The China-Africa Trade Boom

July 11, 2011

The following is a guest post by Joseph Cox, an MA candidate at the Georgetown Public Policy Institute and managing editor of the The Inductive, a blog about U.S. economic and foreign policy.

When polled, Americans always cite foreign aid as the budget item most in need of a good hatcheting, yet, there is also a deep suspicion of Chinese investment in Africa.

The fact is that Chinese investment in Africa dwarfs U.S. aid.  The Chinese have over $100 billion in trade with Africa a year(admitted, not the same thing as direct foreign investment), while the U.S. musters about $4.5 billion in aid.

Source: The Economist

This aid is not without controversy, especially on the ground. The Financial Times (warning gated) recently reported on Zambian miners upset at low wages paid by their Chinese bosses.  However, the end of the article gave the game away:

Despite simmering anger over October’s shooting and labour conditions, workers do not want Collum Coal Mine to close. In a country where two-thirds of the population lives on less than $1 a day, a poorly paid job is better than none at all.

“We’re not happy with the Chinese investment,” says Bernard Dolopo, local representative of the Mineworkers’ Union of Zambia. “But unfortunately we don’t have better investors than the Chinese.”

I have no doubt that working for a Chinese owned mine in Zambia is a miserable experience, but the fact that people are willing to work in those mines anyway demonstrates their benefit.  Likewise, I can understand why Africans are skeptical of Chinese immigration (its not like people from other countries have ever exploited Africans before).  But a decade of 5% GDP growth is a pretty powerful statement that something is working.

I think there is sustainability in this model since the Chinese also directly benefit, and the Africans can negotiate for a better deal later.

A basic truth in investing is that returns and risk are directly related, so the more risk the more return.  Otherwise, the available arbitrage would attract investors and drive down the return. Africa has been dramatically underdeveloped for years leading to massive investment opportunities with huge political risks.  Chinese government run companies are able to reap large rewards and mitigate the risk by (1) not destablizing incumbant governments no matter how illegitimate, it is all ice cream and no spinach for who ever is running the country when the Chinese come in and (2) if there was regime change, the Chinese would just pay the new person to keep the business rolling.

For all the talk from the west about how the Chinese should pressure the Africans on political goals, I think the Chinese have proven to be good examples on other fronts.  The Chinese government’s philosophy is that growth brings legitimacy and that it is possible to create the economic prerequisites for growth (property rights, economic opportunity, infrastructure, working markets, investment) without losing political control.  So, and this is just speculation, even if the Chinese aren’t encouraging political development I think they are (at least implicitly) encouraging growth.  If you look at growth in the developing world over the last decade it has been very strong.  I think this is basically because a lot of poor countries saw what China was doing and copied it. And the Chinese were happy to help them in exchange for access to resources.

So bravo China, here’s to a country with an economic strategy!

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