Africa, China and Investment
Africa, China and Investment
Of the US$ 334 billion in total FDI in 2005 only 9.3%, or US$ 31 billion, went to Africa. The continent with 14% of the world's population and 23% of its land is worth only 2% of its economy. The entire value of African companies as US$ 800 billion of which US$ 600 billion are South African.
Why is this? After all Africa has 8% of the world's oil supply and more metals and minerals than you can shake a pointed stick at.
After decades of instability, warfare, or plain disregard for economic rights the most capable Africans have fled leaving shattered infrastructure behind.
A mining company investing in Cameroon also has to build railroads and deepwater ports, electricity generators, fresh water pipelines, and import engineering skill before their goods can leave the country. That's a huge investment for any private company.
In addition property law in Africa is not a very definite thing. Whole industries, such as telecommunications or electricity production, may be protected. Land ownership by foreigners may be illegal. Redistribution policies, such as local ownership laws, can dramatically increase costs.
Africa has a long history of waiting for investors to build plants and machinery and set up infrastructure before pouncing and holding the investment hostage. Businesses are given the choice: we'll expropriate your whole company, or put you out of business, or you can voluntarily give our nominees a share of your company.
Old Mutual, with a large investment in Zimbabwe, is being forced to hand 51% of their local value to government nominees. South Africa's BEE laws have just forced HP to submit R 150 million of their capital into a government scheme.
Instead of capital being used to its best value the cash "windfall" received by people who haven't earned it gets spent. This increases the overall money supply without increasing the value of the economy. This may lead to the short-term illusion of economic growth but the result is inflation as too much money chases too few goods.
Worse for the economy is that companies which would have spent their cash reserves on maintenance and improvement of their capacity (creating new jobs along the way) don't. This leads to product shortages and further producer inflation at the factory gates.
The companies already invested tend to grin and bear it; at least until an opportunity presents to sell up. Those considering their choices stay away and invest elsewhere.
Africa's attitude to investors is leading them down a dark path. Wary of western businessmen who demand respect for their property rights many are now courting China which asks for none of these rules.
In only two years China has gone from virtually no interest in Africa to its third largest investor. China is prepared to build railways and ports and terminals to service its mines and oil interests. The advantage is that many African nations are now getting infrastructure they never had before. The disadvantage is that China is negotiating some pretty severe trade terms.
China, itself a nation with limited property rights, knows how the influence game is played. They are also treating Africa as a new market for cheap textiles and other manufactures. Many African nations are watching, with distress, as their local manufacturing capacity collapses against the cheap imports.
Earlier this year Zambians rioted at a Chinese mine prompting political demands to drive out Chinese investors. It seems that even the Chinese are not safe from protectionist instincts.
Without local skill and ambition to turn a piece of land into productive capacity Africa's only hope is with the self-interest and pursuit for profits that drives foreign investors.
Chase them away at your peril.
Africa China and Investment - To learn more about this author, visit Gavin Chait's Website.
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Welcome to the Central African Republic of ChinaSouth Africa receives more than 20% of the foreign direct investment (FDI) placed in Africa each year. Don't celebrate too quickly.
Of the US$ 334 billion in total FDI in 2005 only 9.3%, or US$ 31 billion, went to Africa. The continent with 14% of the world's population and 23% of its land is worth only 2% of its economy. The entire value of African companies as US$ 800 billion of which US$ 600 billion are South African.
Why is this? After all Africa has 8% of the world's oil supply and more metals and minerals than you can shake a pointed stick at.
After decades of instability, warfare, or plain disregard for economic rights the most capable Africans have fled leaving shattered infrastructure behind.
A mining company investing in Cameroon also has to build railroads and deepwater ports, electricity generators, fresh water pipelines, and import engineering skill before their goods can leave the country. That's a huge investment for any private company.
In addition property law in Africa is not a very definite thing. Whole industries, such as telecommunications or electricity production, may be protected. Land ownership by foreigners may be illegal. Redistribution policies, such as local ownership laws, can dramatically increase costs.
Africa has a long history of waiting for investors to build plants and machinery and set up infrastructure before pouncing and holding the investment hostage. Businesses are given the choice: we'll expropriate your whole company, or put you out of business, or you can voluntarily give our nominees a share of your company.
Old Mutual, with a large investment in Zimbabwe, is being forced to hand 51% of their local value to government nominees. South Africa's BEE laws have just forced HP to submit R 150 million of their capital into a government scheme.
Instead of capital being used to its best value the cash "windfall" received by people who haven't earned it gets spent. This increases the overall money supply without increasing the value of the economy. This may lead to the short-term illusion of economic growth but the result is inflation as too much money chases too few goods.
Worse for the economy is that companies which would have spent their cash reserves on maintenance and improvement of their capacity (creating new jobs along the way) don't. This leads to product shortages and further producer inflation at the factory gates.
The companies already invested tend to grin and bear it; at least until an opportunity presents to sell up. Those considering their choices stay away and invest elsewhere.
Africa's attitude to investors is leading them down a dark path. Wary of western businessmen who demand respect for their property rights many are now courting China which asks for none of these rules.
In only two years China has gone from virtually no interest in Africa to its third largest investor. China is prepared to build railways and ports and terminals to service its mines and oil interests. The advantage is that many African nations are now getting infrastructure they never had before. The disadvantage is that China is negotiating some pretty severe trade terms.
China, itself a nation with limited property rights, knows how the influence game is played. They are also treating Africa as a new market for cheap textiles and other manufactures. Many African nations are watching, with distress, as their local manufacturing capacity collapses against the cheap imports.
Earlier this year Zambians rioted at a Chinese mine prompting political demands to drive out Chinese investors. It seems that even the Chinese are not safe from protectionist instincts.
Without local skill and ambition to turn a piece of land into productive capacity Africa's only hope is with the self-interest and pursuit for profits that drives foreign investors.
Chase them away at your peril.
Africa China and Investment - To learn more about this author, visit Gavin Chait's Website.
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