beyondbrics

A glaring absence in the story of China in Africa is Chinese manufacturing. The Asian powerhouse may be the workshop of the world, but it has set up few of its own workshops in Africa – even as it keeps expanding its overall investments on the continent.

The World Bank has expressed its desire to work with China to change that and jump start African industrialisation. But two academics have just set out the reasons why it’s going to be an uphill battle, in a short analysis note from the Vale Columbia Center on Sustainable International Investment.

On the African side, they highlight well-known difficulties linked to what they call poor local institutional conditions, namely “unreliable power and water supply, transportation, communication, poor governance, inhospitable regulatory environments, [and the] work ethic.”

All those things make most of sub-Saharan Africa outside South Africa a costly place for manufacturing, not just for Chinese companies but for foreign multinationals in general.

But what’s most interesting in the Columbia note is the discussion of China-side factors that are deterring manufacturing investment.

To explain those factors, the authors draw a comparison between China’s potential to ignite growth in Africa, and the way investment from post-war Japan helped to spur economic development in places such as South Korea and Taiwan, and then, in turn, in the likes of Malaysia and Thailand.

That process was partly about labour: Asia’s fastest-growing economies had a limited reserve of cheap rural labour, so as costs rose they soon needed to look overseas for workers. In today’s China, in contrast, the vast interior still has more advantages as a new production site than any faraway country, as the Columbia note explains:

China has a massive rural labor force yet to be tapped. 750 million people still live in China’s countryside with the average rural income only one third of its urban counterpart.

There are already signs of recent labour unrest over wages in China’s coastal provinces prompting moves inland. And when Chinese companies do open up factories overseas, they’re closer to home in places such as Vietnam or Cambodia.

Another key factor in Asia’s post-war development story was currency appreciation: Japan and the bigger Asian economies allowed their currencies to rise, which in effect taxed their exports but subsidised foreign direct investment.

China, however, is only liberalising the renminbi’s exchange rate at a snail’s pace. Why, according to the Columbia authors, is that?

Largely because China is not quite ready to dismantle labor-intensive industries that still provide much-needed jobs at home. This gradual pace of appreciation gives exporters more time to raise productivity or relocate inland, thereby allowing them to hang on a while.

So that’s why China’s engagement in Africa is still mostly about extracting oil and minerals, together with some basic processing (which in the Democratic Republic of Congo has generated its own controversy) and construction (which promises to go some way toward filling Africa’s infrastructure deficit).

Jeremy Stevens, an economist at Standard Bank who writes on the Bric countries in Africa, told beyondbrics that Africa needs to grow its own regional markets to become more attractive to Chinese manufacturing, and that Nigeria – a big national market all of its own – demonstrated the possibilities.

Nigeria imported in more than $8bn worth of goods from China in 2008 and 2009. This has attracted Chinese people: an estimated 100,000 Chinese nationals currently live in Nigeria, trading light manufacturing goods, textiles and electrical goods. And, this has attracted Chinese firms – often supported by government – which have made investments in Nigeria infrastructure, retail and manufacturing sectors.

For the time being, however, China is likely to keep its biggest workshops to itself.