Africa can benefit from links with China

China’s rapid development has attracted worldwide attention in recent years, with the implications of its expanding influence and growing demand for energy supplies being hot topics for discussion both in China and abroad.

The study by researchers from the universities of Nairobi, Cape Town and Sussex revealed that African economies have a real chance of benefiting from their economic links with China as long as they boost their own capacities to match Chinese demands.

SSA exports to China as a proportion of trade with industrialised countries have grown from 0.43 percent in 1990 to 8.96 percent in 2004, and these are set to expand as a Chinese-driven commodity price boom takes the world by storm.<BR>
The most significant opportunity opened-up to SSA by China’s rapid growth is the enhanced incentives which rising demand and prices provide to commodity producing countries.

Many African economies, including most members of the Southern African Development Community (SADC), have rich primary product resources.

One of the challenges facing Africa, the researchers noted, will be to “develop the supply in-elasticities required to take advantage of raised global demand and prices.”

“This may require a combination of inputs, including enhanced infrastructure, targeted wooing of selected global resource-producing firms and the development of training and research and technology organizations in the respective national systems of innovation,” noted the researchers.

African countries will have to come up with clear strategies on how to manage the exploitation of their natural resources to ensure that the fruits can be drawn down over time, rather than at a single point in time.

The other downside of a rapid growth in commodity prices that Africa has to be wary of is its impact on exchange rates ‘ the so-called “Dutch Disease”. Higher exports and raised prices often lead to currency appreciation.

“Dutch Disease” is an economic concept that attempts to explain the seeming relationship between the exploitation of natural resources and a decline in the manufacturing sector.

The theory is that an increase in revenues from natural resources will deindustrialise a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive.

The term was coined in 1977 to describe the decline of the manufacturing sector in the Netherlands after the discovery of natural gas in the 1960s.

An appreciation of the exchange rate will create problems for other exporting sectors, and promotes forms of structural change which lead to a reallocation of resources from the traded- to the non-traded goods sectors.

South Africa and Zambia are some of the SADC countries that have recently experienced a commodity-driven appreciation of the exchange rate.

The Zambian Kwacha has surged since November last year on the back of high international copper prices and rising foreign investment, a development that has hurt farmers, manufacturers, tourism operators and aid groups.

Zambia is the world’s 11th largest copper producer and its currency is currently trading at about 3,600 to the United States currency.

South African mining firms and other producers have struggled to maintain production levels amid a strengthening rand.

Africa has to work hard to improve its competitiveness by developing effective industrial policies, the researchers said.

A further important lesson which emerges from China’s growing trade presence in Africa is for SSA producers to be less concerned about the sector of production and “more focused on identifying niches where they can build barriers to entry to Chinese producers through the development of innovative capabilities.”

“In manufacturing this may be increasingly difficult as Chinese competences grow, whereas in horticulture and services, including knowledge-intensive services, relative capabilities may be high, as in the case of Kenya’s horticulture sector, South Africa’s medical sector and East Africa’s wildlife tourist sector,” the study said. ‘

August 2006
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