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The Rise of China and India: What's in it for Africa?

Written by: OECD Development Centre

Article Overview: China’s and India’s strong appetite for energy and metal has boosted international prices and the volume and value of African exports.

The Rise of China and India: What's in it for Africa?

♦ China’s and India’s strong appetite for energy and metal has boosted international prices and the volume and value of African exports.
♦ China in particular has become the main trade partner for a number of African countries providing cheap manufactured goods
and reducing Africa's dependence from its traditional trading partners.
♦ Despite the push for exports, terms of trade and growth that the Asian giants provide to Africa, risks for sustainable poverty
reduction are visible in higher raw material dependence and rent-seeking activities.
Since 2001, China and India have jointly contributed
approximately 30 per cent to global output growth and helped
hold world output growth above the 4 per cent threshold level
crucial to improving the terms of trade for primary commodity
producers. By investing huge foreign exchange reserves in
US securities, Asian investors have also contributed both to
low US interest rates and to higher raw material prices.
As a result, sub-Saharan commodity producers benefited from
a higher global demand for their exports and from improved
terms of trade (Figure 1). This fuelled growth performances
in sub-Saharan Africa’s over the period 2001-2004 (4.2 per
cent on yearly average) compared to the period 1996-2000
(3.3 per cent). In parallel, China’s and India’s growing demand
for commodities turns them into major outlets for African
commodities, helping to diversify Africa’s export destinations
(Figure 2). Sub-Saharan Africa’s imports from China (and to a lesser extent India) have also grown fast benefiting urban
consumers (who gain from cheaper consumer goods) and
enterprises (which can source cheaper capital goods).

Is this scenario an unqualified blessing for sub-Saharan
Africa? There is no doubt that any shot in the arm of this
magnitude is positive for the continent, which trails behind
the rest of the world when it comes to economic development
and poverty alleviation. However, policy responses to what
is ostensibly a boon must also be tailored in a careful and
comprehensive manner to facilitate sustainable development
in a region which is socio-economically fragile.
Africa is endowed with extractive industries such as oil,
mining, and timber that are very capital-intensive. Yet,
deepening this pattern of specialization can impede the
development of the manufacturing sector by consuming
all available financial resources and contributing to real
exchange appreciation (the so-called Dutch disease).
Furthermore, economic development strategies based
solely on raw commodities risk having a very limited effect,
if any, on poverty levels – although national incomes may
increase, natural resources exploitation generate preciously
few job opportunities for the low-skilled. In order to avoid
the Dutch disease, resource-rich Africa needs to find ways
to capitalise on windfall gains arising from resourceextraction
and promote job-rich sectors.
Improving the macroeconomic policy mix is crucial. To avoid
remaining stuck in the unpromising corner of vulnerable,
capital-intensive and high-risk dependence on raw
materials with little local-labour content, Africa will have
to carefully manage the windfall gain generated by higher
commodity prices. This is needed to avoid compromising
the future development of labour-rich manufacturing and
services activities. Monetary authorities will have to lean
against real currency appreciation in order to avoid
penalising importing-competing industries and exporters
outside the resource sector. A proper policy mix must be
in place and fiscal authorities are required to limit public
consumption to keep non-tradable prices in check.
Investing abroad part of the export proceeds may be a
solution to insulate local economies from “Dutch
Disease” effects.
Diversification of economic activities is key as well. India
and China are encroaching in the low-tech, labour-intensive
sectors such as apparel where Africa had started being
globally competitive. Still, there is room for capitalising on
opportunities created by the economic ascent of the Asian
giants. For example, West African cotton exports to China
have been boosted by the phasing out of the Multi-Fibre
Agreement and the rapid growth in the Chinese textile
industry. Cotton cultivation in Africa is normally carried out
by smallholders and this can have strong spill over effects
for the whole economy. Thanks to an educated workforce
and reliable infrastructure, Mauritius has managed to attract
huge investment from Indian software houses which have
set their recovery centres there. East African exporters of
fresh fruit and vegetables can intercept the forthcoming
changes in Chinese and Indian dietary habits, which are
likely to converge with those of industrial nations. South
Africa can be an important supplier in agribusiness, wine,
the automotive industry, harbour wharfs, coal-to-liquid
technologies, and chemicals.
Beside diversification, creating vertical and horizontal
linkages with other productive sectors and removing
development bottlenecks are also important. Naturalresource
sectors, such as mining and forestry, can
encourage the development of related industries, as well
as generating opportunities for sectors such as services.
Resource-based sectors can be a channel for knowledge
and technology transfers.

The Rise of China and India
What's in it for Africa?
by Andrea Goldstein, Nicolas Pinaud and Helmut Reisen
Policy Insights No. 19 (May 2006)

Related Articles
  What Drives China’s Growing Role in Africa?
  V. D. The Future of China-Africa Economic Relations: FACTORS INFLUENCING THE GROWING TIES
  References: What Drives China’s Growing Role in Africa?
  CONCLUSION: What Drives China’s Growing Role in Africa?
  II.a Merchandise Trade: TRADE AND CAPITAL FLOWS BETWEEN CHINA AND AFRICA

Article Tags: african countries, african exports, asian giants, asian investors, capital goods, commodity producers, export destinations, foreign exchange reserves, global demand, global output, no doubt, policy responses, poverty alleviation, poverty reduction, raw material prices, shot in the arm, sub saharan africa, threshold level, trade partner, urban consumers



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