PhD Research proposal:Analysis of Chinese Trade and Foreign Direct Investment on eight African countries Economic Development

PhD Research proposal:

Supervisor: Professor Lan Yisheng

Shanghai University of Finance and Economics

Analysis of Chinese Trade and Foreign Direct Investment on eight African countries Economic Development

I-Introduction

China�s newfound interest in trade and investment with African-home to 300 million of the globe�s poorest people and the world�s most formidable development challenge presents a significant opportunity for growth and integration of the Sub-Saharan continent into the global economy.

These emerging economic �giant� of Asia is at the center of the explosion of African-Asian trade and investment, a striking hallmark of the new trend in South-South commercial relations. Both nations have centuries-long histories of international commerce, dating back to at least the days of the Silk Road, where merchants plied goods traversing continents, reaching the most challenging and relatively untouched markets of the day.

Chinese trade and investment with Africa actually dates back several decades, with most of the early investments made in infrastructure sectors, such as railways, at the start of Africa�s post-colonial era.

China�s fast-growing economic ties with Africa are attracting considerable attention. The relationship came into the spotlight during the summit of the Forum on China-Africa

Cooperation (FOCAC) in Beijing in November 2006 and the Annual Meetings of the African

Development Bank (AfDB) in Shanghai in May 2007. While the expansion of trade and investment between Africa and China has been generally welcomed, concerns have been expressed about how China�s growing presence might affect African development (These concerns range from debt sustainability and governance reform to environmental impact; see news reports in Les Echos, October 24, 2006 (in French); Financial Times, November 28, 2006, and News Edge, May17, 2007).

Today�s scale and pace of China�s trade and investment flows with Africa, however, are wholly unprecedented. 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) (Harry G. Broadman: �Africa�s silk road�; China and India new Economic Frontier).

Trade between Africa and China began to accelerate in about 2000. Between 2001 and 2006,

Africa�s exports to China increased at an annual rate of over 40 percent, rising from US$4.8 billion to reach US$28.8 billion in 2006 (Figure 1 and Table 1). During the same period,

Africa�s imports from China quadrupled to US$26.7 billion. In 2006 Sub-Saharan Africa

(SSA) accounted for the bulk of the Africa-China trade; the region�s exports to China amounted t o US$25 billion, about 85 percent of all African exports to China that year.

According to statistics compiled by China, for 2004�06 Africa ran a small trade surplus, about US$2 billion each year (See IMF Working Paper (2007) �What Drives China�s Growing Role in Africa?� Jian-Ye Wang).

The acceleration of South-South trade and investment is one of the most significant features of recent developments in the global economy.

Trade between China and Africa is also expanding rapidly. Valued at only around $3 billion in 1995, total trade grew to an estimated $40 billion in 2005. Premier Wen Jiabao of China stated during the China-Africa Cooperation Forum summit that China hopes to increase that amount to $100 billion by 2010.

Table 1: China Imports and Exports from Africa (US$ millions)

Figure 1: China-Africa Trade Statistics 1995-2005

Source: World Atlas Trade Data, Tralac Analysis (Centre for Chinese Studies, Stellenbosch University (South Africa))

China started providing aids to Africa in 1956. By May 2006, it had contributed a total of 44.4 billion yuan (US$5.7 billion) for more than 800 aid projects, according to a researcher at the Chinese Academy of Social Science (He, 2006). The last officially reported flows were in 2002, when the Chinese government reported that it provided (US$1.8 billion) to support Africa.

China has also been providing debt relief to African countries on its own terms. At the first China-Africa Cooperation Forum in October 2000 in Beijing, the Chinese government pledged to write off in two years overdue obligations on 156 loans owed by African countries; these equaled to 10.5 billion yuan (US$1.3 billion). The pledge was fulfilled ahead of schedule (He, 2007).

Chinese capital flows to Africa in the form of foreign direc t investment (FDI) are growing. While in the past many of these investments were limited to the raw materials sector, the current wave involves firms from many countries and sectors than ever before. This foreign investment also has many implications patterns and the development of the bilateral trade and integration. Many African exports are channeled through multinational enterprises, helping to integrate African countries both with one another and with the global economy.

Table 2: Chinese capital flows to Africa

Figure 2: China FDI flows to Africa

Source: Jonathan HOLSLAG �China�s FDI in SUB-SAHARA AFRICA� Brussels Institute of Contemporary China Studies.

So far, the nature of these flows has been quite similar to those between Africa and its traditional trading partners noted in the OECD studies (2005-2006) (OECD study, The Rise of China and India: What�s in it for Africa?). Against this backdrop, there is intense interest by policy makers and businesses in both Africa and Asia, as well as by international development partners, to better understand the evolution and the developmental, commercial, and policy implications of African-Asian trade and investment relations. This interest is reflected, perhaps most notably, in the South- South discussions held during the African-Asian summit in Jakarta in April 2005 celebrating the fiftieth anniversary of the Bandung Declaration, where the dramatic rise in international commerce between the two regions figured prominently, as well as at the July 2005 (G-8 summit in Gleneagles G8 Summit took place at Gleneagles Hotel, Perthshire, Scotland on 6-8 July 2005), where the leaders of the North underscored the growing importance of South-South trade and investment flows, especially as they pertain to the prospects for fostering growth an d poverty reduction in Africa.

The importance of South-South trade has been recognized for some time; however, there has been no in-depth study conducted specifically on Africa-China trade relations to date.

The main objective of this study is to build a basic understanding of the potential of Africa-China trade and investment relations.

A literature review will be first conducted tracing the evolution of economic growth theories since Adam Smith to the present on the impact of commercial and technological aspects, resulting from international trade, on the physical accumulation and quality of productive factors.

Next, using historical data covering a sample of African countries, multiple regression analyses will be performed to determine the relationship between the specific determinants and real per capita economic (GDP) growth over a twelve year period. Using the results, conclusions will be drawn about the relationship among the determinants i n their effects on long-term economic growth. Several additional trials will be carried out to determine more nuanced information and to test the reliability of the endogenous growth theory model.

The data will be collected according to the International Standard Industry Classification (ISIC).

II-Statement of the problem and motivation

II-1.Overview

China is not a new player in Africa. But its economic and political presence on the continent and its impact on Africa have grown exponentially in the last few years. This has huge consequences for Africa, but it also has significant implications for western policy towards the continent.

In thinking through how Africans and the wider international community should address the new challenges posed by China�s role on the continent, a critical starting point is to better understand the diverse impacts of China on Africa.

Like other parts of the world, Africa is being affected indirectly by the phenomenal growth of the Chinese economy.

It is clear that Africa must not loss its momentum and determination to tackle its development problems and attain the renewed vision of a prosperous vibrant region. In this regard the establishment of the China-Africa Forum came at a critical juncture, offering unconditional support for the AU (African Union) and its various instruments including NEPAD, which is being integrated into sub-regional and National development strategies.

Put another way the big question is how to kick start African poor countries out of a cycle of poverty throughout their trade relationship with China.

So, what is so important about economic growth? Economic growth leads to greater economic prosperity. Increasing overall prosperity improves the lives of those able to partake in the system. People are better able to provide for their needs and fulfill their wants, without the use of force. This rising prosperity is empirically linked to higher overall levels of human happiness and betterment.

Recent developments in growth theory have considered various sources of long-run growth, each of which involves an externality associated with some activity. Examples include human capital accumulation through either learning by doing or education and technological advance through R&D activities.

Additionally many policy makers and academics contend that foreign direct investment (FDI) can have important positive effects on a host country�s development effort, but that empirical evidence for FDI generating positive spillovers for host countries is ambiguous at both the micro and macro levels. In a recent survey of the literature, Hanson (2001) argues that evidence that FDI generates positive spillovers for host countries is weak. But Balasubramanayam et al. (1996) found that in developing countries pursuing outward-oriented trade polic ies, FDI flows were associated with faster growth than in those developing countries that pursued inward oriented trade policies (Laura Alfaro. �Foreign Direct Investment and Growth: Does the Sector matter?�).

A questions immediately arises relative our study and which we would like to answer is:

-What role does China-Africa trade relationship play in African countries economic growth?

-What is the contribution of Chinese outward FDI to host African countries economic growth?

II-2.The aim and Objectives

The need for base-line studies to assess the changing future impact of China on Africa and to the extent that trade links are an accurate reflection of the wider impact of China on Africa.

The main aim of this research is to understand the role of China in the economic growth process of African countries trough its trade relationship with those countries.

In orde r to achieve this, the key objectives are:

-See the Africa�s Position in International Trade.

-Present the statistics (data) on the Chinese net export with Africa.

-Measure and analyze volume and composition of trade between China and Africa.

-Measure the impact of the trade relationship on African countries trade balance.

-To examine the contribution of Chinese FDI on African countries economy.

-To determine whether FDI and ICT exerts different effects on African countries economic growth.

II-3.Expected finding

Since imports and FDI bring additional competition and variety to domestic markets, benefiting consumers, and exports enlarge markets for domestic production, benefiting businesses. Trade exposes domestic firms to the best practices of foreign firms and to the demands of discerning customers, encouraging greater efficiency. Trade gives firms access to improved capital inputs such as machine tools, boosting productivity and providing new opportunities for growth for developing countries.

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