Economic and Political Impact of Chinese Multinationals Operations in Africa - Assignment Example

Economic and political impact of Chinese multinationals operations in Africa Student’s Name Course Tutor Date 6) Critically evaluate the economic and political impact of Chinese multinationals operations in Africa using a case study of your choice. Abstract The huge presence and influence of Chinese firms on the global arena is with no reasonable doubt changing the economic and political landscape. Western owned companies, once the only decision makers in regard to financial resources as well as political relations to govern the global commerce are now facing a lot of challenges owing to the many emerging national corporations experienced in Africa with China. Strongly supported by the Chinese government and being highly competitive, Chinese multinational companies have fully embarked on a process of acquisition drive so as to capture market share and lucrative resources across the African continent. Based on its significance as the region rich in diverse natural resources as well as virgin markets that only have scanty historical ties to the mainland China, the continent is a good ground for the global expansion of the Chinese influence. This discussion paper will highlight the economic and political impact of the Chinese multinationals in the continent, especially in the post-war Angola. Introduction Historical evidence show that the African continent has had ties with China both politically and economically which dates back to over five centuries ago. A remarkable increase in relations between China and Africa of the last twenty years may be attributed to the world economic shifts, changes in the economic policies of the country and geopolitical competition. The Sino-African economic relations are divided into phases, thus the first phase dating back from 1850 to 1950 that was mostly concerned with the colonial labor demand. Such labor mostly concentrated on mining, plantation, and railway construction. The second phase took place in the period of 1960 to 1980. Subsequently, following the establishment of the People’s Republic of China and the resulting cold war, the resultant relations between Africa and China became mostly political. China therefore challenged the economic power houses of the west through provision of foreign aid to African nations so as to build ‘South-South’ strong relations. The influence of Chinese assistance provided a roadmap for much independence movement in the African continent. This also marked the period when Chinese economic restructuring was essentially taking shape so as to pave way for foreign direct investment and liberalization (Shenkar, 1994). The last phase of Chinese influence is believed to have started in the 1990s to the present time, which has been characteristically noticed in the last five years. As stated by Broadman (2007), over the last few years there has been mass movement of Chinese multinationals into African nations mostly noted in the areas of oil extraction, mining and construction. Such initiatives have been highly boosted by the Chinese government. Chinese Foreign Direct Investment in Africa According to Asche (2008), China seized the opportunity of making a grand entry into Africa on realizing that the continent was being marginalized in the global distribution of foreign direct investment (FDI). The Chinese government pledged a lot of foreign direct investment to African nations. In 2007 alone, about 500 registered Chinese government corporations and private owned firms with financial assistance from the state have initiated numerous trade ventures with African governments and private companies. For example, the Chinese government has singled out over 200 firms to benefit from tax concessions, preferential finance, and political support to spread their tentacles globally and in the wake become formidable multinationals. Despite the Chinese government’s unrelenting support to Chinese businesses to go international, at this very stage, the country’s investment in the continent is significantly low compared to other regions such as Asia. Africa has been attracting minimal investment, which is estimated to be in the tune of US$317 million. Though the fundamental motives of foreign direct investments concerns acquiring new markets, getting raw materials, increasing efficiency, Chinese investments in the continent seems to be solely focused on developing the markets for the Chinese made goods and services and securing raw materials for Chinese industries. The figure below shows the volume of trade between China and Africa. China’s trade with Africa Case Study: Economic ties between China and Angola The influence of Chinese in Angola Angola has been on the path of economic recovery thanks to the sustained peace since the end of civil war. The country emerged from one of the worst internal conflicts in the history of the continent, and within a period of less than a decade has become an economic force in the sub-Saharan Africa. The impetus for economic growth has been provided high growth in oil and non-oil sectors. The country has experienced high economic growth in the recent times, for example, in 2006; its GDP clocked 18 percent, which followed an impressive 20.6 the previous year. According to IMF projections the GDP growth will remain high in the subsequent years. On the other hand, inflation has drastically fallen from a whooping 300 percent in the late 1990s to just 12 percent recorded in 2006. Increase in oil earnings have led to large external and fiscal surpluses in current account. With the end of the armed conflict, there has been rapid reconstruction of the country. In the reconstruction process, China has stood out to play a critical role in providing assistance to the whole process. Chinese technical and financial assistance has jump-started so many projects in the areas of education, energy generation, telecommunications, public works and others. Based on the visit to Angola by Wen Jibao, the Chinese prime minister in 2006, his Angolan counterpart Eduardo dos Santos lauded the existing bilateral relations as being mutually advantageous with no pegged political preconditions. Political and diplomatic relations between China and Angola The involvement of China in Angola dates back to the times of struggle for anti-colonialism as it supported the three main liberation movements in the nation, namely União Nacional para a Indêpendencia Total de Angola (UNITA), Movimento Popular de Libertação de Angola (MPLA), and the Frente Nacional para Libertação de Angola (FNLA). The MPLA heavily depended on the Chinese political and military assistance in the 1960s. Following the the recognition of FNLA and UNITA by the then Organization of Africa Unity (OAU) as legitimate group fighting for the liberation of the country, the support melted and instead China took vested interest in the two rival movements. In 1963, the FNLA leader, Holden Roberto met with Chen Yi, the Foreign affairs Minister of China in Nairobi upon which it was reported that China agreed to the armament program. In other developments, the UNITA leader Jonas Savimbi met with Premier Zhou Enlai and Chairman Mao Zedong in 1964 and thereafter received military training and assistance hence becoming a Maoist. When the Chinese Cultural Revolution came to an end in the 1970s, China embarked on a program of providing military training and assistance to MPLA commanders and soldiers. The provision of the military aid did not last long due to internal divisions within the MPLA but also the desire of the Chinese to balance the Soviet’s unrelenting support to the MPLA. The Chinese support wavered again to the two major rival liberation movements. The main target of China was to provide assistance to FNLA even though it extended some limited aid to UNITA. The FNLA received a huge consignment of arms in 1974, and as well benefited from personnel training provided by the Chinese military experts who were based in the Republic Democratic of Congo. The foreign policy of China in regard to aid as far as the three feuding groups were concerned did not materialize. In November 1975 the USSR-backed MPLA faction ascended to power and subsequently declared the country independent. At first, China refused to recognize Angola as an independent country, thus the establishment of DIRECT diplomatic ties was delayed until 1983. The very first trade pact was realised in 1984, followed the creation of a Joint Economic and Trade Commission (JETC) in 1988. The country was rife with allegations that China was still providing military support to the UNITA-controlled region from the then Zaire. This followed the capture of Chinese manufactured arsenal from the UNITA rebels in the northern part of Angola. Based on the report provided by UNITA, the weapons had not been directly procured from China. An American military intelligence report also alleged that UNITA has been using Chinese made Type 72 antipersonnel mines, although this was vehemently denied by the Chinese authorities in Luanda. Despite the damning revelations, the relations between China and Angola gradually improved in the 1990s, making Angola number two in Africa in terms of trade with China before the end of the decade. For instance, when Chinese assistant minister in charge of economy, trade, and cooperation, Yang Wesheng toured Angola in 1997, he pointed to the fact that trade ties between the two nations was significantly growing. The Angolan president, Dos Santos also visited China in 1998 with the main aim of seeking ways to expand the bilateral trade relations as shown by the meetings he held with the Chinese Prime Minister Zhu Rongji and other government officials. Since the end of conflict in Angola in 2002, the relationship of China with Angola has principally focused to economic matters. This relationship was heightened in 2004; the Chinese Export-Import Bank of China (Exim Bank) offered to provide Angolan government with a $2-billion oil-backed loan to enable the country reconstruct its damaged infrastructure. The cooperation between China and Angola has been marked by frequent bilateral visits of government officials with the sole aim of strengthening the bilateral partnership. Such visits have resulted in the improvement of bilateral relations and signing of numerous essential agreements. China maintains an embassy in Luanda while the Angolan government also maintains an Embassy in Beijing (Hodges, 2001). Financial relations and economic cooperation between the two nations Financial relations between the two countries recorded a substantial growth in 2003, when there was signing of a trade and economic cooperation. Signing of the financial cooperation enabled Angola to benefit from a $2-billion credit facility for initiating public projects. The first phase of the implementation of the projects saw seven Chinese multinational firms being contracted to take up the projects. The largest public project under this phase was the rehabilitation of the road between Uige and Luanda. The contract was awarded to China Roads and Bridge Corporation. In the health sector, the Angolan government gave priority to rehabilitation and expansion of the municipal and provincial hospitals as well as the many district health facilities. Coming to the education sector, the main focus has been on the rehabilitation of elementary schools, secondary schools and tertiary institutions. In the agricultural sector, the government utilized the funds in acquiring new agricultural equipment and rehabilitation of the country’s irrigation networks in regions such as Gandjelas, Caxito, Luena and Waco-Kungo. The second chapter of the credit facility went into about 52 projects. Although expansion of education remained a key priority of the Angolan government, the second phase of the projects mainly supported telecommunications and fisheries. Again in the second phase of the projects, Chinese multinationals were actively involved as the fisheries contract was signed with China National Machinery Equipment Import Export Corporation. The firm was mandated to acquire large fishing trawlers and motor boats for artisanal and industrial use. The investment had a lot of positive effects on the country as it created over 20,000 direct jobs and another 100,000 indirect jobs. In telecommunications, the construction of next generation networks that encompassed Internet protocol and optical transmission networks as well as others were realized across the provinces. Further infrastructural and economic development was realized when in 2007; EximBank extended a $500 million to ensure completion of complementary actions in regard to the first phase projects that were not allocated any money. The new financial pact enabled the completion of many other important projects such as energy and water networks for the newly built institutions of learning, the construction of new water treatment plants and telecommunication lines. The economic cooperation between China and Angola has been made such that the latter benefits from the credit facilities and expertise from the Chinese multinational corporations. However, in order to ensure efficiency and balance of trade between the two nations, the Angolan government was compelled to relax its trade conditions thus regulations governing Chinese exports were eased but the local version of the rules for reconstruction were made stringent to ensure significant local participation. Project areas that are identified to be priorities by the various Angolan ministries are forwarded a joint committee of the Angolan Finance Ministry and the Ministry for Foreign and Commercial Affairs of China (MOFCOM). Above all the situation has been tricky for Angola based on the fact that it was just emerging a long armed internal conflict, it considered all projects vital Angolan government considers every project a priority, and therefore there are rarely any disagreements between the two parties regarding the projects being put forward. MOFCOM has been very active in the identification of vital areas that it feels the input of China can provide significant knowledge such as training of health workers. China’s presence in Angola is so dominant that for every project tendered, the Beijing government proposes about Chinese companies to take up the projects. The Chinese credit advancement is similar to current account operations because when a credit facility is ordered by the state, disbursements are channeled through the EximBank directly to the contractors’ accounts. Repayment of the loans usually starts as soon as a project is finished and if a project has not taken off then no payments are made (Angola Press News Agency, 2007). Bilateral Trade between the two countries Commercial trade between Angola and China has tremendously grown in recent times. There has been a sharp increase in China-Angola trade relations since 1990s. Since that time bilateral trade between the two nations has been estimated to be in excess of $700 million. Sino-Angolan trade clocked $1.8 billion in 2000 and by the beginning of 2006, trade increased four-times to over $6 billion and within a year it shot up to about $12 billion hence making the country the largest trading partner in Africa. Crude oil has been the main export of Angola has it account for over 95 percent its exports; on the other hand, it is also the main import by China from Angola. Records have it that for the past half a decade, China is ranked second in terms of importing the Angolan oil after the US, which is about 30 percent of Angolan oil exports. In 2006, Angola was on record as the largest supplier of oil to China surpassing Saudi Arabia which is the main exporter of oil to China. Recently, Chinese imports to Angola have increased and in 2004, China positioned itself as the fourth-largest commercial partner of Angola at $194 million. Over the recent past, China has scaled up its foreign direct investment (FDI) to Angola in addition to commerce. Even though the most of the Chinese operations in the country are in construction industry and oil exploration, funding for non-oil projects have gone up. As assessed by the Nissan president in China, Guo Zhen Fu, Angolan economic stability has lowered investment risks and thus provides a stable environment for investors. The government of Angola has also worked out strategies of encouraging the development of its private sector through initiation of a new investment legislation that provides equality of treatment for Angolan and foreign based companies. The government has also instituted a new trade code, and land tenure legislation with the main objective of defining customary tenure and property rights. The government of Angola through its National Agency for Private Investment (ANIP) has been promoting private investment by foreigners and Angolans by provision of tax incentives in defined development zones and targeted industry sectors. For example, in the last few years, the agency has been supervising the launch of projects worth over $4 billion in terms of investment capital. Records obtained from foreign affairs ministry of Angola shows that in 2007, over 50 Chinese multinational corporations were granted registration by the agency. Studies have shown that about half of the registered companies have been active in the construction sector while the rest are involved in manufacturing, retailing and other businesses. It has been shown that between 2005 and 2007, ANIP has granted go ahead to over 50 projects with a net value of about $73.6 million and were under the management of Chinese companies. Although this is not much compared to other players such as South Africa and Portugal, Chinese FDI to the nation is expected to increase in the next few years based on the fact that new cooperation pacts are being signed by the two nations aimed at attracting prospective international and local investors as well as provision of investment stability and binding legal protection. China has made sure that it positions itself well and has an upper edge in doing business with Angola. For example, in recent times so many merchants have visited Angola to have a first hand knowledge of the Angolan market prospects as well as get to know the market and identify local opportunities. The Luanda International Fair held in 2007 attracted so many private participants from China who were willing to put their investments in Angola. In the period of 2006 and 2007, the number of Chinese businessmen applying for trade visa to Angola went up by over 30 percent. As is the case most of the Chinese companies up on completing the assigned projects have been establishing themselves in the country. For example, China Roads and Bridges Cooperation and China Jiangsu have pledged $1.1 billion and $5 million of the own assets respectively to fund Angolan private sector projects. Sino Hydro, a big name in hydropower engineering has also won a contract offered by the World Bank to build a mega water supply network in Angola estimated to cost $20-million. The increasing participation of Chinese firms in the construction industry demonstrates the urgent need for the county’s infrastructure development since local capacity is very weak, and the Chinese are known for quality work characterized by high efficiency. Critique of Sino-Angolan Relations Over the past few years, the growing role of China in the politics and economics of Angola has been subjected of heated debate. Critical examination of the relations both from the perspectives of the two nations, it is right to say that the relationship is strategic and pragmatic. This is due to the statements that have come from senior political leaders such as the Angolan president. He is on record to have said that China is coming to Angola to get natural resources and on the other hand Angola only wants development. The Angolan leadership has embraced the fact that the Chinese provides credit facilities for vital infrastructure projects that the western nations are not willing to fund. Angola as well as other African states prefers the Chinese financial facilities as they offer good conditions compared to commercial banks with lower interest rates with longer periods of repayment. For example loans that Angola secured from elsewhere in 2004 had stringent conditions such as oil guarantees, they had no grace period and characterised by extremely high rates of interest. Chinese financing came in handy when there was no concessional funding to the nation. This can be attributed to poor relations that existed between the Breton Woods’s institutions and Angola. The never ending episodes of stabilization and hyperinflation have over the time made any lasting agreement with the International Monetary Fund (IMF) be a mirage. The relationship of the country with the World Bank has also been very shaky and has been limited to provision of humanitarian and emergency assistance in cases where there are no agreements with the IMF. The tough conditions that are a feature of the western donor institutions was evident in 2002 when the IMF and other donors nations demanded that Angola negotiate for a program referred to as staff-monitored program (SMP) as well as exhibiting exemplary economic and political performance for a period of three years before qualifying to get any financial aid. An SMP would therefore offer Angola international credibility to its economic policies and consequently prepare the way for the donors to solicit for funds to reconstruct the nation. However, as was evident in other African countries, Angolan government also felt that the Western backed financial institutions were demanding a lot and could not come to agreement based on their conditionalities. Talks with IMF and Angolan government have collapsed so many times in the past. As a savior to a country in need of help, the cooperation of Angolan government with their Chinese counterpart came at the most opportune time. China seized the opportunity and without any conditionalities began the process of funding Angola to rebuild its economy (International Monetary Fund, 2007). Although the Chinese influence in Angola has over the time been dismissed, the Angolan government has been worry of the growing suspicion of the west over Angola’s activities. The Angolan government has often been candid about its relationship with China and very vocal in rebuking any nation that wants to talk about the cooperation. During the 1998 New Year’s address, the Angolan president dos Santos made it clear to members of the diplomatic corps that Angolan government has considered it vital to strengthen its bilateral relationships with other nations as the concept of globalization essentially makes his government to diversify its international relations and embrace the principle of competition, thus making the world a free one as opposed to zoning by powerful nations of the West. This pattern of shift in Angolan bilateral relations with other nations is visible when one critically examines the origins of the country’s imports over the last two decades. The share of China surpasses the others and with only Portugal, the European Union share of the country has extremely declined. Even officials of the Angolan National Bank were quick to point that with the economic woes in Europe, it is no surprise that very few imports will be coming from Europe. In fact, the growing relationship with China should not be regarded as a current ideology but rather as a necessary reorientation of trade partners as a response to the expensive products coming from Europe. The fundamental aspects of China’s entry into African nations such as Angola In its bid to hunt for natural resources and new markets for exporting its goods and services, China has fully focused on Africa for the solutions as the continent is rich in natural resources such as minerals, oil and gas. China is therefore positioning itself to strengthen its relations with the continent as it did during the period of cold war. It is doing this to counter the influence of the Western world in the continent in order to enhance its own global image. The Chinese strategy in Africa are in these aspects thus, first Chinese state officials are known to use public diplomacy, which encompasses high ranking official state visits so as to nurture and win African leaders. The Chinese president, Hu Jingtao has made numerous visits to African nations and the Prime Minister, Wen Jiabao and other senior government officials have also traversed the continent to meet heads of governments. With such spirited engagements, China is trying to build very strong ties with African states and to demonstrate itself as a trustworthy partner to bridge the gap left by the developed Western nations in ensuring economic prosperity of the developing world (Muekalia, 2004). China is also known to pledge huge sums of money as aid and investments in the continent to build infrastructure and other sectors of the economies with no political benchmarks. The last aspect, which constitutes part of the global strategy of China, involves using aid donations to provide impetus for the Chinese firms to internationalise so that they can acquire lucrative overseas assets such as petroleum assets in the African continent through influencing African leaders to accept Chinese government-funded contracts. The Chinese government also supports Chinese firms with cheap credit facilities so as to knock out competitors, which at times include contracts underbidding and equity overpayment. As is the case in established markets, Chinese firms have not been able to gain easy access, but since African markets are unexploited and very open, the continent has become a strategic place for the young and mature Chinese firms. The Sino-Angolan relationship is expected to remain significant to both countries for quite a number of years. It is important to avoid speculations about the Chinese presence in Angola and to rush into a conclusion that the Chinese will principally take over the control of the Angolan economy thus influence the political and social processes. Given the cordial relations between Angola and China, the latter will persistently rally for more control of Angola’s natural resources to edge out other interested parties. However, what is currently causing discontent in Angola is lack of opportunities in the Chinese multinationals hence painting a gloomy picture on a country characterized by high rate of unemployment following thirty years of war. Owing to the fact that there is a projected economic growth of about 25 percent, the country seemingly appears rich although many of its citizens are living in deplorable states of poverty. Officials of a human rights watch organisation referred to as the Association for Justice Peace and Democracy (AJPD) acknowledges that due to a long period of war, many Angolans are insufficiently educated and could not take up most of the skilled jobs; however, there is no valid reason for importation of skilled labour from China (Anshan, 2005). Conclusion Emerging debate on the Sino-Africa relationship portrays China either as Africa’s benefactor or neo-modern imperial power. In Western part of the world, reaction to the Chinese vigorous involvement in Africa is marked with a lot of suspicion. As discussed by French (2004), the Western world policy makers are therefore deeply concerned that China could solely seize Africa’s vast natural resources and in particular the energy reserves of the continent. The new struggle for control of Africa’s resources has generally reignited the gone memories of the scramble and partition of Africa that occurred in the late by Western Europeans. The involvement of China in Africa has a lot of implications for the continent as well as its people. African leaders have to be very careful with the deepening relationship between their countries and China hence a call for guarded optimism on the relationship. Although African continent cannot assume the emergence of China as an economic power house in the global arena, it would be a lie to say that Africa can afford to ignore the emerging global economic giant. However, as stated African governments must be worry of imperialism and refuse in totality shoddy arrangements that may jeopardize sustainable development as well as undermining human dignity and respect for fundamental human rights. What matters most is for the African governments to stipulate clear policies to guide the Africa’s engagement with China. Based on the sad history of the earlier scramble for Africa, African leaders should then be very careful to avoid the repeat of political, economic and legal loopholes and strategically position the continent to reap from any relations. References “Angolan leader addresses OPEC summit in Saudi Arabia,” Angola Press News Agency, November 19, 2007. Anshan, L. (2005). “African Studies in China in the Twentieth Century: A Historiograpghical Survey.” African Studies Review, 481. Asche, H. (2008). “China’s Engagement in Africa-Opportunities and Risks for Development.” Hamburg: Africa Department, Economics Affairs, p. 3. French, H (August 8, 2004), “China in Africa: All Trade and No Political Baggage,” New York Times. Hodges, T (2001), Angola: from Afro-Stalinism to Petro-diamond Capitalism, Oxford: James Currey. International Monetary Fund (2007), Angola: 2007 Article IV Consultation Staff Report, IMF Country Report No. 07/354 (Washington, D.C.: IMF, October 2007). Muekalia, D. J (2004), “Africa and China’s Strategic Partnership” African Security Review, 13, no. 1: 5-1. Read More