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1.5 Globalization trends and implications: Economic Report on Africa 2007

Guest post by: United Nations Economic Commission for Africa

Article Overview: Trade remains uneven

1.5 Globalization trends and implications: Economic Report on Africa 2007

Globally, exports of goods and services are growing faster than GDP. However, not
all regions benefit equally from this trend (figures 1.7 and 1.8). The EU share in
world exports remained around 40 per cent between 2001 and 2004, and declined
to 38.4 per cent in 2005. Over the 1990s, it had declined significantly. In comparison,
the shares of Japan and the USA declined between 2001 and 2005.

The share of Latin America in world exports remained constant at 3 per cent, whereas
that of Asia increased from 27 per cent in 2001 to 29 per cent in 2005. China’s share
in world trade increased from 4.3 to 7.3 per cent in only 4 years. The share of Africa
declined from 3.1 per cent in 1990 to 2.2 per cent in 2002 and increased again to
2.9 per cent in 2005 due to increasing commodity prices.

Capital flows are rising

Global FDI flows have again increased substantially, by 29 per cent in 2005, after
an increase of 27 per cent in 2004. Trends for different regions are less clear for FDI
than for trade (figure 1.9). The EU’s share in world FDI inflows increased to 46 per
cent in 2005, the same level as in 2003. In contrast, the USA lost a significant share,
while Japan’s share remained low. The share of Latin America has fluctuated around
10 per cent over the past 5 years, while that of Asia has more than doubled, from 10
per cent in 2000 to 22 per cent in 2005. China alone now accounts for 8 per cent
of world FDI inflows, which is half of its share in world GDP. The share of Africa
in world investment has also increased, from 0.6 per cent in 2000 to 3.4 per cent
in 2005. For both trade and FDI, China and India are becoming more important
partners for Africa, a sign of the geographic diversification of trade and source of
finance for the continent (see box 1.1).

The rapid growth in both trade and FDI is mainly driven by the distribution of value
chains over several countries according to their comparative advantage in particular
stages of production. For example, some textiles are designed in Europe, while the
fabric is produced in Asia, the cutting and sewing done in Madagascar, and the final
product exported to the USA. This process is driven by lower transport and communication
costs that enable the spread of different production stages all over the world.
However, remoteness is becoming a bigger obstacle as the advantage of being close to
major markets increases the chances of being included in these value chains.

China and India becoming drivers of Africa’s growth through trade and FDI

Trade and FDI from Asia to Africa have increased substantially over the past 10 years. The China-
Africa summit in November 2006 raised the profile of China-Africa relations. China now offers
debt reduction and preferential trade treatment and finances large infrastructure investments in a
number of African countries. It is mainly interested in natural resources, especially oil. Angola is

expected to become China’s most important source of oil in 2006. As in other countries, such as
Kenya, Nigeria and Zimbabwe, Chinese state-owned companies invest large amounts in infrastructure
to secure licenses for minerals.

As a result, African exports to China of mainly raw materials have increased tenfold since
1995 and by more than 50 per cent in the first half of 2006 alone. Imports from China also
increased by 30 per cent in the same period. As these are mainly cheap labour-intensive manufactures,

they have caused problems for local manufactures, especially textiles. Over the past
few years Africa has run a significant trade surplus with China, although some countries such
as Egypt and South Africa have run deficits. By contrast, Africa runs a trade deficit with India
although Indian exports to Africa account for less than one third of the exports from China.

China and India are also becoming major sources of FDI to Africa. Altogether, Asian countries
accounted for 10 per cent of all greenfield investment in Africa in 2005. Chinese investors
are planning an aluminium production plant in Egypt, upgrading of a highway in Nigeria and a
copper project in Zambia. The two Asian countries are also providing aid to Africa through funding
of infrastructure projects and provision of training. China has promised to double its aid to
Africa by 2009.

However, there are some concerns with the growing influence of India and China in Africa.
For example, one complaint is that Chinese firms are not observing workers’ rights and do not
protect the environment, as they face less pressure from civil society. In addition, they bring a lot
of Chinese personnel, which undermines capacity building. Another is that the high demand for
African commodities reduces the incentives to diversify. Sudden increases in export revenues
cause exchange rate appreciation and increase the risk of currency instability due to fluctuations
in commodity prices. There is also a risk for countries that have just reduced their debt burden
through HIPC and the Multilateral Debt Relief Initiative (MDRI) to accumulate more debt through
Chinese infrastructure and export credit loans.

Related Articles
  1.8 References: Economic Report on Africa 2007
  4.0 Diversification trends in Africa: Economic Report on Africa 2007
  References: What Drives China’s Growing Role in Africa?
  V. D. The Future of China-Africa Economic Relations: FACTORS INFLUENCING THE GROWING TIES
  What Drives China’s Growing Role in Africa?

Article Tags: Africa, China, FDI inflows, world exports



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