China’s ascent into Sub-Saharan Africa : a mixed blessing

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China’s Ascent into Sub-Saharan Africa:

A Mixed Blessing

Bachelor Thesis

By

Charley Stokhof

(10654836) Bsc of Economics

February 2016

University of Amsterdam

Faculty of Economics & Business

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Statement of Originality

This document is written by Student Charley Stokhof who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract. With China due for a slowdown, the influence on its trading partners has become a relevant topic in macroeconomics. In this paper, I investigate the effect of the increasing trade linkages between China and SSA on the economic growth performance of the countries in SSA. By using a data analysis, I find evidence supporting the hypothesis that trade with China positively influences growth in the economies of SSA. However, its high export concentration makes SSA vulnerable to external shocks, and the slowdown of the Chinese economy and the changing structure of Chinese demand must be anticipated by African policy makers.

1 Introduction

It is no secret that China has been one of the fastest growing economies of the past 30 years. After the economic reforms of 1978, the country rapidly increased its trade linkages with the rest of the world, becoming one of the biggest players on the global market and the number one economy in exports of goods. The Chinese industrialisation accelerated during the late 1990s and created a large demand for natural resources, leading China into Sub-Saharan Africa (SSA). Chinese demand for African export commodities boomed during the 21st

century, and the trade linkages between SSA and China have increased expansively over the past twenty years. China’s imports of raw materials together with its exports of cheap manufactured goods, has made China the single largest trading partner of SSA (IMF, 2015). Although trade with China has presented great opportunities for the African continent, the growing exports concentration makes the region vulnerable for external shocks. With the Chinese economy experiencing a slowdown for the first time since the Asian Crisis, this is exactly the current topic of concern for the developing countries in SSA. The slowdown is gradual, but the World Bank has expressed the concern that the negative spillover effects on economic growth are increasing, particularly for countries with weak macroeconomic policies (World Bank, 2016).

This development raises the question to what extent China’s ascent into SSA has influenced the economic growth performances of the countries in SSA1

. On the one hand, the Chinese demand for raw materials has increased commodity prices and thus the value of exports, and the imports of cheap manufacturing goods have given the African countries more purchasing power. On the other hand, the cheap imports from China might pose a threat to the African exporters relying heavily on their domestic manufacturing industry (Jenkins &

Edwards, 2006). Additionally, critics have expressed the concern that China’s

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interference in the African political agenda prevents these developing countries from both political and economic reform (Buliamoune-Lutz, 2011). These contrasting influences, together with the lurking slowdown of the Chinese economy are the drivers of this thesis. Through the use of a data analysis I investigate whether the increased trade linkages between China and SSA have had a positive influence on economic growth in the countries of SSA. I focus on merchandise trade between the two regions, exclusively considering the trade of goods, and use data from the IMF, the World Bank and the United Nations Conference on Trade and Development (UNCTAD). Because Chinese FDI stock in SSA has boomed over the past ten years, I briefly comment on the investment channel. The countries with

significant trading linkages with China indeed experienced an average higher GDP growth rate than the other countries in SSA, suggesting China indeed has a positive influence on the economic growth performance of SSA. However, it must be noted that through data analysis alone no conclusive conclusions can be made on the econometric significance of the effect or the direction of causality.

Section two provides an extensive literature review on the effects of trade

liberalisation and the destination of exports on economic growth, together with literature reviews and econometric analyses regarding the macroeconomic relationship between China and SSA. Section three consists of the data analysis; briefly discussing Chinese FDI flows into SSA and mainly focusing on trade with China. Section three ends with the future prospects of the trade relationship between China and SSA. Finally, section 4 contains the conclusion and suggestions for further research.

2 Literature review

The effects of trade liberalisation and the destination of exports on economic growth have been discussed widely in academic literature over the past decades. The increasing

involvement of China in Africa has raised questions on whether this development has a positive effect on the African economies. In this section, an overview of the most relevant papers and empirical findings is given. First, a brief history of growth in both Africa and China is given. Second, the relation between trade liberalisation and economic growth is discussed. Finally, I focus on the trade linkages between SSA and China, and briefly comment on Chinese FDI flows into Africa.

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2.1 A Brief History of Economic Growth in China and Africa

2.1.1 China

A significant amount of research has been done, trying to find the driving factors behind China’s rapid economic growth. Productivity growth, caused primarily by reallocation of both capital and labour resources to the manufacturing industry and away from agriculture, is seen as one of the important factors (Song, Storesletten, & Zilibotti, 2011). Together with

increasing investment and saving rates, a growing labour force, and the demographic dividend, the economy of China entered a period of rapid growth. However, international trade and FDI also played an important role.

In their paper, Branstetter and Lardy (2006) describe China’s transition towards liberalised policies regarding international trade and FDI. They argue that even prior to its entrance in the WTO in 2001, China had already adopted liberalised policies regarding foreign trade. However, in the late 1990’s, the liberalisation towards international trade and FDI accelerated. Before setting a fixed exchange rate in 1995, the currency was gradually being devaluated, causing China’s international competitive position to improve. Together with regulatory changes that increased FDI opportunities, China became one of the biggest players on the global stage.

Nonetheless, China’s growth rate is slowing down. While the labour force has reached its peak in 2011, an increasing dependency ratio causes the savings rate to decrease, and a diminishing return on capital (Cai & Lu, 2013). As can be seen from figure 1, the GDP growth of China has reached a low point in 2014, at 7.4%. This slowdown might have significant consequences for China’s trading partners, especially the ones in developing regions. 0% 2% 4% 6% 8% 10% 12% 14% 16% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Figure 1: China's Annual GDP Growth, 1980-2014

Notes: The growth rate for 2015 is an estimation, and the growth rates for 2016, 2017, and 2018 are forecasts (World Bank) Source: Own elaboration from the World Bank (2016), and the World Bank, Development Indicators

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2.1.2 Sub-Saharan Africa

Throughout the 20th_{century, Africa has been characterized by poor economic performances} compared to the rest of the world. Apart from some exceptions, such as South Africa, all countries satisfy the characteristics of developing economies. Only a few decades ago, most developing countries relied on strict protectionist trade regimes (Edwards, 1993). After World War II especially, they had an inward focus, translating into high import tariffs and small foreign trade sectors. The view that integrating into the global market would create economic growth was not a view that was widely accepted in global academic spheres. However, this view became more popular when in the 1980’s, the emerging Asian economies outperformed Latin American countries on almost every macroeconomic level (Edwards, 1993). The big difference between these two regions was indeed an outward orientation of the Asian

countries, contrasted with a protectionist view in Latin America. Both the World Bank and the International Monetary Fund (IMF) started to make trade liberalisation an important condition for financial aid packages and loans (Greenaway, Morgan, & Wright, 2002). In his study from 1995, Savvides investigates which factors contribute to economic growth in Africa, and indeed finds evidence that more outward-oriented economies have tended to grow faster over time.

2.2 Trade liberalisation and economic growth in developing countries

The hypothesis that trade liberalisation positively affects economic growth has been extensively tested in academic literature. By making it one of the most critical loan

conditions, the IMF and the World Bank showed to believe that becoming an open economy was the way to stimulate growth in developing countries. Taking this in consideration, Ahmad and Kwan (1991) tested the causality between exports and economic growth in Africa. By applying the Granger causality model for 47 African countries, they effectively found no causal link between exports and growth of national income. They did find some moderate evidence on the causality running the other way, from national income to growth of exports.

Edwards (1993) evaluated the literature and the empirical evidence that had been found so far, on the premise that outward-oriented economies outperformed those with protectionist trade policies. One of the most prominent and earliest papers he discusses is the study by Krueger (1978). Her econometric results indicate that higher exports positively influence GNP growth. Krueger (1997) emphasizes that especially developing countries are sensitive to the implemented trade policy. The trade policy, and thereby the level of

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protectionism, decides which production areas and resources are protected, and has a great influence on the whole pattern of import and export (Krueger, 1997). In the World

Development Report, published by the World Bank (1987), developing countries were classified into different groups of trade openness, and it was concluded that economic performance of outward-oriented economies had indeed been better. In the results presented by Edwards it can be seen that all eleven African countries in the sample are classified as either moderately or strongly inward-oriented. However, his main conclusion was that most econometric growth models suffered from omitted variable bias, making it difficult to make inferences about the direction of causality between trade expansion and economic growth.

Rodrik (1997) focuses on the role of trade policy in sustaining long-term growth in SSA. He emphasizes how trade policy is an auxiliary factor in achieving economic growth, and that the fundamentals for long-term growth, such as human resources and macroeconomic stability, should be the main focus of policy makers. Trade liberalisation increased trade volumes, its contribution to growth is however less apparent (Rodrik, 1997). While Rodrik warns for overstating the benefits of openness to the rest of the world, he remains optimistic about what an international focus can do for growth in SSA.

Acknowledging the problem of direction of causality between trade and growth, Frankel and Romer (1999) use geographic characteristics to construct an instrument for international trade. By using instrumental variable and OLS regressions they estimate the effect of international trade on income for 63 countries in 1985. Their main conclusion is that trade increases income for certain levels of capital. Additionally, they conclude that the distance between two countries has a significant negative effect on their bilateral trade. For countries that are landlocked, trade even falls by about one third (Frankel & Romer, 1999). This finding is noteworthy, given that most landlocked countries are situated in Africa.

Greenaway, Morgan, and Wright (2002) criticize the specification of trade

liberalisation in research done so far, and use three different measures. Their results suggest a positive link between liberalisation and real per capita GDP growth in developing countries, though the result is lagged. This suggests that an increase in trade does not have an immediate impact on GDP growth, but the benefits arise in the long run.

2.3 FDI flows from China into SSA

China’s emerge in Africa has been through different macroeconomic channels, with trade being the most important one and the main focus of this paper. However, over the past ten

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years, FDI has become an increasingly important factor in growth opportunities for developing countries.

Studying the dynamics of Chinese FDI into SSA, Kaplinsky and Morris (2009) state that the impact is most evident in construction, infrastructure and the extraction of natural resources. Most incoming investment flows have been aimed to facilitate the export of natural resources, which is predominantly directed towards China. They argue that SSA has to make agreements and implement policies, designed to benefit from the increasing Chinese

investments. Where possible, the African firms should participate in the value chains of Chinese firms.

Zafar (2007) agrees with this view. The rise of Chinese firms does not go hand in hand with more labour opportunities for the African people. He argues that Chinese firms do not have many linkages with local industries, and put little effort in training African workers. Nonetheless, FDI flows are beneficial and even necessary for developing economies, and Chinese FDI is a source for developing opportunities for SSA. Chinese FDI holds great potential for the continent, but it is up to policy makers to enlarge these opportunities and benefits for the African people.

2.4. Trade linkages between China and SSA

The effect China has on its trading partners has been analysed extensively for regions such as Asia and Latin America. For SSA, however, the topic has become popular in academic literature only recently. The methods to study their trade relationship diverge from extensive literature reviews to econometric analyses.

2.4.1 Data analyses and literature reviews

Jenkins and Edwards (2006) analyse the channels through which China and India, the largest economies in Asia, are affecting SSA. They distinguish four types of effects, namely

complementary and competitive, which are then subdivided into direct and indirect effects. The largest complementary effect the Chinese demand has had on the developing economies is its contribution to export growth, and thereby GDP growth. Africa’s comparative advantage in natural resources, and China’s demand for these resources to stimulate their industrial growth, has caused the majority of exports to be mineral, petroleum, and timber. Given Africa’s diversity when it comes to resources and industries, this excludes certain countries, such as Cameroon and Tanzania. However, Jenkins and Edwards state that demand for cotton and food items also account for a significant part in exports to China. Given the lack of

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similarity in export structure, they predict it highly unlikely for SSA and China to become competitors on the global export market.

According to their analysis, imports from China might have a more competitive effect on the African economies. They mostly consist of cheap manufactured goods, benefiting the consumers of these products. Nevertheless, they also pose a threat to the local industries, with complications such as unemployment as a result. Jenkins and Edwards (2006) relativize this by stating that the increased imports from China has mostly been at the expense of imports from other countries, making the danger of unemployment minor. An important indirect impact of these developments is the positive effect of Chinese demand on terms of trade for SSA. With its dominant trade position, China has a large influence on commodity prices, making African exports more expensive, and putting downward pressure on import prices. The most interesting point they make regarding this paper is that the future of SSA’s exports foremost depends on continuing economic growth in China, and given past trends it is likely for China to become an even more important trading partner to SSA.

Kaplinsky and Morris (2007) have a more pessimistic view on the consequences of China becoming the leader in manufacturing exports for local industries in SSA. According to their analysis, SSA’s clothing and textile industries will be excluded from not only the global market, but also face China as a competitor in the domestic markets. The view that export-oriented industrialization holds great growth potential is hereby placed in a different

perspective. Stating that SSA’s export of manufactured goods is only negatively affected by the increased imports from China, they suggest that free-trade environment is not inevitably the best path for developing economies. SSA needs protection, proposing a step back in trade liberalisation and back towards more protectionist policies.

In addition to examining the investment links, Zafar (2007) also includes China’s trade relationship with SSA in his survey. On the one hand, the strong Chinese demand for oils and metals has caused Africa’s competitive position in the global market to improve and

accelerated economic growth in many African economies. With its export of cheap

manufacturing products, it has also given African consumers more purchasing power. Zafar states that through its unique position towards the internal affairs of its trading partners, and its avoidance of imposing political conditions on trade agreements, China gained support from developing economies. On the other hand, the increase in oil and metal prices is negatively impacting the terms of trade for African importers of natural resources. The increasing African imports of Chinese manufactures threaten the local textile and clothing industry, causing deindustrialization and a deterioration of export diversification. As a last

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remark, he states that these developments will change the dynamics of foreign aid programs. Given that China represents great opportunities for the continent, it is important for

international financial institutions and other developed countries to involve China into development aid programs.

2.4.2 Econometric analyses

Maswana (2009) uses a version of the Granger causality test to test the hypothesis of trade with China leading to African growth. He chooses South Africa and Kenya as a proxy for African economies, stating that they represent China’s largest non-oil trading partners in Africa and have the strongest spill over effects into other African economies. The empirical findings support the hypothesis of imports from China leading to economic growth. For the export-led growth hypothesis, no significant evidence is found. However, the reverse hypothesis, economic growth leading to an increase in exports, is confirmed. The causality running both ways for imports is only confirmed for South Africa. Maswana (2009) concludes by stating that trade with China certainly holds opportunities to stimulate economic growth, but African economic structures must be adapted to capture the benefits of this relationship.

According to Buliamoune-Lutz (2011), economic research concerning this relationship tends to be focused on the impact of imports only. Because much literature and empirical evidence exists on the positive effect of exports on growth, this effect is often taken as given. In her paper, she challenges this view by stating that the increasing exports from Africa to China could negatively affect export diversification of African products. African exports mostly consist of primary commodities, and Buliamoune-Lutz states that concentration in these products have been linked to macroeconomic instability and conflict. She tries to answer two questions in her study; first if exports to China stimulate growth in Africa, and second whether export concentration has an effect on the relationship between export and growth.

The methodology used involves a panel data analysis, using data from 1995-2008 on all African countries with available data2. In the regression, import and exports are included separately. The analysis obtains four significant results. First, no empirical evidence is found that exports to China cause economic growth, while export to OECD countries has a strong and significant effect on growth in Africa. Since China is still considered a developing country compared to the OECD countries, this result suggests that trade with developed countries and a high GDP per capita enhances growth. It might also implicate that the effect of export on growth is lagged, considering the increase in trade linkages between China and

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Africa is a more recent development. Second, it is shown that countries with more concentrated exports benefit more in terms of growth from their trade with China than countries with more diversified products. An explanation for this is that when a country’s export consists primarily of one product type, it is often natural resources, which is a valuable product. Developing countries, for which manufactures and food products account for a high portion of their exports, do not benefit from China’s increasing demand for natural resources. Third, the results suggest that the share of imports from China has a robust positive effect on growth, which is contrary to most standing views. Finally, it seems that there is a threshold point when it comes to the positive relationship between growth in Africa and export to OECD countries. This result suggests that after a certain point, the relationship between exports and GDP growth will actually become negative, which is important to consider when exports to China keep increasing. Combining all the above results, Buliamoune-Lutz

concludes that the effect of trade with China has an ambiguous effect on economic growth in Africa, and it is up to policy makers to ensure that the developing economies maximize their benefit of trade with China.

A more recent econometric analysis was performed by Kummer-Noormamode (2014), similarly investigating the trade linkages between China and Africa by determining its effect on Africa’s GDP growth3. This study uses panel data econometric models for 37 African countries from 1985 to 2012, and focuses not only on Africa’s trade with China, but also with the EU and the USA. The results suggest that openness to trade has a positive effect on African growth4. Additionally, openness to trade with China has a significant positive effect on African economic growth, however only during the last decade of the studied period. Considering the other two regions, openness to trade with China has a larger influence on Africa than openness to trade with the EU or the USA, though only during the period 2000-2012. This suggests that, during this century, China might be one of the most important factors in boosting economic growth in Africa. In conclusion, she states that the long-term effects of trade are still dependent on domestic policy and macroeconomic stability; areas where Africa still has a lot to gain.

De Grauwe, Houssa, and Picillo (2012) study the China-Africa relationship from a different perspective. By using traditional gravity models of trade, they examine the determinants of the trade of Africa with China, mainly trying to identify the quality of

3 Ibid.

4_{Kummer-Noormamode (2014) uses openness to trade as a measure for the trade relationships. This variable is} calculated by dividing the sum of imports and exports over GDP.

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governance of China’s African trading partners5. Looking at African trade with France, Germany, the UK, and the USA as well, they find a slightly different result for Africa’s trade dynamics with China. All countries export significantly more to countries with a high quality of governance. However, China is the only trading partner that shows a negative correlation between African exports and governance. In particular, De Grauwe et al. (2012) state that China imports more from countries with a weak rule of law, little regulation, and corrupt governments, supporting the belief that China is maintaining economic relations with countries that are isolated from the global economy. Considering that these countries have less trading ties with Africa’s other main trading partners, China plays a significant role in the future growth of these economies (De Grauwe et al., 2012). This conclusion suggests that a high export concentration causes domestic growth to be susceptible to external shocks, and that the current Chinese slowdown will indeed affect the countries with China as their main trading partner.

3. Methodology

The methodology used in this paper is a data analysis on the trade linkages between China and SSA. By plotting different statistics in both figures and histograms, certain patterns can be discovered, and inferences about the effect of SSA’s linkages with China on their growth performances can be made. It must be noted that from data analysis alone, no conclusive conclusions can be drawn on the causality between certain variables, such as exports and growth. Nonetheless, by looking at the developments of the past few decades, a prediction can be made of the implications that China’s slowing growth rate will have for SSA.

3.1 Foreign Direct Investment

Data on bilateral investment flows into SSA is known to be scarce and inaccurate, only starting to be documented at the beginning of this century. Fortunately, Chinese FDI only started to play a significant role for the African continent during the past ten years, so it makes sense to review this period. According to the Bilateral FDI Statistics reported by UNCTAD, Chinese FDI Stock in SSA amounted to 70 million dollars in 2003, leaping to 18.5 billion in 2012. Apart from a drop during the credit crisis, the investment flows show an

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The gravity model of trade proposes that bilateral trade is positively affected by the size of the two countries involved, and negatively with the distance between them (De Grauwe et al, 2012)

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upward trend. Compared to trade, FDI does not represent a large share of Chinese GDP, but its share is rising. Outward FDI flows represented 1.15% of China’s GDP in 2014, compared to 0.54% in 2005 (UNCTAD). An analysis on the direction of China’s FDI flows shows evidence in favour of the hypothesis that China directs its investment towards countries with abundant natural resources. For the past decade, the countries to which most Chinese FDI was directed are all exporters of primarily fuel, ores, and metal.

To analyse the effect of FDI on GDP growth, the average growth of the economies with the most Chinese FDI stock over the period 2003-2012 is plotted against the average growth of the other countries in SSA in Figure 3. It can be seen that, together with the rise of Chinese investments, the GDP of the host economies has outgrown the average growth of SSA. The countries with most Chinese FDI stock experienced an average growth rate of 6.4%, whereas the remaining countries in SSA had an average growth rate of 4.6%. Since the top 10 mostly consists of countries with abundant natural resources, this trend is likely to partially be the consequence of increased volume of exports, though it seems that FDI has a positive influence on growth performances of the host economies. Taking this in

consideration, it might be effective if China rebalanced part of its investments towards the lower income economies in SSA, that are experiencing low growth rates and are largely dependent on foreign aid. Nevertheless, it must be noted that FDI does not account for a large part of GDP compared to trade, and little conclusions can be drawn from this graph alone about the effectiveness or direction of causality between economic growth and FDI inflows.

0% 2% 4% 6% 8% 10% 12% 14% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Figure 3: GDP Growth, 2003-2014

Top 10 countries with most FDI Flows from China

Sub-‐Saharan Africa

Top 10 countries: Angola, Dem. Rep. of the Congo, Ethiopia, Mauritius, Niger, Nigeria, South Africa,

United Republic of Tanzania, and South Africa.

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3.2 Imports from China

When stating that China is an important trading partner for Sub-Saharan Africa, academics and journalist usually refer to African exports to China. Nevertheless, imports play an important role in economic growth formulas, and in macroeconomic policies. Changes in China’s political and internal landscape might have significant consequences for countries in SSA whose import consists of mostly Chinese products. The increasing trade linkages between China and SSA are proven by the data. In 2004, imports from China represented 6.7% of total imports for the region, while in 2014 this number had increased to 19.1% (See Table 1). This trend is shown from China’s perspective as well, where merchandise exports to SSA accounted for 3.4% of total merchandise exports in 2014. This number was only 1.4% in 2000. This development shows China’s increased involvement in SSA, but at the same time SSA’s growing interest in Chinese products.

To analyse the effect of imports from China on SSA, it is necessary to first investigate the countries that have the highest share of their imports coming from China. From figure 4, it can be seen that in 2014 China accounted for more than 10% of total imports for 36 countries in SSA. For eleven countries, the share of Chinese imports is even larger than 20%.

Traditionally, the majority of imports from China consist of manufactured goods, fluctuating around 90% of total imports from China (UNCTAD). When looking at the countries with the highest Chinese import shares over the last twenty years, one would expect the Chinese import structure to be more diversified. From the data it can be seen that this is indeed the case. The share of manufacturing products of total imports for Benin and Togo was 46% and for The Gambia it was 62%. Yet also for these countries manufacturing accounts for the largest part of their imports from China. As discussed in the previous section, the increasing

0 5 10 15 20 25 30 35 Eth io pi a N ig er ia Ben in G am bi a, T he To go G han a Tan zan ia Cam er oo n An go la Ke ny a Mau rit an ia Cong o, De m R ep. Mad ag as car Comor os Mo zam bi qu e Ni ger Mau riT us Li be ria So uth A fr ic a Eq ua to rial G ui ne a Se ne gal Si er ra Le on e G ui ne a Cong o, R

ep. _Mali

U gan da G ab on Bu ru nd i Cô te d 'Iv oi re Mal aw i Rw an da Zam bi a Zi m bab w e Bu rk in a Fas o Ch ad Ce ntr al A fr ic an R ep . G ui ne a-‐ Bi ss au Cab o Ve rd e São T om e & P rin ci pe Se yc he lle s Pe rc en ta ge o f t ot al im po rt s

Figure 4: Imports from China, 2014

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imports from China have a dual effect on the developing economies in SSA. It has given African consumers access to a wider range of affordable products, such as telecommunication equipment and clothing. For countries with small or non-existing manufacturing industries, this development increases their standard of living. On the other hand, the increasing imports have competitive implications for African countries with a large manufacturing sector. According to Zafar (2007) these countries tend to be the poorer countries in the continent, lacking natural resources and heavily dependent on clothing and textile industries. These industries account for a significant part of the employment share, with job losses as a consequence (Zafar, 2007). Figure 5 plots the GDP growth of the ten countries that had the largest share of their exports in 2014 consisting of manufactured goods and the average growth of SSA. It can be seen that the GDP growth of these countries has been significantly lower than the region average over the past twenty years. However, this trend cannot simply be attributed to the increasing imports of Chinese manufactures. The total value of their exports has increased significantly over the period 1995-2014, with an average of 8.8%, and Lesotho, Zambia, Togo, and Uganda even outperforming the regions average of 9.2%(See Figure 6). Furthermore, the unemployment rates do not support the hypothesis of Chinese imports causing job losses. Apart from Uganda and South Africa, unemployment rates in 2014 have improved from ten years before (See the Appendix). The unemployment rates still remain high, implying that it is a structural problem rather than a recent development caused by the increase in Chinese imports. This provides evidence for the observation by Jenkins and Edwards (2006) that the increase in Chinese imports has mostly been at the expense of

0 2 4 6 8 10 12 14 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Figure 5: GDP Growth, 1995-2014

Top 10 exporters of manufactures Sub-‐Saharan Africa (excluding importers) Top 10 countries imporTng from China

Top 10 countries importing from China: Benin, Togo, The Gambia, Ethiopia, Djibouti, Nigeria, Ghana, Madagascar,

Tanzania, and Angola. Top 10 countries exporting manufactures: Zambia, Mauritius, Lesotho, Swaziland, South Africa, Namibia, Kenya, Comoros, Uganda, and Togo.

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imports from other countries, easing the effect on unemployment. This statement is supported when comparing the growth rate of total imports of manufacturing goods with that of imports of manufacturing goods from China. Total imports have increased with a factor of 4.24 over the period of 1995-2014, whereas imports from China increased with a factor of 32.94 (UNCTAD).

Figure 5 also shows the GDP growth of the countries that had the highest share of their imports coming from China for the period 1995-2014. Apart from Togo, this is a completely different composition. The growth path is similar but outperforms the average of the other countries in SSA for most of the period. The countries with China as their

predominant source of imports experienced a growth rate of 5.3% during this period, compared to a rate of 4.8% for the other countries. For this century only, these rates were 5.7% and 4.7%, respectively. This trend provides some support for the correlation found by Baliamoune-Lutz (2011) between imports from China and African growth.

All together, it seems as though SSA has mostly benefited from the increased imports from China, and that the negative spillover effects on manufacturing industries are relatively modest. However, the difference in growth performance is small and it must be remembered that the economic growth is dependent on other factors as well.

Table 1: Exports and Imports to/from China as Percentage of Total

Year Exports (% of total) Imports (% of total) 1996 1.7 3.0 1998 1.7 3.9 2000 4.6 3.9 2002 4.6 5.0 2004 8.6 6.7 2006 10.8 9.5 2008 13.0 11.9 2010 15.1 13.4 2012 15.4 15.2 2014 17.3 19.1 Source: UNCTAD

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Source: UNCTAD

3.3 Exports to China

3.3.1 Exports by volume

As discussed in the literature review, the positive effect exports have on economic growth is supported by significantly more empirical evidence than the effect of imports. Similarly to imports, the increasing trade linkages between SSA en China are reflected in the share of Chinese exports originating from SSA (see Table 1). Again, this is also becomes apparent from China’s perspective where the share of merchandise imports from developing economies in SSA as a percentage of total imports is showing an upward trend, with a peak of 5.5% in 2012 (World Bank). Even though increasing exports contribute to economic growth, the increasing export dependency and concentration make SSA vulnerable for external shocks, such as the slowdown of the Chinese economy.

Looking at Figure 6, it is clear that China accounts for a notably higher share of exports than it does for imports when it comes to SSA. For 25 countries, exports to China in 2014 accounted for more then ten per cent of total exports. For Sierra Leone, even 81% of exports had China as their destination. To analyse whether China has contributed to export growth in SSA, Edwards and Jenkins (2006) use an alternative measure than simply the share of Chinese exports. The contribution is calculated by dividing the increase in exports to China for a certain period by total exports in the base year. According to Edwards and Jenkins (2006) this measure is more accurate than the share of China in the increase of total exports, since that measure could be inflated by slow total export growth. Table 2 shows the

contribution made by China to total export growth for the period 2005-2014 for ten different countries. Not surprisingly, the Chinese contribution to export growth is highest for the

0% 2% 4% 6% 8% 10% 12% 14% Sub-‐Saharan Africa Lesotho Uganda Zambia Togo Comoros Kenya South Africa Namibia Swaziland MauriTus

Figure 6: Average Export Growth, 1990-2014

Source: Own elaboration from UNCTAD 0 10 20 30 40 50 60 70 80 90 Si er ra Le on e Cong o, R ep. An go la Mau rit an ia Cong o, De m R ep. So uth A fr ic a G am bi a, T he Li be ria Zi m bab w e Zam bi a Ce ntr al A fr ic an R ep . Mo zam bi qu e Eq ua to rial G ui ne a Ben in Rw an da Mal i Eth io pi a G ab on G ui ne a-‐ Bi ss au Ni ger Bu rk in a Fas o Cam er oo n G han a Tan zan ia To go Bu ru nd i U gan da Mad ag as car Ch ad Mal aw i N ig er ia Se ne gal G ui ne a Cô te d 'Iv oi re Ke ny a Mau riT us Se yc he lle s Comor os São T om e & P rin ci pe Cab o Ve rd e Pe rc en ta ge o f to ta l e xp or ts

Figure 7: Exports to China, 2014

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countries with the highest share of total exports going to China in 2014. Countries such as Angola and Sierra Leone have benefited significantly from their increasing ties with China, whereas it is highly unlikely that China has had an economic impact on export growth for Comoros and Seychelles. Nevertheless, China’s contribution of 27.5% to export growth for the entire region is considerably high, and the increase in export volume is also reflected in the change in export value for SSA. Total export value increased by 112.7% from 2005 to 2014, whereas the value of exports to China increased by 293.4%.

Table 2: Growth of exports to China (2005-2014) as % of total exports in 20056

Source: Own elaboration from UNCTAD

6

Thefirst six countries had the highest share of total exports going to China, and the last four countries had the smallest share of total exports going to China in 2014 (by data availability)

Angola 102%

Sierra Leone 950%

South Africa 15.6%

Congo 38.9%

Dem. Rep. of the Congo 103%

Mauritania 161% Comoros 0.74% Kenya 1.3% Mauritius 0.41% Seychelles 0.09% Sub-Saharan Africa 27.5% 0% 2% 4% 6% 8% 10% 12% 14% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Figure 8: GDP Growth, 1995-2014 Top 10 countries exporTng to China

Sub-‐Saharan Africa

Top 10 countries:Angola, Benin, Congo, Dem. Rep of Congo, Eritrea, Equatorial Guinea, The Gambia,

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To analyse the effect on GDP growth, the average GDP growth of the ten countries with the highest share of Chinese exports for the period 1995-2014 is plotted in Figure 8. Apart from the period following the credit crisis, the countries with predominantly Chinese exports have experienced a higher average GDP growth than the rest of SSA. The average growth over the period was 5.9% for the countries primarily exporting to China, compared to 4.7% for the other countries in SSA. For this century the average rates were 6.1% and 4.5 respectively. It seems that a high share of Chinese exports has a positive influence on economic growth.

3.3.2 Exports by product structure

The higher GDP growth by countries with a large Chinese export share can most likely also be attributed to the structure of exports. The Chinese demand for natural resources becomes clear when looking at the structure of African exports to China. Out of the ten countries with the highest Chinese exports share, seven of them have either ore or oil as their main

commodity. China is the number one export destination for five of the eight oil exporters of SSA7

. Given this focus on natural resources, it is expected that African oil and metal exporters benefit the most from the increasing linkages with China in terms of growth. However, the rise of commodity prices since the beginning of this century seems to have come to an end. Commodity prices are currently weak and expected to decline even further, with large implications for especially oil exporters (IMF, 2015). Although this decline in prices is a positive development for oil importers in SSA, these countries are also experiencing price declines of their main export commodities (IMF, 2015).

To see if oil exporters profited in terms of economic growth from their trade relationship with China, the first step is to compare their growth performance with that of African oil exporters with a different primary export destination. Figure 9 shows the average GDP growth of the four largest oil exporters in SSA with China as their main export

destination, together with the average growth rate of four other oil exporters in SSA. The growth rates fluctuate widely, and for the past five years it seems the countries with another main export destination performed better. However, the overall GDP growth is higher for Angola, Congo, Equatorial Guinea, and Gabon. Their average growth during the period was 7.4%, compared to 5.6% for Chad, Nigeria, Guinea, and Niger. Additionally, during the period preceding the global credit crisis, the oil exporters with China as their main exports destination had an average growth rate of 10.1%, whereas for the other countries the average

7_{The IMF classifies Chad, Cameroon, Gabon, Angola, Nigeria, Congo, Equatorial Guinea, and South Sudan as} the Sub-Saharan African oil exporters

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rate was 6.1%. According to the World Bank (2016) China is gradually rebalancing its growth away from natural resources towards consumption. This development could explain why the benefit from having China as a main destination for African oil exporters decreased during this century. During the first period, Chinese demand for raw materials was still booming and the growth of the African countries exporting to China was 4.0 percentage points higher (World Bank, 2016). This development implicates that the Chinese demand for oil has a positive effect on economic growth for African oil exporters.

To investigate whether this is true for countries with a different export structure, I applied the same analysis to exporters of food items and ores and metals. For countries with food items as their primary export product, the average growth rate has been slightly higher for the countries with China as their main exports destination (See Fig. 10). The average growth rate of the period was 4.9%, while for the other countries it was 3.7%. As can be seen from Figure 10, the solid line exceeds the dashed line for the last four years, but falls below it during 2014. This development might already reflect the decreasing GDP and imports growth rate of China. However, in the period preceding the credit crisis the countries with different export destinations performed better, and China was still experiencing increasing growth rates. From the graph alone, it cannot be concluded that food exports towards China contribute more to growth than food exports towards different countries.

The growth of countries that export mainly ores and metals to China has been

relatively constant during the past few years. The difference between the average growth rates over the period is largest for this product group, with an average rate of 6.4% for countries exporting to China and 4.2% for countries with other main export destinations. From 2006 onwards the difference in growth is even around 3.0 percentage points. Figure 11 suggests that countries for which exports mainly consists of ores and metals, China is the most beneficial trading partner in terms of economic growth.

Comparing across the figures, it can be concluded that exporters of natural resources have experienced the highest growth rates during this century, primarily exporters of oil. Considering that China is SSA’s primary importer of oil, this also implies a positive effect of exports to China on the economic growth performance of the host economies.

3.4 Future Prospects

Even though the effect trade with China on economic growth in SSA is not clear-cut, the international trade developments of the African economies are certainly dependent on Chinese trade trends. The Chinese growth rate of imports reported by UNCTAD was 0.48%

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-‐4% -‐2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Figure 10: GDP Growth for Food Exporters, 2000-2014

China as main export desTnaTon

Other main export desTnaTon

Countries with China as main destination of export: Eritrea, Ghana, Sierra Leone, the Gambia, and Zimbabwe. Countries with other main destination of export: Cote d'Ivoire, Guinea-Bissau, Malawi, Seychelles, and the United

Republic of Tanzania. Source: Own elaboration from UNCTAD 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Figure 9: GDP Growth for Oil Exporters, 2000-2014

Countries with China as main destination of export: Angola, Congo, Equatorial Guinea, and Gabon. Countries with other main destination of export: Chad, Guinea, Niger, and Nigeria. Source: Own elaboration from

UNCTAD -‐4% -‐2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Figure 11: GDP Growth for Ores & Metal Exporters, 2000-2014

Countries with China as main destination of export: Dem. Rep. of the Congo, Mauritania, and Zambia. Countries with other main destination of export: Guinea, Madagascar, and Rwanda. Source: Own elaboration from UNCTAD

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in 2014. Apart from during the global credit crisis this is the lowest rate since 1998, and the same holds true for the Chinese growth rate of exports of 6.03% in 2014. If the Chinese economy is indeed due for a slowdown, and their demand shifts away from natural resources this could have long-term consequences for SSA. The World Bank already altered their estimation for the 2015 growth rates of SSA. In June 2015 they estimated real GDP to grow with 4.2% during the year, but new estimates have been adjusted to 3.4%.

However, African economies might also benefit from this rebalance of demand when Chinese demand will grow on other markets. According to the IMF (2015) the rebalance might be accompanied by a reallocation of low-end manufacturing activities towards SSA. Moreover, for certain African countries there is still potential to increase the trade linkages with China. UNCTAD reports the merchandise trade correlation index between two countries, measuring whether they are competitors on the global market or natural trading partners. For countries such as Uganda and Guinea, that have little ties to China, this index is negative, suggesting they might benefit from bilateral trade agreements8

.

4. Conclusion

4.1 Summary and Concluding Remarks

Trade linkages between China and SSA have increased rapidly over the past twenty years. To investigate the effect of China’s ascent into SSA, I analysed data on the macroeconomic linkages between the two regions, focusing on trade. First of all, the data indeed confirm the increasing ties between the two regions, with China becoming the single most important trading partner for SSA. Second, it seems that the countries with most Chinese FDI stock experienced a higher average growth than the rest of the region. However, a more extensive analysis on the effects of investment flows would be required to make conclusive statements on the effect of Chinese FDI in SSA. Third, the data analysis on imports to China suggests a positive link between imports from China and economic growth. The increased imports of cheap manufactured goods have mostly been at the expense of imports from other countries, and the negative spillover effects for the African exporters of manufacturing goods seem to be modest. Fourth, the countries with China as their main destination of exports seem to have positively benefited from this trade relationship, and China has made a significant

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contribution to the growth of their exports. The exporters of oil from SSA have experienced the highest GDP growth rates of the region for the analysed period, also implying a positive effect of exports to China on economic growth.

In conclusion, SSA appears to have positively benefited from their increasing trade linkages with China in terms of economic growth. However, with China as their most important trading partner, the region is vulnerable to shocks in the Chinese economy. The current slowdown might have significant consequences for the growth performances and opportunities of the African economies. However, policy makers might anticipate this development and reallocate resources to benefit from China’s changing demand structure.

4.2 Suggestions for Further Research

Whereas the academic literature is rich in analyses and studies on the effect of trade

liberalisation on economic growth, the investigations particularly focusing on the relationship between SSA and China are scarce. Since China’s ascent into the region is a relatively recent development, it would be interesting to see more econometric analyses on the effect of Chinese involvement in Africa’s developing economies. Hopefully, the data on countries in SSA will become better documented and more accurate during the coming years.

The current Chinese slowdown is a gradual process and it cannot yet be determined whether the decreasing growth rate will persist. If China is indeed due for a long-term slowdown, the long-term consequences will only become apparent in a few years, or maybe even decades. During this period, it will really become clear how vulnerable SSA is to external shocks, and to what extent their relationship with China has influenced their economic growth performances.

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Appendix

Table 1: Unemployment rates, 2002-2014

Source: World Bank, Development Indicators

Table 2: List of countries used in the analysis

Country 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Zambia 14,7 15,2 15,3 15,9 15,6 15,2 15,6 14,8 13,2 13,2 13,1 13,1 13,3 Lesotho 33 38,6 36 36,4 32,5 26,4 25,3 28,5 28,3 30,2 27,2 24,6 26,2 Mauritius 7,2 7,7 8,5 9,6 9,1 8,5 7,2 7,3 7,7 7,9 8,7 8 7,7 Swaziland 22,8 22,8 22,9 22,9 22,9 23 23 22,9 22,8 22,7 22,5 22,3 22,3 Uganda 3,5 3,2 2,5 2 3,6 3 3,6 4,2 4,2 4,2 4,2 4,2 3,8 South Africa 27,2 27,1 24,7 23,8 22,6 22,3 22,7 23,7 24,7 24,7 25 24,6 25,1 Togo 7,2 7,1 7,1 7,1 7,1 7,1 7,1 7 7 7 7 6,9 6,9 Namibia 19,1 18,8 21,9 20,2 21,7 19,4 37,6 29,7 22,1 19,8 16,7 19 18,6 Kenya 9,7 9,6 9,6 9,5 9,5 9,4 9,4 9,4 9,3 9,2 9,2 9,1 9,2 Comoros 6,7 6,7 6,7 6,6 6,6 6,6 6,6 6,5 6,5 6,5 6,5 6,5 6,5

Angola Ethiopia Niger Benin Gabon Nigeria Botswana Gambia Rwanda Burkina Faso Ghana Sao Tome and Principe Burundi Guinea Senegal Cabo Verde Guinea-‐Bissau Seychelles Cameroon Kenya Sierra Leone Central African Republic Lesotho Somalia Chad Liberia South Africa Comoros Madagascar Swaziland

Congo Malawi Togo Côte d'Ivoire Mali Uganda Dem. Rep. of the Congo Mauritania Zambia

Djibouti Mauritius United Republic of Tanzania Equatorial Guinea Mozambique Zimbabwe

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