Brief Blog: November 19, 2010 – Chinese Chess, Part 2

Click here for Part 1

It’s been over a year since Obama’s celebrated daytrip to Ghana. Urging African leaders to abandon pervasive corruption and secrecy in favor of good and transparent governance (“Yes you can!”), the president pledged to support their efforts. And U.S. aid continues to flow.

But in the realm of private investment, China is leaving us in the dust. In Africa, as in Europe, China is laying the groundwork for a world in which it will be the dominant player.

Whereas 75% of U.S. investment in Africa comes from oil companies, the Chinese are investing broadly and strategically across the continent. By all accounts, China will surpass the U.S. as Africa’s largest investor in Africa in 2010.

The Chinese have the advantage of recent experience. As Deborah Brautigm points out in her exhaustive study, Dragon’s Promise: The Real Story of China in Africa, China itself is a developing nation, having reduced in just a few decades its poverty from 50% to less than 10%. The Chinese approach to investment in Africa is based on lessons learned from its own successful development. Beijing is extending resource-backed development loans to African nations modeled on the loans China extracted from Japan in the late 1970s. In exchange for oil, coal and minerals, which China has in abundance, Japan supplied China with modern infrastructure and technology. In the 1980s, Japan financed myriad infrastructure projects in China, using Japanese firms to build modern railways, ports and power grids.

Now the world’s biggest consumer of minerals, China has to look abroad to satisfy its demand. Africa’s natural resources and infrastructure needs mesh well with China’s demand for those resources and infrastructure capabilities. According to the African Development Bank, more than 35 African nations are engaged with China in infrastructure financing. The Export-Import Bank, China’s export credit agency, finances most of the loans.

Compared to Western aid agencies that typically pay high salaries to legions of “experts,” the Chinese maintain much lower operating costs. While Chinese construction companies generally import 20% of their labor and management from China, workers live in inexpensive housing and receive modest salaries. The terms of Chinese loans also tend to be more favorable than those from U.S. companies.

Chinese ventures in Africa have come under increasing scrutiny. Critics have accused the Chinese firms of maintaining poor labor conditions, making closed-door deals, bribing officials and evading taxes. Earlier this week, Ngozi, managing director of the World Bank, speaking at one of China’s largest mining conferences, urged Chinese companies to operate with more transparency, while acknowledging that African governments are responsible for some of the problems. As well, Okonjo-Iweala encouraged the mining executives to process the raw materials in local communities, thereby “creating employment, developing skills and leading to buy-in from the local people.” And naturally increasing profits to the Chinese…

In another bold experiment, China is establishing special trade and economic zones in several countries. Targeted trade zones have bolstered China’s own economic development; China currently has one hundred such targeted zones.  Seven zones – in Nigeria, Mauritius, Ethiopia, Zambia and Algeria – are in the planning stages.

Undeterred by corruption, terrorism and bureaucracy, the Chinese persevere, creating profits and cementing relationships, positioning themselves for long-term trade dominance in the region.

Checkmate.