China, African and mineral economies.
What are the benefits and potential pitfalls of China’s growing economic involvement with the continent of Africa?
China is on the move, motivated not so much, if we are to believe its leaders, by political concerns as economic ones. If China is to sustain its rapid industrial development, it needs raw materials, oil in particular. The drive is on to secure supplies and the African continent has been and continues to be targeted. This is good news for Africa, a continent that has, despite the emotional fears of ‘colonialism’ and ‘neo-colonialism’, in fact been marginalized in world trade, due to the kinds of domestic economic policies pursued by the majority of governments since independence. With roughly twenty percent of the world’s population, sub-Saharan Africa contributes to only one percent of world trade. Whilst China and India are growing rapidly as the result of opening to international investment and of domestic reform, sub-Saharan Africa has stagnated, even declined. Whilst Asian countries have been pulling people out of absolute poverty at rates not witnessed before in world history, Africa has slipped backwards. China is a major ‘driver-economy’ in Asia and will be increasingly a driver-economy with respect to the rest of the world. If the United States economy slows further as a result of changes in the housing market and the drying up of spending financed by rising house prices, expanding Asian economies such as China and India are likely to maintain international growth. Rising investment in oil exploration and development and increased exports and export-earnings will bring benefits, loosen budget constraints and kick-start other developments. With the attention being given to the continent by China, other international investors may take courage and reconsider African countries as a place to invest. Sub-Saharan Africa is growing again.
There is a price to pay, though this price in economic terms ought not to be laid at China’s door. The phenomenon takes place whatever the source of the commodity boom. Commodity price booms bring good news— high foreign exchange earnings—though the down side is that countries where the export-base is heavily dependent on a few natural resources such booms tend to bring with them a rising external value of the currency. This can lead to the closing off of other traditional exports (especially those from the agricultural sector that are or at least have the potential to be environmentally sustainable) as the higher foreign-exchange rate removes competitiveness. Agricultural exports are labor-intensive and land extensive (in other words they combine resources in the ‘right’ proportions with respect to availability). Mineral economies under modern technological conditions are capital-intensive.
Mineral economies in sovereign entities (such as Nigeria, Norway or Chad) and non-sovereign entities (such at in Northern Minnesota) alike face a similar set of pragmatic problems. In the investment phase large quantities of investment have a big but short-term impact on growth. In the production phase production builds up, peaks and then declines. In time the resource is depleted and economic well-being moves to somewhere else. It was probably Herodotus who first observed that economic activity never stays long in any one place. Demand for the output comes from the world economy and this itself is subject to periods of expansion and contraction. What matters is how these problems are faced and managed. Norway, for example, is well-aware of the limited potential life-span of oil production and has a planned approach to the investment of the oil revenues. Norway has avoided, as a result, the closing off of economic options that mineral booms can bring. Botswana has maintained its traditional export (beef to the European market) and has avoided by careful macro-economic management cutting of its traditional exports whilst benefiting from the new diamond industry. Botswana’s macro-economic policy has led to the development of high levels of reserves (to enable it to outride any slump in foreign exchange earnings should the diamond market decline). Whilst many sub-Saharan African counties had to adjust to deficits, Botswana had to learn how to adjust to surplus. Windfall gains need to be managed with an eye on both diversification of the economic base and on the long-term. Prudence (one of the Classical virtues) demands care for the long-term and care for the long-term ought to be one of the special responsibilities of government (David Hume thought as much in the early part of the 18th century). Botswana is currently seeking to diversify its economic structure through services, particularly financial services, in which it feels it has, as a result of prudent macro-economic policy, often described as the ‘best in Africa’, a competitive advantage. It has avoided one problem of mineral development (potential loss of traditional exports) and is seeking to avoid the other (no diversification away from the mineral economy).
An important consideration therefore is the quality of governance, the capacities of governments to manage mineral economies in ways that are beneficial in the long-term. This means re-investing revenue from mineral resources in health, water and sanitation and in education rather than in financing consumer imports or in the purchase of armaments. It means building up reserves to offset ‘external shocks’ to the economy (unexpected reductions in commodity prices or even drought). It means learning for the errors of the last forty years and from the success of places such as Norway and Botswana. It means, in short, raising the quality of governance. And here is a potentially significant problem. China has been accused of undermining long-term Western attempts to increase good governance by supporting regimes that have gained international disapproval (Sudan, Zimbabwe). The issue with respect to commodity booms is of significance: windfall profits and economic rent need to be reallocated with care and efficiency and transparency if the growth in mineral exports it to bring long-term benefits. Good governance is key. In the end this is really up to governments in Africa and to those who elect them.