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China’s investment in Africa and the Flying Geese Paradigm

July 28, 2017 Leave a comment

I have blogged before on Chinese Investment in Africa and recently came across a very interesting article in the Harvard Business Review ‘The World’s Next Great Manufacturing Center’ by Irene Yuan Sun. It outlines the effects of Chinese investment in Africa and how it could lead to an industrial revolution in the continent.

Investment in manufacturing by privately owned Chinese companies has increased from only 2 in 2000 to well over 150 in 2015 and 2016 and are transforming Africa’s economy by providing millions of jobs and encouraging a new generation of local entrepreneurs as well as attracting support from inspiring African institutions. Investment by the Chinese in Africa has usually been associated with natural resources or services but with manufacturing now being more prevalent industrialization is a growing possibility.

Chinese investment is about supply and demand

China sojourn into Africa is become more prevalent and has a lot to do with supply and demand. A generation under the one-child policy has had an impact on the supply of labour causing shortages to arise and ultimately wages – 12% annually since 2001 and productivity adjusted manufacturing wages nearly tripled from 2004 to 2014.

On the demand side Africa has started to integrate regional markets – in 2105 half the countries in Africa joined the Tripartite Free Trade Area, which will combine 600 million people in a single trading bloc, forming the 13th-largest economy in the world. The six nations of East Africa have created a single customs union – same as FTA but all member nations agree a set of standard tariff levels between themselves and outside nations. This is known as the Common External Tariff (CET). Nigeria boosts an enormous domestic market with high margins for companies as there is little competition. Also Lesotho enjoys tariff-free access to the US market and can take advantage of being close to the South African infrastructure.

Chinese companies in Africa employ locals

According to Justin Yifu Lin, a former chief economist at the World Bank. China is about to graduate from low-skilled manufacturing jobs which will free up nearly 100 million labour-intensive manufacturing jobs, enough to more than quadruple manufacturing employment in low-income countries. To put that into perspective, when manufacturing employment reached its peak in the United States, in 1978, only 20 million people had jobs in American factories. Now five times that number of jobs are about to migrate out of China.

By 2050 Africa’s population will reach 2 billion creating the largest pool of labour in the world. Today though some of the highest unemployment rates are in African countries – Nigeria 12.% with approximately 19% of the labour force being underemployed. However youth unemployment is just over 42%.
Although the media in Africa tend to portray an image that Chinese companies don’t employ local labour, recent analysis shows Chinese factories in Africa employ locals in large numbers – no research sample had a figure of local workers in a Chinese company lower than 78% and in some larger companies the figure exceeds 99%. In Nigeria 85% of workers hired by Chinese manufacturers are locals and 90% of workers in Chinese manufacturing and construction companies in Kenya are local.

The Flying Geese Paradigm

Flying Geese Paradigm.pngIn developing economics the flying geese paradigm was the view of Japanese economists upon the technological development in Southeast Asia viewing Japan as a leading power. It states that manufacturing companies act like migrating geese, flying from country to country as costs and demand change. Factories from a leading country are forced by labour-price pressures to invest in a follower country, helping it accumulate ownership and move up the technology curve. This movement shifts the bulk of economic activity in the follower country from low-productivity agriculture and informal services to high-productivity manufacturing. The follower country eventually becomes a leading country, spawning companies in search of new production locations. The paradigm offers a convincing model of how Asian economies developed—in a chain from Japan to the Asian Tigers to China – see image above.

It describes not only the movement of companies from country to country, but also a process of industrial upgrading from product to product within each country – see image below. First a few companies show up to try their hands at making a certain product. As they learn, their profits attract other manufacturers of the same product. But as the field gets crowded, intensifying competition and thinning profits, some companies look for something else to make—this time something slightly more complicated and thus harder to copy. As the cycle repeats, companies that started by copying and learning are inventing and teaching a mere generation or two later. An analysis of 148 countries shows that as GDP rises, manufacturers within a country predictably move toward ever more complicated products. In another decade or two, factories in Africa will be churning out computers instead of ceramics and clothing.

Flying Geese Paradigm 2.png

Investment in manufacturing key to Africa’s development

For any economy to develop being more productive in the long run is the only way to create a higher standard of living. Manufacturing tends to become more productive over time as there is overseas competition from imports as well as having to compete in the export market. Furthermore manufacturing investment has a big multiplier effect – research shows that for every manufacturing job created, 1.6 service jobs follow.

Conclusion

Industrialization will allow Africa to follow in the footsteps of Japan, South Korea, Taiwan, and China: to build factories that employ its booming population and to refashion its institutions to meet the demands of modern capitalism. Most important, it will provide a real chance to raise living standards across broad sectors of the populace. If Africa could lift just half as many people out of poverty as China has in a mere three decades, it will eliminate extreme poverty within its borders. For nearly 400 million people, that would mean the difference between going hungry and being full, between scrounging for work and holding a steady job, between asking their children to do menial labor and sending them to school. The Chinese showing up in Africa today don’t doubt that this will happen. As one of them, who is working to build a special economic zone in Nigeria, said to me: “This is exactly like my hometown 30 years ago. If we could do it, then so can this place.”

Sources:

Harvard Business Review ‘The World’s Next Great Manufacturing Center’ by Irene Yuan Sun. May-June 2017

ANZ Bank – ‘ASEAN – The Next Horizon’ – June 25th 2015

China – a blessing or curse for Developing Countries of Africa?

May 20, 2017 Leave a comment

I recently read in the New York Times Magazine a very interesting article on China and how it has built up enormous holdings in poor, resource-rich African countries. Although it may seem as a blessing to the local economy it does have its drawbacks. You can read the full article here but I have edited it for students doing Development Economics topic at A Level.
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Everywhere you look on the globe China’s presence can be felt, driven by its insatiable demand for resources and new markets as well a longing for strategic allies. In 2000 China had 5 countries as their largest trading partner but that has increased today to more than 100 countries including New Zealand, Australia and the USA.  Although there has been a slow down in China, President Xi Jinping has indicated that over the next decade approximately $1.6 trillion will be put into infrastructure and development throughout Asia, Africa and the Middle East. This is serious money that makes a bold statement as to their intentions globally.

China hasn’t held back in trying to secure sufficient resources to keep their economy going. Besides oil and gas China’s state-owned companies have bought mines around the world eg:

  • Peru – copper
  • Zambia – copper
  • Papua New Guinea – nickel
  • Australia – iron ore
  • South Africa – iron ore
  • Namibia – uranium

However as the Chinese economy slowed recently the demand for imports of commodities dropped thus impacting on some of these commodity exporting countries – in particular mines in Western Australia, Zambia and South Africa have been forced to close.

When China met Africa
You maybe aware of a previous blog post in which I talked about the DVD documentary  ‘When China met Africa’ which focused on Chinese investment in Zambia – a very good look at the micro environment that businesses operate in.  Investment in Africa by the Chinese started in 1976 with a 1,156 mile railroad through the bush from Tanzania to Zambia but it wasn’t until the 2000’s that Chinese authorities realised that there was a need for resources to fuel its own internal growth. With this in mind Chinese companies were given free reign to go and seek these resources.

With the end of the Cold War and the Middle East becoming a major conflict area, the US involvement in Africa started to dwindle. Furthermore with the Trump administration raising doubts about free trade agreements and global warming there is an opportunity for China to push its own initiatives and push for global leadership. A Trans Pacific Partnership without the US is very appealing to the Chinese authorities as it allows to become a dominant player in negotiations with other members.

husab mine.jpegChina tends to provide no-strings financing that, unlike Western aid, is not conditional on human rights, clean governance or fiscal restraint. The Namibian finance minister welcomed China as an alternative but although the Chinese want you to be masters of your own destiny and dictate what you want, there are conditions which doesn’t necessarily make their presence truly beneficial. Namibia has seen significant Chinese investment especially in the Husab Uranium Mine ($4.6bn) the second largest uranium mine in the world. It is estimated that it will increase Namibia’s GDP by 5% when the mine reaches full production although almost all of the uranium will go to China for nuclear energy and thereby reducing its dependence on coal. Approximately 88% of China’s energy comes from fossils fuels, 11% from hydropower, solar and wind and only 1% from nuclear power. In order to reach clean energy goals and lose the mantle of chief polluter in the world, China has put a lot of emphasis on nuclear power and they have 37 nuclear reactors with another 20 under construction. The aim is to have 110 reactors by 2030 and become an exporter of nuclear-reactor technology.

The Chinese company China General Nuclear (CGN) has a 90% stake in the mine with the Namibian government 10%. Although Namibians are benefitting from all the infrastructure investment by the Chinese they have saddled the country with debt and have done little to reduce the 30% unemployment rate – Namibia has one of the most unequal societies in the world. In China independent unions are essentially illegal but Namibians have the Metal and Allied Namibian Workers Union (MANWU) which accused Chinese state-owned companies of paying Namibian workers only one third of the minimum wage and also using Chinese workers for unskilled jobs that by law should be going to Namibians. As the unions’s secretary said “the Chinese will promise you heaven but the implementation can be hell”. Also scandals involving Chinese nationals  include tax evasion, poaching endangered wildlife, money laundering have done little to enhance the mood of locals.

Over the last decade China has got a reputation for pillaging and pilfering the natural world with its growing demand natural resources as well as the illegal wildlife trade. Chinese businesses have had public backlash over their proposals that could do damage to the environment. One company wanted to clear a 30,000 acre forest so that it could plant tobacco – the soil in the forest is totally unsuitable for this purpose. Another wanted to set up donkey abattoirs to meet China’s demand for donkey meat and skin whilst a Nambian-based Chinese company requested to capture killer whales, penguins, dolphins and shark in Namibian waters to sell to aquatic theme parks in China. Under pressure from activists the Chinese firm withdrew their request.

Is China the World’s New Colonial Power?

Categories: Development Economics Tags: ,

The Doughnut Model of Economics

May 8, 2017 Leave a comment

A recent book entitled “Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist” by Kate Raworth of Oxford University’s Environmental Change Institute, offers an alternative to the all too familiar policy of economic growth to solve the issues of poverty, inequality, unemployment in the global economy. Simon Kuznets, who normalised the measurement of economic growth, stated that national income cannot be a accurate measure of total welfare in an economy as it only measures annual flows of money and not stocks of wealth and their distribution. Raworth states that the current model of endless economic growth using up the finite resources of the planet is not the way forward. Most textbooks refer to the circular flow as the model of the economic system – households, firms, banks, overseas markets and the government which bears little relationship to reality today. Instead Raworth goes beyond this simple circular flow model and includes social and environmental issues – energy, the environment, raw materials, water pollution etc.

The Doughnut
Raworth’s circular flow consists of two rings – see graphic below.

Doughnut Economics.jpeg

Inner Ring – this consists of the social foundation and those things we need for a good life – food, water, health, education, peace and justice etc. People living within this ring in the hole in the middle are in a state of deprivation.

Outer Ring – this consists of the earth environmental limits – climate change, ozone depletion, water pollution, loss of species etc.

The area between the two rings is the “ecologically safe and socially just space” in which humanity should strive to live. As stated in The Guardian review, the purpose of economics should be to help us enter that space and stay there. As the graphic shows we breach both rings as billions of people live below the poverty line and climate conditions, biodiversity loss, land conversion etc are at concerning levels. The video below is a useful explanation.

China and the exodus of cash

March 5, 2017 Leave a comment

Another very good video from PunkFT. As the Chinese economy starts to slowdown by its standards (even at 6% growth) the Chinese are sending their money overseas in search of safer investments. In doing this they are often violating currency controls which are there to keep money inside China. The housing market in many countries have been driven up by the flood of cash from China – Vancover, Sydney, Hong Kong, New York and Auckland. Chinese spent almost $30 billion on U.S. homes in 2015.

How will authorities stop the outflow? One way is to increase domestic interest rates to encourage people to deposit their money in local banks. However this impacts those Chinese companies that borrow money and could prompt some debt-laden companies into deleveraging. Worth a look and great animations.

China’s wages on the increase

February 28, 2017 Leave a comment

Useful new video from the FT showing the increase in China’s wages and how they are catching up with those in the developed world. China’s labour force as a whole, hourly wage is around 70 per cent of the level in weaker eurozone countries, according to data from Euromonitor International. Has China reached the Lewis Point where the abundance of cheap labour has dried up as workers return to the rural areas? Could be used for the A2 Developing Economies topic.

International migration – what about developing to developing countries?

January 21, 2017 Leave a comment

When you look at figures regarding international migration, the movement of people from developing to developed countries is most talked about and is the most common of the four types. Figures issued by the McKinsey Global Institute estimate that 120m people have made this move – see graphic below:

Developing Countries Migration.png

The second largest move is from developing to developing countries with just under 80m. This flow has been a popular option as people leave a poor country for a somewhat less poor country in search of higher wages. For instance the World bank estimated that 1.5m migrants from Bukino Faso live in the Ivory Coast which is proportionately larger than Indians in the UK, Turks in Germany and Mexicans in the US. The Ivory Coast is a poor country but not as poor as Burkina Faso and with wages double what they are in Burkina Faso migration is an attractive proposition. The World Bank estimates that $343m in remittances flowed from Ivory Coast to Burkina Faso in 2015 and accounts for 87% of all remittances.

Another example of movement from a developing to developing country is India and Bangladesh with an estimate of 20m Bangladeshis living in India. The World Bank estimates that more money is remitted to Bangladesh from India than from any other country – $4.5bn in 2015.

Why is developing to developing becoming more prominent?

  • Neighbouring countries tend to share currencies meaning money can be moved more easily in ways that officials do not notice.
  • Poorer people cannot afford travel to the West or the Gulf
  • The poorer people are the shorter the distance they can travel so neighboring countries might be attractive
  • Neighboring countries often share a language
  • Tribes often span borders of developing countries
  • In developed countries most jobs require legal documentation and authorisation. In the developing world informal work is seen as the norm.
  • More less-skilled work is available in developing countries.
  • The West does not have enough jobs for those from developing countries – African, Asian countries may offer more opportunity.

Sources: McKinsey Global Institute, The Economist.

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