A helping hand from China for Africa?
An analysis of the effects of Chinese loans and investments on the
economic integration of African countries
Master thesis Political Science – Political Economy track Paul Metz
Master thesis of Paul Metz Supervisor Dr. J.Y. Gruin Second reader Dr. F. Boussaid Student info Paul Metz 10527214 paulmetz5@gmail.com Word count 16668 Date 20-06-2019
Abstract
This thesis will take a closer look on the effects of Chinese loans and investments on the integration of African countries in the world economy. Neo classicism and the dependency theory imply that loans and investments, provided that certain requirements are met, will help countries to integrate into the world economy which ultimately can lead to economic growth. In order to see whether these claims hold up, this thesis will take a closer look at the cases of South Africa and Nigeria. By comparing Chinese loans and investments in 2003 and 2008, and the scores on four indicators - (1) an increase in the region’s share of world exports of goods and services, (2) the generation of trade surpluses; (3) an increase in the share of world manufacturing; (4) an increase in the world share of FDI – this thesis hopes to be able to contribute to the scientific debate surrounding this topic. Both countries have experienced increasing levels of Chinese loans and investments, but only Nigeria has experienced growth on three out of the four indicators, while South Africa even experienced a decline on three out of the four indicators. This would imply that under some circumstances loans and investments would indeed lead to a better integration into the world economy, but further research will be needed in order to say what these circumstances are.
Table of contents
ABSTRACT ... 3 CHAPTER 1: INTRODUCTION ... 5 CHAPTER 2: LITERATURE REVIEW ... 8 2.1 CHINESE LOANS AND INVESTMENTS ... 8 2.2 AFRICA’S INTEGRATION INTO THE WORLD ECONOMY ... 12 CHAPTER 3: THEORETICAL FRAMEWORK ... 14 3.1 CORE THEORIES ... 14 3.1.1 Neo Classicism ... 14 3.1.2 Solow model of growth and the new growth theory ... 16 3.1.3 Dependency theory ... 18 3.2 CONCEPTS ... 20 3.2.1 Loans and investments ... 21 3.2.2 Integration into the world economy ... 23 3.3 MECHANISMS ... 24 CHAPTER 4: METHODS & OPERATIONALIZATION ... 25 4.1 RESEARCH METHOD ... 25 CHAPTER 5: ANALYSIS ... 28 5.1 SOUTH AFRICA ... 28 5.1.1 Background ... 28 5.1.2 Chinese involvement in South Africa ... 30 5.1.3 Analysis ... 31 5.1.4 Region share of world exports ... 32 5.1.5 Trade surplus ... 33 5.1.6 World Manufacturing ... 34 5.1.7 World FDI share ... 34 5.1.8 Conclusion South Africa ... 35 5.2 NIGERIA ... 36 5.2.1 Background ... 36 5.2.2 Chinese involvement in Nigeria ... 37 5.2.3 Analysis ... 38 5.2.4 Region share of world exports ... 38 5.2.5 Trade Surplus ... 40 5.2.6 World Manufacturing ... 40 5.2.7 World FDI share ... 41 5.2.8 Conclusion Nigeria ... 42 CHAPTER 6: CONCLUSION ... 43 BIBLIOGRAPHY ... 46
Chapter 1: Introduction
In 2012, the African Union opened their new headquarters in Addis Ababa with great joy. The headquarters had been funded and built by the Chinese, and is one of the many examples of Chinese investments in Africa (Maasho, 2018). However, the French newspaper ‘Le Monde’ reported in 2018, that data from the computers in the headquarters had been sent forward to Chinese servers every night in the period between 2012 and 2017 (CFR, 2018). Chinese and African Union officials have denied the accusations and the Chinese ambassador to the African Union even called the report ‘ridiculous and preposterous’ (Maasho, 2018). Whether or not the espionage has taken place, it does raise an interesting point, namely the fact that investments can have unintended side effects for the recipient, or can be used as tools to achieve certain goals by the investor.
In the last decades, China has become one of the largest trading partners of Africa. No other country has so much engagement with Africa on themes such as trade, aid, infrastructure financing and investment as China does (Jayaram et al., 2017). Chinese economic
involvement has increased from 20 billion US dollars in 2001, to 120 billion US dollars in 2011 (Cheru & Obi, 2011, p.72). During the seventh Forum of China-Africa Cooperation in September 2018, Xi Jinping has even pledged to admission 60 billion dollars in commercial loans to Africa (Pham et al., 2017). The Chinese loans consist mostly out of credits and loans for infrastructure (often with little to no interest) that are fast, flexible and have almost no extra conditions (Pham et al., 2017). By accompanying these loans with managerial know-how and entrepreneurial spirit, some argue that China is helping Africa to accelerate the process of the development of their economies (Jayeram et al., 2017). Others however, argue that Chinese investments in Africa can also be seen as something dangerous for African countries and not necessarily a factor that contributes to economic development. The reasons for China to invest these amounts of money in Africa are very diverse, (1) they provide access to the local markets for Chinese firms; (2) they can be derived from the intense competition within the Chinses economy, since a large part of these loans and investments is coming from private companies; (3) they are a result from the excessive domestic production capability; (4) they can take advantage of African regional and international trade agreements (Onjala, 2016, p.92). So by seeking access to new markets, exploiting natural resources and taking over the role of the West as preferred trading partner (Klaver & Trebilcock, 2011, p.167) China is trying to benefit economically by investing in Africa. Amongst other factors, this has
contributed to the fact that China is currently becoming more and more integrated into the global markets and is holding one of the world’s greatest pools of financial assets, second to only the United States of America (Töpfer, 2018, p.252).
For African countries, the motives are not that different. While some might differ from the specific goals such as the advantages regional trade agreements can bring, the overarching theme of benefiting economically is the same. African countries for example benefit from these FDI’s in at least seven ways: (1) they elevate commodity prices, (2) they strengthen the ability of African countries to extract their natural resources, (3) they improve the
infrastructure, (4) they help develop the manufacturing sector, (5) they increase employment, (6) they offer new markets and (7) benefit the local African consumers (Klaver & Trebilcock, 2012, p.168). However, it is not unambiguous that the loans and investments of China solely have the positive effects that are pictured above. Some of the infrastructure projects for example, have high costs and just limited added value. Another disadvantage is the fact that the Chinese FDI’s have limited transferability for technology, employment and skills (Klaver & Trebilcock, 2012, p.168). So while African countries try to benefit economically from the loans and investments of China, it is still not sure if they will.
Where China has yet profited from the integration in the global markets and world economy, African countries are still lagging behind. The fact that the effects of the loans and
investments of China in Africa are not yet clear, has led to the following research question for this thesis: ‘To what extent do Chinese loans and investments increase the integration of
African countries in the world economy?’. Because of this research question, this thesis will
have both academic as well as societal relevance. The academic relevance arises from the fact that many scholars have tried to analyse what China’s motives while investing in Africa are or they tried to analyse to what extent African countries are economically developing by more integration into the world economy. Seldom however, have scholars tried to combine these two fields to see what effects the investments of China have on the integration of Africa into the world economy. The societal relevance can be derived from the fact that by analysing to what extent these FDI’s are effective for the economic development of African countries, this thesis can hopefully make a modest contribution to how African countries deal with these loans and investments, in order to make the most out of them.
In order to answer the research question, first a short overview about what is already written about the Chinese loans and investments in Africa, and about the integration of African countries into the world economy will be given. Secondly, it is necessary to understand what benefits FDI’s can have and how countries are able to integrate into the world economy. These questions will be answered in the theoretical framework together with the theories of liberalism and the dependency theory, which help understand the reason why loans and investments are important in order to integrate into the world economy, and why this might be desirable for African countries. Thirdly, in the methodology section the mechanics that
underlie the central claim in this thesis will be elaborated upon further, and the research design that is used in order to answer the research question will be explained. Fourthly, the analysis will be done with the selected cases in order to answer the research question. Lastly, a brief conclusion will be given, which will entail a short summarization of the findings and the implications these have for future research.
Chapter 2: Literature review
Before the research question can be answered, it is important to know what other scholars have already written about the topic. In this part of the thesis, a closer look will therefore be taken at two important fields of research regarding the research question. First, this chapter will take a closer look at the research that has been done on the history and development of Chinese loans and investments in Africa. Secondly, this chapter will look at the literature about the integration of Africa in the world economy.
2.1 Chinese loans and investments
In the past few centuries, Europe has turned out to be one of the main trading partners of Africa. Europe has been the destination for more than half of Africa’s exports in the last decades, resulting in new opportunities for both countries, as well as making Africa very dependant of Europe (Mutambara, 2013, p.276; Young & Peterson, 2013, p.497). The link between these countries can be traced back to the colonial, linguistic and historical ties between certain European and African countries. These ties have led to a focus of Europe on African, Caribbean and Pacific countries considering their (developmental) trade relations, which have resulted in favourable access for these countries to the European single market (Young & Peterson, 2013, p.500). However, in two decades, China has taken over this role from the European countries. In many cases, African countries prefer the Chinese loans and investments to these of European countries or the United States of America. If African countries aim to benefit from the Chinese investments, reshaping the way in which they receive their investments and how they trade is crucial (Jauch, 2011, p.51). The need for change has also been recognized by China itself, and they have already started to make these changes. They have moved their emphasis from importing raw resources, to the development of hi-tech industries (Tang, 2018, p.924). By using their enormous amount of US-dollars as a way of investing in African countries and thereby assisting Chinese firms in becoming global firms, foreign direct investments (FDI) have become a major instrument for the Chinese government in Africa (Onjala, 2016, p.91). In the period between 2011 and 2015, Chinese imports of minerals and petroleum from Africa dropped from over 62 billion US dollars to 35 billion US dollars, while their FDI grew from 16 billion US dollars to 35 billion US dollars (Tang, 2018, p.924). This development is also not expected to stop here, Sinopec, the second
largest oil company of China, has pledged to invest over 20 billion dollars in the next five years in Africa (Onjala, 2016, p.91).
While the amounts of investments and loans to Africa are clearly rising, the effect of these loans and investments are still unclear. There is a lively debate among scholars about the effects of loans and investments on economic growth. In their article, Ram & Zhang (2002) analyse whether FDI’s have a positive effect on economic growth. They start out by stating the different advantages and disadvantages that FDI’s can have. As mentioned in the
introduction, there are some widely shared views how FDI’s can contribute to the economic growth of receiving countries. This is because: ‘FDI accelerates host countries’ growth by (1)
augmenting domestic savings and investment, (2) helping transfer of technology from the “leaders,” (3) increasing competition in the host country’s domestic market, (4) increasing exports and earning foreign exchange, and (5) imparting several other types of positive externalities (spillovers) to the economy at large’ (Ram & Zhang, 2002, p.205). On the other
hand however, FDI’s can also lead to a stagnation or decline of the economic growth since the transfer of technology, can for example be technologies that are not yet of use for the host country. Another possibility might be that the entry of a much more developed enterprise destroys the competition within a domestic market instead of increasing the competition (Ram & Zhang, 2002, p.205). It can even lead to the distortion of domestic politics within the host country in order to favour the foreign investors (Ram & Zhang, 2002, p.205). So while they raise some serious points of critique on the effect of FDI’s on economic growth, they come to the conclusion that FDI’s do have a positive impact on the economic growth of countries due to the factors mentioned above (Ram & Zhang, 2002, pp.207-208).
More specific to the case of Africa, Babalola et al. (2019) have looked into how FDI’s, trade and aid influence the economic growth of Nigeria. They concluded that these factors are of great significance for the economic growth. Increasing these variables will therefore lead to a boost of the Nigerian economy (Babalola et al., 2019, p.15). According to this research, aid and trade have a long-term and short-term causality to the economic growth, while FDI’s only have short-term causality. The reason why these variables would lead to economic growth is that open economies perform better than closed economies when dealing with exchanging goods, services, capital, labour, information, and ideas. The exchange of these elements in turn leads to economic growth (Babalola et al., 2019, p.17).
Awunyu-Vitor & Sackey (2018) take a closer look in their article on the effects of FDI’s in the agricultural sector on the economic growth in Ghana. According to them, this is a neglected topic within the field of economic development. They claim that agricultural
development takes place via FDI’s and open trade that stimulate amongst others job creation and ultimately lead to economic growth (Awunyu-Vitor & Sackey, 2018, p.1).
Simultaneously, government expenditure holds a negative but significant relationship with economic growth; their advice is therefore that the government should focus on flexible trade policies in order to attract more FDI’s, leading to economic growth for Ghana through
agricultural development (Awunyu-Vitor & Sackey, 2018, p.1).
Seyoum et al. (2015) have analysed 23 different developing African countries in the period of 1970-2011 and the effects of FDI’s on economic growth (measured by real GDP growth). Their analysis shows that there is a bidirectional Granger causality link between economic growth and FDI’s in the case of the 23 developing African countries (Seyoum et al., 2015, p.58). In some cases, the increase of FDI’s indeed have led to an increase of the GDP thus economic growth. In other cases, economic growth determined the attraction of FDI’s. In short, economic growth and FDI’s have a mutual reinforcing relationship according to
Seyoum et al. (2015, p.60).
Loots & Kabundi (2012) also highlight the importance of FDI’s in Africa, and their positive effect on the economy. They do so, by making a cross-section regression of 46 African countries in the period of 2000-2007. However, their main contribution is
determining what factors lead to the attraction of FDI’s. They came to the conclusion that the availability of natural resources is of great importance when determining the destination of the FDI’s by the providers of these investments (Loots & Kabundi, 2012, p.140). Also, trade openness and market size are important indicators for the destination of FDI’s (Loots & Kabundi, 2012, p.128).
In short, these authors all argue that (Chinese) FDI’s, loans and investments can give a positive boost to the growth of the African economies. By analysing different (sets of) countries in different time periods, they all came to the conclusion that the loans and investments are beneficial for host countries. Important indicators for this phenomenon are the presence of natural resources, market size and trade openness.
While, as mentioned above, many authors share the believe that loans and investments are beneficial for African host countries, there is also a large group of academics that argue the
opposite. Especially notable, is the research of Akinlo (2004) who, just as Babalola et al. (2019) has looked into the effects of FDI’s on the economy of Nigeria. Where Babalola et al. (2019) found a positive effect on the economic growth, Akinlo (2004) found a much more moderate relation between the two variables. Because of the large natural resources of Nigeria (mainly oil), extractive FDI’s might not be growth enhancing at all, or at least significantly less than manufacturing FDI’s (Akinlo, 2004, p.636). A solution for this problem might be to incorporate the oil sector better into the economy, and to privatize the oil sector as a whole. Nigeria is able to profit from FDI’s, only after a considerable lag (Akinlo, 2004, p.636).
Adams (2009) comes to a similar conclusion in his research. He analyses the effects of FDI’s and domestic investments (DI’s) on economic growth in Sub-Saharan Africa. He looks at 42 countries in the period of 1990-2003. He notices that DI is positively and significantly correlated with economic growth (Adams, 2009, p.939). FDI’s however, do not lead to a proportionate positive impact on African economic growth. In contrary, FDI’s on the short term have negative impacts on DI’s and therefore on the economy as a whole, but can with the right policies have a positive impact on the long term (Adams, 2009, p.939). It is therefore crucial that the FDI’s are targeted right, and that African countries increase the absorption capacity of their local firms and make sure government and multinational enterprises cooperate in the right way (Adams, 2009, p.939).
In his research, Bezuidenhout (2009) has looked at both the effects of FDI’s and aid on the economic growth of African countries. Regarding FDI’s, he underlines the findings of Adams (2009) and Akinlo (2004), namely that FDI’s not automatically have a positive impact on economic growth. ‘From the analysis, it is clear that the contribution of FDI to growth in
the region appears to be limited, and that the belief that more FDI will lead to increased growth, is not a forgone conclusion. Current policies aimed at attracting FDI will have to be revisited in terms of selecting the specific type of investment that is required.’ (Bezuidenhout,
2009, p.319). Again, the need for policy reform is stressed in being crucial for the
effectiveness of FDI’s. Bezuidenhout (2009, p.319) is not more positive regarding the effects of aid. Aid turns out to be unrelated to economic growth, but it can indirectly contribute to it. If aid is used to complement and enhance current investments, it will be a lot more effective. Aid can for example be used in order to improve education and thereby the domestic human capital (Bezuidenhout, 2009, p.319).
Ojeaga et al. (2016) find that FDI’s have different effects on regions in Africa. In North Africa FDI’s have a significant effect on the economic growth, however in East, West and South Africa, it does not (Ojeaga et al., 2016, p.29). One of the most important factors
that drive FDI is trade openness, but the often poor quality of African domestic markets result in the fact that many African countries are unable to take advantage of the FDI’s (Ojeaga et al., 2016, p.29). Again the conclusion of their research is that there are great possibilities for African countries to benefit economically from FDI’s, but the poor policies prevent that from happening. With policy reforms and better regulation from the government, FDI’s would be much more effective (Ojeaga et al., 2016, p.45).
2.2 Africa’s integration into the world economy
What has become clear from the existing literature is that there is no widely accepted view on the effectiveness of (Chinese) loans, aid and investments on the economic growth in Africa. Some argue that FDI’s lead to economic growth because of for example the stimulation of the export sector and others argue that there is no significant correlation between FDI’s and economic growth because many domestic markets are poorly regulated in Africa and therefore these countries are unable to reap the benefits from these FDI’s. It is however also important to take a closer look at the debate regarding the integration of Africa into the world economy since that is closely intertwined with the effectiveness of loans and investments. The scientific literature is less divided about the importance of integration into the world economy and the position African countries currently take in this process. However, there is some debate on the effects of integrating into the world economy on specifically African countries. Ćetković & Žarković (2012) explain this problem very well in their article. They set out the positive as well as the negative impacts that integration in the world economy can have. It can for example lead to a greater freedom of movement of goods and services by the lowering of trade barriers, which will lead to international specialisation and an expansion of international economic transactions (Ćetković & Žarković, 2012, p.168). It also allows for greater
international competition and simultaneously a great reduction in transportation costs since multiple countries invest in infrastructure at the same time (Ćetković & Žarković, 2012, p.168). However, at the same time these effects do not appear for every country. The benefits that integration in the world economy can bring are not allocated evenly over the countries. Bush (2012) for example underlines this last point in his article. He argues that the optimism of globalisation and integration into the world economy for Africa is misplaced, and that it is reducing their political and economical independence (Bush, 2012, p.32). He even claims that
the hope for the future should not be the neoliberal approach of free trade, technological transfers from developed countries and open markets, but resistance to globalisation and integration into the world economy. African (Bush, 2012, p.32)
Chabal picks up on the points made by Ćetković & Žarković (2012) and Bush (2012) and analyses if African countries might not profit that much from integration into the world economy. Africa might not yet be prepared to compete in the world economy. ‘The free flow
of goods and finance and the breaking down of barriers to trade work to the detriment of countries that are weak economically, unstable politically and crippled by poverty. It follows from this view that Africa needs to be protected from the full force of globalisation if it is to survive the cold winds blowing from the north.’ (Chabal, 2010, p.109). However, he comes to
the conclusion that this claim is both historically as well as analytically inaccurate. Saville & White (2015) tend to agree more with the last points made by Chabal (2010), namely that these claims are inaccurate. They claim that countries with a higher degree of economic integration develop faster economically, and that the levels of human welfare are higher, and poverty levels lower (Saville & White, 2015, p.82). Their research produces two unambiguous findings: (1) The economies of African nations have been
growing slowly but surely in terms of global integration, and (2) even though it is still hard to spot, African economies are slowly but surely catching up on the rest of the world (Saville & White, 2015, p.101).
What the existing literature around the investments of China in Africa and the literature around the importance of integration into the world economy have shown is that there is a no widely accepted view on either fields of research. While many recognize the positive effects that integrating into the world economy can bring, the process of how to do so remains a hot topic. Some argue that integrating into the world economy should be an immediate goal for every country, while some argue that it might be better for developing countries to firstly develop their economy so that they can be competitive at the global level.
Chapter 3: Theoretical Framework
In the literature review it has become clear that the research topic is quite controversial. Different concepts, theories, and mechanisms were used by scholars to conduct their
researches. Many of these concepts can be viewed as ‘contested concepts’ i.e. a concept that has no widely accepted definition (Van der Eijk, 2001, p.12). Before it is therefore possible to answer the research question, it is important to state which definitions of certain concepts will be used in this research and what is understood by certain theories. After this has been done, the underlying mechanisms of this thesis’ argument will be discussed and linked to the literature.
3.1 Core theories
3.1.1 Neo Classicism
The theory that lays the foundation and justification for the articles written by the scholars mentioned in the literate review, and for this thesis, is neo classicism. The groundwork for this theory can be traced back to famous scholars as Smith and Ricardo. The renowned liberal philosopher Adam Smith starts his work ‘The Wealth of Nations’ with carefully explaining what benefits and increase in the division of labour can bring for economies (O’Brien & Williams, 2016, p.181). In short, the division of labour breaks up the production process by assigning different parts of the production process to different individuals instead of one individual making an entire product. By doing so, the speed of the production will be increased because individuals get better at their job the more they do it, travel time is eliminated because individuals do not have to move between jobs anymore and by
simplifying the production process, machinery can be applied (O’Brien & Williams, 2016, p.182). This process would lead to benefits for the society as a whole since the effects would even flow down to the lowest members of society. So for division of labour to work, the state should enlarge the market. ‘The larger the market, the more different types of products would
be created and the greater the division of labour’ (O’Brien & Williams, 2016, pp.182-183).
One way of enlarging the market is by participating in international trade, of which David Ricardo changed the public’s perspective through his model of comparative advantage. Where
formerly trade was seen as a zero-sum game, Ricardo showed that trade was in fact a positive-sum game (O’Brien & Williams, 2016, p.104). In short, the theory of comparative advantage contains that states will always profit from trade if they focus on the production of goods in which they are relatively more efficient (or less inefficient) than other states (O’Brien & Williams, 2016, p.104). By not focussing on the production of goods in which states are the most efficient, but by linking it to their competitors, states will be able to consume more than that they would been able to without trade (O’Brien & Williams, 2016, p.104). With this knowledge, many make the argument that free trade leads to economic growth because resources are allocated more effectively through comparative advantage, it leads to a more efficient dissemination of knowledge and technologies and it increases competition in both domestic and international markets (Chang et al., 2009, p.33).
While Smith and Ricardo help us understand how international trade is linked to the allocation of resources, they do not elaborate greatly on the link between trade and the dissemination of knowledge and technologies. Technology diffusion however, plays a key role in the process of economic growth (Borensztein et al., 1998, p.116). Less developed countries can potentially benefit enormously from trade with more developed countries in the sense that they can draw upon the large amounts of yet discovered and sophisticated
knowledge capital of more developed countries (Grossman & Helpman, 1990, p.91). It is also mostly the well-developed economies that provide in the discoveries of new technologies (Barro & Sala-I-Martin, 1997, p.1). Therefore, trade restrictions can reduce the worldwide economic growth. Hypothetically, assuming that countries allocate their resources in the comparative advantage way Ricardo described, some countries will tend to focus more on the research and development (R&D) sector, and some on the manufacturing sector that makes use of the technologies created by the R&D sector (Rivera-Batiz & Romer, 1991, p.972). Trade restrictions will in that case lead to less economic growth, since countries will invest in research that possibly already has been done, so they will be wasting money on redundant research efforts (Rivera-Batiz & Romer, 1991, p.972).
While undeniably being an extremely important factor and offering easier ways for
technology to be transferred from one country to another and thereby providing pathways for economic growth, participating in free trade can also offer certain other types of benefits that can ultimately lead to economic development. In the contemporary age of globalisation, i.e.: ‘the process of greater integration within the world economy through movement of goods and
services, capital, technology and (to a lesser extent) labour, which lead increasingly to economic decisions being influenced by global conditions’ (Jenkins, 2004, p.1), factors as
services, capital and labour also play important roles in the development of economies. Just as technology, services provide an important input for the production and export process, and the international competitiveness for countries (Tongzon & Cheong, 2016, p.101). Free trade in services can for example be of great importance for economies that thrive on knowledge and is closely linked to the R&D industries as mentioned earlier. Countries that do not produce many goods, but do have a large amount of firms offering for example consulting, medical services or construction services can obtain new markets via free trade (Munin, 2010, p.84). Therefore, the service sector contributes both directly as well as indirectly to the benefits an economy receives from free trade (Tonzon & Cheong, 2016, p.102). It reliefs a country’s reliance on for example the export of goods to achieve sustainable economic growth and increasing a country’s international competitiveness and simultaneously it contributes to this economic growth by directly improving the export performance (Tongzon & Cheong, 2016, p.102).
Another important determinant for firms to become competitive at the international level is the cost of labour (Espinosa, 2018, p.300). Firms differ in pay policies in order to beat the competition. Paying your employees a good salary may result in attracting better skilled labour and therefore increase the international competitiveness of the firm (Espinosa, 2018, p.298). As a result, this will not only increase the competitiveness of firms, but also those of the country in which they are situated. Due to an increase in size of the sector in which these firms are operating, the competitiveness of the country as a whole will improve. Movement of labour can therefore lead to economic growth via the influence it has on industries of
countries (Espinosa, 2018, p.295).
3.1.2 Solow model of growth and the new growth theory
The final factor that explains why integration into the world economy influences economic growth is through capital. This can best be explained via the neoclassical-based theory of growth of Solow and the new growth theory that builds upon that. The Solow model assumes that economic growth can be obtained by raising levels of investment i.e. capital widening, which in turn will lead to an increase in capital stock, which will in turn lead to an increase
per capita income in the host country (Solow, 1956). Solow states that long-run economic growth (the steady increase in aggregate output) is obtained through both the accumulation of capital, and technological improvements (Seyoum et al., 2015, p.49). The basis for his model is formed by two assumptions about capital and technological improvements. (1) The
technological progress is exogenous; (2) the assumed neoclassical production function has a diminishing marginal productivity (Chen et al., 2014, p.263). Adding the variable of
population growth, and assuming that both the population growth and the savings rate are exogenous, the model predicts that these variables determine the steady-state level of income per capita (Mankiw et al., 1992, p.407). Because these variables are different for every country, countries experience different levels of economic growth. ‘The higher the rate of
saving, the richer the country. The higher the rate of population growth, the poorer the country’ (Mankiw et al., 1992, p.407). Solow assumes that the returns on capital will decrease
because of the fact that if capital will increase relative to other resources, their marginal product will drop (Chen et al., 2014,p. 263). However, this might be the case if capital is to be defined purely as buildings and machines, but when a broader definition is used which
includes for example investments in human capital or technology, the loss of returns is less logical (Chen et al., 2014, p.263). This is also directly one of the main points for critique on the Solow model of growth. The incorporation of investments in human capital as well as physical capital is crucial in understanding the relation between income, growth, savings and population (Chen et al., 2014, p.263; Mankiw et al., 1992, p.408). A model that expanded upon the Solow model in order to take these ‘renewed’ variables into account is the new growth theory. By adding human capital to the equation, externalities to education and R&D would prevent the return on capital from falling, and because of this investments would influence long-term growth even more. Growth would namely not only be determined by the growth of the population and the technological development in a country (Nell & Thirlwall, 2017, p.163).
In short, the neoclassical view explains very well how integration into the world economy and economic growth are intertwined and how one can lead to the other. This occurs mainly through the easier movement of goods and services, capital, technology and to a lesser extent labour. The Solow model of growth and the new growth theory, based on these neoclassical views, subsequently explain very well on how investments influence economic growth. While these theories lay the groundwork for this thesis, there is too much criticism on these theories to simply ignore. Therefore the next paragraph will expand upon this criticism.
3.1.3 Dependency theory
Santos (1970) describes dependency as: ‘a situation in which the economy of a certain
country or group of countries is conditioned by the development and expansion of another economy, to which their own is subjected’. Dependency theory emerged in the 1960’s as a
reaction to modernization theorists. The theory focuses on the institutional structures by which weaker states get exploited by powerful core states, even after they became
independent (Chase-Dunn, 2001, p.196). It contested the idea that economic development would be diffused from developed countries to underdeveloped countries as proposed by amongst others the neoclassical theorists (Chase-Dunn, 2001, p.196). These power relations between developed and underdeveloped states are crucial within the dependency theory since they help understand how the hierarchical interactions based on economic exploitation and neo-colonial military and political control help keep the inequality in place (Chase-Dunn, 2001, p.196). Main forms of critique from the dependency theorists on for example the inflows of investments in developing countries are also based on these principles. They reject the notion that capital inflows lead to economic growth because of at least six reasons
(Seyoum et al., 2015, p.50). First of all, they argue that the benefits developing countries can experience from these capital inflows are unequally distributed. The investments made by for example the multinational corporations (MNC) are not in the interests of the host countries, but favour these MNC’s strongly (Seyoum et al, 2015, p.50). Secondly, the presence of MNC’s in the host country, which is characteristic in combination with FDI’s (which will be explained later in the theoretical framework), can often result in crowding-out local
enterprises and employees and lead to market monopoly for the MNC’s (Seyoum et al., 2015, p.50). Thirdly, because host countries are technology wise often not as developed as the country that is investing in them, the introduction of inappropriate technologies might lead to an increase in unemployment since the economy of the host country is shocked by the
introduction of these technologies and not prepared to handle this sudden development (Seyoum et al., 2015, p.50). Fourthly, certainly in the case of Africa, a great risk is that the investments are purely made with the intention to exploit the natural resources of the host country (Seyoum et al., 2015, p.50). Fifthly, dependency theorists worry that the investments may lead to an uneven income distribution within the host country, and that it disrupts the cultural dynamics within the recipient countries (Seyoum et al., 2015, p.50). Lastly, and arguably one of the most disruptive downsides of these investments as argued by dependency
theorists, is that these investments may interrupt with the domestic politics of the host countries in favour of the MNC’s or the supplying country (Seyoum et al., 2015, p.50). An important factor that influences mainly the last concern raised by the dependency theorists is the state of the domestic and international institutions, without them market failure and herd behaviour are real risks (Underhill, 2013, p.577). Important international institutions like the international monetary fund (IMF) and the World Bank try to provide stability for both other institutions as well as the financial system as a whole. Stability is of great importance because it prevents institutions from: ‘becoming a failure of the integrated financial area as a whole’ (Jones & Underhill, 2013, p.3). Stability occurs when investors keep their investments abroad, and capital keeps flowing freely over borders. When financial actors start doubting the
safeness of their investments and the financial system as a whole, they might start changing their positions, which can result in instability for the financial integration (Jones & Underhill, 2013, p.13). By imposing policies that help keep the financial system stable, institutions like the IMF and the World Bank try to create open economies that promote economic
development (Winters et al., 2004, p.72). The intentions of the IMF and the World Bank are also known to be more in line with the neoclassical view on development, and try to support countries in making the shift from closed economies to liberalization and integration into the world economy (Nelson, 2018, p.3). One of the tools they use in order to promote this view is handing out funds in exchange for market orientated policy reforms in the recipient countries (Nelson, 2018, p.3). And while it has become clear that integration into the world economy can lead to an increase in production and economic growth altogether (Winters et al., 2004, p.107), this is exactly the danger that dependency theorists were warning for. The problem with these international institutions is namely the way in which they are built. The voting power in the IMF for example, is built around the economic power a member state has; the more economical power, the more voting power (Gallagher, 2015, p.186). This means that developed countries have the ability to enforce political reform through international
institutions such as the IMF and the World Bank (Underhill, 2013, p.581). Poor countries do not possess the power to form a counterweight and give input in the policies formed by these institutions (Cassimon et al., 2010, p.4). This highlights the point that dependency theorists make about the disturbed power relations between developed and underdeveloped countries. Because of their political power, developed states are able to enforce potentially damaging policies up on underdeveloped states. Trade liberalization and integration into the world economy might for example not always be the most beneficial for a developing country.
Participating in the world economy and opening up the domestic markets for foreign investors may lead to an increase in poverty traps, situations in which a household cannot escape
poverty once it has reached the poverty line, for example (Winters et al., 2004, p.96). In order for trade liberalization to work, a country might need a range of domestic policies backing it up, which in turn needs functioning domestic institutions since policies are in fact nothing more than decisions being made in a certain institutional context (Winters et al, 2004, p.107; Cassimon et al., 2010, p.23). This is subsequently an important point of critique on the more developed countries: ‘we want to make the bottom billion look like us, but we forgot how we
got to where we now are. We did not do it in a single leap […]’ (Collier, 2010, p.25). The
developed countries try to impose policies on the underdeveloped countries that worked for them, in the hope that they for the underdeveloped countries as well. According to amongst others dependency theorists, developing countries should be offered the necessary space to develop their domestic institutions so that they are able to handle the incoming investments. Integration into the world economy and the forthcoming financial flows cannot replace country specific development strategies (Cassimon et al., 2010, p.24).
In short, neoclassicism has shown what can motivate countries to invest in other countries, or why it might be appealing for countries to accept these loans and investments. It has also shown why countries would integrate into the global economy and what economic benefits this could bring for them. The mechanics of how these investments would lead to a better integration into the world economy will be discussed later in this theoretical framework. On the other hand, the dependency theory has shown why countries might be hesitant in
accepting foreign loans and investments and what negative consequences they may have. It also shows possible solutions for these negative consequences and certainly does not dismiss the idea that loans and investments cannot be economically beneficial for host (and often less developed) countries. Together these theories sketch a good image of the dynamics between investments and global economic integration.
3.2 Concepts
In the previous paragraphs, a lot of concepts and theories have been discussed, but as stated in the introduction of this chapter, a lot of these concepts can be seen as contested concept: concepts without a widely agreed definition. It is therefore necessary to discuss what will be
understood by certain concepts in this thesis in order to make a sensible analysis. In the upcoming paragraphs, first the understanding of what loans and investments entail will be discussed. After that has been done, integration into the world economy will be specified.
3.2.1 Loans and investments
There are several different reasons why concepts might be considered to be contested. A concept can for example consist out of multiple concepts that need explaining themselves, which in turn makes the formation of a comprehensive definition difficult (Van der Eijk, 2001, p.14). Another reason is that the definition of a concept entails certain normative and descriptive elements (Van der Eijk, 2001, pp.13-14). The latter is applicable in the case of integration into the world economy, which will be explained in the next paragraph. The former is the case with the definition of loans and investments. The term loans and investments is namely very broad and consists out of multiple different forms of financial interactions between actors, and therefore the most important forms of interactions will be discussed in the upcoming paragraphs.
One of the most important and commonly used investment forms are FDI’s. While this term has already been mentioned frequently this thesis, it has never been defined properly. The definition for FDI’s that will be used in this thesis is formed by the Organisation for
Economic Cooperation and Development (OECD): ‘[…]a category of investment that
reflects the objective of establishing a lasting interest by a resident enterprise in one
economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor’ (OECD, 2008, p.7). The long lasting
interest also implies that there is a long-term relationship between the hosting country and the direct investor that there is a significant amount of influence on the management of the enterprise in question (OECD, 2008, p.7). This investment form can manifest itself in two different ways. Firstly, firms have the option to create new production facilities in the hosting country i.e. Greenfield Investments. Another option is through mergers and acquisitions (M&A) (Arslan & Larimo, 2011, p.345; Yokota & Chen, 2012, p.266). Developing countries often try to attract FDI’s from well-developed countries because the long-term relationship and the influence of the investors bring multiple benefits in contrast to for example regular loans. The main focus of developing countries is to attract FDI’s from foreign firms that have
a well-developed R&D sector in order to profit from the in-house technology since FDI’s are the main form of transferring technology across borders (Yokota & Chen, 2012, pp.265-266). However, which form of FDI’s (Greenfield Investments or M&A) are used when accessing the host countries market determines for a big part whether or not the hosting country is able to economically benefit from these investments (Yokota & Chen, 2012, p.266). Greenfield Investments often lead to a positive impact on the host countries economic growth, while M&A’s only affect the economic growth through R&D spillovers in a positive way if the host country has large amounts of human capital (Yokota & Chen, 2012, p.266). What mainly drives MNC’s to conduct FDI’s, is the market potential of the developing countries, and the growth opportunities they offer (Arslan & Larimo, 2011, p.345). This however does not explain why MNC’s make the decision to use one of the two available options for market entries. What does explain the preferred mode of entry is the trade-off between entry costs, and R&D spillovers. When R&D spillovers are high, and when there is a small different cost between Greenfield Investments and M&A, a MNC will most likely opt for Greenfield Investments in order to minimalize technology leakage (Yokota & Chen, 2012, pp.277-278). However, when R&D spillovers are relatively low, a MNC will most likely choose for M&A. This has important policy implications for developing countries, since it is country specific if the attraction of FDI’s through Greenfield Investments or M&A is more beneficial for the host country. Countries therefore have to adopt the right policies in order to attract the right forms of FDI’s, in a globalizing world in which M&A FDI’s are currently dominating (Yokota & Chen, 2012, pp.277-278).
Besides investments, loans also play an important role in financial interactions between countries. In the oxford dictionary, a loan is defined as: ‘a thing that is borrowed, especially a
sum of money that is expected to be paid back with interest’. In itself, a loan is a
straightforward concept, however the conditions that dictate how the loan has to be paid back and what the extra conditions might be differentiate loans from each other. Western loans to African countries for example consist mostly out of cash or materials, often accompanied with certain regulations and conditions. Chinese loans to the same countries consist mostly out of credits and loans for infrastructure (often with little to no interest) that are fast, flexible and have almost no extra conditions (Pham et al., 2017). The reason why Chinese loans do not have certain political or economic conditions are diverse. It is a tool for the Chinese government to strengthen its ties with African countries by creating a ‘paradigm of
investment for the long term, by granting these loans with hardly any strings attached, China is fundamentally reshaping African economies (Cheru & Obi, 2011, p.75) and thereby
hopefully creating new markets for their MNC’s in the long-term. So therefore the concept of a loan on itself is fairly obvious, however the difference is made by the interest, conditions and the goals on which these factors are based.
3.2.2 Integration into the world economy
Another concept that needs clarifying is the integration into the world economy. Since it entails multiple normative terms such as ‘integration’ and ‘world economy’, it is important that a clear definition is given to this concept in order to be able to come to the right conclusion in the analysis. Another concept that is closely linked with integrating into the world economy is globalization. Jenkins (2004, p.1) describes globalization as ‘the process of
process of greater integration within the world economy through movements of goods and services, capital, technology and (to a lesser extent) labour, which lead increasingly to economic decisions being influenced by global conditions.’. According to this definition of
globalization, integrating into the world economy takes place via (increased) movements of goods and services, capital, technology and labour. Integrating into the world economy is therefore heavily dependent on free trade and trade liberalization. More concrete however, integration into the world economy entails ‘[…] an increase in the region’s share of world
production of goods and services; an increase in the region’s share of world exports,
generating trade surpluses; progressive product specialisation, or specialisation in goods and services for which demand is increasing; an increase in the share of world manufacturing; and an increase in the world share of FDI.’ (Robles Jr., 2008, p.183). Important to notice, is
that for a country to successfully integrate into the world economy, it is first necessary to integrate into the region. By doing so, countries get the opportunity to amongst others decrease the negative effects of lacking competition in the region, to be able to influence (foreign) investors hence making it easier to attract FDI, reduce transaction costs which are caused by geographic, legal and institutional barriers that weaken the global competitiveness of goods and services that are produced in the region, to be able to benefit from technological improvements, to lower R&D costs and to increase the yields from innovation (Robles Jr., 2008, p.184). Therefore in this thesis, integration into the world economy will be seen as a combination of these two explanations by Jenkins (2004) and Robles Jr., 2008). The ultimate
goal of integrating into the world economy is increasing the movement of goods and services, capital, technology and labour; which will be achieved through an increase in the regions’ share of world production of goods and services, world exports, product specialization and the share of FDI’s coming to the host country.
3.3 Mechanisms
In order to be able to answer the research question: ‘To what extent do Chinese loans and
investments (FDI’s) increase the integration of African countries in the world economy?’, it is
first necessary to discuss the underlying assumptions that link loans and investments to integration in the world economy. To do so, this thesis will make use of both the positive, as well as the negative implications investments may have on economic growth according to Ram & Zhang (2002) in combination with the definition of integration into the world economy given by Robles Jr. (2008). The reason why this thesis will focus on integration instead of economic growth is because integration is a step in the process that can lead to economic growth. The aim for many countries is therefore to integrate the economy at global level (Shahbaz, 2012, p.2325), because as explained above, according to a neoclassical view, trade and trade openness can lead to economic growth. However the mechanism that makes this possible is integration into the world economy. Therefore by looking at integration into the world economy, effects on economic growth can also be derived from this analysis. Summarizing, this chapter has shown how neoclassicism can be used in order to understand the logic behind the effects of loans and investments on economic growth. By participating in international trade, countries gain benefits they otherwise would not have had. Important benefits that countries can experience due to open trade are loans and investments. Via these loans and investments countries gain the ability to augment their domestic savings and have access to technologies they otherwise would not have. However, dependency theory has shown us that international trade does not always lead to this outcome, and that it is for instance very important that the institutional foundation in the host country is well established in order to reap the benefits from these loans and investments. In the next chapter, a closer look will be taken on how exactly loans and investments lead to better integration into the world economy.
Chapter 4: Methods & Operationalization
In order to formulate an answer to the research question: ‘To what extent do Chinese loans
and investments (FDI’s) increase the integration of African countries in the world economy’
it is essential that a proper research design is used and that the concepts are operationalized in a correct way. Therefore, the next chapter will firstly discuss the chosen research method and the implications this will have for its validity. After this has been done, the concepts will be operationalized so it becomes clear how the analysis will be conducted. Finally, the data that will be used and where it originates from will be discussed.
4.1 Research method
This thesis will make use of a qualitative research design complemented with quantitative data. While using quantitative data is obviously a good way to look at the exact amounts of exports in the region for South Africa or at the inflows of FDI into Nigeria, it fails to highlight the underlying structures of how these exports and investment flows have come into
existence. Therefore making use of a qualitative research design, this thesis will be able to attribute meaning to events and their environment (Bryman, 2012, p.399). Qualitative research offers the ability to provide descriptive detail when presenting the results of the analysis since it helps put phenomena in perspective (Bryman, 2012, pp.400-401). Another benefit of qualitative research is the fact that it puts the emphasis of research on processes. Because of this, qualitative research has a strong sense for change (Bryman, 2012, p.402). In this thesis, this helps to understand why Chinese loans and investments have made an impact on South Africa and Nigeria, and if this impact has changed over time. Finally, qualitative research offers the opportunity to further sharpen the research question and the theory that is grounded within the data during the research (Bryman, 2012, pp.403-404). In practice this means that if it the data does not support the central claim in this research, it may point towards other explanations or hint for further research. The way in which this qualitative research will be done is by making use of a case study. The main focus of a case study research design is the extensive examination of a single case or phenomena (Bryman, 2012, p.67). A commonly used definition is: ‘an intensive study of a single unit for the purpose of
understanding a larger class of (similar) units’ (Gerring, 2004, p.342). By making use of a
(Nigeria), this thesis hopes to get a better insight in the effects of Chinese loans and
investments on the integration into the world economy. A critical case study examines a case that is chosen because of the strong link to the theory, and because it can help understand under which circumstances the hypothesis will or will not hold (Bryman, 2012, p.70). In this case, South Africa has been chosen as a critical case since it for example in 2012 received more than twenty per cent of all the Chinese FDI flowing into Africa (Leung & Zhou, 2014). Simultaneously, South Africa calculates for 41 per cent of the total export value of Sub Saharan Africa (World Bank, 2019). Therefore it is logical to assume that there is at least a correlation between the inflow of loans and investments and the integration into the world economy, therefore South Africa can be seen as an example of a critical case as described by Bryman (2012, p.70). Next to South Africa, this thesis will also make use of Nigeria as a representative case. A representative case, or a exemplifying case is a case that exemplifies a category of cases of which it is a member (Bryman, 2012, p.70). Nigeria is namely a perfect example of a country that mainly exports raw materials and resources, such as many African countries do (World Bank, 2019). The exports revenue of petroleum for example, makes up for almost 83 per cent of the total exports revenue of Nigeria (OPEC, 2018). Simultaneously, Nigeria is also one of the biggest destinations for Chinese loans and investments in Africa, besides South Africa (Leung & Zhou, 2014). Therefore, by using Nigeria as a exemplifying case, this thesis aims to get a better understanding of the effects of Chinese loans and investments on African countries, since Nigeria exemplifies many African countries in a suitable way.
Since a case study is not per definition a sample of one (Bryman, 2012, p.70), combining a critical case study with a representative case study, this research hopes to influence the
external validity in a positive way. One of the main points of critique on case studies has been that the external validity is often low, since the use of a single case cannot be representative for other cases, and therefore does not explain enough (Bryman, 2012, p.71). However, by using two cases, with different origins (critical versus representative), this research hopes to tackle this problem and keep the external validity as high as possible.
Another important factor that should be addressed is the internal validity. Internal validity takes into account the issue of causality. Does the conclusion incorporate a causal relationship between the two variables used in the research (Bryman, 2012, p.47)? This research tries to address this issue by making use of temporal variation and within-unit covariation. The
former will be addressed by focussing on different points in time, before as well as after the loans and investments have been made by China, the latter will be addressed by focussing on different aspects of how countries may be able to integrate into the world economy, and how loans and investments may be of influence. How this will be done exactly, will be explained in the next paragraph. By making use of temporal variation and within-unit covariation, this research hopes to discover a causal relationship and safeguard the internal validity (Gerring, 2004, pp.343-344).
While the theoretical framework has given us insights in what integration into the world economy entails, and how loans and investments might be of influence to them, it has not yet given us the means in how to measure these effects. Therefore, this paragraph will discuss in how integration into the world economy will be measured. As stated in the theoretical framework, indicators for integrating in the world economy are: ‘an increase in the region’s
share of world production of goods and services; an increase in the region’s share of world exports, generating trade surpluses; progressive product specialisation, or specialisation in goods and services for which demand is increasing; an increase in the share of world manufacturing; and an increase in the world share of FDI’ (Robles Jr., 2007, p.183). These
indicators will be applied to Nigeria and South Africa. At the same time, the amounts and destinations (sectors of where the investments are headed to) of Chinese FDI will be analysed. By doing so, this research will hopefully be able to find a correlation or causal relationship between Chinese loans and investments and integration into the world economy.
The data that will be used in order to perform the analysis will be coming from international organizations (IO’s) such as The World Bank, the OECD, the IMF and OPEC. These
documents contain raw data that offers us a clean insight in the exports and imports of African countries. Combining this data in this qualitative research with articles and theories from other scholars can give us insights in the underlying structures of how the status quo have come to be. The articles from other scholars will be obtained by using both the physical as well as the online library of the University of Amsterdam (UvA).
Chapter 5: Analysis
In the analysis, two countries will be assessed on the amounts of loans and investments they are receiving, and the change in the indicators that have been given in the operationalization which represent their integration into the world economy. South Africa has been chosen as a case because of their close resemblance to the literature that suggest foreign loans and investments will make a positive impact on the integration into the world economy. Nigeria has been chosen because of the fact that their economy is mainly focussed on exporting raw materials and resources (which is common for many African countries) while simultaneously receiving large amounts of Chinese loans and investments. Before being able to start the analysis on these countries, it is first necessary to get a better understanding of the histories of these two countries, and how their economy and production sectors are composed. By doing so, it will be also be possible to discover potential other explanations for findings we might encounter later in the analysis.
5.1 South Africa
5.1.1 Background
South Africa is a country with a rich history, originally inhabited by Khoisan and Bantu people. However, in 1652 Dutch traders settled in South Africa by making a stop over point for their travels to the Far East called Cape Town (CIA, 2019). In 1806, the British took over the Cape of Good Hope area and the Dutch settlers (Boers/Afrikaners) had to flee the area and established their own republics in the north of South Africa (CIA, 2019). The discovery of certain high valued natural resources such as diamonds and gold led to an enormous increase in immigration and economic growth, but also led to harder repressions of the indigenous population. The British also defeated the Dutch settlers in the Second South African War (1899-1902) but ruled together over the country from 1910 and onwards (CIA, 2019). In 1948, the Afrikaner dominated National Party was elected into power and put in place the policy of Apartheid, separating the races and favouring the smaller white minority at the expense of the larger black majority (CIA, 2019). And while the Apartheid has been abolished, the marks it has left on society are still very much notable. South Africa is until today still one of the most unequal countries in the world and the society is deeply divided
(Drew, 2010, p.24). The gap between poor and rich for example is widening. Absolute poverty is declining thanks to government grants, but the redistribution is limited. Another factor that divides the South African society are the racial lines (Drew, 2010, p.24). While the absolute poverty might be declining, this is more the case for certain groups within the South African society than others. The division between racial lines for example causes the civil society to become even more divided. Therefore these social economic divisions highly influence the social cohesion within South Africa. This is a risk for numerous factors of South Africa; firstly, local politicians often face numerous constraints when implementing
reforming policies (Easterly et al., 2006, p.103). Secondly, social cohesion determines the quality of institutions within the country (Easterly et al., 2006, p.103). So this would imply that the domestic institutions of South Africa could be considered to be quite weak, which as we have seen in the theoretical framework, implies that South Africa is not prepared
optimally to handle incoming investments.
However, South Africa has faced major changes since the 1990s. After a long period of internal struggles and international reactions regarding the Apartheid policies, it has finally made major economical changes to these institutional structures of the economy in order to be able to integrate better into the regional, and ultimately world economy (Kowalski et al., 2013, p.397). While before 1990 South Africa was already the biggest economy in southern Africa, after these policy changes they started to become even bigger. Their GDP was about four times the size of the rest of the region, and their trade numbers were about three times the rest of the region (Hentz, 2005, p.23). Neighbouring countries were highly dependent on the infrastructure of South Africa in order to get their own exports, and about 90% of the
electricity that was produced in 1992 in that region, was produced by South Africa (Hentz, 2005, p.23). The forces that drive this regional cooperation are the Southern Africa
Development Community (SADC) and functional cooperation (Hentz, 2005, pp.33-38). The SADC consists out of Angola, Botswana, Democratic Republic of the Congo, Lesotho, Madagascar, Malawi, Mauritius, Namibia, Mozambique, Seychelles, South Africa,
Swaziland, Tanzania, Zambia and Zimbabwe, and has as main goal promoting development for these countries (De Sousa, 2015, p.12). The relation between South Africa and the SADC has always been a tricky one. While it is on the one hand the anchor of regional relations for South Africa, on the other hand there is a so-called hegemons dilemma (Hentz, 2005, p.33). The neighbouring countries see the positive influence that South Africa can have on them, but at the same time they are scared of its regional dominance (Hentz, 2005, p.33). This has
resulted in lots of power plays over FTA’s and other regional trade agreements, but has ultimately led to the leading role South Africa has today within the region (Hentz, 2005, pp.35-36). Another factor that drives the regional relations of South Africa are functional cooperation, and this mainly manifests itself through three areas: water resources,
hydroelectric power and transport (Hentz, 2005, p.36). These areas commit South Africa to cooperate with the countries in their close proximity because they are mutually dependant on each other (Hentz, 2005, p.36).
So now that it has been made clear how South Africa became the country it is today, and how it cooperates with the countries close to them, the only thing that still rests us is to give a short insight in how their economy is build up. As mentioned before, South Africa is rich of
resources and has a strong agricultural sector, but their main focus of the economy is in the services sector (CIA, 2019). And while we have just seen that South Africa is traditionally one of the largest economies in Africa, and can be seen as the hegemon in the southern Africa region, they have well-developed financial, legal, technical and energy sectors, and their stock exchange is the largest of Africa and in the top twenty of the world, South Africa has seen some setbacks lately (CIA, 2019). In recent years, economic growth has strongly declined and inequality, poverty and unemployment numbers remain among the highest in the world (CIA, 2019). Due to the great instabilities, commonness of strikes, the internal struggles within the ruling party and the volatility of the rand, almost all credit rating agencies have downgraded South Africa’s debt to junk bond status (CIA, 2019).
5.1.2 Chinese involvement in South Africa
The relationship between China and South Africa has developed from minimal contact, to a close economic cooperation between the two nations (Bradley, 2015, p.881). Because of the leading role that South Africa took on the African continent, China has sought ways to form a strategic partnership between the countries in order to profit from this development (Bradley, 2015, p.881). While the government of South Africa is hungry for Chinese investments, a growing coalition of liberal minded South Africans is resisting Chinese influence, because they are worried for a neo-colonial influence by the Chinese investors, which can erase the hard earned post-apartheid democratic ideals (Bradley, 2015, p.881). A good example of Chinese involvement in South Africa is the acquisition in 2007 of 20% of the stakes in the
