A Chinese led neo-ISI in Africa

A frequent refrain in the African media and civil society is that foreign actors must provide more than just resource extraction in Africa. In late May outgoing Busa CEO Jerry Vilakazi called for an increase in value added production creating employment. “The solution to Africa’s high levels of unemployment and poverty, lies in us finding and agreeing on a new way of doing business through investing in value-adding enterprises in the continent”.

The problem with the natural resource industry in development terms is that it generates relatively little employment. Nevertheless the industry generates huge rents which dominate the economy meaning government has little need to promote other industries.

Industries with the power to bring about widespread poverty reduction need to be labour intensive and broad based. Every large developed country has developed as a result of a mix of agriculture and manufacturing providing employment in rural and urban areas respectively.

Therefore in the 1950s developing countries sought to artificially kick-start their domestic manufacturing by setting up national champions to manufacture the goods that they were importing. This served the dual purpose of generating domestic employment, while also saving foreign exchange for capital goods. The hope was that once these companies became established they could begin exporting and continue to grow.

This Import Substitution Industrialisation (ISI) in Africa proved unsuccessful however, as companies lacked the expertise and the incentives to become competitive. State support for these companies was not sufficiently contingent on their success, and indigenous technicians were in too short a supply to drive effiicient manufacturing.

Recent relationships between China and Africa however have re-invigorated and revived the field. The major risk of ISI was that setting up these industries brought very large sunk costs. Therefore as companies failed to become competitive the temptation was for government to continue to support them rather than to cut ties. The change here is that investment and the risk is born by China, while China has the know how to make manufacturing work. The benefit here is that African governments do not bear the risk of failure, however they also do not maximise potential benefit.

This is a problem that China knows well. The solution Beijing found to this problem was to demand that foreign investors engaged in joint ventures with Chinese companies. This would be a wise restriction for African policy makers to impose. Chinese investors haveencouraged this approach in Rwanda where a local partner also provides the political connections and local knowledge required to succeed.

China’s Ambassador to Rwanda Shu Zhan said, “It is better way to set joint ventures between Chinese investors and Rwandans”, however he also added that Chinese Joint Ventures would be better able to find markets for manufactured good, “[i]f the government can invest in energy so that investors can build industries to process raw materials to look more attractive for export”.

The second problem with ISI in Africa was that during the 1950s and 1960s most of the world was not fully industrialised. This meant that many countries were competing to dominate the market for light manufacturing. To some extent Africa lost out to Asia which enjoyed more stable political structures, and support from the USA.

Half a century later Africa still finds itself with large numbers of people in conditions of poverty, and a lack of employment in agriculture and manufacturing. However billions of Asians have been brought out of poverty, and the industries which provided the employment to do so are gradually becoming uncompetitive in countries where currencies and wages are rising in value.

Last month Obe Ezekwesili raised this point calling on African countries to prepare themselves for a possible 83-85 million manufacturing jobs which are likely to be outsourced from China alone. If African countries can establish sufficient regulatory and transport infrastructure to keep costs low then it is very possible that Chinese and Western firms will move their manufacturing centres to Africa where they can benefit from cheap labour. While these industries may not be African owned they will bring vital knowledge and experience to Africa.

This process has already began, with the car industry an early developer. An interesting article on the FOCAC website explored this growth market. According to statistics from the Automobile Branch of China Chamber of Commerce for Import and Export of Machinery and Electronic Products, in the first 11 months of 2009, Chinese auto export to Africa reached a total of 102,000 vehicles in volume and 1.74 billion U.S. dollars in sales, surpassing those with Asia and making Africa the largest destination continent for Chinese auto export.

Chinese car makers are increasingly establishing assembly plants in Africa. In 2011 China Motor Corporation (CMC) in SA announced its intention to build a $1bn vehicle factory outside Harrismith in the Free State creating 2500 jobs. Meanwhile Chinese lorry manufacturer Foton plans to establish a Sh1.2 billion assembly plant, expected to churn out 10,000 units of prime movers, tippers, buses, pick-ups, and light commercial trucks per year. The company can avoid a 25% import tax by manufacturing locally, thereby cutting costs to better compete for the local market. The potential strength of Africa’s consumer market is a real pull for manufacturers, and African leaders must leverage that to extract concessions from investors on local employment and technology transfer.

China’s deepened engagement represents both an opportunity and a risk for African countries. Earlier this year the Newcastle Chinese Chamber of Commerce in South Africa threatened to retrench unskilled workers, shut down factories and relocate to Swaziland and Lesotho if the government brought in minimum wage legislation. As Chinese companies become more active they will wield further power. This could be exacerbated by the many different regulatory environments in numerous African states breeding a race to the bottom. Organisations like Ecowas, SADC, the EAC and Comesa will be vital in organising collective bargaining to properly leverage Africa’s market, while standardising regulation to ensure a united front.

The most pertinent question to ask in relation to China’s engagement in Africa is not whether Chinese policy is benevolent or malicious. The question is whether Africa’s governance architecture can become mature, quickly enough to manage and regulate the huge growth in economic activity brought about by the upswing in South-South business engagement over the past decade.