AFRICA’S SILK ROAD

China and India’s New Economic Frontier

Harry G. Broadman
Economic Adviser
Africa Region
The World Bank

Singapore
September 2006
Background
„ Increasingly notable hallmark of the recent trend in South-South
economic relations is the rapid increase in trade and investment flows
between Sub-Saharan Africa and Asia, especially with China and India.

„ Chinese trade and FDI in Africa actually dates back decades, with
most of the early investments made in infrastructure sectors, such as
railways. India, too, has a long history of FDI in Africa, particularly in
East Africa, where there are significant expatriate Indian communities.

„ China and India have rapidly modernizing industries and burgeoning

middle classes with rising incomes and purchasing power

….resulting in growing demand not only for natural resources but also non-
traditional resources such as processed commodities, light manufactured
products, consumer goods, and tourism

... where Africa has the potential to export.

2
Main Questions Addressed by the Study
„ What has been the recent evolution of the pattern and
performance of trade and investment flows between Africa
and Asia, especially China and India.

„ Which factors are likely to significantly condition these

flows in the future.

„ What have been the most important impacts on Africa of

its trade and investment relations with China and India.

„ What actions can be taken to help shape these impacts to

enhance Africa’s economic development prospects.
3
Focusing on Four Key Factors
„ “At-the-border” trade and investment policies:
Policies affecting market access (tariffs and NTBs); FDI policy regimes; and
bilateral, regional and multilateral trade agreements.

„ “Behind-the-border” (domestic) market conditions:

Business environment; competitiveness of market structure; quality of market
institutions; and supply constrains such as poor infrastructure and skill
shortages

„ “Between-the-border” trade facilitation factors

Cross-border trade facilitating logistical and transport regimes; quantity and
quality of oversea market information; impacts of tech. standards; and role of
migration.

„ Complementarities between investment and trade

Extent to which investment and trade flows leverage one another; effects of
trade-investment complementarities on scale of production and integration
across markets; participation in global production networks and value chains;
and spillover effects of transfer of technology.
4
Summary of Key Messages
„ China and India’s new-found interest in trade and investment with
Africa presents a significant opportunity for growth and integration of
Sub-Saharan Africa into the global economy.

„ China and India’s South-South commerce with Africa is about far

more than natural resources, opening the way for Africa to become a
processor of commodities and a competitive suppliers of goods and
services to these countries.

„ A growing number of Chinese and Indian businesses active in Africa

are on a global scale with world class-technologies, fostering the
integration of African businesses to more advanced markets.

„ A major unevenness between the two continents remain. It is

imperative that both sides address asymmetries and obstacles to its
continued expansion through reforms, which entail reforms at the
border, behind the border, and between the border, as well as reforms
that leverage linkages between investment and trade.

5
 Data & Methodology
„ Analysis of newly collected firm-level survey data on 400+ African
firms with Chinese and/or Indian affiliation in four focus countries–
Ghana, Senegal, South Africa, and Tanzania (May 2006)
„ Analysis of originally developed 16 individual business case studies
carried out in the field in the four focus countries, focusing on four
sectors—construction, food, textiles and apparel, and general
manufacturing (May 2006)
„ Gravity model analysis of African bilateral trade flows worldwide to
assess barriers to trade with China and India

„ Analysis of existing firm-level micro data from World Bank

Investment Climate Assessments (ICAs) and data from World Bank
Doing Business in African and Asian countries, special emphasis given
to China and India
„ Analysis of trade data from UN COMTRADE, UNCTAD TRAINS,
and IMF Trade of Direction
„ Country-specific qualitative data from existing resources, incl. DTISs
6
Findings

7
 Africa in the Global Economy

Africa’s development pattern increasingly diverse,

with more and more success stories

1/3 population in non-oil countries with growth at least 4.5%

1/5 population in non-oil countries with growth under 3.0%
E q u a t o ria l G u in e a
Chad
A n g o la
Sudan
N ig e ria
27% O il c o u n t r ie s
Co n g o , Rep .
Ga b o n
M o za m b iq u e
Rw an d a
Uganda
M a li
Bo ts w a n a
C a p e V e rd e
T a n za n ia
Percent of total Africa population

S ie rra L e o n e
E t h io p ia 34% G r o w t h 4 . 5 % o r h ig h e r
M a u r it a n ia
M a u rit iu s
Gh a n a
B e n in
B u rk in a F a s o
Senegal
C a m e ro o n
G a m b ia , T h e
N a m ib ia
Z a m b ia
G u in e a
Togo 19%
N ig e r G r o w th 3 ~ 4 .3 %
M a la w i
S o u t h A f ric a
M adagascar
S a o T o m e a n d P rin c ip e
Le s o th o
S w a zila n d
E rit r e a
Kenya
S e y c h e lle s
C o m o ro s 20%
G ro w th < 3 %
C o t e d 'Iv o ire
C e n t ra l A f ric a n R e p u b lic
G u in e a - B is s a u
B u ru n d i
Co n g o , D em. Rep .
Z im b a b w e
-1 0 -5 0 5 10 15 20 25
A ve r a g e G D P g r o w th r a te 1 9 9 6 ~ 2 0 0 5
8
Source: World Bank WDI.
 Africa in the Global Economy

But Africa’s share of world exports has been declining

Africa's share of world exports

8%
7%
6%
5%
4%
3%
2%
1%
0%
1948 1953 1963 1973 1983 1993 2004

Source: IMF Trade of Direction, 2005 year book.

9
 Africa in the Global Economy

Africa accounts for 1.8 percent of global FDI flows

Eastern Europe & Former Soviet

Union (9.5%)

North America (17%)

Western Europe (34.1%)

MENA East Asia

(1.1%) (19.6%)

South Asia
LAC (9.2%) (1.1%)

SSA (1.8%)
Pacific (6.7%)

Regional Share of FDI Net Inflows, 2004

Source: WDI, 2006

10
 Africa in the Global Economy

Globally, Africa Has Not Increased Its Share of Non-Oil

Exports
Non-oil export share as percent of GDP

50%
45%
1983-1985 1993-1995 2003-2005
40%
35%
30%
25%
20%
15%
10%
5%
0%
East Asia Eastern Latin Middle East South Asia Sub-Saharan
and Pacific Europe and America & and North Africa
Former Caribbean Africa
Soviet
Union

Source: IMF DOT.

11
 Africa in the Global Economy

Prices Have Risen for Major Africa’s

Export commodities
Price index 1990=100 250 233 2000 2005

200
142
150 123
103 104 98
80 80 80 87
100

50

0
Agriculture Energy Food Minerals/ Raw
metals Materials

Source: World Bank DEPG price indices for Africa exports.

12
 Africa in the Global Economy

China and India’s Contribution to Global Commodity

Demand
Percent contribution of China and India to the growth of world
imports of selected commodities, 2000-2004

50%
India
40%
30% China
20%
10%
0%
-10%
Precious Crude Metallic Woods Cotton
stones oil Ores

Source: Goldstein, Pinaud, Reisen, and Chen. 2006. The Rise of China and India, What’s in It for Africa? OECD.
13
 Country-Level Trade and
Investment Patterns

The Dramatic Rise of China and India as Destinations for African

Exports
Average annual merchandise export growth A f ri c a ' s M e rc ha nd i s e Imp o rt s f ro m C hi na a nd
Ind i a
rate, Africa to Asia
12 0 0 0

60% 10 0 0 0 2002
48% 2003
50%

1999-2004
2004
8000

1999-2004

1990-94
40%
1990-94
Percent

20% 6000
30%
1999-2004
1990-94

20% 4000

10% 7% 14% 14%

13% 2000
0%
China India Rest of Asia 0
China Ind ia

Data sources: COMTRADE, using Asia countries’ reported data on imports from Africa. Africa’s petroleum exports to India was adjusted for
missing values.

14
 Country-Level Trade and
Investment Patterns

Current China’s FDI Outflows to Africa, By Country

Current Chinese FDI outflows to Africa are largely, but not
exclusively, resource oriented
Chinese 2004 FDI flow, Million $US
Sudan
Nigeria
South Africa
Guinea
Benin
Madagascar
Congo, Rep.
Cote d'Ivoire
Sierra Leone
Gabon
Rest of Africa
Kenya
Zambia
T ogo
Equatorial Guinea
T anzania
Niger
0 50 100 150

15
Source: 2004 Chinese FDI Statistics Bulletin
 Country-Level Trade and
Investment Patterns

„ The volume of African exports to Asia is accelerating. It

grew by 15% between 1990 and 1995, it has grown by
20% during the last five years (2000-2005).

„ As of 2005, Asia’s share of African exports (27%) is on

par with the EU (32%) and the US (29%).

„ Despite this growth, Africa still remains relatively small

from perspective of Asian economies. African exports to
Asia account for only 1.6% of total global imports of
Asian economies.

„ Asian exports to Africa are equally growing rapidly.

During the last five years, they have grown by 18%, higher
than any other region, including the EU.
16
 Country-Level Trade and
Investment Patterns

„ China and India --- though still only 13% of all of Africa’s
exports -- has been one of the most rapidly growing
markets at 1.7 times the overall growth for African exports

„ As between India and China, it is China that is the most

dynamic segment: Exports to China grew by 48%
annually 1999-2004 compared to 14% for India, so that 10
percent of SSA exports are now to China and some 3% are
to India

„ 86 percent of exports to China and India are oil, metals,

and agricultural raw materials.

„ 5 oil and mineral exporting countries account for 85% of

exports to China, and South Africa alone accounts for 68%
of exports to India.
17
 Policy Factors Affecting Trade Flows

Impacts on Bilateral Trade Flows of African Countries:

Roles of At-the-Border, Behind-the-Border, and Between-
the-Border Factors
All Merchandise Trade Manufactured Trade
Exports from Imports to Exports from Imports to
Africa Africa Africa Africa

Importer Trade Restrictiveness n.s. n.s. – n.s.

At-the-
border Regional Trade Agreement + + + n.s.
Factors
Preferential Market Access n.s. n.s. + n.s.

Customs Procedure - Exporter – n.s. – n.s.

Customs Procedure – Importer + n.s. n.s. n.s.

Between-the- Internet Access – Exporter + + + +
border
Factors Internet Access – Importer n.s. n.s. n.s. n.s.

Port Quality – Exporter – + – +

Port Quality – Importer + + + +
Domestic Business Procedure –
Behind-the- Exporter – n.s. – n.s.
border
Factors Power Infrastructure Quality –
Exporter n.s. n.s. + n.s.

Source: Authors’ calculations based on 2002–2004 average figures. See chapter 2 for details. 18
Note: Only the signs of significant coefficients are shown (level of significance above 10 percent). “n.s.” represents a coefficient not
statistically significant.
 Role of At-the-Border Policies

Africa’s Leading Exports face Escalating Tariffs in

China and India
A fric a Im p o rts

C h in a In d ia J ap a n A s ia A v e ra g e
211 R a w h id e s 6 .5 0 .1 0 0 .8
611 L e a th e r 8 .8 1 4 .7 0 .7 4 .6
612 M a n u fa c tu re s le a th e r 1 4 .6 15 1 .9 7 .9
222 O il se e d s 5 30 0 .4 2
423 V e g e ta b le o ils 10 45 - 2 7 .7
7111 C o ff ee , n o t ro a s te d 8 100 0 2 .3
7112 C o ff ee , ro as te d 15 30 9 .1 9 .1
721 C o c o a b e a n s, ra w 8 30 0 2 .8
722 C o co a p o w d e r 15 - - 0 .2
333 P e tro l. o ils, c ru d e 0 - - 0 .2
334 P e tro leu m p ro d u cts, refin e d 7 .4 15 2 .1 0 .3
66722 D ia m o n d s, s o rte d 3 - 0 2 .2
66729 D ia m o n d s, c u t 8 15 0 6
6673 O th e r P re c io u s /s e m i-p re c io u s sto n es 7 .3 15 0 9
897 J e w e lr y 2 6 .8 15 0 .9 1 5 .7
263 C o tto n 27 10 0 1 4 .8
6513 C o tto n ya rn 5 15 - 5
652 C o tto n fa b ric s , w o v e n 10 15 1 5 .6
84512 J e rs e y s, e tc . o f c o tto n 14 - 5 .7 6 .8
8462 U n d e r g a rm e n ts , k n itte d 1 4 .1 15 6 .9 5 .2

Source: UNCTAD TRAINS database. 19

Note: Darker shades represent higher levels of processing.
 Role of At-the-Border Policies
The Spaghetti Bowl of African Regional Trade
Agreements Is Not Investor Friendly

COMESA Nile River Basin IGAD

ECCAS
AMU
CEMAC
Somalia
Algeria Sao Tomé & Principe
Libya Cameroon Egypt
Morocco Mauritania Central African Rep.
ECOWAS Tunisia Gabon Djibouti
Equat. Guinea Burundi*
Ghana Rwanda* Ethiopia
Conseil de Cape Verde Chad Rep.Congo
Nigeria Eritrea
L’Entente Gambia Sudan
DR Congo Kenya*
Benin Niger Angola Uganda*
Togo Burkina Faso
Cote d’Ivoire
Guinea-Bissau Mali
Senegal EAC
Liberia
Sierra Leaone
Guinea
Tanzania* Malawi* Mauritius*
Zambia* Syechelles*
SACU
Zimbabwe* Comoros*
WAEMU Mano iver Madagascar*
Union CLISS South Africa Namibia*
Botswana Reunion
Swaziland*
Lesotho

Mozambique *CBI

SADC IOC
Source: World Bank.
20
 “Behind-the-Border” Factors

Chinese and Indian Foreign Investors Foster Competition

in African Markets
80
Average Foreign Share (%)

70
60
50
40
30
20
10
0
0 20 40 60 80 100
Average Domestic Market Share (%)

Source: World Bank Staff.

21
 “Behind-the-Border” Factors

Exporters in Africa Face Significant Interruption in

Electricity Service from Public Grid, Lowering Their
International Competitiveness
30

25
percent of time

20
Non exporter
15
Exporter
10

0
Ghana Senegal South T anzania T otal
Africa

Source: World Bank Investment Climate Assessment for Senegal, South Africa, and Tanzania. Teal et al. (2006) for Ghana.

22
 “Between-the-Border” Factors

Ethnicity vs. Nationality: Indian Investors are More

Integrated into Africa than are Chinese Investors

Ethnic Origin of Owner

African Chinese Indian European
African 100% 4% 48% 51%
Nationality of

Chinese 0% 93% 0% 1%
Owner

Indian 0% 0% 45% 0%
European 0% 0% 4% 41%
Other 0% 4% 3% 7%
Source: World Bank staff.

23
 “Between-the-Border” Factors

African Exports are Constrained Because Domestic Firms

Do Not Meet International Technical Standards

Quality Certifications (ISO 9000, 9002, 14000)

Received ISO Did Not Receive ISO
100
75
% of firms

50
25
0
ea

ali
n

a
e
ia

ia
l
s

a
r

ga

bi
qu
iu
ni

ca

r ic
op

an
itr

m
Be

rit

ne
as

bi

Af
Er

hi

nz

Za
au

am
ag

Se
Et

Ta
h
M
ad

oz

ut
M

So
M
Source: World Bank Enterprise Surveys

Source: World Bank.

24
 FDI-Trade Complementarities and Network
Production-Sharing Opportunities

African FDI and Exports are Complements

The corre lation coe fficie nt be twe e n FDI as % of
GDP and me rchandi se e xports as % of GDP

120%

Merchandise exports as % of GDP, 2005 y = 1.9x + 0.4

100% R2 = 0.6
Oil countries
80%

60%

40% Non-oil countries

y = 0.97x + 0.20
20% R2 = 0.05

0%
0% 10% 20% 30% 40%
FDI as % of GDP, 2004

Source: IMF WEO; oil countries include Angola, Chad, Republic of Congo, Equatorial Guinea, Nigeria,
and Sudan.
25
 FDI-Trade Complementarities and Network
Production-Sharing Opportunities

Extent of Scale and Geographic Spread: Number of

Separate Firms Belonging to Holding Companies/Group
Enterprises

African Chinese Indian European

Domestic
8 1 2 3

Other Africa
2 4 1 8
Outside
Africa 2 16 5 58
Source: World Bank staff. Data pertain to median values.

26
 FDI-Trade Complementarities and Network
Production-Sharing Opportunities

Distribution of Output Sales by Destination

Market and Nationality
African Chinese Indian European
Domestic 85% 81% 89% 76%
Other Africa 10% 20% 18% 17%
Europe 5% 0% 0% 13%
North America 2% 0% 0% 2%
India 0% 0% 0% 1%
Other South Asia 1% 1% 0% 1%
China 0% 3% 0% 1%
Other East Asia 0% 0% 0% 3%
Other 1% 1% 1% 3%

27
Source: World Bank staff. a Data pertain to 2005 median annual sales.
 FDI-Trade Complementarities and Network
Production-Sharing Opportunities

Purchases of New Machinery by Import Origin and Firm

Nationality
Nationality African Chinese Indian European
Domestic 55% 32% 15% 28%
Other Africa 3% 1% 7% 12%
China 6% 60% 13% 1%
India 5% 0% 22% 2%
Other 31% 8% 44% 56%
Source: World Bank staff. a Data pertain to 2005 median values.

28
 FDI-Trade Complementarities and Network
Production-Sharing Opportunities

Distribution of Material Input Purchases by Origin

Market and Nationality

African Chinese Indian European

Domestic 60% 31% 27% 40%
Other Africa 7% 4% 9% 9%
Europe 13% 1% 13% 34%
North America 3% 5% 1% 6%
India 5% 2% 26% 3%
Other South Asia 3% 1% 4% 1%
China 4% 55% 7% 3%
Other East Asia 2% 1% 3% 3%
Other 2% 0% 11% 1%

Source: World Bank staff. a Data pertain to 2005 median annual purchases. 29
 FDI-Trade Complementarities and Network
Production-Sharing Opportunities

Extent of Vertical Integration by Nationality

African Chinese Indian European

Output Sales to Parent

Firm or Affiliate
9% 19% 0% 14%
Input Purchases from
Parent Firm or
Affiliate 3% 23% 9% 15%
Source: World Bank staff. Data pertain to 2005 median values.

30
 FDI-Trade Complementarities and Network
Production-Sharing Opportunities

Extent of Value-added in Output Sales and Exports, by

Destination Market and Firm Nationality
Firm Nationality African Chinese Indian European

Product
Finished Assembled 88% 90% 90% 89%
Domestic Sales Partially Finished 5% 9% 4% 4%
Raw Material 6% 0% 5% 6%
Finished Assembled 83% 89% 100% 78%
Sales to Other
African Partially Finished 8% 11% 0% 15%
Countries
Raw Material 9% 0% 0% 7%
Finished Assembled 77% 75% 100% 90%
Export Sales
Outside of Partially Finished 10% 25% 0% 10%
Africa
Raw Material 13% 0% 0% 0%

Source: World Bank staff. 31

Note: Pertains to sales to private firms. Data pertain to 2005 median values.
Policy Recommendations

32
“At-the-Border” Formal Policy Reform (1)

– For all countries: Lowering the level of tariffs overall on MFN

basis in the context of WTO negotiations.

– For China and India: Eliminating the escalating tariffs that limit
Africa’s leading exports.

– For most African countries: Eliminate anti-export bias in import

tariff policies; and reduce bias in investment decisions and
disincentives for product diversification

33
“At-the-Border” Formal Policy Reform (2)

– For most African countries, China & India: Eliminating NTBs,

including technical standards as protectionist measures.

– Primarily for African countries: Rationalizing and harmonizing

existing “spaghetti bowl” bilateral and regional agreements

– For African countries: Strengthening the role of Investment

Promotion Agencies (IPAs) and public-private investors’ councils

– Primarily for African countries: Export and investment incentives

must be tailored to country-specific circumstances and in concert
with WTO rules.

34
Beyond Formal Trade and Investment Policy
Reform (1)
„ “Behind-the-Border Reforms”

– Primarily for all African countries: Enhance domestic inter-

enterprise competition by:
• Eliminating fundamental economic and policy barriers to entry
• Eliminating exit barriers (reducing subsidies and eliminating
practice of tolerating arrears)

– Primarily for all African countries: Improve governance through:

• Greater transparency and accountability of public officials’
conduct
• Efficient institutions which facilitate effective resolution of
commercial disputes

35
Beyond Formal Trade and Investment Policy
Reform (2)
„ “Behind-the-Border Reforms” (cont’d)

– All African countries: Reduce poverty impacts from

domestic price/production changes by trade flows
through promoting labor mobility, including:

• Enhancing wage differentiation and adaptability

• Improving the effectiveness of social safety net

36
Beyond Formal Trade and Investment Policy
Reform (3)
„ “Between-the-Border” Reform

– Primarily for all African countries: Further

development of trade facilitation infrastructure for
integration into the global market as well as regional
integration within Africa, including:
• improvement and modernization of ports, road, and rail
transport
• Improvement and modernization of telecommunication/IT
capacity.

– Primarily for all African countries: Customs reform

through:
• Improving coordination among border-related agencies
• Simplify customs procedures and make customs codes rule-
based, transparent and commercially-oriented
37
• Introduce the use of IT into the customs system
Beyond Formal Trade and Investment Policy
Reform (4)
„ “Between-the-Border” Reform (cont’d)

– Most African countries: Address imperfections in the

“information market for trade and investment
opportunities,” incl. technical standards

– Primarily for all African countries: Review measures

that restrict the movement of professionals (Mode IV
reform)

38
Beyond Formal Trade and Investment Policy
Reform (5)
„ Reforms to Enhance Trade-Investment Complementarities
and Network Trade

– Most African countries: Bringing the regime governing

FDI in line with international best practices, which
typically includes:

• Adhering to “national treatment” for foreign investors

• Prohibiting the imposition of new and/or phasing out the
existing TRIMs such as local content measures
• Providing for binding international arbitration for investor-state
disputes, tailored to country-specific circumstances

39
Beyond Formal Trade and Investment Policy
Reform (6)
„ Reforms to Enhance Trade-Investment Complementarities
and Network Trade (cont’d)

– All African countries: Deregulation of services,

including implementation of market-reinforcing reform
of regulatory procedures and rules

– All African countries: Enhance flexibility in capital

markets

– All African countries: Strengthening training and

secondary and post-secondary educational programs for
workers and managers

40
Actions by Policy-Makers (1)
„ International Community (Bilateral and Multilateral
Donors)

– TA to support capacity building in African countries with priority

areas on “aid-for-trade” issues such as:

• Trade facilitation
• Technical standards
• Customs regime improvement
• Harmonization of RTAs
• WTO accession
• Governance reforms

41
Actions by Policy-Makers (2)
„ African, Chinese and Indian Governments

– Efforts to implement their reform agenda by their hands

– Reforms beyond formal trade and investment policies involves

actions to:
• Enhance domestic competitions
• Foster labor market flexibility
• Improve trade facilitation mechanisms
• Liberalize services sectors and implement associated regulatory
reforms
• Improve investment climate to attract foreign investors

– Trade policy reforms through:

• Reducing tariff and non-tariff barriers
• Eliminating tariff escalation
• Removing disincentives to exporting
• Pursuing WTO accession (for non-members)
42
• Rationalizing, harmonizing, and modernizing existing RTAs