McKinsey Quarterly - Doing Business in Africa

[Thierry.]

Making the most of Chinese aid to Africa

It’s time to move beyond sterile arguments and accept China’s role in Africa. But it’s also time for China to enhance that role.

 

The debate over China’s role in Africa continues to rage. One side contends that China is a rapacious neocolonial oppressor, while the other sees it as a miraculous alternative to decades of failed Western aid. To a large extent, however, facts on the ground have rendered this debate academic: China already has become an indisputably significant force in Africa’s development, with substantially increased commitments and engagements just in the past few years. Pragmatism argues for moving the discussion ahead, to how China’s involvement can reap the greatest benefit for both Africans and Chinese.

 

African and Chinese leaders—along with interested outside parties, such as multilaterals, foundations, and nongovernmental organizations (NGOs)—should focus on three opportunities. The first is strengthening Africa’s economic-development strategies and capabilities at the national and regional levels. Second, China’s willingness to undertake additional strategic-development projects in Africa, including the recent emphasis on sustainable and results-driven models, should be supported. Finally, collaboration between Chinese institutions working in Africa and other donors or partners ought to be developed and encouraged.

 

China’s role in Africa is dynamic, with deep historical roots and a wide range of ever-changing engagements and models that don’t lend themselves to black-and-white categorization. By pursuing these three opportunities, Africa and China can uncover new ways to promote economic development and the reduction of poverty on the continent.

 

China’s historical role

The People’s Republic of China started engaging with African countries not long after it was founded. Since the Bandung Conference, in 1955, its activities in Africa have been rooted in their common experience as developing regions. From then onward, China has committed aid and support to various African leaders and countries, despite its own economic and political challenges and upheavals. With inventive packages of aid, loans, and investments, the People’s Republic, in return, secured votes to take China’s seat at the United Nations (held by Taiwan’s government until 1971), opened up channels for much-needed oil and mineral resources, mitigated its food-security concerns, and gained a strategic foothold on the continent.

Even in 1978, when China was just emerging from the devastating effects of its Cultural Revolution and was itself one of the world’s poorest countries, it provided foreign aid to 74 countries—and to more in Africa than the United States did. By 1984, China was the eighth-largest bilateral donor to sub-Saharan Africa, ranking higher than many members of the Organisation for Economic Co-operation and Development (OECD). From 2002 to 2007, China offered over $33 billion worth of government-sponsored aid and investment, over half for infrastructure projects, to African countries. Today the continent is dotted with Chinese-sponsored projects, from railways to agricultural centers to clinics to stadiums.

Several attributes of China’s engagement in Africa merit particular attention.

 

Credibility as a fellow developing country

It’s no secret that some Chinese activities in Africa have prompted concern and even hostility, particularly the long-standing support of leaders in countries like Sudan and Zimbabwe, as well as questions about worker safety, community engagement, and environmental degradation. Overall, however, the evidence suggests that many Africans welcome the involvement of China not only because of the scale of its resources and commitments but also because it has credibility. The Chinese see themselves as a developing country, a view shared by many Africans; indeed, China still ranks 97th in the world for GDP per capita, according to the International Monetary Fund (IMF).

 

Many Africans welcome the involvement of China not only because of the scale of its resources and commitments but also because it has credibility.

Yet China’s recent development trajectory—lifting hundreds of millions of its people from poverty in the past 30 years—offers Africans lessons and hope. Other factors adding to China’s credibility are its pragmatic, business-like approach to development and focus on much-needed infrastructure projects. Also, Chinese workers are generally well-respected because they are prepared to work in Africa’s fields or factories, often at the locals’ salaries, in contrast to the wages, housing, and approaches of Western aid organizations or commercial enterprises. For this reason, China still explicitly rejects the label of donor.

Project-based aid and investment models

Chinese aid generally focuses on specific projects rather than the large programmatic models familiar to Western donors, such as the President’s Emergency Plan for AIDS Relief, a US-sponsored program for HIV/AIDS prevention and treatment. This US effort has a broad strategy, operating across several countries, with a multiyear approach and standardized practices. By contrast, China’s health assistance generally involves commitments to build a clinic or hospital in a country or region or to send Chinese medical personnel or medicines to specific countries. These efforts are sometimes associated with a particular investment or a Chinese official’s political commitment to a local African leader. Such projects are not part of a broader program to build networks of hospitals, for example, or to develop a replicable and scalable approach. Instead, the Chinese focus on an immediate need—though sometimes a very large one, such as dams or highways—which they generally execute in a timely, effective way.

 

Also, the line between aid and investment is unclear for many of these projects. Some of the ambiguity arises from China’s aid model: with no central foreign-aid agency, Beijing often designates different ministries (or, in some instances, provinces) to tackle different projects in different countries. China’s blended model of aid, investment, trade, and technology as levers for development, while less common in Western approaches, has an antecedent: China’s own experience as a recipient of aid and investment in the 1970s and 1980s. At the time, China entered into deals with Japan and many Western partners, bartering its own natural resources and commodities for technologies, tools, and know-how.

 

Broad-based interests

While access to natural resources and consumers is an important goal for many of China’s African projects, such a narrow view of its role risks missing the broader commitment. Today, China is involved in almost every African country that does not recognize Taiwan—even the resource-poor ones. While the majority of China’s $107 billion-a-year bilateral trade with African countries still involves extractive industries, China’s reach extends to almost every sector. In 2009, the Chinese Ministry of Commerce reported that about 1,000 Chinese enterprises do business in Africa, spanning fields such as trade, transportation, agriculture, and the processing of agricultural products. Even official Chinese development aid does not appear to be disproportionately provided to countries with large endowments of natural resources.

New approaches and enhanced engagements

During the past few years, China has attracted considerable attention for its commitments to Africa. In November 2009, at the Forum on China–Africa Cooperation (FOCAC), Chinese premier Wen Jiabao announced a $10 billion package of loans and aid, including programs in agriculture, education, and health. In addition, the China–Africa Development Fund has made more than $5 billion of new money available for private-equity investments in Africa and has an ever-growing presence of workers on the ground to develop an investment pipeline.

 

In these and other announcements, we discern a shift in tone and emphasis on both the Chinese and African sides. China’s engagement with the region appears to be growing not only in sectors and geographies but also in a broader strategic commitment. Premier Wen suggests as much in his recent focus on support for African development in the fields of agriculture, debt relief, expanded market access, climate change, health, education, environmental protection, and investment. Similarly, African leaders increasingly seek more comprehensive and heavily negotiated packages of aid and investments from China—a preoccupation reflected in recent deals with Ghana and Malawi.

 

There have also been examples of better coordination and attention to measurable results and strategic goals. New dialogues between China and the aid and development programs of other countries, multilateral organizations, and NGOs are under way. Even collaborative opportunities with other foreign donors have opened up; most recently, the Chinese Academy of Agriculture has partnered with a number of Chinese and African institutions to support an international initiative by the Bill & Melinda Gates Foundation to create green super rice, a new variety that can survive in harsh environments.

Strengthening African development strategies and capacity

Chinese leaders frequently make state visits to Africa. On their return to Beijing, they often take a “checkbook” approach to aid, charging Chinese government ministries with fulfilling commitments to high-level African officials for construction, infrastructure, health, agricultural, or other projects. Although this approach has led to random acts of kindness, they are often not only unrelated to the recipient government’s agricultural- or industrial-development strategies but also not sustainable. What’s more, the Chinese often rely on their own labor and materials, so projects may have little connection or benefit to local workers or industries (for more on China’s role in Africa, see “South Africa in the spotlight: An interview with Deputy President Kgalema Motlanthe”).

 

China has, for example, launched over ten agricultural demonstration centers in Africa to expand R&D on African crops, irrigation, agricultural engineering, or other potential drivers of agricultural reform (as suggested by China’s own experience). To date, however, these centers often operate in a vacuum, poorly connected to the recipient countries’ national programs and with limited outreach to local farmers and slim chances of scaling up nationally.

 

The Chinese approach to aid and investment presupposes that an effective public sector in the recipient country exists, which is not always the case. That approach has to change. African countries must continue to take more responsibility for their development agendas instead of leaving them in the hands of others, even if well-meaning. It will therefore be necessary to create more explicit and comprehensive development strategies for agriculture and other areas. Planning is a skill, and African countries should develop it to make sure that the aid they get from China can be readily used and expanded. This view has gained currency and now has the support of groups such as the African Center for Economic Transformation, the Rockefeller Foundation, and the African Union. Even Chinese stakeholders, including China’s state planning agency, recognize that many African countries lack robust strategic-development plans and therefore can’t benefit fully from investments by China and others.

 

Support China’s shift to programmatic engagements

At the FOCAC meetings in Egypt last November, Chinese leaders repeated their commitment to connecting more closely with host communities, measuring results, and making them sustainable. These comments may reflect an understanding, held by many who follow China’s work in Africa, that projects often haven’t realized their promise.

 

How to get more from these investments? They must be more programmatic—that is, linked to a development strategy for the relevant country—have clear objectives, and span more than a single project. China’s government and corporate leaders must establish performance metrics from the outset of engagements, provide appropriate and transparent roadmaps for achieving goals, and develop a way to measure outcomes. Depending on the project, the performance metric might be its impact on production, employment, the alleviation of poverty, market development, health outcomes, or student achievement.

Consider the fact that China has sent agricultural experts to Africa since the 1950s, basing its approach on the impact that hundreds of thousands of local extension technicians had on Chinese agricultural reform. Yet the country’s current agricultural-extension efforts in Africa are small (with fewer than 1,000 experts on the continent), uncoordinated, and unsystematic. Several Chinese agricultural experts believe that these programs have had a negligible impact. Teaching formats range from classroom lectures to field schools, often without clear curricula or objectives. Generally, each African country decides on the technology, expertise, and training China should provide.

 

Such programs could prove valuable, but they would be more effective if planned and executed with a better understanding of specific African conditions and local issues. Other desirable features include relevant best practices and evaluation systems to measure a program’s short-term impact (such as increases in productivity or the skills of farmers) and long-term, sustainable gains (such as higher levels of rural income).

 

Encourage more collaboration

While some believe that China wishes to go it alone in Africa, there is increased evidence to the contrary. China’s engagement with African national and regional organizations and leaders on a variety of projects has significantly increased. A formal dialogue among donors is taking place in the OECD’s Development Assistance Committee (DAC). Many NGOs, foundations, and academic institutions in China, Africa, and elsewhere are beginning to work together. China invited academics, African health officials, and international representatives to Beijing last December, for example, to attend an international roundtable on China–Africa health collaboration. The discussions could promote greater cooperation between China and other partners—through temporary staff transfers, joint missions, and pilot projects—in delivering health assistance to Africa.

 

Enormous opportunities exist for shared learning and improved models for programs in agriculture, health, and financial services, to name just a few fields. Collaboration also holds great promise in scientific R&D as China dramatically increases its spending and capabilities. Moreover, the impact of aid and investment projects run by China could be enhanced if it worked with third parties that can make things happen because of their local staff and contacts and deep understanding of the countries and sectors where they operate. Closer collaboration between the Chinese Ministry of Agriculture or the China–Africa Development Fund and the Alliance for a Green Revolution in Africa,1 for example, could identify opportunities for investment, aid, and trade.

 

China could catalyze the efforts of African countries to develop economically and lift their people from poverty. Let’s move the debate beyond “good versus bad” and “China versus the West” to capitalize on the opportunity at hand.

[Thierry.]

McKinsey is focusing on Africa this quarter for obvious reasons, nevertheless good insight from the world's largest management consultants

[Thierry.]

The case for investing in Africa

 

The continent is now growing much more rapidly than the OECD nations. It may well be on the cusp of a reversal of fortunes.

 

Most international businesses are still not very aware of Africa’s investment opportunities. Information costs are high: Africa is fragmented into many different countries, and even in aggregate the continent is a fairly small economy. For several decades, investor ignorance did not matter: with few exceptions Africa’s economies were too badly run for there to be many opportunities for firms of integrity. But there has been a sea change—Africa is on the move. There will be ups and downs, but investors from the countries of the Organisation for Economic Co-operation and Development (OECD) who remain set in their ways may be missing a giant business opportunity if they fail to pay attention to the changes afoot.

 

The situation in Africa quietly began to change during the period 1995–2005. Profound macroeconomic reforms tamed inflation and opened economies to international trade. More patchily, the regulatory environment facing international business also improved. Public ratings, such as the World Bank’s Doing Business surveys, enabled African governments to benchmark their performance and began to put pressure on those that were recalcitrant. As the global commodity boom built to its 2008 crescendo, many African countries were well positioned to harness the spike in their export revenues for growth beyond the resource extraction sector itself.

 

That upturn in national growth rates was mirrored in the increased profitability of companies operating in Africa. Indeed, three distinct sources of data indicate that returns on investment are higher there than in other regions. One was a comprehensive study of the publicly traded companies operating in Africa for the period 2002–07, mostly in the manufacturing and services sectors. It found that these companies’ average return on capital was around two-thirds higher than that of comparable companies in China, India, Indonesia, and Vietnam. Another source, on the foreign direct investment of US companies, showed that they were getting a higher return on their African investments than on those in other regions. Finally, analysis of a series of surveys of several thousand manufacturing firms around the developing world found that, at the margin, capital investment had a higher return in Africa.1

 

This was the scene in the years leading up to the global crisis. Although its origins had nothing to do with the continent, the crisis did not bypass Africa. Its effect was to collapse commodity prices—for example, the price of oil initially tumbled by more than $100 a barrel. More subtly, the international appetite for risk collapsed, and since Africa is still generally viewed as the riskiest region, investors got scared; for example, international banks curtailed letters of credit to African exporters far more drastically than to those in other regions.

 

These effects were severe. However, with a few exceptions—inevitable in a region with so many countries—Africa weathered the economic storms well. Led by its two largest economies, South Africa and Nigeria, most countries had built prudent fiscal positions: in a remarkable break with its past, Nigeria had freed itself from debt and built up over $70 billion of foreign-exchange reserves. Further, the adverse impact of the crisis through commodity prices lasted less than a year for Africa. Globally, commodity prices rapidly bounced back and seem to have stabilized around levels markedly higher than those in the decades before the boom, underwritten by growing Asian economies and their corresponding need for commodities.

 

Revenues from commodity exports have been augmented not just by high prices but also by the resource discoveries that high prices have triggered. Yet the recent discoveries are merely the beginning: the scale of what is likely to happen is not widely appreciated. As I show in The Plundered Planet, Africa is the last major region on Earth that remains largely unexplored. In the long-explored countries of the OECD, the average square kilometer of territory still has beneath it around $114,000 of known subsoil assets, despite two centuries of intense extraction. In contrast, the average square kilometer of sub-Saharan Africa has a mere $23,000 of known sub-soil assets. It is highly unlikely that this massive difference is due to a corresponding difference in what is actually there. Rather, the difference in known assets is likely to indicate an offsetting difference in what is awaiting discovery.

 

It is reasonable to suppose that what is actually under the soil in the average square kilometer of Africa is at least as valuable as what is known still to be available in the OECD. An implication is that once these untapped resources have been discovered, Africa’s commodity exports will be around five times their present level. In turn, this has three profound implications. One is that many of the countries in which resources are discovered will be those that currently are not significant resource exporters: the economic map of Africa will change quite drastically as new opportunities open. A second is that such a radically higher level of commodity exports across the region will support correspondingly larger economies. The final implication is that in the process of getting to this much higher level, Africa will have a prolonged phase of rapid growth.

 

Now for the reality check. During the commodity booms of the 1970s, Africa also had a wave of resource discoveries. With a few exceptions, most notably Botswana, these opportunities were not harnessed for transformative growth. Indeed, the more common experience was an ugly and costly political contest for control of the revenues. If history repeats itself, the forthcoming much larger wave of resource discoveries in Africa will leave a legacy of scarred landscapes and scarred lives.

 

Yet the contrast between Nigeria’s dysfunctional management of its first oil boom of 1973–83 and its brilliant management of the second boom of 2003–08 cautions against the gloomy cynicism that until recently bedeviled investor thinking about Africa. The road to economic transformation is undoubtedly likely to be a bumpy one, but many African societies have learned both from their own histories and from the prosperity of other once-poor countries. Unlike the externally dictated structural-adjustment programs of the 1980s, the key struggles over economic policy will be internal to African societies. They will not all be won, but nor will they all be lost: some societies will decisively adopt progrowth economic strategies.

 

To date, Africa has lacked the spectacular regional role models of economic success that so benefited Asia. But it is now starting to get them. Even in Rwanda, a landlocked, crowded country lacking in natural resources, a leadership committed to economic transformation has been able to sustain a growth rate of 10 percent. In some of the countries with more favorable fundamentals, even faster growth rates will be sustained. Such successes will have a profound influence on the neighbors, just as occurred in Asia.

 

As in Asia, I doubt that there will be a close correspondence between the struggles for democracy and the struggles for economic transformation. The struggles for democracy do indeed have an important economic dimension: many African rulers have accumulated excessive personal power and abused it to sacrifice the common good of national prosperity for narrow sectional self-interest. But more recently, some African leaders, such as President Museveni of Uganda, President Kagame of Rwanda, and Prime Minister Meles of Ethiopia, have built strong credentials for a commitment to the economic transformation of their societies while being somewhat hesitant democrats. Some of Africa’s coming economic successes will be in societies that have won the struggle for accountable democratic government. But others will be in societies in which autocratic leaders have become ambitious for national goals rather than merely for power and privilege; expect some African repetitions of Malaysia’s experience.

 

To date, Africa has lacked the spectacular regional role models of economic success that so benefited Asia. But it is now starting to get them.

 

Africa’s economic potential extends well beyond commodity exporting. Per capita GDP in China is already above the global average, so its days as the low-wage factory of the world are limited. Africa will soon be the last remaining major low-wage region. It has an enormous coastline, more proximate to both European and North American markets than Asia is. Over the past three decades, offshoring shifted labor-intensive manufacturing from the OECD countries to Asia. In the next decade, expect the same process to begin shifting these activities from Asia to Africa. Contrary to fears that the “Dutch disease”2 must inevitably make nonresource exports uncompetitive, the Asian examples of Malaysia and Indonesia have demonstrated that successful exporting of natural resources can be entirely compatible with successful exporting of light manufactures.

 

From African independence, beginning in the early 1960s, until around the turn of the millennium, the OECD prospered while Africa stagnated. A legacy of this divergent experience is that OECD investors are skeptical of Africa’s future. Their skepticism is not shared by the new entrants to international investment, who missed this sorry phase of African economic performance. It may be that Africans will use their history to learn from it, while OECD investors end up being trapped by it. Africa may be on the cusp of a reversal of fortunes. Indeed, Africa is now growing markedly more rapidly than the OECD. A future of continued rapidly rising prosperity for the OECD looks less assured than it did before the global crisis, whereas several decades of high growth look to be quite a likely scenario for Africa. At present, the typical investment portfolio has massive exposure to the OECD countries and negligible exposure to Africa. This looks unlikely to be appropriate for the coming decades.

[Muriidi]

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yes i agree .. but i don't see how china could ever find the time .. taking into account the tremendous developnents in south east asia ..

.. i don't think industrialization is a priority in africa .. that's what the northern hemisphere is there for .. becoming a center of trade .. that's what the arabian peninsula is there for ..

 

.. sorry africa no one needs any of that from you .. thus no need for any african national states ..

 

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[N.O.R.F]

Interesting ya T