Africa and the BRIC nations

Thursday, 26 February 2009

In 2003 Goldman Sach's published the article 'Dreaming with BRICs: The Path to 2050' in which they predicted that the four emerging economies which form the acronym was derived (Brazil, Russia, India and China) would continue to develop as major forces in the global economy, collectively becoming larger than the current G6 in the next fourty years.

Recent developments, none more so than the sub-prime mortgage crisis in the US and the EU, have confirmed Goldman Sach's assumptions and proven how global risk is being recalculated as emerging and frontier markets are becoming increasingly attractive for investors keen to diversify their portfolios and pump money into relatively risky markets with massive growth potential.

The 'arrival' of China and India, the world's two most populous countries, onto the global economic scene since the turn of the century has rapidly altered international dynamics and started what many see as an inevitable shift of power away from the traditional powers of the past three hundred years. Following closely behind have been Russia, buoyed by the ongoing commodities boom, and Brazil, reaping the rewards of pragmatic economic reform, as the BRICs have become an integral investment and global expansion component of almost all serious Western multinationals.

The growth of the BRICs in economic prominence has coincided with major political and economic gains throughout Sub-Saharan Africa as markets continue to open up to foreign competition and attract private sector capital inflows. Spurred on largely by China's unprecedented foray into the continent, the BRICs have turned their gaze towards Africa as a significant component of future growth due primarily to the continent's largely untapped markets and huge resource wealth. For Africa, the increasing attention from BRICs has renewed interest from its traditional trading partners and served to counter the reputation of the continent as a developmental lost-cause with little to offer the global economy.

China

Several events since 2002 have led China to identify Africa as a top political, economic and strategic priority - backing this up with unprecedented levels of trade, developmental assistance and diplomatic attention. Trade alone between Africa and China has increased ten-fold since the turn of the century. The rapid increase in ties has led to fears that Africa is entering into a neo-colonial relationship with China, which is interested only in its natural resources and will stop short of developing sustainable infrastructure for domestic growth in Africa.

The new colonialists?
Before entering into a discussion of China as a colonial power in Africa, it is important to place things in context. There are at present between 700 and 800 sizeable Chinese firms in Africa, whereas in Singapore (which is a fraction of the size of Gauteng), hosts approximately 2500 Chinese companies. The Singaporeans are begging for more Chinese investment, while in Africa we are terrified of a perceived invasion. 800 companies in 54 countries on the second largest continent on earth is hardly the colonial venture that some claim it to be.

In addition, China's foreign direct investment (FDI) into Africa in 2007 represented less than 3% of its global FDI outflows and annual trade with the entire continent amounted to half the value of China's total trade with South Korea. The hype which has surrounded China's foray into Africa has created the impression that it has, in the space of a decade, become the most dominant foreign player on the continent. In reality it will be decades before Western nations, and many of Africa's former colonial powers, will be replaced as the continent's largest trading partners

Regardless of its relative size in relation to other trading blocs, there can be little doubt that China's obvious interest in Africa is rapidly altering the nature and rules of the game for foreign investors looking to tap into opportunities on the continent.

Changing perceptions of Africa's potential
In 2003 The Economist labelled Africa 'The Hopeless Continent', a statement which went uncontested throughout much of the Western media. Little wonder then that the diplomatic attention paid by China to small, supposedly weak African states with little to offer foreign investors has rapidly altered global perceptions of the continent's potential.

Between 2006 and 2007 China's President Hu Jintao visited no less than 17 African countries, the most ever by any foreign head of state in such a time frame. In July 2007 Premier Wen Jiabao visited 7 African nations and in January 2008 Foreign Minister Yang Jiechi embarked on a high-level four-nation tour. These visits have had the explicit aim of securing stronger relations to improve China's access to Africa's resource wealth - as well as tying up allies to counter the geo-political influence of the West in international affairs.

Conversely, U.S President George Bush has made only two visits to Africa in a decade, the most recent coming in February this year where he visited Tanzania, Liberia, Rwanda, Benin and Ghana promoting humanitarian assistance and trying to gather support for the White House's Africa military command centre Africom.

Increasing Africa's strategic importance
Traditional Western players have enjoyed preferential and often monopolistic control over Africa's resources since 1960. China's voracious appetite for these same resources, and its surplus of capital to pay for them, has increased Africa's strategic importance - and therefore its value in the global context. The commodity's boom which has led to five straight years of growth in excess of 5% in Africa has been led by demand from China and India. This boom is likely to continue for at least another 15 years - meaning that traditional players in the commodities sector in Africa will be forced to pay more, improve service delivery and engage in a healthy dose of competition. Aware of their value, African states are able to dictate the rules of the game to an extent that was previously impossible.

Speeding up development
Another major advantage of China as a trading partner in Africa is the speed with which Beijing is able to make and implement decisions. Where the World Bank takes five years to conceptualise and implement a road or rail upgrade project, China takes 6 months. Infrastructure developments in Angola, Senegal, Gabon, Nigeria and Ghana attest to the rapidity of these developments. Due to all major Chinese enterprises being state-owned and decision-making extremely centralised in Beijing, China is able to deliver on promises made in a way which no other trading partner has been able to.

The speed of service delivery from China is forcing Western Developmental Finance Institutions to speed up their processes, reduce bureaucratic red tape and bottlenecks and implement policies in a more pragmatic fashion. Given how far behind Africa is in relation to the rest of the world, this urgency can only be a good thing.

Africa in China
In addition to this, the China-Africa relationship is all too often framed as a one-sided affair. While Chinese companies have rapidly moved into the retail and construction sectors in Africa, few African companies have taken advantage of the massive opportunity that exists in exporting to or setting up shop in China, a market of 1.3 billion people. Several large South African firms such as SABMiller, Naspers, Richemont and Sasol have moved into China and benefited hugely from access to the world's largest and fastest growing market.  With bilateral trade agreements being signed between China and a range of African states, it is a matter of time before more African companies begin to benefit from access to the Chinese market.

Criticisms of China in Africa
There are valid criticisms against China's foray into Africa - such as how Chinese companies are driving out local competition through importing their own labour and driving down cost, and how the Chinese government has propped up illegitimate states such as Sudan and Zimbabwe through its policy of non-intervention in state affairs.

These are two valid criticisms which Beijing is attempting to counter through a variety of initiatives, such as the deployment of peace keepers to Sudan and the extension of bilateral aid to upgrade employment creation infrastructure in several African states. The road will be a long one for China to truly alter these negative - and deteriorating - perceptions.

However, the allegation that China lacks an ethical code when doing business with Africa is hypocritical and selective. All of Africa's corrupt leaders have enjoyed thriving trade with the West throughout their reigns. In the words of Zaire's former dictator Mobuto Sese-Seko, "it takes two to be corrupt - the corruptor and the corrupted". It was virtually impossible to do business in states such as Nigeria, Cameroon and Kenya during the 1970s and 1980s without engaging in improper practice - which in no way deterred the myriad of Western multinationals still plying their trade with great success in these and other equally contentious markets.

Another common but erroneous allegation is that China is becoming Africa's new colonial power by controlling resources while not stimulating local African economies. This misguided and dangerous allegation implies a weakness on the African side which flies in the face of recent developments.

It is up to Africa, and not the outside world, to decide whether it will be subjected to another colonial-type relationship with foreign powers. What is more, China and Africa have been trading for centuries - long before colonial powers carved up the continent. There are remnants of Chinese trade with Africa stretching back to 1200. Apart from contentious pseudo colonies in Taiwan, China is not and has never been interested in colonising foreign countries. Had it been interested in such activities, it would have dominated and controlled the majority of the world before the United States of America was formed, and certainly before Portugal and Britain 'discovered' Africa. China's push into Africa is a commercial one. Success for Africa will depend on the ability of its leaders to create strong legal and regulatory frameworks to guide foreign investment from China. Studies have shown that where rules exist and are enforced in Africa, China and its companies are happy to comply.  

Mutually beneficial trade and cooperation
Beijing is also quick to state that it too is a poor country. There are as many people living below the poverty line in China than there are in Sub-Saharan Africa. For this reason, China does not talk of aid with Africa - but rather frames its discourse in the context of mutually-beneficial trade and cooperation.

African states know that in order to attract investment from China they need to have a valuable proposition - a process which is far more likely to lift the continent out of poverty than the traditional 'cap-in-hand' approach to courting additional foreign aid from the world's developed nations, which has done little to create long-term growth in Africa. In saying this, China injected upwards of US$ 9 billion into Africa last year in the form of 'win-win' investment, an amount which dwarfs the World Bank's US$ 2.5 billion. The World Bank has since asked to partner China in financing projects in Africa. With foreign reserves of US$ 1.5 trillion and a sovereign investment fund of US$ 200 billion to plough into promising global companies, China's purchase of 20% of Standard Bank is likely to be the sign of things to come.

In short, China brings a model of economic recovery to Africa that is able to work without the involvement of foreign advisors, institutions or bilateral mentors. For Africa, looking back on half a century of failed Western-led efforts to alleviate poverty and enhance self-governance, the new model provided by Beijing is a refreshing alternative, and one which will increasingly be adopted as the continent looks to speed up reform and narrow the gap with the developed world. While some lament the nature of China's push into Africa, others on the continent are pragmatically realising the potential this shift is creating and increasingly becoming viable global market players.

Russia

Following close on the heels of China and India, Russia's parastatals are making rapid inroads into Africa's resources, financial services, retail and telecommunications sectors. There are several politically-motivated reasons for this shift, the most viable being the desire from within the Kremlin's political elite to diversify its global assets and secure against potential geo-political shifts in the future. Another prominent motive, especially regarding Russia's push for natural gas reserves in Nigeria, is to increase Europe's dependence on Russian gas supplies. At present, the planned Trans-Sahara Gas Pipeline from Nigeria to Algeria for exporting Nigeria's largely untapped natural gas into southern Europe would present the first major competition for Russian gas suppliers in the European market. By engaging directly with the Nigerian government and ensuring that Russia's state-owned gas giant Gazprom has a large stake in the project, Moscow will be able to control part of the new supply chain and prevent its competitive edge from being undercut. With Russia part of the equation, the Nigerian government, and all those set to benefit from increased exploitation of West African gas supplies, have an additional investor to balance with existing interest from China, India, the US and traditional French and UK companies.

While the majority of Russian investment in Africa has been in the resources sector, there is significant and growing interest from Russian state and private firms in Africa's financial services and telecommunications potential. Russia's Renaissance Capital has blazed a trail in Sub-Saharan Africa since entering in 2006. The company has already invested over US$ 500 million in selected East and West African economies and set up a US$ 1 billion Africa Fund to tap into opportunities throughout the sub-continent. RenCap's main focus is on Nigeria at present after organising Access Bank of Nigeria's IPO in 2006 which raised US$ 350 million, making it the largest of its kind in Africa. RenCap is allocating 50% of its revenue to Nigeria, with three equity indices focused on locally-listed Nigerian companies. 

In comparison to China and India, Russian trade with Africa is relatively minimal, at just over US$ 3 billion in 2006 but the intention to increase this amount is a political and economic priority for Moscow as it attempts to catch up to its competitors in securing lucrative deals across a broad range of sectors in Africa.

India

In contrast to Russia and China, India's foray into Africa is largely a-political, coming on the back of tremendous economic growth in India and the emergence of a huge entrepreneurial middle class keen on expanding globally. India's push into Africa is also driven largely by the need to secure reliable access to energy reserves in order to fuel its nascent growth as strategic alliances with its energy producing neighbour states have, over the course of the past five years, become increasingly untenable.

India-Africa trade has increased by a massive 1000% over the course of the past decade, driven in large part by India's emerging multinationals such as Tata, Ranbaxy, Mahindra & Mahindra, Reliance and Mittal Steel (ArcelorMittal). In attempting to tie up energy assets in Africa, Indian firms have met with direct competition from China, thereby driving up the bargaining power of the African state in question. Indian firms do not have the same level of access to cheap financing as their Chinese counterparts and are therefore being forced to prioritise the stimulation of key sectors throughout Africa in order to secure the desired contracts. India's skilled labour force and its strong domestic market make it an ideal trading partner for Africa, with relations bolstered by the large Indian diaspora living in Southern and Eastern Africa.

Africa also enjoys a favourable balance of trade with India. In 2006 India imported US$ 12.6 billion worth of goods from Africa, exporting US$ 9.5 billion. In South Africa, one of India's largest trading partners in Africa, 35 Indian firms have invested US$ 150 million since the end of apartheid - with a further US$ 500 million planned. There is no doubt that India views Africa as a major economic and diplomatic priority, not only to secure energy assets but to grow key sectors in Africa in order to boost bilateral trade. For India, the more advanced African economies are the greater the bilateral trade prospects. Africa's growth is very much in India's best interests.

Brazil

Brazil's economic revival under incumbent President Lula Da Silva has been remarkable and has seen a significant expansion of its national corporations into the global economic space. Since openly apologizing for Brazil's role in the African slave trade and claiming that Brazil has a "political, historical and moral obligation" to Africa, President Da Silva has practiced what has come to be known as "good politics" in Africa - couching economic deals in increased diplomatic and collaborative agreements. The aim is to access Africa's large markets and secure deals to further Brazil's aim to become a major global player, while simultaneously galvanizing the South-South axis between the worlds developing nations to counter the overbearing influence of the G8. In addition to this, Brazil has a keen interest in promoting the 'Biofuels Revolution' in Africa - convincing governments to boost their Biofuels industries and thereby allow Brazilian companies to offer their services in an industry they have rapidly become world leaders in.

According to President Da Silva, Brazil's Africa play is "just at the beginning". Led predominantly by state-owned corporations such as Petrobras and CVRD, Brazil's push into Africa is largely strategic - indicating its awareness of Africa's massive potential.

Conclusion

There is growing awareness of the influence the BRICs will have throughout the 21st century in dictating the rules of global economic and political interaction. This shift, coupled with an ongoing commodities boom and a global search for new untapped investment potential, places African states in an unprecedented position of strategic significance.

The greatest challenge will be how this new wave of growth is managed from within Africa.

For long-term growth to be ensured there needs to be significant investment in infrastructure, education and in the broadening of the middle class throughout the continent. Aware of these needs, and of the failure of aid and unilateral trade to adequately address them, the BRICs are generating a new and far more dynamic discourse with Africa - aimed at a mutually beneficial relationship which is based on the belief in Africa's potential, rather than in the idea that it has none.

The way African states are able to integrate and create standard investment rules and standards will largely determines their ability to generate meaningful growth from the relationship with the BRICs, a trading bloc which holds infinite potential in the contemporary global economic arena.

By Simon Freemantle, Senior Manager and Head of Africa Frontier Advisory