An African Moment in a Risky World



(Photo: China Daily)

The effects of the global economic crises of 2008 are still being felt in the United States and Europe, in the form of persistent unemployment, sovereign debt crises, and stagnant demand. Now, the fallout from the slowdown could begin to affect the unique economic relationship between China and Africa.

Over the last three decades, the Chinese Communist Party has ensured its political dominance by delivering consistent economic growth and development. China’s economic model is a turbo-charged version of the authoritarian approach developed in Singapore under Prime Minister Lee Kuan Yew. The essence of this model is state-directed heavy investments in labor-intensive economic sectors, leveraging China’s comparative advantage in low unit cost of production (cheap labor) in order to establish a strong export-based economy.

However, the global economic slowdown – especially the economic challenges facing the United States and Europe – coupled with rapidly rising wages in China, implies ever less demand for Chinese exports. A decrease in economic growth and economic development will call the legitimacy of the Chinese Communist Party into question. To avert such political fallout, the Chinese state will need to shift its economic model from being reliant to exports to one that is based on consumption by a large and increasingly wealthy domestic market. This means adopting structural economic reforms that will make domestic consumption a greater part of economic output.

China is Africa’s biggest trading partner and one of its biggest sources of foreign direct investment (FDI). Chinese FDI to and trade with Africa, as well as other nations, focuses mainly on the natural resource sector. This gives China particular leverage in Africa, where governments and economic elites are often financed primarily by the exploitation of primary commodities such as oil and gas, minerals, cocoa, cotton, and other cash crops. But a Chinese economy that is less reliant on massive exports is also one that needs to import less raw materials and primary commodities for its manufacturing sector. This has significant implications for Africa.

In the case of Nigeria, for example, oil and gas play a disproportionately important role in the financial system and government finances, accounting for over 90 percent of exports and government revenues, but only thirteen percent of economic output. Many other countries in Africa share similar structural economic distortions. The inherent risk is that the economic challenges facing some of the world’s biggest economies– the United States, the European Union, and China – will lead to less trade with and FDI flow into Africa. Should such a possibility become manifest, then the political consequences for African political elites would be dire.

Africa, in general, has many of the requisite elements for high economic growth. Demographically, its population is young and growing – on average, sixty percent of the continent’s population is below the age of thirty. This promises a bountiful long-term supply of labor. Though infrastructure is sorely lacking due to decades of poor maintenance and graft, there are vast swaths of unexploited arable land that would form the foundation for a vibrant agro-industrial economy.

To leverage these favorable factors, and deliver sustainable economic growth and development to their populations, African governments depend on inflows of FDI – which bring not only much-needed capital, but also technology and expertise. In the last decade, an increase in FDI inflows to Africa accounts for the robust positive economic growth trends that the region has experienced. As proof, the African middle class is now 350 million strong, spending about $700 billion annually. At current trends, the African middle class is expected to grow to one billion people by the year 2050.

But with the economic headwinds facing the European Union and the United States, along with impending structural adjustments to China’s economy, FDI flows to Africa are projected to slow. This is prompting increasing competition among African states over a shrinking pool of investment capital. To achieve competitive advantage in attracting investment capital, many African nations are now embarking on structural economic reforms to improve the investment climate in their economies. Reforms such as better fiscal consolidation, privatization of state-owned enterprises, power sector deregulation, legal and judiciary reforms, and legislative initiatives such as Freedom of Information Acts are becoming more commonplace throughout Africa.

The prevailing wisdom is that an entrepreneurial market economy is the best solution for the swelling youthful populations of Africa. The importance of FDI to achieving this objective is widely recognized among African political elites. The contest for FDI is prompting transformational economic reforms across the continent.

The increasing economic pressures on African political elites make them more disposed to political reforms that are required for an enabling business environment. These changes would also make Africa a more desirable target for US business investment beyond the natural resources sector, including consumer products and services, infrastructure (telecoms, power, transportation, real estate), the budding financial sector (insurance, banking), and agriculture (agro value-chains). For US corporations, opportunities abound and the time is right.