China & India: Whats in it for Africa?

Nicolas Pinaud OECD Development Centre

A B C D E
To k y o

W o r l d
29-30

B a n k
2006

May

China & India: Whats in it for Africa?

An OECD Development Centre Study

May 2006

by Andrea Goldstein, Nicolas Pinaud, Helmut Reisen and Xiaobao Chen

Available at: OECD Development Centre Web: www.oecd.org/dev OECD online bookshop: http://www.oecdbookshop.org

Identifying Conduits
Africa's growth

? +
Africa's terms of trade
Governance standards & debt sustainability issues

+ ?
FDI in SSA

+ ?

?
Declining prices of manufacturing goods & increased competition by Asian producers on local & third markets

+ Super Cycle
Raw Materials

+ +
Direct demand

SSA exports redirection twds the Asian Drivers

+
Global interest rates

+
+

China / India Growth

3

Identifying Conduits.
1 2 The Asian Drivers Global Impacts & Africa. The Asian Drivers as Markets for African Exports.

Foreign Direct Investment. Conclusions: Issues & Challenges.

Identifying Conduits
Africa's growth

+
Africa's terms of trade

+ Super Cycle
Raw Materials

+
Global interest rates

+
Direct demand

China / India Growth

5

Chinas & Indias Contribution to Global Growth

8.0 7.4% 6.9% 7.0

5.7% 6.0

Growth percentage points (contribution to global growth, as a %)

4.8% 5.0 4.6% 5.4 4.0

(78%)

5.4
(73%)

3.9
(68%)

3.0

3.3
(70%)

3.1
(67%)

2.0 0.5 (9%) 0.4 (6%) 1.0 1.1

(16%) (23%)

0.5

(7%)

0.4 (7%)

0.4 (8%) 1.3 1.5

(20%)

1.1

1.2
(25%)

(23%)

0.0 2000 2001 China 2002 India Others 2003 2004

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

The Asian Bid: Lower Interest Rates Support Commodity Prices

Composition of China and Indias Foreign Exchange Reserves (end 2005)

FX Reserves
bn US$ of which %UST

US Treasury Holdings
bn US$ % of total UST in circulation
13.6

China + Hong Kong India

980

30.2

296

145

9.7

14

0.7

Source: US Treasury, www.treas.gov/tic; central banks of China, India and Hong Kong (Hong Kong Monetary Authority), press releases.

Chinas & Indias Rising Energy and Steel Use

Year-on-year growth rates, percent

China
Annual average, %
Industrial production Energy consumption Energy production Crude steel consumption Crude steel production

India
2000-2003 1996-1999 2000-2003

1996-1999

9.90

10.07

4.97

5.84

1.16
0.15 7.78 6.78

6.16
6.16 17.74 15.70

3.35
1.49 3.56 2.60

2.41
2.51 4.04 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.

Chinas & Indias Shares in World Imports of Selected Primary Commodities

% 30.0

25.0 20.0 15.0 10.0 5.0 0.0

Crud e o il Metallifero us o res Wo o d s Co tto n Precio us sto nes

India 2000

India 2004

China 2000

China 2004

Source: UN Comtrade database

Commodity Prices: Rising...

Com m odities Prices in real term s 140 120 China? 100 80 60 40 1900

1915

1930

1945

1960

1975

1990

2005

Source: University of Oxford.

10

Increasing African Purchasing Power of Exports & Improving Terms of Trade

Africa
110 100 90 80 70 60 50 40 1980 1984 1988 1992 1996 2000 Export volume (left scale) Purchasing power of exports (left scale) Terms of trade (right scale) 150 140 130 120 110 100 90 80 70 60
120 100 80 60 100 40 20 0 1980 1984 1988 1992 1996 Export volume (left scale) Purchasing power of exports (left scale) Terms of trade (right scale) 2000 98 96 94

Asia
108 106 104 102

Source: UNCTAD Handbook of Statistics (2005)

11

Commodity Prices: Rising... but Volatile

yoy % change

80.0 60.0 40.0 20.0 0.0 -20.0 -40.0 1997 1998 1999 2000 Iron ore 2001 Copper 2002 Cotton 2003 2004

Oil (crude)

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

Source: OECD Development Centre (2006) based on World Bank data

12

China & India as Swing Importers of Commodities Relevant to Africa

Net imports by China & India of Selected Commodities
China
yoy,% change 250 200 150 100 50 0 -50 1999 2000 2001 2002 2003 2004 4500 4000 3500 3000 2500 2000 1500 1000 500 0 -500
yoy, % change 200 150 100 50 0 -50 1999 2000 2001 2002 2003 2004 800 700 600 500 400 300 200 100 0 -100 -200

India

Crude Oil Woods

Metalliferous Ores Cotton (Right Axis)

Crude Oil Metalliferous Ores (Right Axis)

Woods Cotton (Right Axis)

Source: UN Comtrade database

13

Identifying Conduits.
1 2 The Asian Drivers Global Impacts & Africa. The Asian Drivers as Markets for African Exports.

Foreign Direct Investment. Conclusions: Issues & Challenges.

14

Identifying conduits
Africa's growth

+
Africa's terms of trade

+ Super Cycle
Raw Materials SSA exports redirection twds the Asian Drivers

+
Global interest rates

+
Direct demand

China / India Growth

15

Rising Africas Trade with China and India ...

Share of China & India in African Trade
Percent 7 6 5 4 3 2 1 0 1990 1995 Exports to China Exports to India 2000 2004 Imports from China Imports from India

Source: IMF Direction of Trade Statistics

16

... Reorienting Trade Away from OECD Countries

Destinations of African Exports in 1995
100%

80%

60%

40%

20%

0%

SS Africa

Sudan

Angola

to industrial countries to India

Source: IMF Direction of Trade (DOTS)

Burkina Faso

to China (mainland) Others

Congo

Chad

Congo, DR

Zambia

Nigeria

17

... Reorienting Trade Away from OECD Countries

Destinations of African Exports in 2004
100% 90% 80% 70% 60%

35.9% 9.3% 66.9%

50% 40% 30% 20% 10% 0%

SS Africa

Sudan

Angola

to industrial countries

Source: IMF Direction of Trade (DOTS)

Burkina Faso

to China (mainland)

Congo

Chad
to India

Others

Congo, DR

Zambia

18

Nigeria

... While not Changing the African Export Mix

Chinas Chinas

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

101

share: 25%
120

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

share: 81%

100

100

99

80
% share

98

Ranks in X
% share

60

97

1
96 95

1
40

1
% in total X % in total X to China

20

94

% in total X Oil

% in total X to China

Oil
Share of China in Angolas Exports: 23.2% (2003)

Share of China in Sudans Exports: 41% (2003)

Source: OECD Development Centre calculations based on ITC Trademap (UNCTAD)

19

... While not Changing the African Export Mix

Cameroon's Exports to China & the World (2003)
50 45 40 35 30

Chinas
share:

% share

25 20 15 10 5 0

17.5%

1 2
3
% in total X
Oil Wood Cotton

% in total X to China

Share of China in Cameroons Exports: 4.4% (2003)

Source: OECD Development Centre calculations based on ITC Trademap (UNCTAD)

20

Identifying Conduits.
1 2 The Asian Drivers Global Impacts & Africa. The Asian Drivers as Markets for African Exports.

Foreign Direct Investment. Conclusions: Issues & Challenges.

21

Identifying conduits
Africa's growth

+
Africa's terms of trade

+ Super Cycle
Raw Materials FDI in SSA SSA exports redirection twds the Asian Drivers

+ +
Direct demand

+
Global interest rates

+
+

China / India Growth

22

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)

No inflows of FDI to Africa driven by production networks

Asian FDI to Africa

Oil mostly, but not only
23

Foreign Direct Investment Chinese and Indian FDI in Africa

Period 1995-2004: Chinas OFDI : USD11.2bn / Chinas FDI in Africa: USD1.1bn Indias OFDI : USD14.3bn / Indias FDI in Africa: USD2.3bn
60 9

8 50 7

40

30 4

20

2 10 1

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Share of Africa in total India OFDI

Share of Africa in total China OFDI

China & India % in total Africa IFDI (right scale)

Source: UNCTAD, Ministry of Commerce of India and China

24

Identifying Conduits.
1 2 The Asian Drivers Global Impacts & Africa. The Asian Drivers as Markets for African Exports.

Foreign Direct Investment. Conclusions: Issues & Challenges.

25

Issues & Challenges Africa: Stuck in the Raw Material Corner?

Competition on third and local markets

Africa's growth

+
Africa's terms of trade

?
Declining prices of manufacturing goods & increased competition by Asian producers on local & third markets

+ Super Cycle
Raw Materials
FDI in SSA

+ +
Direct demand

+ +

SSA exports redirection twds the Asian Drivers

+
Global interest rates

China / India Growth

26

Issues & Challenges Africa: Stuck in the Raw Material Corner?

Dutch Disease?
Real Effective Exchange Rates (2000 = 100)
1977-2001
Sub-Saharan Africa Excluding Nigeria and South Africa CFA franc zone 102.7 98.8 104.7

2002
93.5 105.1 107.3

2003
102.5 103.3 112.3

2004
104.8 100.1 112.7

WAEMU
CEMAC SADC SACU COMESA Oil-producing countries

104.9
104.5 98.2 103.1 93.2 115.4

106.5
108.4 86.3 75.9 111.0 110.5

110.6
114.6 102.6 98.0 102.4 109.9

110.6
115.5 107.8 107.0 96.0 114.6

Non-oil-producing countries
Fixed exchange rate regime Floating exchange rate regime

100.4
101.9 103.0

89.1
127.7 85.8

100.3
132.1 95.3

101.9
125.0 99.3

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

27

Issues & Challenges Africa: Stuck in the Raw Material Corner?

Less & more diversified African countries: 1996 - 2003

Herfindahl-Hirschman-Index
Less diversified More diversified
Egypt Tanzania Morocco Tunisia Uganda Kenya Eritrea

Niger Burkina Faso Africa Cameroon Equatorial Guinea Ghana Cote d'Ivoire Algeria

Zambia Senegal Mauritius Sudan Mozambique SACU * Madagascar

0.0 5.0 10.0 15.0 20.0 25.0 30.0

Ethiopia DRC Chad

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0

1996

2003

1996

2003

Sources: African Economic Outlook 2005/2006

28

Issues & Challenges Softer Economic Ties with China & India
Africa's growth ? + ?
FDI in SSA Governance standards & debt sustainability issues

+
Africa's terms of trade

+ ?

?
Declining prices of manufacturing goods & increased competition by Asian producers on local & third markets

+ Super Cycle
Raw Materials

+ +
Direct demand

+
+

SSA exports redirection twds the Asian Drivers

+
Global interest rates

China / India Growth

29

Issues & Challenges Softer Economic Ties with China & India

China & India as emerging non-DAC donors

Diminished IFIs leverage? Less transparency in public finance? HIPC achievements at risk? Improvements in Aid efficiency in jeopardy?

Chinese Corporations and Governance

Standards & Codes in extractive industries Procurement Corporate Social Responsibility
30

Issues & Challenges China, India & Africa: Governance Issues

Trade Ties with China and India and Corruption in Africa
Country CPI TI Score*/ Rank/ CPI Change 2004 of 145 since 2000 Main Export Items percent of total Exports, 2002 Precious Metals Crude Petroleum (75.2), Wood(13.9) Inorganic acid, oxide, etc.(21.5) Fish (12.1) Copper (39.2) Crude Petroleum (76.2) Diamonds (100) Crude Petroleum (30.3), Wood (7.7) Crude Petroleum (43.9) Crude Petroleum (91.4) Crude Petroleum (88.9) Chinas Share 2003 percent of export receipts 4.6 5.5 1.4 2.6 1.7 40.9 n.a. 30.3 4.4 23.2 0.5 Indias Share 2003 percent of export receipts 4.2 2.0 13.0 9.9 3.6 3.0 4.0 0.2 0.3 0 9.9

South Africa Gabon Senegal Tanzania Zambia Sudan Sierra Leone Congo Cameroon Angola Nigeria

4.6 3.3 3.0 2.8 2.6 2.2 2.3 2.3 2.1 2.0 1.6

44 74 85 90 102 106 114 114 129 133 144

-0.4 n.a. +0.5 +0.3 -0.8 n.a. n.a. n.a. -0.1 +0.3 +0.3

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

31

Issues & Challenges 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 animal feed) 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
32

Thank you.

An OECD Development Centre Study

May 2006

by Andrea Goldstein, Nicolas Pinaud, Helmut Reisen and Xiaobao Chen

Available at: OECD Development Centre Web: www.oecd.org/dev

OECD online bookshop: http://www.oecdbookshop.org

33

Annex 1: China & India as Swing Importers: the Case of Cotton

China, India and the international cotton market

Harvest
Output
(000 tons)

2004/05
Percentage change / 2003-04 Contribution to change (%) / 2003-04 Output
(000 tons)

2005/06
Percentage change / 2004-05 Contribution to change (%) / 2005-06

China United States India Pakistan

6320 5149 3315 2465

29.8 29.5 14.7 42.2

30.3 24.6 8.9 15.3

5770 4410 3825 2210

-8.7 -14.4 15.4 -10.3

39.5 53.0 -36.6 18.3

Brazil
Uzbekistan World

1300
1056 25211

3.6
17.3 23.4

0.9
3.3 /

1250
1125 23817

-3.8
6.5 -5.5

3.6
-4.9 /

Source: Authors estimates based on Cotton Outlook (August 2005)

34

Annex 2: High terms of trade variability

Terms-of-trade variability for each country*, 1997-2002 Oil exporters: Angola Congo Gabon Nigeria Sudan Metals exporters: D. R. Congo Kenya South Africa Agricultural exporters: Cameroon Ethiopia Ghana Tanzania Manufacturing exporters: China India 3.51 9.72 19.73 15.19 9.16 8.78 23.72 5.72 1.90 41.15 39.92 22.75 38.44 7.90

Terms-of-trade variability (average) for each group, 1997-2002 30.03

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 7.48

.. 16.80 4.46 7.76 0.92 10.5 4.22 2.12 0.54 13.21 4.47 1.69 1.08 1.22 6.61 0.77 1.04 0.91 2.11 2.29

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

35

Annex 3: China Greatly Contributes to Demand Growth for African Commodities

China's contribution to change in African exports

Sudan

DR Congo

Congo

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

Change in exports ('000 US dollars)

to the World to China to the rest of the World

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

36

Annex 4: Chinas Industry & Africas Commodity Exports

Index, % yoy 325 275 225 175 125 75 25 -25 -75 1997 14 12 10 8 6 4 2 1998 1999 2000 2001 2002 2003 0 2004

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, West T exas 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

37

Chinese and Indian FDI in Africa: the Case of Natural Resources

Sudan
ONGC is building a 720km pipeline to the Red Sea, as well as a stadium. 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 Unipecs 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.

38

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. India currently holds a 56.25% stake) launched a wholly owned subsidiary in Mauritius, the first competitor to the state-owned incumbent

In August 2005 Mahanagar Telephone Nigam (in which the Govt. of

39

Issues & Challenges Africa: Stuck in the Raw Material Corner?

Leamer Triangle and Resource Boom

Source: Leamer et al. (1999)

40