Asian investment-promotion activities is growing, but the effectiveness of local export incentives, including export processing zones, has been diminished by poor governance and implementation capacities.
2. Behind-the-border conditions. These include the business environment, regulatory and competitive issues, infrastructure and labour quality, and other internal constraints:
   • Competition. The report stresses the 'potent force' of competition -- in respect of protective policies, barriers to entry and exit, public procurement, and labour- and other input-market structures -- in explaining the productivity and export performances of all firms operating in Africa. It asserts that the more competitive a sector, the more FDI it attracts and the stronger its export performance. Moreover, the stronger the presence of Chinese and Indian firms in a sector, the more competitive that sector. The survey results also suggest that, in such sectors, imports -- including Chinese and Indian imports -- are the primary source for competitive forces.
   • Transactions costs. Four elements stand out as sources of the high costs facing Asian firms in Africa: poor infrastructure, including reliability of services, access and price; inefficient labour and capital markets; unfavourable regulation; and weak governance (see AFRICA: WB Doing Business data show some improvement - September 8, 2006).
3. Between-the-border factors. These include trade-facilitation facilities, information about international market opportunities, and technology and skills transfers:
   • Trade-facilitation costs. The costs of searching for and building cross-border commercial relationships in Africa are high. The survey revealed 'significant imperfections and asymmetries' in the quality of relevant market information Asia-Africa commercial opportunities. To compensate, there is considerable reliance on ethnic networks for information flows. The supply of trade finance and risk insurance is limited for African firms, while Chinese and Indian investors receive significant public financial support. Logistical obstacles, especially in connection with transport and communications systems and in landlocked African countries, also abound. Many African countries do not belong to the International Standards Organisation and few African firms, even among prospective exporters, adhere to recognised international standards.
   • Technology and skills transfers. The potential for exploiting such synergies in FDI is real. However, it is being compromised by the practice of Chinese firms in particular of assigning executives only temporarily to African projects and importing an estimated 80,000 Chinese migrant workers instead of recruiting from local labour pools.

4. FDI-trade complementarities. The report finds strong country-level complementary relationships between FDI and exports in both Africa and Asia, with important contributions from both Chinese and Indian firms. Asian FDI-related exports are also contributing to Africa's regional integration efforts. Moreover, Asian investment is contributing to African firms' integration into the new global production and distribution networks and value chains -- though this is less discernible with reference to Chinese investment. Significant opportunities for greater African participation in network trade in services -- including tourism -- are also identified.

   However, the report concludes that few African countries have proved able to 'make the leap' and exploit these opportunities. It attributes this failure to the low absolute levels of FDI inflows, in turn the consequence of the hitherto limited and shallow reforms of the African investment and business climate.

   The report argues that, contrary to conventional belief, the data reveals that the behind- and between-the-borders constraints, and the limited exploitation of potential complementarities, are collectively at least as important as at-the-border policies in explaining Africa's failure to leverage more benefit from its economic links with India and China.