Thu, Jun 10, 2021

Development finance in Sub-Saharan Africa: The Chinese model

Blog Post by Amin Mohseni-Cheraghlou

Africa China Fiscal and Structural Reform Macroeconomics Trade

In July 1944, 730 delegates from forty-four allied nations gathered in Bretton Woods, New Hampshire to finalize their plans to set up rules and institutions to regulate the international economic and monetary system. The main outcome of those deliberations was the establishment of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which is now the lending arm of the World Bank Group, offering loans to developing economies with favorable terms. The idea was for IBRD and later the World Bank Group (WBG) to be the one-stop-shop where the less developed and developing economies would go to finance their large-scale infrastructure projects and to receive technical assistance (TA) for the budgeting, financing, and managing of such projects.

Fast-forward seventy-seven years from the first Bretton Wood meeting in July 1944, and the WBG is no longer the monopolist in the development finance market, at least not in Sub-Saharan Africa (SSA). For example, while, WBG disbursed around $34 billion to SSA between 2018 and 2020, the estimated value of the known Chinese investments and construction projects in SSA reached a whopping value of $54 billion in the same period—$20 billion more than the World Bank Group. Below are a few recent examples of the several hundred energy, transport infrastructure, real estate, and mining projects financed and/or constructed by Chinese entities—often state-owned enterprises (SOEs)—in SSA:

  • Niger: $7 billion oil pipeline development started in 2019
  • Nigeria: $5.8 billion hydroelectric powerplant started in 2018
  • Guinea: $3.6 billion investment and construction in the aluminum sector between 2018 and 2020
  • Nigeria: $2.8 billion gas pipeline project started in 2020
  • Cameroon: $1.3 billion port project that started operating in 2018

According to China Global Investment Tracker (CGIT) dataset compiled by American Enterprise Institute (AEI), there were a total of 601 Chinese foreign investments and constructions in SSA between 2006 and 2020, exceeding $303 billion in total value (see Figure 1). Nigeria (13.3 percent), Ethiopia (8.2 percent), Angola (8.1 percent), Kenya (5.4 percent), Zambia (5.3 percent) and DRC (5.3 percent) were home to more than 45 percent of total Chinese investment and construction over the past fifteen years in SSA (see Figure 2).

Unlike the early colonial powers in Africa who erected infrastructure mainly in areas of the continent with access to free waters and shipping ports, the Chinese investment and construction is scattered all over the continent. Nevertheless, the available data suggests a similar preference towards SSA countries with access to free waters. As seen in Table 1, more than two-thirds of all Chinese investment and construction projects have taken place in countries that have access to open waters, and the average value of such contracts ($528 million) is about $75 million larger than projects in landlocked SSA countries ($453 million). This is especially true when one focuses on projects related to the Belt and Road Initiative (BRI), where the difference in the average value of contracts between the two groups of SSA countries increases to $131 million and more importantly is statistically significant at less than 5 percent level. Specifically, 220 BRI-related projects with an average value of $509 million were recorded for SSA countries with access to shipping ports, compared with 110 BRI-related projects with an average value of $378 million for the landlocked countries (Table 2). The main reason behind this is that Chinese construction projects are heavily concentrated on the transport sector and BRI-related infrastructure. Moreover, the coastal economies are on average much larger and have lower costs of doing business when compared to other SSA economies, making them an attractive destination for Chinese transport infrastructure projects on the continent.  

Table 1. Comparison of average value of Chinese projects in Sub-Saharan Africa: landlocked countries vs. countries with access to free waters (2006-2020)

Number of projectsAverage value of projects ($ million)
Countries with access to free waters406528.7
Landlocked countries195453.2
Difference between the two groups75.5

Table 2. Comparison of average value of BRI-related Chinese projects in Sub-Saharan Africa: landlocked countries vs. countries with access to free waters (2013-2020)

Number of projectsAverage value of projects ($ million)
Countries with access to free waters220509.8
Landlocked countries110378.8
Difference between the two groups131.0**
**: Difference is statistically significant at less than 5 percent level.

When it comes to sectors, around 87 percent of the total value of all Chinese investment and construction in SSA were concentrated in only four sectors: energy (34.3 percent), transport (29.3 percent), metals (12.6 percent), and real estate (10.8 percent) (see figures 3a, 3b, and 4).

These are the same four sectors of interest for Chinese companies—public or private—active in the Middle East and North Africa (MENA) region. Not surprisingly, however, the energy sector accounts for around 50 percent of all Chinese investment in the MENA region, followed by transport, real estate, and metals at 19, 15, and 6 percent, respectively.

The available evidence from Sino-SSA economic relations and Chinese commercial ties in the MENA region suggests a modern bartering system is at play, where developing countries in these regions pay for Chinese investment and construction in their economies through guaranteed long-term supply of hydrocarbons, agriproducts, or minerals. While there is a mixed track record for this bartering mechanism, Chinese economic diplomacy in SSA has certainly resulted in political gains for Beijing. With forty-nine votes in the United Nations, the majority of SSA countries often vote with China, supporting its global agenda. This is especially true for SSA countries that are also the recipients of Chinese Official Development Assistance (ODA).

Taking advantage of SSA’s ample supply of energy, natural resources, and young and inexpensive labor force, more and more of Chinese energy and labor-intensive production and mining is taking place in this region. In the long run, such a trend will lead to growing infrastructure, physical and human capital, and wages in SSA, which are necessary ingredients for economic development of the region. With a population of 1.1 billion, which is expected to almost double by 2050, the economic development of the SSA will in turn translate to an attractive consumer market. Moreover, with around two million Chinese nationals living and working across SSA, about 10,000 firms owned and operated by Chinese entities (albeit large majority privately), and hundreds of billions of dollars of investment, construction, ODA, and loans, China’s footprint in the region has been growing rapidly. In a world where large economies are competing for geographically diversified sources of energy, natural resources, and new consumer markets to keep their economies vibrant and growing, it seems that Beijing’s economic diplomacy and statecraft in Sub-Saharan Africa has secured China’s access to all the above for the foreseeable future.

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