V. Chinese Investment in Africa’s Fastest Growing Economies

African countries have experienced an extraordinary period of economic growth over the last couple of decades. The recent downturn in the global economy has cast a dark shadow on the future of growth worldwide, but growth in Africa has been resilient and remains high (Diao et al 2017). Before turning to the literature, we pursue one more line of inquiry that might help shed light on the role of Chinese investment in Africa. In this section, we examine the role that investment (not just Chinese investment) has played in Africa’s fastest growing economies. Our logic is as follows: if growth has been accompanied by rapid investment in these economies, then there is a chance that Chinese investment could have played a role in spurring this growth. On the other hand, if growth is primarily led by consumption, then it would be hard to argue that Chinese investment had played a direct role in stimulating growth.

As we discussed in our introduction, the average annual growth rate of GDP for Africa as a whole was 4.9 percent over the period 2000-2015. Of the 17 countries with above-average growth, seven are resource rich and their growth likely corresponds to the recent global commodity price boom that has now dissipated. These countries are Angola, Chad, DRC, Namibia, Nigeria, Sierra Leone and Zambia. However, many of these high-growth countries are resource poor including Burkina Faso, Ethiopia, Kenya, Rwanda and Uganda. And it is clear that in other countries such as Mozambique and Tanzania, natural resources do not explain the bulk of the recent performance. Overall, more than 70 percent of the increase in Africa’s total GDP (measured in constant USD) between 2000 and 2015 can be explained by the growth in these 16 countries; they accounted for 45.4 percent of African total GDP in 2000 and 58.6 percent in 2015.[1]

Figure 15 shows that in these high growth African countries, investments, measured as gross capital formation in national accounts, have grown rapidly between 2000 and 2015. Moreover, investment growth rates are consistently higher than GDP growth rates in most of these countries, ranging from 8.6 percent in Angola to 20 percent in Mozambique (Figure 15). We also distinguish between resource-rich and other high-growth countries using different colored dots in Figure 15. By doing this, we are able to show that the high growth rate of investment is not necessarily related to commodity booms that benefit resource-rich countries only. By contrast, the average annual growth rate of investment was 6 percent in the rest of Africa’s economies (the red diamond dot in Figure 15).  Thus, investment has clearly been at least a proximate driver of growth in Africa’s fast growing economies.

What about consumption? We also find that final consumption growth rates are very close to GDP growth rates across the 16 high-growth countries; the correlation coefficient between consumption and GDP growth rates is 0.79. This seems to indicate that rapid investment growth did not come at the expense of consumption growth in most countries. For resource rich countries, high growth in investment can be financed by windfalls from commodity booms (which may be partly a result of Chinese demand) but for the rest of the African countries, high growth in investment requires external sources of financing including foreign aid, foreign loans and foreign direct investment. While Ethiopia has received substantial loans from China and the World Bank, it may be an exception in that it seems to have also financed much of its public investment through a combination of heterodox policies, including financial repression designed to channel private savings to public investment (Rodrik, 2016).

Against this background, we examine the relative importance of FDI in total investment in Africa’s fast growing economies. From Section 4, we already know that for Africa as a whole, FDI increased rapidly. Here we compare the rapid growth in FDI with the rapid growth in overall investment in these 16 countries. We focus on the period of 2004-2015 the period in the acceleration of FDI to Africa. As shown in Figure 16, total FDI inflows to these 16 countries are equivalent to 12.4 percent of gross capital formation over 2004-2015, indicating that FDI is not a major source of financing. However, it could be that FDI was attracted to these countries primarily in recent years because of these countries’ growth performance, which has expanded the size of the domestic market and has possibly increased the demand for investments in infrastructure.

Figure 16 also shows huge variation in the shares of FDI in capital formation in 2004-2015, which are represented by the purple bars, from high to low in the figure. The shares are as high as 60 percent in Sierra Leone and Mozambique and are negative (meaning net FDI outflows) in Angola. There are five countries where the shares are more than 25 percent, and another five with shares higher than the group average. Only four of these 10 countries are resource rich, which is consistent with our finding that a significant share of FDI takes place outside of the mining sector. The two green bars in Figure 16 represent breakdowns of FDI flows in two sub-periods, 2004-2011, and 2012-2015.  The results show that for most countries, FDI shares increase between the two sub-periods.

We highlight the recent increase in FDI in Figure 17. In this figure, the red diamonds represent the ratio of the most recent four years’ FDI total flows (2012-2015) over the previous eight years’ (2004-2011). There are 8 countries where aggregate FDI in 2012-2015 is more than in 2004-2011 (over 8 years), and again, most of these countries are not resource rich. While the absolute level of FDI inflows is still low in some of these non-resource rich countries (e.g., Burkina Faso, Ethiopia and Kenya, where shares of FDI inflows are equivalent to less than 10 percent of gross capital formation), growth in FDI inflows has been rapid in the most recent period.  On the other hand, FDI flows to Nigeria fell sharply between 2012-2015 and 2004-2011. This may be an indication that natural resource seeking FDI will be difficult to sustain over the long term. On the other hand, it may be that Nigeria is unique.

 

The Role of Chinese FDI in the High Growth African Countries

We have established that investment has played a key role in the growth of Africa’s fastest growing economies. We turn now to the role that Chinese FDI has played in these fast growing economies. In Figure 18, we compare FDI inflows from China to total FDI inflows for each country. We can see that Chinese FDI increases faster than total FDI in all but two countries, Zambia and Rwanda. And only in Nigeria and Rwanda is China’s FDI in 2012-2015 less than its FDI in 2004-2011. There are 7 countries in which China’s share of FDI doubles between 2004-2011 and 2012-2015. Of these 7 countries, only Chad is resource rich. In-depth studies are required for better understanding Chinese FDI in these countries, which will be done in Section 6.

Although Chinese FDI has grown rapidly, its share in Africa’s total FDI is still small (Figures 13a and 13b). In 2012-2015, China’s share in total FDI inflows remains modest in most high growth countries, except for Kenya and Chad where it accounts for more than 25 percent of total inflows (Figure 19). From Figure 18, we already know that Chinese FDI to Kenya and Sierra Leone is 2.7 times and 68 percent greater, respectively, in 2012-2015 than in 2004-2011. Still, the absolute amount of Chinese FDI inflows in these two countries is modest. Besides these two countries, the shares of Chinese FDI in the 16 high growth countries’ total FDI are still low and is only greater than the average share for Africa in five of these countries.

 

The Role of Chinese Contracted Construction Projects in Investment

We do not have data on the total value of fulfilled contracted construction projects in Africa; instead we only have access to estimates of commitments to construction projects in African countries in addition to the value of fulfilled projects reported by China. According to the Infrastructure Consortium for Africa, China accounted for nearly $21 billion of the $83.4 billion committed to African infrastructure in 2015, which includes commitments by African governments and the private sector (ICA 2016). Turning our focus to the data on fulfilled Chinese projects, we have already shown that Africa is a major destination for Chinese engineering firms (see Figure 10). Figure 20 emphasizes that China’s role in construction projects in Africa has increased in recent years. We show this by comparing the value of construction projects to total capital formation for the two sub-periods defined in the previous subsection. As shown in Figure 20, the share of Chinese contracted construction projects in gross capital formation increased in 15 of the 16 high-growth countries from 2004-2011 to 2012-2015. The average share of Chinese construction projects in gross capital formation rises from 7.7 percent to 12.9 percent between these two periods, although it is as high as 40 percent in Chad in 2012-2015. Growth in demand for construction projects in African countries is expected to be rapid in the countries where investment grows rapidly. It also seems that in the countries with more growth in investment in recent years, the share of Chinese contracted construction value in the countries’ gross capital formation is high. In Ethiopia, for example, Chinese contracted construction value is equivalent to 24.5 percent of gross capital formation in 2012-2015, compared to 15.2 percent over the previous 8 years.

Summarizing, we find that investment has played a key role in Africa’s fastest growing economies. The evidence presented here also indicates that investment in the majority of Africa’s fastest growing economies is not limited to natural resources, since the majority of Africa’s fastest growing economies are not resource rich. Instead this investment was financed the old fashioned way: by loans, foreign aid or FDI - or in the case of Ethiopia – financed at least in part by domestic savings. Finally, we find that although Chinese FDI did not account for a large share of investment in most of these countries, its role in financing investment increased more rapidly in Africa’s fastest growing economies in the period 2012-2015 than in the rest of Africa.

 


[1] We exclude Niger from the high growth African countries on the ground of the country’s low per capita GDP growth rate in 2000-2015.

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