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Source: www.africaecon.org

Africa Economic Institute

Africa's Silk Road: Expanding Economic Opportunities


The recent skyrocketing Asian trade and investment in Africa is becoming part of a global trend toward accelerating commerce among developing countries.

Africa has had a growing demand for Asia’s manufactured goods and machinery while demand in Asia’s developing economies is growing for Africa’s natural resources and labor-intensive goods. African-Asian foreign direct investment (FDI) flows are growing rapidly, mainly dominated by the flows of Chinese and Indian foreign direct investment and trade in Africa. By mid-2006, the stock of China’s foreign direct investment to Africa was an estimated $1.18 billion (The World Bank). trade between the two continents has expanded considerably as well. In the year 2000, Asia received about 14 percent of Africa’s exports; six years later, the figure increased to an estimated 27 percent. The increase in volume of the trade has made Asia Africa’s third largest trading partner, closely after the European Union and the United States.

 

Because of its labor-intensive capacity, Africa has the potential to export nontraditional goods and services competitively to the average Chinese and Indian consumer and firm. In the past few years, Chinese and Indian foreign direct investment in Africa has diversified into other sectors such as apparel, power generation, power generation, road construction, tourism and telecommunication, among others.

 

In 2004, the Chinese FDI flow was dominated by Sudan, with almost $150 billion, followed by Nigeria with almost $50 million (Chinese FDI Statistics Bulletin). The increase in foreign investment in Africa gives optimism. Asia’s economic growth during the past 25 years got as many as 400 million out of “extreme poverty”. Many are hoping the same “miracle” might happen in Africa to help some of the 300 million poor in Africa from poverty as well.

 

“To be sure, if you take a snapshot of today, the overwhelming bulk of Africa’s exports to Asia are 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.”

 

Between the two countries, China appears to be the most essential destination market for Africa’s exports. Exports to China grew 48 percent in 5 years between 1999 and 2004, compared to 14 percent for India.

 

The growth in African exports to China and India in the last few years is mainly driven by the large domestic demand for natural resources in those countries, which is a consequence of growing industries and household consumption.  Leading commodities include petroleum, ores and metals, among other raw materials. Oil, however, “dominates Africa’s exports to China and India”. Together they account for 85 percent of Sub-Saharan exports to China and India.

 

China and India’s current interest in trade and investment in Africa is an important opportunity for the growth and development of Africa to integrate into the global economy. Not only may it allow Africa to provide natural resources to Asia, but it may also help Africa become a processor of commodities and an important supplier of goods and services to Asia. This would help advance African businesses and markets.

 

To ensure the beneficial economic opportunities between Asia and Africa, however, the countries need to compromise on tariffs, reforms to decrease transaction costs and facilitate trade between the countries. Once these issues are addressed, the countries can expand trade and aggrandize production that will benefit the global economy as a whole.

Source: www.africaecon.org