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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

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