The Mixed Blessing of Africa's Silk Road

With exports tripling in the past five years, Asia is Africa’s third largest export destination partner, following only the European Union and the United States. The optimistic tone of a study recently released by the World Bank, however, failed to hide some underlying concerns about this shift in the pattern of world trade.

According to Harry G. Broadman’s report, Africa’s Silk Road: China and India’s new economic frontier, exports to Asia now represent a quarter of African outgoing trade, while in the other direction exports have seen a significant increase, growing at approximately 18 percent per annum, a growth rate higher than that of Asian exports to any other region.

Nor is it trade alone that has boosted the economic relationship between the two regions. China now accounts for $US 1.18 billion of foreign direct investment on the African continent, which, Broadman’s study claims, is beginning to diversify from traditional sectors:

With regard to investment, much of the accumulated stock of Chinese and Indian FDI in Africa is concentrated in extractive sectors, such as oil and mining. While this has been grabbing most of the media headlines, greater diversification of these countries’ FDI flows to Africa has in fact been occurring more recently. Significant Chinese and Indian investments on the African continent have been made in apparel, food processing, retail ventures, fisheries and seafood farming, commercial real estate and transport construction, tourism, power plants, and telecommunications, among other sectors.

The study emphasises the important change in world trade brought about by these strengthened trade relations between developing countries. Previously the global economy was dominated by commerce between developed countries (the North), or between developed and developing countries (the South). The recent expansion of South-South trade is seen as a positive evolution, with potentially positive implications for Africa, which Broadman calls “the world’s most formidable development challenge.”

Despite these optimistic assertions, however, the report also touches on the glaring asymmetry in this trade relationship:

While Asia accounts for one-quarter of Africa’s global exports, this trade represents only about 1.6 percent of the exports shipped to Asia from all sources worldwide. By the same token, FDI in Asia by African firms is extremely small, both in absolute and relative terms.

There is also evidence that the domestic and international business of African producers has been displaced by Asian imports and investments. On this, Broadman says:

This competition spurs African firms to become more efficient, but it also creates unemployment and other social costs during the transition. Not surprisingly, some African governments are responding with policies that protect domestic businesses.

To recognise the social costs as occurring only “during the transition”, however, is to make a gross understatement regarding the likely inability of the “world’s most formidable development challenge” to cope under the impact of such powerful market forces.

Another hint at the complexity of the issue comes in the report’s disclaimer:

[this] analysis focuses on political economy, governance, and institutional issues insofar as they directly have economic implications.

No consideration then of the controversial political conditions of China’s economic relations with African countries, a significant factor in the recent acceleration of trade between Asia and Africa.

As Craig Timberg reported in The Washington Post in June:

When Chinese President Hu Jintao toured Africa in April...[he] reiterated China's policy of making business deals without any expectation that governments will improve democracy, respect human rights or fight corruption. He told reporters in Nairobi, the last stop of his tour, that China follows "a policy of non-interference in other countries' internal affairs."

Timberg goes on to describe how China has also used its veto power within the U.N. Security Council to provide diplomatic protection to countries that sign deals with Chinese companies.

Whether it’s a case of non-interference or diplomatic protection, debate has been raging within international organisations as to how much protest can or should be made over this aspect of China’s economic engagement with developing countries.

However – and surprisingly for a World Bank document – Broadman’s report appears to prioritise the development of the African continent over the values of the North:

[W]ith China and India poised to take the lead—Africans cannot afford to be left behind, especially if growth-enhancing opportunities for trade and investment with the North continue to be as limited as they have been. Nor can the rest of the world, including Africa’s international development partners, afford to allow Africans to be unable to genuinely participate—and most importantly, benefit from—the new patterns of international commerce.

The study’s in-depth policy recommendations covering everything from market access to the business environment to technology transfer, therefore appear to be made largely to improve and balance out the Asia-Africa trade relationship. If they are not implemented, however, Broadman’s forecast is much less hopeful, predicting missed opportunities and continued imbalances:

All other things equal, taken together, these could reduce the likelihood of a boost in Africa’s prospects for economic growth and prosperity.

While “South-South trade” implies an unprecedented model of equality in global commerce, there are many who see a different picture. As Timberg points out:

[A]nalysts say [that] burgeoning Chinese business interests are following a pattern long established in Africa: Foreign powers treat the continent mainly as a source of raw materials and a market for finished goods.

Africa's silk road might just be leading us into territory that's all too familiar.