We face neither East nor West: we face forward-Dr. Kwame Nkrumah
Chinese investment activity in Africa has skyrocketed in recent years, outpacing every other nation except South Africa. China finances more infrastructure projects in Africa than the World Bank and provides billions of dollars in low interest loans to the continent’s emerging economies. These loans and investments are typically made in exchange for securing access to natural resources. Based on its principles of nonintervention and respect for sovereignty, China gives this money with little or no strings attached. The West, which typically conditions its loans on initiatives like democracy promotion and corruption reduction, has labeled China a “rogue donor,” whose actions will be damaging to Africa in the long run. However, Western aid approaches like conditionality have largely been development failures. The Chinese model, with no colonial past or explicit political agenda, is a legitimate challenger to the Western aid status-quo. China is merely the largest and first leader of a growing cohort of developing countries interested in Africa’s commodities. These new investors have the option to adopt wholly China’s unconditioned approach or a more responsible engagement strategy. What all players are beginning to realize is that ultimately Africans themselves must decide what form they want this increased investment attention to take---Madison Condo.
According to a research paper titled “China’s Impact on Africa – The Role of Trade and FDI”, ‘Over the last 15 years, China has become a major economic partner of sub-Saharan African countries.1 Total merchandise trade between China and Africa increased from $9 billion in 2000 to $166 billion in 2012, making China Africa’s largest trade partner (UN Comtrade, 2014). In terms of foreign direct investment (FDI), Chinese FDI flows to Africa increased from just $200 million in 2000 to $2.9 billion in 2011, turning China into the largest developing country investor in Africa (UNCTAD, 2013; MOFCOM). Additionally, Chinese aid initiatives in Africa in the form of economic or technical cooperation have also increased remarkably in the last decade. According to China’s National Bureau of Statistics (NBS), the turnover on economic cooperation projects2 in Africa reached $29 billion in 2011 compared to $1.2 billion in 2000.
At the same time, Africa’s growth performance has improved significantly. Following two decades of negative growth rates in the 1980s and 1990s, Africa’s Gross Domestic Product (GDP) per capita grew by an annual average of 2.4 percent in 2000-2009, while the growth rate in 2010-2012 amounted to 1.8 percent (World Bank, 2014). In view of this development, the question arises as to whether China’s engagement has contributed to economic growth in Africa. This is the main focus of this paper. Obviously, various factors have contributed to Africa’s better growth performance, including a marked improvement in institutions and infrastructure and a decrease in conflicts and macroeconomic distortions (OECD et al., 2013; UNECA, 2013), all of which have to be controlled for in an empirical investigation. Due to the intensity of Sino-African economic linkages an empirical assessment of the impact of one country (China) on African growth seems appropriate.
When assessing the economic impact on Africa, it is important to note that China’s economic activities have resulted in an overall increase of trade, FDI, and aid in Africa rather than a diversion of existing flows from third countries. In principle, this should have positive effects. An expansion of international trade with a new partner like China could boost growth rates by increasing demand for African products (mainly raw materials). Also, the diversification of Africa’s traditional trading partners could reduce export volatility, thereby decreasing output volatility and thus boosting long-run growth rates (Hnatkovska and Loayza, 2004). Furthermore, China’s enormous demand for raw materials has led to higher world market prices for raw materials, improving the terms-of-trade of African exporters of natural resources (Zafar, 2007). Consumers in Africa could benefit from (additional) imports of manufactured goods from China, allowing them to cut their expenses by consuming low-cost Chinese products or increasing the variety of consumer goods available to them. Likewise, African producers could take advantage of low-cost Chinese inputs in their production process.
Similar to trade, foreign investment from China could also have positive growth effects. It is expected to enlarge the capital stock in African countries, to increase productivity levels through higher competition intensities, and it is associated with higher tax revenues (UNCTAD, 2006). Also, foreign investment could foster productivity spillovers to African firms. In contrast to North-South FDI, spillovers from South-South FDI could be even larger, as Chinese firms use technologies that may be more appropriate for African firms. Finally, Chinese economic cooperation projects establish and improve much needed infrastructure in Africa, which lowers transaction costs and thus enhances (internal and external) trade and growth rates’.
In contrast to these positive effects, China’s engagement in Africa could have negative consequences for economic growth as well. Partly due to China’s strong demand for raw materials, African exports are more and more concentrated in the primary sector. This enhances the risk of encountering (or deepening) the resource curse in African countries (Carmignani and Chowdhury, 2012). An exchange rate overvaluation due to increasing exports of natural resources could crowd out manufacturing products. Extracting and exporting natural resources could lead to rent-seeking and corruption (Busse and Gröning, 2013). This matters as most African countries have already weak institutions and China, bound by its “non-interference” policy, and does not tie trade and investment to any reform conditions.
Additionally, Chinese manufactured firms could displace their African competitors in case they produce similar goods. Both exchange rate overvaluations and low-cost competition from China threaten African suppliers in manufacturing. Depending on the country considered, this applies in particular to textiles, furniture, footwear, or ceramic products (Morrissey and Zgovu, 2011). Either the home market of African suppliers could be contested by Chinese firms or African exports to third markets, for instance in Europe or America, could be displaced (Giovannetti and Sanfilippo, 2009). Summing up, there are opportunities and risks that arise from China’s various activities in Africa. This calls for an empirical analysis of the growth effects in African countries.
Although China’s engagement in Africa has received considerable attention in policy publications (Goldstein et al., 2006; Broadman, 2007; Kolinsky et al., 2007, Asche and Schüller, 2008; Morrissey and Zgovu, 2011), there are very few econometric analyses on this topic. Of the existing econometric literature one strand explores the determinants, while the other studies the impact of Chinese trade, FDI and/or aid in Africa.
With regards to determinants, Kolstad and Wiig (2011) find that Chinese FDI predominantly flows to African countries with large natural resources endowments. Cheung et al. (2012) confirm China’s resource-seeking investment motive and also find market potential, trade intensity and the presence of Chinese contracted projects to attract Chinese FDI to Africa. While Sanfilippo's (2010) supports market size and resource endowment to be the main drivers of Chinese FDI, he finds that these same motives attract Chinese economic cooperation projects in Africa even more. Finally, Biggeri and Sanfilippo (2009) argue that Chinese economic activities in Africa are not only driven by a country’s resource endowment or market size but also by the strategic interaction of trade, FDI and aid, that is, Chinese infrastructure projects in a particular country increase Chinese FDI to that country, while Chinese FDI in a former period increases trade with that country (or vice versa).
Considering that the studies on determinants identify strategic links between the three “channels”, trade, FDI and aid, the existing studies that evaluate the impact of Chinese economic activities cover only one particular channel. For instance, Meyersson et al. (2008) study the impact of African resource exports to China on African economic and political development. The authors find that African resource exports to the world have no effect on African growth, but exporting natural resources to China as compared to the rest of the world has large positive effects on economic growth and investment in Africa. Baliamoune-Lutz (2011) also finds that African countries exporting primary products to China benefit more in terms of growth and that imports from China have a positive effect on African growth, contradicting the wide held belief of resource curse and displacement effects. On the other hand, Giovannetti and Sanfilippo (2009) do find that Chinese exports displace African exports in third markets, including the European Union and the United States. Finally, Whalley and Weisbrod (2012) analyses the impact of Chinese FDI on African growth by employing Solow growth accounting methods. Their results suggest that a significant portion of the accelerated growth in some African countries in the years immediately before and after the financial crisis can be attributed to Chinese FDI inflows.
As discussed, many studies confirm that there is an important link between Chinese trade, FDI and aid flows to Africa. To the best of our knowledge, there has not yet been an econometric analysis on the impact of China’s activities on African growth including the three main channels, trade, FDI and aid, at the same time. Consequently, our analysis accounts for all three channels of interaction in order to obtain a comprehensive picture of China’s impact on Africa. In terms of methodology, we use panel data for 43 sub-Saharan African countries, the period 1991-2011, a simple Solow-type growth model and two different econometric methods, including an instrumental variable approach.
Afrobarometer is a pan-African, non-partisan research network that conducts public attitude surveys on democracy, governance, economic conditions, and related issues across more than 30 countries in Africa. Five rounds of surveys were conducted between 1999 and 2013, and findings from Round 6 surveys (2014/2015) are currently being released. Afrobarometer conducts face-to-face interviews in the language of the respondent’s choice with nationally representative samples that yield country-level results with a margin of sampling error of +/2% (for a sample of 2,400) or +/-3% (for a sample of 1,200) at a 95% confidence level. Round 6 interviews with almost 54,000 citizens in 36 countries (see list in the Appendix) represent the views of more than three-fourths of the continent’s population.
Key findings On average across 36 African countries, the United States of America is the most popular model for national development (cited by 30% of respondents), followed by China (24%). About one in 10 respondents prefer their former colonial power (13%) or South Africa (11%) as a model. Countries and regions vary widely in their admiration for various development models. In Southern and North Africa, China matches the United States in popularity, and in Central Africa, China takes the lead (35% vs. 27% for the United States). In five Southern African countries (Lesotho, Swaziland, Namibia, Malawi, and Zimbabwe). South Africa is the most highly regarded development model. A plurality of Africans see their former colonial power as wielding the greatest external influence in their country (28%), followed by China (23%) and the United States (22%). France is seen as particularly influential by its former colonies, including Côte d'Ivoire (where 89% of citizens see France as the greatest external influence), Gabon (80%), and Mali (73%). China’s influence is perceived to be highest in Zimbabwe (55%), Mozambique (52%), Sudan (47%), Zambia (47%), South Africa (40%), and Tanzania (40%). Almost two-thirds (63%) of Africans say China’s influence is “somewhat” or “very” positive, while only 15% see it as somewhat/very negative. Favorable views are most common in Mali (92%), Niger (84%), and Liberia (81%). A majority (56%) of Africans also see China’s development assistance as doing a “somewhat” or “very” good job of meeting their country’s needs. The most important factors contributing to a positive image of China in Africa are its infrastructure/development and business investments and the cost of its products, according to survey respondents, while the quality of its products gives its image a black eye. Political and social considerations rank low among factors affecting China’s image on the continent.
During the past decade, China’s rapidly growing presence in Africa has increasingly become a topic for debate in the international media and among economists and policy analysts. While China’s unique economic approach to Africa meets the African countries’ need for funding and infrastructure projects, the model has been widely criticized. In particular, China’s natural resource-backed loans raise questions about the continent’s future and its capacity for sustainable development.
Studies of China’s Africa strategy (or lack thereof) have been overwhelmingly focused on China’s economic interests in Africa, the role played by Chinese government and companies, and the economic and social impacts of such activities on the ground. With a few exceptions, there is a strong tendency to assert moral judgments in the assessment: China’s activities in Africa are often characterized as “evil” when they are seen as representing China’s selfish quest for natural resources and damaging Africa’s fragile efforts to improve governance and build a sustainable future. However, they are characterized as “virtuous” when they are seen as contributing to a foundation for long-term economic development through infrastructure projects and revenue creation.
While economic issues are important to the strategic positioning of Africa in China’s overall foreign policy, Africa’s broader role in China’s international agenda is yet to be thoroughly explored. As China becomes a global economic and political power, a simplistic perception of Africa as China’s supplier of raw materials inevitably neglects other key aspects of Africa within China’s global strategy. Furthermore, even as China’s goals and policies have become more diversified, little effort has been spent examining China’s internal bureaucratic processes by which political, economic and security decisions are made regarding its Africa policy. This paper seeks to examine these largely unexamined basic, internal elements of China’s Africa policy.
China seeks to satisfy four broad national interests in its relations with the continent. Politically, China seeks Africa’s support for China’s “One China” policy and for its foreign policy agendas in multilateral forums such as the United Nations. Economically, Africa is seen primarily as a source of natural resources and market opportunities to fuel China’s domestic growth. From a security standpoint, the rising presence of Chinese commercial interests in Africa has led to growing security challenges for China, as the safety of Chinese investments and personnel come under threats due to political instability and criminal activities on the ground. Last but not least, China also sees an underlying ideological interest in Africa, as the success of the “China model” in non-democratic African countries offers indirect support for China’s own political ideology and offers evidence that Western democratic ideals are not universal.
The popular focus on China’s vast economic endeavors in Africa (especially in the extractive industries) seems to suggest that Africa is somehow “critical” for China. In reality, Africa accounts for only a tiny percentage of China’s overall foreign economic activities: China’s investment in and trade with Africa represents 3 percent and 5 percent of its global investment and trade, respectively. Politically, the continent is of small importance to China’s foreign policy agenda, with Africa playing a largely supportive role in China’s overall international strategy. Rather than being seen as “key” or a “priority,” Africa is seen to be part of the “foundation” on which China’s broader strategic ambitions are built. I compared with the “struggle” with big powers or China’s strenuous relationship with its neighbors, Sino-African relations have been relatively smooth and free of major disturbances, thanks to a shared sense of historical victimization by Western colonial powers and a common identity/affinity as developing countries. The nature of Sino-African ties is largely transactional and reciprocal.
Given the general low priority of Africa in China’s foreign policy agenda, Africa issues rarely reach the highest level of foreign policy decision making in the Chinese bureaucratic apparatus. In practice, policymaking specific to Africa happens mostly at the working level and is divided among several government agencies, with the Ministry of Foreign Affairs (MFA) and the Ministry of Commerce (MOFCOM) taking the lead on political affairs and economic affairs, respectively. On security issues such as U.N. peacekeeping operations, naval escort missions and evacuation missions, the Chinese military plays a significant role in coordination with MFA and MOFCOM. On issues under the mandate of specific government agencies, such as Chinese medical, agricultural or technical assistance to Africa, the policy is coordinated among MFA, MOFCOM and the agency directly involved.
China’s Africa strategy is not free of problems or controversies. The most vocal criticism inside the Chinese policy community is that China fundamentally lacks an Africa strategy and commercial interests have overtaken (and even undercut) other national interests. There is a constant tension between the narrow, mercantilist pursuit of economic interests in Africa and that pursuit’s impact on the overall health of the Sino-African relationship and China’s international image. Bureaucratically, this partly contributes to the abrasive competition between MFA and MOFCOM for the leading role in China’s policy toward Africa. This conflict is most evident on the issue of China’s foreign aid to Africa.
Meanwhile, the proliferation of China’s commercial actors in Africa in recent years has made government supervision and management particularly challenging. Beijing’s inability to cope with the rapidly expanding Chinese presence in Africa is exacerbated by the lack of political risk assessment and the absence of a comprehensive commercial strategy for Africa. The resolution of these issues will determine the nature and content of China’s future policy toward Africa while exerting critical influence over the future development of the continent.
China’s involvement in African affairs dates back to the 1950s. The time marked the beginning of African states breaking free from the yoke of colonialism. China’s relationship with Africa in modern times was thus characterized by the former supporting liberation movements that had then been in momentous stages leading to independence of most African countries from the colonial masters in the 1960s. Initially, China’s support was mainly motivated by ideology, but this would change in the coming decades. A major shift in the dynamics of the China-Africa relationships came about in the 1980s when China embarked upon its “Opening up and Reform Policy” –a wide-ranging policy that gave birth to the new China as we know it today. Economic and geo-strategic interests rather than the desire to export a specific political philosophy drive China’s current relationship with Africa. The intensity of relations also changed: with its increasing economic and political power as well as hunger for resources China’s relations with Africa intensified. China’s opening up and re-discovery of Africa coincided with Africa’s deteriorating economic performance as a result of conflicts, mismanagement as well as structural adjustment policies. China brought a viable alternative of social, political and economic development formula to the uni-polar world of the 1990s. Frustrated by complex donor policies and the high overhead costs of multilateral development projects, African governments continue to appreciate the alternative presented by China in an increasingly multipolar world. China is a nation that knows what it means to be poor and to be so in a time when the industrialized world managed to create unprecedented wealth and affluence. That reality and the negative experience it begot are still fresh in the memories of the Chinese people, old and young. Thanks to the transformation made possible in a span of four decades, China, which is home to a fifth of the world population, has now managed to assert itself as one of the major powers. Considered to be nothing short of “miraculous”, China’s rise came about through its Reform and Opening up Policy – a hugely successful wealth creation formula developed and perfected as the “Chinese Model”. Today, China seems willing to share its successful, albeit unique, growth and development model with developing countries. As a result, China’s importance in African politics, governance and development is growing. The launching in the wake of the 21st century of the Forum on China-Africa Cooperation (FOCAC), coupled with the increasingly higher participation of African Heads of State and Government in the Forum, is evidence to the enhancement of the China Africa partnership. The attendance of a record 42 African Heads of State and Government at the 5th FOCAC meeting in Beijing attracted much attention among the international community. This growing relationship has become the focus of much scrutiny and triggered unending intellectual discourse in Africa, Europe and North America. As part of this general discourse, politicians, economists, historians, businesspeople, journalists and others have been forming widely divergent opinions. Let us see some of the highlights that characterize this discourse. Many argue that Chinese policies on Africa are inferior to the policies pursued by western counterparts. A close examination, however, exposes that such allegations do not hold water. Chinese trading regime in Africa (its exports to Africa) is criticized as being focused on consumer goods; a business strategy that apparently benefits African consumers by offering affordable goods of reasonable quality, while at the same time increasing unemployment as African industries are unable to compete. As much as this is true, the same can be said about Africa’s trade with the North America or the European Union trade blocs that openly offer subsidies to their farmers and put up tariff barriers—practices undermining the competitive edge of African producers and exporters. Chinese investment in the continent is also criticized for being opportunistic. This criticism is lodged in the sense that companies look for niche markets regardless of the political environment, often taking up investment opportunities that have been ignored or even relinquished by others. Chinese companies are also perceived to be willing to take greater financial risks than their western competitors. While it is true that Beijing is backing the expansion of its private and state-owned enterprises into Africa through soft loans and export credits, this policy is not inherently different from the behavior of other governments. It is also true that governments and companies from Europe and North America are quite willing to ignore bad governance and human rights abuses, despite the strict regulatory frameworks they swear to adhere to. This is clear in places such as Angola, Chad, Equatorial-Guinea, Nigeria and recently Eritrea, where oil and other precious minerals exploration rights are at stake. It would be hypocritical to expect China and others to adhere to higher ethical standards than their competitors. China is also accused of supplying arms to ‘rogue states’ in Africa. But again, a close examination of the available evidence shows that these accusations are unfounded. The Middle East and Asia are the main destinations of Chinese arms exports, a mere 7% of Chinese arms exports reach Africa. In terms of global sales in the decade between 1998 and 2007, the United States, Russia and Germany were the biggest exporters of arms to Africa, while China held the tenth position. Even in Sudan, a country of key strategic importance to Beijing, 87% of all arms procurements between 2003 and 2007 came from Russia, China’s share accounting for only 8% during the same period (SIPRI, 2008). Therefore, one can conclude that Beijing’s role in Africa does not deviate much from the norms and practices put in place by the more established powers such as the United States, Great Britain or France. The historic track record of Western governments in propping up dictatorships, clandestine arms transfers and the promotion of trade interests through financial aid is every bit as bad as Beijing’s current controversial policies, a point often overlooked outside the continent. The key problem for us, Africans, is that our economies are weak in value creation. What our workers and factories produce is produced more efficiently, with better quality and at lower cost, by other economies. In such circumstances, making money is easier through rent than through value creation. African governments should be capable of guiding their private sector towards value creation, a key factor for achieving a sustainable competitive edge in the global market. Furthermore, partnerships that Africa forges should be targeted to enhance such an environment. By the same token, a ‘rent collecting’ Africa cannot sustain the current partnership with China in the long term. A relationship forged around this drive of backing Africa’s value creation endeavor is the only relationship that can be considered as a genuine South-South cooperation and one that would last in a win-win. Discussing the China-Africa relationship can only be of any practical significance if taken from the perspective of whether or not it is driven by a genuine spirit of South-South cooperation in a sustainable manner. Chinese foreign policy led by a policy of ‘non-interference’ should by no means be misconstrued as ‘indifference’ to African problems and realities. We now know that China has been taking stapes and making its presence more and more felt with growing participation in development assistance, humanitarian aid and UN-led peace support operations in Africa. It is therefore in line with its policy to be tailoring its relationships to African realities and to be perfecting the structures that direct its ties with Africa as a continent in general, and individual countries in particular. The FOCAC provides a unique and genuine opportunity for both parties to mold their relationship in a way that serves their long-term interests on the basis of mutual benefits, respect and equality. Furthermore, the CATTF serves as a platform for African and Chinese scholars and academics to critically study issues relevant to and in the context of Sino-African relations and propose whatever options that can be had for better ways of furthering and cementing the partnership. This gives African researchers and scholars the opportunity to learn from past mistakes and assist their governments in developing new policies and/or perfecting existing ones towards a sustainable and fruitful relationship.
Since 2000 China has emerged as Africa’s largest trading partner. Chinese direct investment in and lending to African countries has grown rapidly as well. A bevy of Chinese workers have moved to Africa in recent years, with estimates running as high as one million. China’s engagement in Africa has no doubt led to faster growth and poverty reduction on the continent. Growth in Sub-Saharan African has been very impressive over the past decade, especially in the mid-2000s when GDP growth averaged close to 7% per annum. Note that growth has since slowed down, especially in 2015 and 2016. Both the high levels of growth and the subsequent slowdown are related to China.
African growth rates are not as impressive when discussed in per-capita terms because population growth has continued at a rapid rate (nearly 3% per year between 2005 and 2015). Overall GDP growth is an indicator of the region’s growing weight in the world economy. Per-capita growth is needed to improve living standards and to reduce poverty. The per-capita GDP growth rate of the average African economy was 2.8% in the 2000s, a large increase over the 0.6% per annum rate in the 1990s. Some of this growth acceleration is attributable to internal developments: African countries have strengthened their institutions and macroeconomic policies. But demand from China for the continents’ main exports—oil, iron, copper, zinc, and other primary products—has led to better terms of trade and higher export volumes, which have also been important factors.
The acceleration of African growth is important because it has led to the best progress on poverty reduction in several decades. Between 1990 and 2002 the poverty rate in Sub-Saharan Africa was static, with 57% of the population living below the World Bank’s poverty line of US$1.90 per day. Between 2002 and 2011 the poverty rate dropped 13 percentage points. Sustained growth is needed to further reduce poverty.
While China’s deepening engagement with Africa has largely been associated with better economic performance, its involvement is not without controversy. This is particularly true in the West, as typical headlines portray an exploitive relationship: “Into Africa: China’s Wild Rush”; “China in Africa: Investment or Exploitation?” and “Clinton warns against ‘new colonialism’ in Africa.” This study aims to objectively assess China’s economic engagement on the African continent. The surge in Chinese involvement is relatively recent, so one simple objective is to marshal evidence about the scale of China’s trade, investment, and migration. Beyond that is the question of whether China’s involvement differs from that of Africa’s other economic partners.
China’s economic engagement with Africa is a complex issue with numerous facets. It is usually difficult to find good and comprehensive data on low-income countries, and much of Africa is low-income. This general problem is compounded by a tendency toward non-transparency on the part of the Chinese government and China’s state-owned enterprises (SOEs). In general, China’s engagement with Africa is a win-win scenario for both sides, so it would make sense to be more forthcoming with information. Still, there is enough available information on and research into China’s trade, investment, and migration vis-à-vis Africa to draw some tentative conclusions and to make some recommendations for African countries, China, and the West. Specifically, this study draws six main conclusions.
The first tentative conclusion relates to the scale of China’s activities in Africa. The media often portrays China’s involvement as enormous, potentially overwhelming the continent. To be fair, China does not always help its image in this regard. When Xi Jinping participated in the latest China-Africa summit in South Africa in December 2015, he pledged US$60 billion of support for African development. This is a big, general commitment covering many different areas and potentially disbursing over many years. Almost certainly, some of the plans will never pan out. In terms of realized Chinese investment in Africa, the amounts are significant enough to contribute to African growth but not at the huge scale that some media coverage suggests. According to data from China’s Ministry of Commerce (MOFCOM), the stock of Chinese direct investment in Africa was US$32 billion at the end of 2014. This would represent less than 5% of the total stock of foreign investment on the continent. However, about half of Chinese outward investment is reported as going to Hong Kong, even though much of this transits to other locations. In other words, MOFCOM’s figures for Chinese investment in different countries may be lower than in reality. But even if one doubled the estimate of Chinese outward direct investment (ODI) in Africa, China’s share of overall ODI would still be modest.
Stocks naturally change slowly. But the World Investment Report 2015 similarly finds that China’s share of inward direct investment flows to Africa during 2013 and 2014 was only 4.4% of the total. Of course, direct investment is not the only form of foreign financing. The Export-Import Bank of China and China Development Bank have also made large loans in Africa, mostly to fund infrastructure projects. In recent years, Africa has received about US$30 billion annually from outside sources for infrastructure projects, and China has provided about one-sixth of that financing. In short, Chinese financing is substantial enough to contribute meaningfully to African investment and growth, but the notion that China has provided an overwhelming amount of finance and is buying up the whole continent is inaccurate.
The second main finding from the study concerns China’s direct investment and governance. China has drawn attention by making large resource-related investments in countries with poor governance indicators, such as DR Congo, Angola, and Sudan. These deals are certainly part of the picture when it comes to China’s engagement with Africa; MOFCOM data show large stocks of Chinese investment in those countries. But the more general relationship between Chinese direct investment and recipients’ governance environments is different. After controlling for market size and natural resource wealth, total foreign direct investment is highly correlated with measures of property rights and rule of law, as one might expect. This is true both globally and within the African continent. China’s ODI, on the other hand, is uncorrelated with measures of property rights and the rule of law after controlling for market size and natural resource wealth. In this sense, Chinese investment is indifferent to the governance environment in a particular country. Again, this is true both globally and across the African continent. While China has investments in DR Congo, Angola, and Sudan, those are balanced by investments in African countries that have relatively good governance environments. South Africa, for instance, is the foremost recipient of Chinese investment. But because Western investment tends to avoid the worst governance environments, Chinese investment is relatively high in those locations.
A third main finding emerges from examining MOFCOM’s database on Chinese firms investing in Africa. In the aggregate data on Chinese investment in different countries, the big state enterprise deals naturally play an outsized role. MOFCOM’s database on Chinese firms investing in Africa, on the other hand, provides a snapshot of what small and medium-sized Chinese firms—most of which are private—are doing in Africa. Unlike the big SOE investments, these firms are not focused on natural resource extraction. The largest area for investment is service sectors, with significant investment in manufacturing as well. Many African economies are interested in attracting Chinese investment in manufacturing and services and welcome this development. The fourth finding relates to infrastructure finance. Africa has well-known infrastructure deficiencies, but in recent years infrastructure financing has expanded and helped many African countries begin to rectify these deficiencies. Much of the funding for this will have to come from domestic sources, but foreign financing can play a useful, complementary role. As noted above, in the past few years Africa has received about US$30 billion annually in external finance for infrastructure. China is providing about one-sixth of this amount. Chinese financing is a useful complement to other sources, particularly as traditional finance from multilateral development banks and bilateral donors is concentrated on water supply and sanitation. Likewise, private participation in infrastructure is primarily aimed at telecommunications. China has filled a niche by focusing on transportation and power.
Chinese financing of infrastructure has also enabled Chinese construction companies to gain a firm foothold on the continent. Evidence suggests that Chinese companies have become highly competitive, crowding out African construction companies. This is an area where a tradeoff seems to exist between, on the one hand, getting projects completed quickly and cheaply and, on the other, facilitating the long-term development of a local construction industry.
This point leads to the fifth finding of the study. There are many Chinese workers in Africa; the total is disproportionately high when compared to the amount of financing that China has provided and compared to migrants from other continents. This is a tentative conclusion because the data on this issue are particular weak. But estimates of Chinese migrants in Africa exceed one million. Many migrants initially move to Africa as workers on Chinese projects in infrastructure and mining and then, perceiving good economic opportunities, stay on. Similar to the dilemma confronting the continent’s construction industry, African countries face a tradeoff here: Chinese workers bring skills and entrepreneurship, but their large numbers limit African workers’ opportunities for jobs and training. The popular notion that Chinese companies only employ Chinese workers is not accurate, but the overall number of Chinese workers in Africa is large, and it is not clear that all of these workers are on the continent legally.
A final important finding of the study is that the foundation for the Africa-China economic relationship is shifting. China’s involvement in Africa stretches back decades, but the economic relationship accelerated after 2000, when China’s growth model became especially resource-intensive while its domestic supplies of energy and minerals were dwindling. In the early 2000s, China was poor in natural resources but boasted a rapidly growing labor force that gave the country comparative advantage in manufactures. By contrast, Africa was relatively resource-rich, with a labor force significantly smaller than China’s. It was logical for China to import natural resources from Africa, and demand from China drove up prices and trade volumes. It was also natural for China to export manufactures to Africa.
These patterns of trade and investment are now likely to gradually shift in response to changing demographics. The working-age population in China has peaked and will shrink over the coming decades. This has contributed to a tightening of the labor market and an increase in wages, which benefits Chinese people. Household income and consumption are also rising. At the same time, China’s old growth model, which focuses on exports and investment, is running out of steam. China is already the largest exporter in the world, and it is unrealistic to expect its exports to grow faster than world trade, so exports have become a lagging sector for China. And after years of high investment, China now faces excess capacity in real estate, manufacturing, and infrastructure. Chinese growth has entered a phase in which consumption is growing faster than investment, and the expansion of consumption primarily benefits services, not industry. Compared to past trends, China’s changing pattern of growth is less resource-intensive, so China’s needs for energy and minerals are relatively muted. At the same time, China is likely to be a steady supplier of foreign investment to other countries, and part of that will involve moving manufacturing value chains to lower-wage locations.
Africa’s demographics are moving in the opposite direction. In fact, they resemble China’s at the beginning of its economic reform 35 years ago. About half of Africa’s population is below the age of 20, which means the working-age population will surge over the next 20 years, and will probably continue growing until the middle of the century or later. Roughly speaking, Africa needs to create about 20 million jobs per year to employ its expanding workforce. Twenty years from now, it will need to create 30 million jobs per year. Africa’s demographics present both an opportunity and a challenge. It is unrealistic to expect the China-Africa economic relationship to change overnight. Nor would it be reasonable to expect large volumes of Chinese manufacturing to move to the continent in the near future; it would be more natural for value chains to migrate from China to nearby locations such as Vietnam and Bangladesh. But if even small amounts of manufacturing shift, this could make a significant difference for African economies, which are starting out with an extremely low base of industrialization. And it is useful to have a long-term vision that an economic relationship that started out very much centered on natural resources should shift over time to a greater focus on human resources.
While these findings are tentative given the weakness of some of the underlying data, it is still possible to make some fairly robust recommendations for African countries and their civil societies, for China, and for the West, which has been mostly critical of the deepening Africa-China relationship.
The first recommendation for African governments is to work with China to produce better data on all aspects of the economic relationship. This is most important as it relates to migration, as there are widely varying estimates on the number of Chinese workers in Africa. African governments should track and publicize how many work visas they grant. They should also carefully track and publicize how much foreign debt the country has taken on, both with and without a sovereign guarantee. African countries generally have low debt burdens following previous write-offs by Western governments and international institutions. This puts them in a good position to take on moderate levels of additional debt, but it is important to guard against the reemergence of unsustainable debt. The amounts and terms of loans for infrastructure and investments in mining should be easily available to the public so that citizens can judge for themselves the costs and benefits of different projects.
As highlighted, despite problems with the data related to Chinese workers in Africa, there seem to be many such workers. Given the immigration laws in place, it seems unlikely that all of them are in Africa legally. A second strong recommendation for African governments is to do a better job of managing the inflow of labor into their economies. As mentioned above, a real tradeoff exists here, as Chinese migrants bring skills and useful connections to the Chinese economy. However, throughout its own development, China severely limited the number of workers that foreign investors could bring as part of their projects, instead requiring those investors to train the local labor force. African countries would do well to study these practices and try to manage their labor inflows. Ideally, worthwhile projects can move ahead while maximizing the positive impact on the local labor market.
Africa needs to create more jobs to keep up with its rapid population growth. High commodity prices and an export boom supported African economies over the past decade, but it is likely that the big commodity cycle has ended for the foreseeable future. Compared to the recent past, it is both more important for African economies to develop manufacturing and tradable services, and more feasible. Chinese wages have risen substantially, and exchange rate movements have also improved African competitiveness. It will be no simple task, however, to attract manufacturing and service investments from foreign and domestic firms. Therefore, a third priority for African countries is to improve investment climates. Wages and exchange rates are not enough to make a location competitive. Good infrastructure in power, transport, and telecommunications are also needed, as is the “software” of integration: efficient customs administration, reasonable control over corruption, and secure property rights.
China’s large-scale economic engagement in Africa is still a relatively recent phenomenon, and it makes sense that the engagement would evolve based on experience. Some recommendations for the Chinese government and Chinese firms include:
First, China should reconsider its big mining investments in poor-governance environments. These investments by state enterprises are generally not working out. SOEs are playing with the public’s money and seem to be wasting quite a bit of it. China will be better served if more of its outward investment is carried out by the private sector, which is likely to earn better returns, just as it does within China. In addition to the poor results from some of these resource investments, it is now clear that China’s appetite for natural resources will remain muted compared to the 2000s, so there is no longer the same need for risky investments in these areas.
Second, China should work with African governments to encourage Chinese firms to hire and train African workers and to limit the flow of labor to amounts designated by African countries. Movements in wages and exchange rates help with this adjustment. It is becoming expensive to send a worker from China to Africa, so companies have growing financial incentives to hire locally.
China has played a useful role in countries such as Ethiopia by setting up industrial zones, financing infrastructure, and encouraging Chinese firms to move some manufacturing production to Africa. A third recommendation is for China to step up this kind of engagement, an effort that would align with Chinese leaders’ tendency to take a long-term perspective. Throughout the near future, the labor force in South and Southeast Asia will continue to increase, and these will be natural sites for labor-intensive manufacturing. But over time, Africa will become the world’s primary source of net labor force growth. Africa and its partners stand to benefit if economies there diversify into manufactures and tradable services. Through infrastructure and direct investment, China can play a critical role in this process.
Meanwhile, Western governments and the media have been largely negative about China’s engagement with Africa. A first recommendation for Western audiences is to take a more balanced and objective view toward a phenomenon that is naturally complex and multifaceted. The fact that public opinion surveys in Africa mostly reflect positive attitudes about China is important. If Chinese involvement were largely detrimental, that would suggest that African populations do not know where their interests lie. It is much more likely that China’s trade and investment provide benefits to African economies and that people on the ground correctly perceive this. Given the tremendous need for infrastructure and job creation in Africa, Western audiences should be pleased that China’s efforts are helping to alleviate these pressures.
A second recommendation for Western governments is that they step up their existing efforts to strengthen governance in African countries. This includes providing technical assistance to help government and judicial systems operate more efficiently, as well as helping strengthen civil society. Mining and infrastructure projects carry environmental and social risks no matter the funding source. There are plenty of examples of Western companies whose investments have led to environmental and social problems. The utility of finance depends to a large extent on the quality of governance both at the national and local levels. This is a long-term objective; there is no simple recipe for improving governance. But for Western audiences to sit back and criticize various Chinese-African collaborations is unhelpful and typically not appreciated by African audiences. Providing more support to improve governance would be a constructive alternative.
While education underpins economic, social and financial prosperity for every country in the world, it is arguably one of the last sectors to innovate through technology. At the same time, experts predict 1 billion additional students worldwide by 2050, driven by population growth (in emerging economies in particular), increased participation in education, longer time at school and an increased need for reskilling due to labor market shifts.
Education is the bedrock of china’s development.
The People’s Republic of China (hereafter “China”) is the world’s most populous country, with a population of over 1.3 billion, covering approximately 9.6 million square kilometers. Since the implementation of economic reform and opening policies in 1978, China has become one of the world’s fastest-growing major economies. With the GDP growth rate averaging between 7% and 8% a year in recent decades, China has become the world’s second largest economy by nominal total GDP (World Bank, 2015).
Despite China’s emergence as one of the world’s most influential economies, relatively little is known in other countries about China’s education system or about how its students learn. This report seeks to provide an overview of education in China today, including mechanisms the country uses to manage its education system, as well as current policies and reforms. It focuses on education in mainland China, and puts a spotlight on the four provinces and municipalities that participated in the 2015 edition of the OECD Programme for International Student Assessment (PISA).
China’s education system
China has the largest education system in the world. With almost 260 million students and over 15 million teachers in about 514 000 schools (National Bureau of Statistics of China, 2014), excluding graduate education institutions, China’s education system is not only immense but diverse. Education is state-run, with little involvement of private providers in the school sector, and increasingly decentralized. County-level governments have primary responsibility of the governing and delivery of school education. For the most part, provincial authorities administer higher education institutions. In recent years, the Ministry of Education has shifted from direct control to macro-level monitoring of the education system. It steers education reform via laws, plans, budget allocation, information services, policy guidance and administrative means (National Centre for Education Development Research, 2008).
In China, students must complete nine years of compulsory education. Most students spend six years in primary school, though a few school systems use a five-year cycle for primary school. Primary education starts at age six for most children. This is followed by three to four years of junior secondary education. Before the 1990s, secondary schools recruited students on the basis of an entrance examination. To emphasize the compulsory nature of junior secondary schools, and as a part of the effort to orient education away from examination performance and towards a more holistic approach to learning, the government has replaced the entrance examination with a policy of mandatory enrolment based on area of residence (Schleicher and Wang, 2014). The gross enrolment ratio for primary education in 2014 was 103% compared with 104% in 2006, while for secondary education gross enrolment ratio was 94% compared with 64% in 2006 (UNESCO-UIS, 2016)
After finishing compulsory education, students can choose whether to continue with senior secondary education. Senior secondary education takes three years. There are five types of senior secondary schools in China: general senior secondary, technical or specialized secondary, adult secondary, vocational secondary and crafts schools. The last four are referred to as secondary vocational schools. Students undergo a public examination called Zhongkao before entering senior secondary schools, and admission depends on one’s score on this examination. The government uses examination results from Zhongkao to assign students to different senior secondary schools.
China has made significant efforts to expand participation in secondary vocational schools in recent years in order to meet the country’s fast-evolving economic and manpower needs. In 2014, secondary vocational schools accounted for a little less than 22% of total senior secondary school enrolment in China (UNESCO-UIS, 2016). Although senior secondary education is not part of compulsory education in China, in 2014, 95% of junior secondary graduates continued their study in senior secondary schools (National Bureau of Statistics of China, 2015). This figure is notable because in 2005 only around 40% of junior secondary graduates attended senior secondary schools (National Bureau of Statistics of China, 2005).
This year’s African Economic Outlook examines recent macroeconomic development and structural changes in Africa, and outlines the 2018 prospects (Part I). It then focuses on the need to develop Africa’s infrastructure, and recommends new strategies and innovative financing instruments for countries to consider, depending on their level of development and specific circumstances (Part II).
PART I: MACROECONOMIC DEVELOPMENTS AND STRUCTURAL CHANGE
African economies have been resilient: Real output is up, reflecting generally good macroeconomic policies, progress in structural reforms (especially in infrastructure development), and generally sensible policy frameworks Global and domestic shocks in 2016 slowed the pace of growth in Africa, but signs of recovery were already manifest in 2017. Real output growth is estimated to have increased 3.6 percent in 2017, up from 2.2 percent in 2016, and to accelerate to 4.1 percent in 2018 and 2019. Overall, the recovery in growth has been faster than envisaged, especially among non-resource–intensive economies, underscoring Africa’s resilience. The recovery in growth could mark a turning point in net commodity-exporting countries, among which the protracted decline in export prices shrunk export revenues and exacerbated macroeconomic imbalances. Economic fundamentals and resilience improved in a number of African countries. In some, domestic resource mobilization now exceeds that of some Asian and Latin America peers. But it is still insufficient to meet the high level of financing to scale up infrastructure and human capital. Many African economies are more resilient and better placed to cope with harsh external conditions than before. But the end of the commodity price super-cycle has cut earnings from primary exports in many countries, undermining planned investments. Weaker external conditions have exposed fiscal vulnerabilities in natural resource–dependent economies as well as several others.
African countries should strengthen their economic resilience and dynamism to lift their economies to a new growth equilibrium driven by innovation and productivity
Although domestic revenue mobilization improved substantially in recent decades, tax-to-GDP ratios are still low in most African countries. Revenue regimes have to better capture more gains from growth and structural change as economies formalize and become more urbanized. With external official development assistance sharply lower, and greater appetite for debt to finance infrastructure and social sectors, many African governments have turned to international capital markets to meet their financing needs. The result: A build-up of debt, much on commercial terms. Despite the increase, debt levels for most countries have not yet breached the traditional threshold indicators. They have actually declined in nine African countries — sometimes mechanically because of the rebasing of gross domestic product — and remained stable in others. Dollar interest rates are expected to edge up and bond spreads widen, increasing the risk of sudden halts in private capital flows. Major investments in infrastructure, financed principally by external borrowing, have raised concerns about a currency and maturity mismatch in debt service, as revenue streams accrue predominantly in local currencies and debt obligations mature before these streams begin. With the notable exception of the CFA franc used by 14 African countries, which is pegged at a fixed exchange rate against the euro, most African currencies have lost about 20–40 percent of their value against the dollar since the beginning of 2015. But the resulting competitive currency depreciation will not necessarily translate into a strong price advantage in export markets. Structural change is taking place but at very low pace. Structural reforms, sound macroeconomic conditions, and buoyant domestic demand are sustaining the growth momentum in resource-intensive economies. Recent empirical work shows that Africa’s recent growth and poverty reduction has been associated with a decline in the share of the labor force in agriculture — especially since the early 2000s, and most pronounced for rural females. This decline has been accompanied by an increase in the productivity of the labor force, as it has moved from low productivity agriculture to higher productivity services and manufacturing. The employment share in manufacturing is not expanding rapidly. In most of the low-income African countries, the employment share in manufacturing has not peaked and is still expanding, albeit from very low levels. African countries should strengthen their economic resilience and dynamism to lift their economies to a new growth equilibrium driven by innovation and productivity rather than by natural resources. Macroeconomic policy strategy should aim at ensuring external competitiveness to avoid real exchange rate overvaluation and take the full benefits of trade, improve fiscal revenue, and rationalize public expenditure. To achieve these goals, the macroeconomic framework must blend real exchange rate flexibility, domestic revenue mobilization, and judicious demand management. In the medium term, the most important area of fiscal policy is tax reform. Widening the tax base (eliminating many exemptions and leakages) rather than hiking already high marginal tax rates will be indispensable for boosting tax revenues. None of these fiscal policy options is straightforward. All of them have difficult distributional and welfare consequences — and all are intensely political. Policy makers need to ensure that fiscal policy does not undercut the growth-promoting effects of public investment, reversing the inroads made in poverty reduction, health, and education across the continent. None of these fiscal choices is straightforward. Intensely political, all have difficult distributional and welfare consequences. Decisions should be made taking into account country-specific circumstances and development priorities. Development projects and programs in the pipeline should thus be balanced against other needs. Recurrent expenditures have to be kept in check, mainly by preventing growth of the public sector wage bill. Real exchange rate depreciations might be viewed as helpful tools, but given the strengthening of the U.S. dollar against many African currencies, competitive depreciations may not necessarily translate into a strong price advantage in export markets. Africa needs more development financing. But the build-up of debt should be consistent with country development needs and capacities to service the loans without compromising fundamentals for future growth. Debt must be deployed Quite a number of the continent’s success stories can serve as a source of inspiration for African policymakers and suggest ways to avoid failed take-offs in productive investments that yield income streams for self-financing and grow the economy, in order to build capacity for increased domestic resource mobilization that can wean countries from foreign debt and prevent potential debt distress. Expenditure-reducing measures will have to bear a large share of the burden of restoring external balance. The infrastructure–investment drive across Africa, financed largely by external borrowing, needs careful analysis to ensure that revenue streams (generated in local currencies) are strong enough to meet the debt obligations when they fall due.
Jobless growth? Employment growth is only half of output growth Sustained growth should create jobs, which drive poverty reduction and make growth more inclusive. But Africa’s recent high growth rates have not been accompanied by high job growth rates. Between 2000 and 2008, employment grew at an annual average of 2.8 percent, roughly half the rate of economic growth. Only five countries — Algeria, Burundi, Botswana, Cameroon, and Morocco — experienced employment growth of more than 4 percent. Between 2009 and 2014, annual employment growth increased to an average of 3.1 percent despite slower economic growth. But this figure was still 1.4 percentage points below average economic growth. Slow job growth has primarily affected women and youth (ages 15–24). Africa is estimated to have had 226 million youth in 2015, a figure projected to increase 42 percent, to 321 million by 2030. The lack of job growth has retarded poverty reduction. Although the proportion of poor people in Africa declined from 56 percent in 1990 to 43 percent in 2012, the number of poor people increased. Inequality also increased, with the Gini coefficient rising from 0.52 in 1993 to 0.56 in 2008 (the latest figure available). Africa will become the youngest and most populous continent in the next few decades. Its labor force will rise from 620 million in 2013 to nearly 2 billion in 2063. A “demographic dividend” might provide a great opportunity for Africa — and the rest of the world, which is expected to experience significant labor shortages. But technological advances could reduce its value. In the face of rapidly growing populations and heightened risks of social unrest or discontent, jobless growth is the most serious concern for African policy makers. The urgency of implementing reforms for attracting foreign direct investment in industries with strong competitive potential and thus allowing the private sector to create enough “good jobs” cannot be overstated. Quite a number of the continent’s success stories (growth spikes not followed by crises) can serve as a source of inspiration for African policymakers and suggest ways to avoid failed takeoffs. The experiences of countries such as Mauritius, Ethiopia, and Rwanda provide useful lessons for the entire continent. Successful take-offs require productivity growth. Labor force reallocations from the traditional, subsistence, low-productivity sectors to the modern high-productivity sectors must be a key part of African growth accelerations. They require not only the creation of jobs in modern agriculture, industry, and services, but also policies that empower the poor and the low-skilled workers so that they can take advantage of the new opportunities that arise with structural transformation. A first priority for African governments is to encourage a shift toward labor-absorbing growth paths. They should put in place programs and policies aimed at modernizing the agricultural sector, which employs most of the population and is typically the main step toward industrialization. A second priority is to invest in human capital, particularly in the entrepreneurial skills of youth, to facilitate the transition to higher-productivity modern sectors.
PART II: FINANCING INFRASTRUCTURE: STRATEGIES AND INSTRUMENTS
Africa’s infrastructure needs — $130–$170 billion a year — leave a financing gap of as much as $108 billion. But with better strategies, sustained
The excess savings in many advanced countries could be channeled into financing profitable infrastructure projects in Africa and inclusive growth can still be achieved in the context of a large infrastructure gap. Africa must industrialize to end poverty and to generate employment for the 12 million young people who join its labor force every year. One of the key factors retarding industrialization has been the insufficient stock of productive infrastructure in power, water, and transport services that would allow firms to thrive in industries with strong comparative advantages. New estimates by the African Development Bank suggest that the continent’s infrastructure needs amount to $130– 170 billion a year, with a financing gap in the range of $68–$108 billion. With such a large infrastructure gap, and urgent needs in health, education, administrative capacity, and security, Africa has to attract private capital to accelerate the building of critical infrastructure needed to unleash its potential. But African countries do not need to wait until all financing gaps are filled before they transform their economic structures. Africa now collects about $500 billion in tax revenue every year, $50 billion in foreign aid, $60 billion in remittances, and $60 billion in FDI inflows. More than $100 trillion is managed by institutional investors and commercial banks globally. African countries seeking financial resources now have a wide variety of options, well beyond foreign aid. Also in the picture are sovereign wealth funds and market finance.
The global economy would benefit enormously from Africa’s industrialization and the building of productive infrastructure in the continent the excess savings in many advanced countries could be channeled into financing profitable infrastructure projects in Africa. A small fraction of the excess global savings and low-yield resources would be enough to plug Africa’s financing gap and finance productive and profitable infrastructure. Increased production of capital and consumer goods in G20 economies and in Africa would also put into motion several multiplier effects, generating further demand for intermediate inputs, augmenting incomes, and increasing employment. All that would generate 7.5 million jobs in the G20 economies.
Increasing the share of manufacturing in GDP in Africa (and other LDCs) could boost investment in the G20 by about $485 billion and household consumption by about $1.4 trillion. The impact of African (and other LDC) industrialization on G20 economies would also be large. Direct exports of capital and consumption goods would increase by more than $92 billion. And the indirect effects associated with this increase in exports — given the domestic linkages between G20 exporters and other domestic producers — would increase G20 production by $132 billion. All that would generate 7.5 million jobs in the G20 economies. It would boost aggregate demand, create employment in poor and rich countries alike, and move the world toward peace and prosperity. That this mutually profitable global transaction is not taking place is one of the biggest paradoxes of current times. Under ideal political circumstances, a mutually profitable global pact to finance Africa’s infrastructure would be established so that Africa and the world could reap such win-win benefits. A realistic assessment of global governance and political economy issues in advanced economies suggest that Africa should not wait for the international community to understand the potential global benefits of its industrialization or to finance the continent’s $130–170 billion infrastructure gap. Instead, the continent should adopt a more pragmatic approach to infrastructure financing. Focusing primarily on new models of financing, African countries can jump directly into the global economy by building well-targeted infrastructure to support competitive industries and sectors in industrial parks and export-processing zones linked to global markets. By attracting foreign investment and firms, even the poorest African countries can improve their trade logistics, increase the knowledge and skills of local entrepreneurs, gain the confidence of international buyers, and gradually make local firms competitive. Infrastructure projects are among the most profitable investments any society can make. When productive, they contribute to and sustain a country’s economic growth, and therefore provide the financial resources to do everything else. But many governments try to do too much at the same time and end up not actually doing much.
Some countries on the continent are using a wide range of financing mechanisms to support investments in infrastructure, and the successful new approaches should be scaled up
Or they give priority to the wrong industries and sectors and devote their limited financial, administrative, and human resources to activities that are not competitive and cannot generate enough payoffs to sustain development. Universal access to high-quality infrastructure can only be a long-term goal. Trying to achieve it with limited resources has led governments to spend too much on too many projects with low economic returns and little impetus for industrial growth and employment creation. However, African countries do not need to solve all their infrastructure problems before they can achieve sustained and inclusive growth. Instead, they should focus on how to best use their scarce infrastructure budget to achieve the highest economic and social returns.
Targeting sectors and locations is therefore a key policy recommendation fortunately, the current global financial conditions are favorable and likely to remain so in the medium term, and new instruments are being developed to mitigate the higher risks facing investors in many African countries. It should be acknowledged that private financing of infrastructure will likely remain a small share of global spending on infrastructure, estimated at 5–10 percent. Governments can optimize the use of existing infrastructure to reduce inefficiency and waste, and prioritize investments into projects with the highest economic and social returns. Effective institutional arrangements are thus essential for effective management of the complex tasks of project planning, design, coordination, development, implementation, and regulation. To improve efficiency, governments should also focus on the soft side of infrastructure development — on policy and regulatory issues, on education and training of the teams involved in infrastructure financing, and on constant research to keep up with new knowledge. African countries should better leverage public funds and infrastructure investments, while encouraging private sector participation. But the different stages of development of African countries mean that the policy approaches need to be country specific. Some new financing mechanisms could be implemented in all African countries, taking into account the specific economic circumstances and the productive structures of national economies. Infrastructure debt has not yet been widely considered a major asset class by investors in Africa. But some countries on the continent are using a wide range of financing mechanisms to support investments in infrastructure, and the successful new approaches should be scaled up. Creating an “infrastructure asset” class to attract institutional investors and the enhanced use of guarantees by government or development finance institutions can lower perceived private sector risk and crowd in funding. Project potable bonds are designed to mobilize pension and life insurance funds as well as sovereign funds for PPPs in emerging economies. They would finance long-term investment funds from the beginning to the closing of a project, avoiding refinancing risk. Several entities — including MIGA, AfDB, GuarantCo, and institutions such as Nigeria’s InfraCredit — offer risk mitigation, credit enhancements, and guarantees to support financial arrangements, public–private partnerships, and access to local and international capital markets. To facilitate long-term finance, an MDB could provide a put option after the construction and ramp-up period and receive a guarantee premium. The MDB would then take the construction and early operational risk to facilitate financing, complemented by commercial loans, if appropriate. To buy debentures or convertible bonds to finance the initial phases of a project, an MDB could provide short-term, flexible loans to governments. The debentures would be issued by a privately owned special-purpose vehicle that builds and operates the infrastructure facility and finances the initial phase of the project. After construction and after some of the initial risks have subsided, the government would sell the debentures to investors in the market and use the proceeds to repay the MDB. Output-based long-term PPP agreements can support the delivery of basic service where policy concerns would justify public funding to complement or replace user fees. They reduce the burden on development to recover all costs through just connection and tariff costs.
This obviously sound weird as the entire output of china is far beyond the total output from Africa. But the significant in making sense out of this is justified by Michael Bloomberg’s advice to the US Senate. It states “History shows that investment in infrastructure is a powerful driver of economic growth. Modernizing the highway system for electric and autonomous cars is essential competitiveness in the global marketplace. It’s time for Congress to invest in a new generation of highways that will benefit our health and economy for decades to come”.
The fourth industrial revolution is about innovation using key technologies. Our swift and proactive means of getting laws to regulate the advances in research and development for the development of products can help us to export about 80% of our human resources to china.
China as advanced as they are still have challenges in keeping up with the expectations. Human resources is an important asset to their growth. We must therefore harness our resources in training the right people to fill up jobs and tasks in china.
I argued in my article earlier that Africa need to invest in technology startups as it is an effective driver in training the requisite human resource for the needs of major developed counties and for itself development.
Global Entrepreneurship Network (Ecosystem)
Ecosystem builders all over the world face political, economic, and social challenges in helping local startups succeed.
This is why we are thrilled to once again partner with Startup Genome in releasing the Global Startup Ecosystem Report (GSER), which I view as the world’s leading source of knowledge on ecosystem performance. The rigorous analysis produced by Startup Genome helps quantify and clarify the Success Factors behind ecosystem performance, and what actions can strengthen ecosystem vibrancy.
Based on the voices of over 10,000 founders across the world, the GSER assesses 43 ecosystems in 23 countries on a dozen Success Factors. This year’s Most encouragingly, the GSER’s analysis of startup sub-sectors highlights the ability of any ecosystem, no matter its size or location, to concentrate resources on developing excellence in a focused area. Your ecosystem doesn’t need to be Silicon Valley—you just need to focus on helping startups succeed in a few key areas.
Such work, however, is difficult. Building a broad-based economy powered by innovation requires dedicated investments and tough decisions by policymakers. Information and knowledge are critical tools in that work. If your cities are not in this report, reach out to me at GEN if you want to see your ecosystem included in next year’s assessment.
We are proud to count Startup Genome as a core member of the Global Entrepreneurship Research Network (GERN). Together with all our other leading research institutions, we are always at work finding new ways to gather data, new research questions to address, and how to best translate research into practice. We hope the leading researchers in your country are engaged.
There has never been a better time to start a startup, or a better time to join the global effort to build strong startup ecosystems. This can only be done if we are able to assess what a startup ecosystem requires at each point in its development, and focus resources on those policies and programs proven to accelerate growth and increase performance.
The global startup revolution continues to grow. Global venture capital investments in startups hit a decade high in 2017, with over $140 billion invested. Total value creation of the global startup economy from 2015 to 2017 reached $2.3 trillion—a 25.6% increase from the 2014 to 2016 period.
Underneath this continued growth, fundamental shifts are occurring. The types of companies that fueled the first and second generation of global startup ecosystems—social media apps, digital media, and other pure internet companies—are declining.
While these companies have built the current infrastructure that the new generation of startups use—think Facebook and Google as a platform for global marketing, Wordpress for content publishing—startup formation in these sub-sectors is not growing as it used to, and in some cases, it is declining.
Top startup hubs like Silicon Valley, London, and New York continue to dominate top-level activity and maintain their status as the top performers for most sub-sectors. But we see strong up-and coming ecosystems in specific sectors like Fintech, Cyber security, and Blockchain.
East vs. West: The Rise of China and Diminishing U.S. Dominance
A major way we see the map of entrepreneurship changing globally with new hubs of excellence is the increase of activity in Asia and the decline of U.S. preeminence. The United States and Silicon Valley are still the top value creators in the global startup ecosystem—but their dominance is not as sharp as it once was.
For the past six years, the share of funding going to Asia-Pacific countries grew, while the U.S. share declined. In 2017, VC funding for startups in the United States compared to the Asia-Pacific region were even, with each accounting for 42% of investment value. If we look at the combined years of 2016-2017, as we do in the following chart, the USA is still a bit ahead.
China is the primary growth driver in this shift. In 2014, only 13.9% of current unicorns were from China. In 2017 and 2018 so far, that number has grown to 35%—while for the United States it has decreased from 61.1% to 41.3%.
The United States still dominates in unicorn exits, partially because the unicorn phenomenon started and grew in the country earlier than elsewhere. When looking at total worldwide unicorn exits in 2016-2017, 65% are from the United States.
Accordingly, our approach is based on 10 key elements:
1 Direct experience of startups and ecosystems: our team brings the experience of serial entrepreneurship across multiple countries and continents, angel investing, startup community building, and corporate innovation management.
2 Ecosystem Definition — a region with a shared set of characteristics and pool of resources, generally located within a 60 mile (100 km) radius around a center point, with a few exceptions. Toronto and the Waterloo region, for example, are two distinct regions roughly 60 miles apart. However, the data-driven assessment of both of them resulted in almost identical results, demonstrating that they were in fact one and the same ecosystem. Also important, if a startup moves prior to an exit we identify the startup’s original ecosystem to properly measure its ability to produce startup success.
3 Measuring pre-seed startups and their original location— startups are dependent on their ecosystem’s Success Factors and resources only at the early stage. In every ecosystem, most startups are pre-seed or bootstrapped, yet no one has data on them. Funding databases cannot capture relevant data on pre-seed startups, so they tell a misleading the story.
4 Large datasets—with the absence of rich data on early-stage startups being the largest challenge, we invested seven years into building the largest global dataset on such startups.
5 Partnerships—achieving such a large research requires a support of the global community. We depend on the collaboration of more than 300 partners, more than 40 governments and innovation agencies, more than 50,000 startup founders, and several global partners like Global Entrepreneurship Network, Tech Nation (formerly Tech City UK), Crunchbase, and Orb Intelligence.
6 Quantifying experience, not opinions—with our survey instrument, for instance, we ask, “How many days did it take to get a visa? “We don’t ask, “How difficult is it to get a visa?”
7 Performance validation—all our variables are derived from practical experience and the research literature. We then put each one to the test of both our startup and ecosystem performance models. If it doesn’t clearly impact performance metrics, we discard it—over the years we discarded more than a hundred metrics that failed our performance tests.
8 Consistent data collection—we measure ecosystems around the world at the same time of the year over several years to remove seasonality and cyclical effects.
9 Studying many ecosystems at different stages and benchmarks— a wide range of ecosystems is required to understand how factors change across time and contexts, and build a sound mathematical model. Also, one performance data point is not worth anything without something to compare it to. The experience building a dynamic SaaS startup performance benchmarking application at Startup Compass came handy.
10 Mathematical model—we combined all this data with deep data science skills to build a complex mathematical model that captures the impact (outcomes) of input variables (Success Factors) against a performance model.
Here, we review some of the important concepts that inform and define our approach.
Our science is rooted in Michael Porter’s work on industry clusters. The “geographic concentration of interconnected businesses, suppliers, and associated institutions”1 in a particular sector or industry increases the a) average productivity of each entity, b) innovation and c) creation of new businesses.
While this is a good foundation, it is important to mention that this concept was largely based on the examination of traditional industries. Porter’s insights shaped multiple generations of economic development practice and continue to do so today. But we tested these dimensions to account for the new reality of innovation-based, and especially Tech/ICT ecosystems.
Key Dimensions of Industry Clusters and Startup Ecosystems
1 Size. Michael Porter asserted that the larger the size of an industry cluster, the higher the productivity of its participants; the higher the level of innovation; and the higher the rate of new business entry. We found that in fact the average productivity does not consistently increase with size, but the production of scaleups does a Together with the Kauffman Foundation, we are developing a methodology to precisely assess small ecosystems. This is a critically important initiative for many cities.
2 Local Connectedness. Michael Porter wrote that the degree of interconnectivity is the second key dimension of industry clusters because “economic activities are embedded in social activities; that ‘social glue binds clusters together.” Many growth economists over the past 30 years have looked at the phenomenon of “increasing returns,” finding that knowledge networks play a key role in promoting growth. Our research has furthered this work explored these networks and quantified their dimensions. Our Local Connectedness factor captures the extent to which a startup community is tightly-knit (a factor that facilitates the flow of knowledge) or not. Please see the accompanying article for our detailed findings.
3 Global Connectedness. This is our original contribution to the concept of industry cluster: a third and very important dimension of innovation-based startup ecosystems. Think of it as the global fabric of knowledge, ideas, people and organizations, weaved primarily by quality founder-to-founder relationships across countries. As illustrated with Stockholm and Chicago, a higher level of Global Connectedness helps startups integrate into this global fabric, raising their level of performance. We developed a new way to measure this because the existing methods were inadequate. Knowledge about new innovations or the complexities of disruptive business models are spread by word of mouth between people with quality relationships, not by light LinkedIn connections.
4 Scale up Production. Because among startups “the top-performing 10% provide roughly 80% of gross revenue and job creation.
Internet of Things (IoT)
Agtech and New Food
Advanced Manufacturing and Robotics
Health and Life Sciences.
These current surge and future requires concerted efforts.
These current surge and future requires concerted human efforts in driving the growth of the world. Technology requires enormous research and development and Africa need to channel most of resources in developing its population to feed china and other parts of the world.
Most of the important thing to do require us to enact new laws that allows for speed transformation and processing.
Africa’s legislature need to be proactive in helping to secure the future of its people.
We can produce more technical human resources to deal with our problems and export most to deal with the challenges of China.
It is now or never.
Derek Kweku Degbedzui
Co-founder, Future-Ready Lab
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