Africa's Silk Road: China and India's New Economic FrontierRecently accelerating Asian trade and investment in Africa hold great promise for Africa’s economic growth and development—provided certain policy reforms on both continents are implemented. This is a central finding of a new book, Africa’s Silk Road: China and India’s New Economic Frontier .
by Harry G. Broadman
The author of the book, World Bank Economic Adviser Harry Broadman, says that skyrocketing Asian trade and investment in Africa is part of a global trend towards rapidly growing South-South commerce among developing countries.
Africa’s Silk Road provides, for the first time, systematic empirical evidence on how the two emerging economic giants of Asia— China and India—now stand at the crossroads of the explosion of African-Asian trade and investment.
Broadman surveyed 450 firms, including Chinese and Indian companies, operating in four African countries—South Africa, Tanzania, Ghana, and Senegal—and developed in-depth business case studies in the field of additional 16 Chinese and Indian firms in Africa. Africa's Silk Road offers original firm-level data on the African continent of Chinese and Indian firms operating there.
Growing demand and greater investment
The book shows that exports from Africa to Asia tripled in the last five years, making Asia Africa's third largest trading partner (27 percent) after the European Union (32 percent) and the United States (29 percent).
Indian and Chinese foreign direct investment in Africa also grew, with China's amounting to $US1.18 billion by mid-2006.
China and India each have rapidly modernizing industries and burgeoning middle classes with rising incomes and purchasing power. These societies are demanding not only natural resource-extractive commodities, agricultural goods such as cotton, and other traditional African exports, but also diversified, nontraditional exports such as processed commodities, light manufactured products, household consumer goods, food, and tourism.
Because of its labor-intensive capacity, Africa has the potential to export these nontraditional goods and services competitively to the average Chinese and Indian consumer and firm.
"To be sure, if you take a snapshot of today, the overwhelming bulk of Africa's exports to Asia is natural resources," says Broadman. "But what's new is there is far more than oil that is being invested in—and this is an important opportunity for Africa's growth and reduction of poverty because Africa's trade for many years has been concentrated in primary commodities and natural resources."
Roadblocks along the way: asymmetries and the need for policy reforms
While growing Asian trade and investment is cause for optimism, the book cautions that there are major asymmetries in the economic relations between the two regions. While Asia accounts for one-quarter of Africa’s global exports, this trade represents only about 1.6 percent of the exports shipped to Asia from all sources worldwide. By the same token, FDI in Asia by African firms is extremely small, both in absolute and relative terms.
And, the rise of internationally competitive Chinese and Indian businesses cuts into both domestic sales and exports of African producers of, for example, textiles and apparels.
“It is imperative that both sides of this promising South-South economic relationship address asymmetries and obstacles to its continued expansion through reforms,” says Broadman.
The study details a series of reforms that should be undertaken by all the countries:
- “At-the-border” reforms, such as elimination of China and India’s escalating tariffs on Africa’s leading exports; and elimination of Africa’s tariffs on certain inputs that make its own exports uncompetitive.
- “Behind-the-border” reforms in Africa, to unleash competitive market forces, strengthen its basic market institutions, and improve governance.
- “Between-the-border” improvements in trade facilitation infrastructure and institutions to decrease transactions costs, such as customs administration, transport and communications.
- Reforms that leverage linkages between investment and trade to allow African businesses’ participation in modern global production-sharing networks generated by Chinese and Indian investments in Africa.
With this newest phase in the evolution of world trade and investment flows taking root—the increasing emergence of South-South international commerce—African businesses cannot afford to be left behind. Those reforms are critically important to allow Africa to be able to genuinely participate—and most importantly, benefit from—the new patters of international commerce.