Focus topics


China’s investments on the African continent – not a savior

Prof. Robert Kappel
Robert Kappel, Professor Dr. em, teaches at the International SEPT Competence Center (Small Enterprise Promotion and Training) at the University of Leipzig.

China regularly claims that Chinese involvement is good for the development of African countries. There is no doubt that Africa’s foreign trade with China has soared. A few years ago, China was even praised for coming to Africa’s aid to bridge the technological and economic divide. The People’s Republic was more willing to invest than Europe and the US. China has been involved in infrastructure development like no other country to date. Some observers have even gone so far as to claim that Chinese private companies’ investments in recent decades have spurred Africa’s industrialization and ignited a surge in employment, improving people’s lives. But upon closer inspection, these statements prove to be less than credible.

China’s direct investment in Africa increased to a value of over $56 billion by the end of 2020 (stock). Chinese investment inflows into sub-Saharan Africa have increased (chart 1). In 2020, they amounted to $4.2 billion. The following countries are among the major recipients: South Africa (about 14 percent), DR Congo (12.5 percent), Angola (6.5 percent), Zambia (6.5 percent), Ethiopia (5.6 percent), and Ghana (4.1 percent).

A look at individual countries shows that China is not only concerned with raw materials and power, but also with market access: Chinese investment in Nigeria is focused on manufacturing industries, including the production of building materials, furniture, food, beverages, and packaging. In many of these sectors, Chinese firms have since displaced Nigerian companies. Most of the companies are now in Chinese hands. However, the majority of the workforce is local. In the Lekki Free Trade Zone (the lagoon off Lagos on the Gulf of Guinea, editor’s note), for example, 70 percent of the workforce of Chinese companies was Nigerian. Chinese investment in Tanzania is largely in the textile and garment industry. In 2016, there were 400 Chinese-owned companies in Kenya, most of which were involved in light manufacturing, construction, tourism, and natural resource exploitation. In addition, Chinese companies invested in metal, communications, and automotive industries in Kenya.

Many African countries impose fewer government regulations on businesses, so increasingly stringent environmental regulations in China have also prompted many Chinese companies to invest overseas. The prospect of growing markets and middle classes is another draw for Chinese companies. Finally, tariff exemptions for trade with the United States and the European Union are attracting export-oriented Chinese manufacturers to Africa.

It is therefore fair to say that China is a key economic player on the African continent.

Job growth remains weak

Chinese investment has a positive impact on employment and economic growth in sub-Saharan Africa. A one percent increase in Chinese investment led to a marginal 0.2 percent increase in employment and a 0.17 percent increase in economic growth. This leaves China far behind European investors.

A key aspect of Chinese investment in Africa is its sectoral focus. Except for a relatively small proportion of greenfield investments in the manufacturing sector, the bulk of Chinese investment or lending is directed towards China’s strategic objectives. Against this background, it is not surprising that Chinese investments have created only few jobs (only 1.8 employees per one million US dollars invested) – whereas German investors have created as many as 4.6.

There is a lot of commotion in the West over Chinese investment. Observers believe that Chinese companies will create millions of jobs in Africa because of rising wages in China, which could leave Europe even further behind. In 2011, for example, the World Bank’s former chief economist and Senior Vice President for development economics, Justin Lin, stated that China is on the verge of moving away from low-skilled manufacturing jobs and becoming a ‘leading dragon.’ This would free up nearly millions of labor-intensive jobs in China, enough to more than quadruple manufacturing employment in low-income countries.

Many observers even believed that Africa would be the world’s next great manufacturing hub, as the Chinese industry could produce in lower-cost regions and 100 million jobs could shift from China to Africa. If this were true, China could indeed be seen as Africa’s “development escalator,” as more jobs than ever before would be created, higher growth generated, and poverty eliminated.

Indeed, Chinese companies and the Chinese state have invested and also created jobs for Africans – but on a much smaller scale. For example, according to the Ethiopian Investment Commission, there were about 620 active Chinese investment projects in 2020 (mostly in the manufacturing and construction sectors), employing about 200,000 workers. In Ethiopia’s special economic zones, this amounted to about 86,000 jobs in 2020 (about 29,000 in 2018) and only 74,000 in early 2021 due to the pandemic. In other countries, the figures are much lower. Overall, Chinese investment in the African continent created an average of about 19,000 jobs annually between 2010 and 2019 – far more than US firms are contributing, but also far fewer than any European investors.

Many authors argue that the possibility of increasing investment in sub-Saharan Africa is based on the fact that wages in China are rising, and Africa may thus become a destination for foreign direct investment in the manufacturing sector. However, the low-wage argument is not very convincing. In African countries, unit labor costs are usually high compared to many Asian countries. Moreover, most Chinese investments are made in the power and commodity sectors, i.e. they are capital- and resource-intensive investments made not due to possible wage differentials but because of the rising demand for commodities created by the modernization of the Chinese economy.

Compared to China, unit labor costs in African countries remain higher. In addition, inadequate and expensive infrastructure (roads, power, weak information and communication technologies; low research activities) and weak institutions have a negative impact on the business environment for foreign investment. Especially the Asian low-income countries Bangladesh or Vietnam have a clear advantage over African countries, which is why Chinese investors tend to invest in the neighboring region rather than in African countries.

And what’s more:

  1. In the meantime, China is modernizing its manufacturing technology (“Made in China 2025”) in accordance with the jiqi huanren (machines replace workers) directive. Labor cost differentials are becoming less important.
  2. If African countries could ever have benefited from lower unit labor costs, this advantage is diminishing due to the “globotics upheaval” (robotization, digitalization, artificial intelligence), which is overall labor-saving. It is therefore by no means safe to say that rising wages in China will lead to higher Chinese direct investment.

Benevolent actor?

African countries should not make the mistake of regarding China as a benevolent actor. It is no different from other global powers pursuing their economic and foreign policy interests. There are structural asymmetries between China and Africa, most evident in trade and investment patterns: China mainly imports raw materials from Africa, while Africa mainly imports higher value-added industrial and consumer goods. These imports also impair African industrial development.

In the eyes of the Chinese government, the last China-Africa Summit (FOCAC) was a success, and the planned projects were largely implemented: Industrial promotion, infrastructure connectivity, trade facilitation, eco-friendly development, capacity building, health care, deeper exchange in education as well as in peace and security. However, many African countries do not see cooperation in such a positive light. More and more African countries are beginning to criticize China’s activities. After all, many promises were broken or were associated with high costs (debt trap). And so, the contribution to the industrialization of Africa has been very low so far.

Among the topics to be discussed at the 2021 FOCAC Summit in Dakar are:

  1. the design of trade (for example, facilitating access to the Chinese market, which is closed off by tariffs and non-tariff trade barriers).
  2. China will attempt to advance its digital Silk Road agenda in Africa. The African side is more interested in economic investment, sustainable debt measures, the fight against the climate crisis, and measures to get out of the commodity trap.

If China is truly interested in a successful investment and cooperation strategy in Africa, the Chinese government will have to redirect and shift the focus of its investment more towards labor-intensive manufacturing, agriculture, and service sectors, and local cooperation with domestic companies.

Related

    Forging prettier numbers
    A big payoff from US-China climate cooperation
    At what point does cooperation lead to complicity?
    China’s true soft power