Shaping the Future

　　Since the turn of the century, China has become Africa’s largest trading partner. While Sino-African relations are often touted as “win-win” by Chineseand African leaders, trade relations have beencriticized for being unbalanced as Africa’s naturalresources are traded for Chinese-manufactured consumergoods. This relatively unequal trade structurehas led many to suggest that China’s manufacturedexports are cutting into opportunities for Africanindustrialization.

　　Critics of the Sino-African trade relationshipshould note that this picture is not at all too differentfrom Africa’s trade with the rest of the world. Naturalresources underpin Africa’s exports to China, withAfrican nations linked to China’s economic growththrough raw materials. In 2012, oil, minerals, preciousstones and non-monetary gold accounted for 93.5percent of China’s imports from Africa. This was upfrom the 86.1 percent recorded a decade earlier.When evaluating Africa’s export profile to the UnitedStates, a similar trend emerges. In 2012, 87.5 percentof U.S. imports from Africa were primary commodities,down from a high of 92.8 percent in 2007.

　　On the import side, Africa receives technologyand labor-intensive manufactured goods, despitethe existence of an unskilled labor pool in manyAfrican countries. This is not in line with economictrade theory, which suggests that African economiesshould have developed a robust manufacturing base,moving away from focusing on natural resourcesproduction and instead investing in manufacturingenterprises that can make use of abundant laborresources.

　　Manufacturing decline

　　Flying in the face of population trends,Africa’s manufacturing value added hasdeclined over the past three decades,and the continent’s economic diversificationhas been limited. Africa’s sharein global manufacturing value addeddropped from 1.2 percent in 2000 to 1.1percent in 2008. The continent’s manufacturedexports contributed only 1.3percent in 2008 to global manufacturingexports, up from 1 percent in 2000. Theregion still remains marginalized in globalvalue chains.

　　Meanwhile, developing Asia’s share in globalmanufacturing value added rose from 13 percent to24 percent between 2000 and 2008. China has beenat the forefront of this development. What has drivenAsia’s success, and what has contributed to Africa’srelative failure?

　　In China especially, a constructive policy packagethat opened markets and implemented favorabletrade and exchange rate policies, together with asound and stable government that provided secureproperty rights and an environment that attractedinvestment, were crucial building blocks for anexport-driven economic strategy.

　　Africa has largely failed to emulatethis successas it has lacked the necessary policy environment.

　　Deficient infrastructure on the continent hasalso led to higher production and transaction costs.Poor leadership, governance, weak institutions andrent-seeking activities have also detracted fromopportunities to build the continent’s value-addedsector. Despite significant tariff preferencesinto the United States, under the AfricanGrowth and Opportunity Act (AGOA), Africa’smanufactures are not competitive.

　　In contrast, China has quickly becomethe global price setter for manufacturedexports. This has affected Africanmanufactures’ market shares in domesticand export markets – particularly in theclothing and textiles sector, as this is thesector that has substantial manufacturedexport capacity in Africa (relative to othermanufacturing sub-sectors).

　　To put this into context, U.S. imports ofapparel and clothing totaled $79 billion in2008. Through improvements in its globalcompetitiveness, China expanded its contributionto U.S. clothing imports from 11.4 percent in 1990to 14.6 percent in 2000 and 34.5 percent in 2008.Africa reduced its stake in the American market from11.9 percent in 1990 to 6.6 percent in 2000 and only2.5 percent in 2008. Although African economieswere growing rapidly during this period and enjoyedtariff preferences, they were unable to expandor even maintain their market share in the UnitedStates.

　　Competition

　　China is a notable competitor for Africa’s clothingand textiles sector – a key job-creating sectorand established springboard for diversification.

　　Such competition, coupled with greater Chineseresources demand, has arguably steered someAfrican economies toward greater specialization innatural resources production. Yet, it is Beijing thathas expressed goodwill and taken action to addressimbalances in some African countries’ trade andproductive engagements with China.

　　China’s shifting production structure and moveup the manufacturing value chain, coupled withBeijing’s pursuit of a more sustainable growth path, isresulting in reforms of the nation’s industrial capacity,and ultimately a shift from “Made in China” to“Created in China.” The World Bank estimates thatmore than 80 million Chinese lower-end manufacturingjobs will be moved offshore over the mediumterm due to rising labor and input costs. As mature,labor-intensive industries look to move to relativelylower-cost regions, competitive and forward-lookingAfrican economies should use opportunities in theseindustries to position themselves to attract investment.

　　Chinese-funded and constructed special economiczones (SEZs) in nations such as Ethiopia,Mauritius, Nigeria and Zambia, are already supportingthis trend. These zones could be key contributorsto unlocking Africa’s diversification potential andvalue-addition based industries. These dedicatedgeographic areas are attracting production industries.

　　Supported by transport, power and otherbusiness infrastructure improvements, as wellas preferential tariff structures, these zones, ifmanaged effectively, could be catalysts in Africa’smove toward diversification. The SEZsare positioned to attract FDI through variousfiscal and other incentives, and to generateforeign reserves from value-added exports.

　　Ultimately though, they look to create opportunitiesfor local employment, skills andtechnology transfer, as well as the potentialfor backward linkages in host countries to pursuegreater diversification of exports and domestic economicactivities.

　　With China already acting as a major contributorto the advancement of Africa’s infrastructure, and akey financier of the continent’s development, Africanpolicymakers should be actively looking to attractChinese production in industry, assembly and agroprocessingsectors by drawing on Chinese capital,skills and technology, either through joint venturesor partnerships. China has already given financialsupport to such ventures. And as domestic structuralchanges in China accelerate – with China movingaway from being a leading exporter economy tobecoming a consumer and investor-focused country– industrialization prospects could improve for countriesthat recognize this opportunity and positionthemselves accordingly. CA

　　How China is shaping Africa’s industrialization prospects By Hannah Edinger and Ron Sandrey