China and India: What’s in it for Africa?

Andrea Goldstein, Nicolas Pinaud, Helmut Reisen, and Michael-Xiaobao

Chen

Paris 16/17 March 2006 OECD

2

Why this project? In a context of rising commodity prices, Sub-

Saharan Africa growth performance is improving

What is the role of China and India?

Anything new in terms of trade and investment linkages, as well as politics?

Is there a risk of reversal of progress in production/export diversification? what about governance?

Should policies be adapted?

3

Identifying conduits

Super CycleRaw Materials

China / India Growth

Africa's terms of trade

+

Declining prices of manufacturing

goods&

increased competition by

Asian producers on local & third

markets

Africa's growth

FDI in SSA

Global interest rates

SSA exports redirection twds the

Asian Drivers

+

-

+

+ +

+

Governancestandards & debt

sustainability issues

?

??

++

+?

+

Direct demand

4

China and India’s contribution to global growth

Source: Authors’ own calculation based on IMF World Economic Outlook Database, September 2005N.B: GDP based on purchasing-power-parity (PPP) valuation of country GDP.

Global growth rate & China’s / India’s contribution

1.1 1.2 1.3 1.5

3.3 3.1

3.9

5.4

1.1

0.50.5

0.4 0.4 0.4

5.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2000 2001 2002 2003 2004

Gro

wth

pe

rce

nta

ge

po

ints

(co

ntr

ibu

tio

n t

o g

lob

al g

row

th, a

s a

%)

China India Others

(78%)

(6%)

(16%)

6.9%

4.8%

4.6%

5.7%

7.4%

(70%)

(7%)

(23%)

(67%)

(8%)

(25%)

(68%)

(9%)

(23%)

(73%)

(7%)

(20%)

5

Sources of China’s Income and Output Growth, 1998-2003

-Percentage points-

Avg. 1998-2003

2003

Employment Contribution

0.3 0.4

Capital Contribution

4.9 5.5

Residual Factors

2.8 3.1

- Sectoral change,

0.5 0.7

- Education, 1.1 0.8

- Multi factor productivity

1.3 1.6

Thanks to capital accumulation (investment growth), potential growth in 2005 has reached 9.5 per cent. Unlikely to be sustained forever.

One future source of growth will be domestic consumption.

For raw materials, this may imply less demand for metals, more for soft commodities.

6

China and India’s rising energy and steel use

China India

Annual average, %:

1996-1999 2000-2003 1996-1999 2000-2003

Industrial production 9.90 10.07 4.97 5.84

Energy consumption 1.16 6.16 3.35 2.41

Energy production 0.15 6.16 1.49 2.51

Crude steel consumption 7.78 17.74 3.56 4.04

Crude steel production 6.78 15.70 2.60 7.01

Sources: Authors’ own calculation based on World Development Indicators (2005), International Energy Agency Data Service, Steel Statistical Yearbook (2004), International Iron and Steel Institute.

Year-on-year growth rates, percent

7

The Asian Bid:Lower Interest Rates Support Commodity Prices

- end 2005 -FX Reserves

bn US$ , of which %UST

US Treasury Holdings

bn US$ % of sum

China

+ Hong Kong

980 30.2 296 13.6

India 145 9.7 14 0.7

8

Commodity prices on the rise, but volatile

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

1997 1998 1999 2000 2001 2002 2003 2004

Oil (crude) Iron ore Copper Cotton

Source: AfDB/OECD (2005), African Economic Outlook.

9

Africa: Back to the Raw Material Corner?

The benefits of Asia’s rising global demand (net imports) for Africa-relevant commodities may be attenuated by the volatility of demand of the Asian giants.

Mono-economies are volatile.

Raw material dependence: less skill formation, more corruption, damaged environment?

10

Leamer Triangle and Resource Boom

11

China’s industry and Africa’s exports

-75-25

2575

125175225

275325

1997 1998 1999 2000 2001 2002 2003 2004

Index, % yoy

0

2

4

6

8

10

12

14

Annual growth rate of major African commodity exports to China (Left Scale)

Crude Oil (petroleum), Price index, 1995 = 100, simple average of three spot prices; Dated Brent, WestTexas Intermediate, and the Dubai Fateh (Left scale)Annual GDP growth rate of China (Right scale)

Annual Industrial growth rate of China (Right scale)

Source: UN Comtrade, World Bank Commodity Price Data (Pink Sheet) and World Development Indicators

12

China and India as net importers of commodities relevant to Africa

-50

0

50

100

150

200

250

1999 2000 2001 2002 2003 2004

yoy,% change

-500050010001500200025003000350040004500

Crude Oil Metalliferous Ores

Woods Cotton (Right Axis)

-50

0

50

100

150

200

1999 2000 2001 2002 2003 2004

yoy, % change

-200-1000100200300400500600700800

Crude Oil Woods

Metalliferous Ores (Right Axis) Cotton (Right Axis)

Source: UN Comtrade database

AfricaAsia

13

India’s and China’s shares in world imports of selected primary

commodities

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Crude oil M etalliferousores

Woods Cotton Preciousstones

India 2000 India 2004 China 2000 China 2004

Source: UN Comtrade database

14

Declining world manufacturing export price

-10

-5

0

5

10

15

20

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Annual price change (%)

Export price of manufactures in US dollars, percent change

Source: IMF World Economic Outlook Database (September 2005)

15

High terms of trade variability

Source: Authors’ own computations based on UNCTAD Handbook of statistics (2005)

Terms-of-trade variability for each

country*, 1997-2002

Terms-of-trade variability (average)

for each group, 1997-2002

Terms-of-trade effects on GDI** for each country (percent),

1997-2003

Terms-of-trade effects (average) on GDI for each group (percent),

1997-2003

Oil exporters:

30.03

7.48

Angola 41.15 ..

Congo 39.92 16.80

Gabon 22.75 4.46

Nigeria 38.44 7.76

Sudan 7.90 0.92

Metals exporters: 10.5

2.29

D. R. Congo 23.72 4.22

Kenya 5.72 2.12

South Africa 1.90 0.54

Agricultural exporters:

13.21

2.11

Cameroon 19.73 4.47

Ethiopia 15.19 1.69

Ghana 9.16 1.08

Tanzania 8.78 1.22

Manufacturing exporters:

6.61

0.91

China 3.51 0.77

India 9.72 1.04

16

Increasing African purchasing power of exports & improving terms of trade

Africa

0

20

40

60

80

100

120

1980 1984 1988 1992 1996 2000

0

2040

6080

100

120140

160

Asia

0

20

40

60

80

100

120

1980 1984 1988 1992 1996 2000

94

96

98

100

102

104

106

108

Export volume (left scale)

Purchasing power of exports (left scale)

Terms of trade (right scale)

Source: UNCTAD Handbook of Statistics (2005)

17

Rising Africa’s trade with China and India ...

0

1

2

3

4

5

6

7

1990 1995 2000 2004

Percent

Exports to China Imports from China

Exports to India Imports from India

Source: IMF Direction of Trade Statistics

18

... inducing a trade reorientation away from OECD countries

Source: IMF Direction of Trade (DOTS)

Direction of trade for selected African countries in 1995

0%

20%

40%

60%

80%

100%

to industrial countries to India to China (mainland) Others

19

... inducing a trade reorientation towards the Asian Drivers …

Source: IMF Direction of Trade (DOTS)

Direction of trade for selected African countries in 2004

0%

20%

40%

60%

80%

100%

to industrial countries to India to China (mainland) Others

20

... while not changing the African export mix

Angola's Exports to China and the World (2003)

94

95

96

97

98

99

100

101

Share in total X Share in total exports to China

% s

ha

re

Oil

China’s

share:

25%

Share of China in Angola’s Exports: 23.2%

1

1

21

Sudan's Exports to China & the World

0

20

40

60

80

100

120

Share in total X Share in total exports to China

% s

ha

re

Oil

Share of China in Sudan’s Exports: 41% China’s

share:

81%

... while not changing the African export mix

11

22

Cameroon's Exports to China & the World (2003)

0

5

10

15

20

25

30

35

40

45

50

Share in total X Share in total exports to China

% s

ha

re

Oil Wood Cotton

Share of China in Cameroon’s Exports: 4.4%

... while not changing the African export mix

1

2

3

1

2

3

China’s

share:

17.5%

23

Ghana's Exports to China & the World

0

10

20

30

40

50

60

70

Share in total X Share in total exports to China

% s

ha

re

Oil (seed / rubber / cocoa) Metals (excl. gold)

China’s

share:

13.2%

Share of China in Ghana’s Exports: 1.6%

... while not changing the African export mix

2

1

2

7

24

Share of China in Kenya’s Exports: 0.3%

China’s

share:

8.6%China’s

share:

2.5%

... while not changing the African export mix

Kenya's Exports to China & the World

0

5

10

15

20

25

30

35

40

45

Share in total X Share in total exports to China

% s

ha

re

Textile Metals

928

1

2

25

China greatly contributes to demand growth for African commodities

Source: Authors’ own calculations based on ITC Trademap (UNCTAD)

China's contribution to change in African exports

-200000 0 200000 400000 600000 800000 1000000 1200000 1400000 1600000 1800000

Angola

Congo

DR Congo

Sudan

Change in exports ('000 US dollars)

to the World to China to the rest of the World

26

Foreign Direct Investment

Low degree of direct competition for projects

Textiles an exception (but note MFA, AGOA, EBA)

Low degree of production complementarities (different from Asia, more similar to Latin America)

Asian FDI to Africa

Oil

African companies in China and India (diaspora investors, South African MNCs)

27

Chinese and Indian FDI in Africa

SSA % in total China OFDI SSA % in total India OFDI China & India % in total SSA IFDI

1991 0.4 n. a. n. a.

1992 3.9 n. a. n. a.

1993 15.0 n. a. n. a.

1994 39.7 n. a. n. a.

1995 16.6 n. a. 4.13

1996 19.1 10.03 4.24

1997 48.3 2.62

1998 34.1 3.46

1999 16.1 2.59

2000 38.9 5.49

2001 10.2 41.1 4.68

2002 6.4 7.65

2003 5.1 7.9 3.11

2004 n. a. 13.6 n. a.

28

Chinese and Indian FDI in Africa: the case of natural resources

Sudan

– CNPC owns 40% of the Greater Nile Petroleum Operating Company. – ONGC is building a 720km pipeline to the Red Sea, as well as a stadium.

Nigeria

– CNOOC acquired a 45% working interest in an offshore oil mining licence “OML 130” for US$2.268b cash; CNPC invested in the Port Harcourt refinery; PetroChina is interested in the Kaduna refinery.

– ONGC Mittal Energy Ltd (OMEL), the joint venture between Oil and Natural Gas Corporation and L. N. Mittal Group, will invest US$6b in railways, oil refining and power in exchange for oil drilling rights.

Gabon

– Sinopec and Unipec have a joint venture with Total. PanOcean exploits the Tsiengui on-shore basin and is associated with Shell to explore Awokou-1

– An Indian consortium signed an exploration and production sharing contract in November 2005.

29

Chinese and Indian FDI in Africa: the case of telecommunications

ZTE, a Chinese vendor, runs a joint venture mobile operation in the Republic of Congo with the local operator and bought a 51 percent stake in Niger Telecommunications when the company was privatized.

Distacom of Hong Kong became the strategic investor in Telecom Malagasy (Telma) in Madagascar, paying $12.6 million for a 68 percent stake and committing $165 million in additional investments over five years.

In August 2005 Mahanagar Telephone Nigam (in which the Govt. of India currently holds a 56.25% stake) launched a wholly owned subsidiary in Mauritius, the first competitor to the state-owned incumbent

30

31

Dutch Disease?

1977-2001 2002 2003 2004

Sub-Saharan Africa 102.7 93.5 102.5 104.8

Excluding Nigeria and South Africa

98.8 105.1 103.3 100.1

CFA franc zone 104.7 107.3 112.3 112.7

WAEMU 104.9 106.5 110.6 110.6

CEMAC 104.5 108.4 114.6 115.5

SADC 98.2 86.3 102.6 107.8

SACU 103.1 75.9 98.0 107.0

COMESA 93.2 111.0 102.4 96.0

Oil-producing countries 115.4 110.5 109.9 114.6

Non-oil-producing countries 100.4 89.1 100.3 101.9

HIPC Initiative(completion point countries)

105.2 96.2 93.4 90.7

Fixed exchange rate regime 101.9 127.7 132.1 125.0

Floating exchange rate regime 103.0 85.8 95.3 99.3

Source: IMF, Regional Economic Outlook: Sub-Saharan Africa, Supplement, September 2005

Real Effective Exchange Rates ( 2000 = 100)

32

Africa – still stuck in the raw material corner?

-4.0 1.0 6.0 11.0 16.0 21.0 26.0

Eritrea

Uganda

Mali

Tanzania

Chad

Mauritania

Nigeria

Gabon

Angola

Senegal

Congo

Cameroun

Madagascar

Sudan

1998 2002Sources: African Economic Outlook 2004/2005

(Herfindahl-Hirschman-Index)

33

Other, “Softer” Economic Ties

ODA and IFIs leverage (direct and indirect effects)

Foreign policy priorities and bilateral diplomatic relations

Governance

– Standards & Codes in extractive industries– Procurement– CSR

Others

– Quality of imports– Functioning of world commodity markets

Case studies on

– Angola– Senegal – Benin, Burkina, Ghana – Morocco/Tunisia

34

Economic Ties with China and India and Governance

Country CPI TI Score*/ Rank/ CPI Change 2004 of 145 since 2000

Main Export Items percent of total Exports, 2002

China’s Share 2003 percent of export receipts

India’s Share 2003 percent of export receipts

Angola 2.0 133 +0.3 Crude Pe troleum (91.4) 23.2 0

Cameroon 2.1 129 -0.1 Crude Petroleum (43.9)

4.4 0.3

Congo 2.3 114 n.a. Crude Petroleum (30.3), Wood (7.7)

30.3 0.2

Gabon 3.3 74 n.a. Crude Petroleum (75.2), Wo od(13.9)

5.5 2.0

Nigeria 1.6 144 +0.3 Crude Petroleum (88.9) 0.5 9.9

Senegal 3.0 85 +0.5 Inorganic acid, oxide, etc.(21.5)

1.4 13.0

Sierra Leone 2.3 114 n.a. Diamonds (100) n.a. 4.0 Somalia n.a. Wood & Pulp (49.2) 5.6 11.7

South Africa 4.6 44 -0.4 Precious Metals 4.6 4.2 Sudan 2.2 106 n.a. Crude Petroleum (76.2) 40.9 3.0

Tanzania 2.8 90 +0.3 Fish (12.1) 2.6 9.9 Zambia 2.6 102 -0.8 Copper (39.2) 1.7 3.6

Source: Authors’ own computations based on Transparency International (2004) and OECD (2005), African Economic Outlook

35

Summing up the evidence

Positive impact on international commodity prices

Positive impact on trade and FDI volume

Diversification of geographical markets (although OECD and non-OECD business cycles are increasingly correlated)

Limited changes in the African trade mix

Risks

– Leamer triangle?– Dutch disease?– Resource course?

36

Policy implications Reorient development strategies

– Avoid competition in labor-intensive manufactures (e.g clothing)– Support diversification into sectors that are complementary to

Asian growth (e.g. soft commodities and FFV)– Maximize the potential benefits of PTAs and geographical

proximity

The raw material boom calls for a policy mix that

– restrains public consumption – leans against nominal appreciation (including through at least

partial foreign investments of the surplus).

Donor policies

– Caution in emphasis on governance – Less bureaucracy and more practical action– Capacity-building in rural and agricultural areas– Despite PSD, government-to-government linkages remain crucial