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Tata Motors Ltd
More countries in Africa are joining the global economy. Over the last decade, the continent’s GDP expanded at an average annual rate of 5.1 percent, low compared with emerging giants like China and India but still well above the global growth rate of 2.9 percent. During this period, Africa also became far more globally integrated and saw its merchandise trade grow at an annual rate of 12.9 percent, vs. a global growth rate of 8.9 percent.
Africa’s economic ties with China and India have grown at a particularly rapid pace. This development—when put in the context of Asia’s ongoing march toward becoming the world’s economic center—has led many to believe that China and India have taken over from the West as the new economic powers in Africa. That conclusion, however, hinges on some common misconceptions about China and India’s engagement with Africa.
Myth No. 1: China and India dominate the race for Africa.
During 2000-2010, Africa’s merchandise trade with China grew at an annual rate of 29 percent (from $9 billion to $119 billion) and with India at an annual rate of 18 percent (from $7 billion to $35 billion). While these growth rates are very robust, they are building on a very low base. So far, Africa’s economic partnership with Europe dominates that with China or India. In 2010, Europe received 36 percent of Africa’s exports, compared with 13 percent for China and 4 percent for India. Over 37 percent of Africa’s total imports came from Europe, vs. 12 percent from China and 3 percent from India. In 2010, even the U.S. was ahead of China in terms of total merchandise trade with Africa.
To date, China and India also have played only a small, albeit growing, role in terms of capital investment in Africa. Each accounts for less than 5 percent of the total inbound foreign direct investment (FDI) stock in Africa, a tiny fraction of that from Europe and the U.S.
In short, as newly active players, China and India are making rapid headway in Africa. However, appearances notwithstanding, they are still far behind the developed economies—especially Europe—in terms of economic engagement with Africa.
Myth No. 2: China and India’s engagement with Africa is all about natural resources.
Many Indian companies are looking at opportunities to sell in African markets. In 2010, Indian mobile operator Bharti Airtel paid $9 billion for the African telecom operations of Kuwait-headquartered Zain. Tata Motors (TTM), India’s largest automaker, has opened an assembly operation in South Africa. Mumbai-based Essar Group is investing in the African steel sector and Godrej, another Indian conglomerate from Mumbai, is very active in Africa’s consumer goods market. Karuturi Global, the Bangalore company that is the world’s largest rose producer, has become one of Africa’s largest players in commercial agriculture and leases 1,200 square miles of land in Ethiopia. Indian companies are also very active in Africa’s emerging IT services market.
Chinese companies are also not just focused on Africa’s natural resources. China has taken a growing interest in helping build Africa’s infrastructure such as roads, railways, bridges, ports, and power stations. At the 2009 China-Africa Summit, China pledged to build 100 clean energy projects in Africa covering solar, biogas, and hydropower. It also announced the phasing in of zero import tariffs for 95 percent of products from the least developed African countries.
Both China and India are beginning to see Africa not just as a resource supplier but also as a market and as a target for capital investment in many sectors of the economy.
Myth No. 3: China and India are the new neocolonialists in Africa.
In recent months, British Prime Minister David Cameron and U.S. Secretary of State Hillary Clinton have warned Africa to be cautious of “new colonialism,” especially from China. On this dimension, however, the West doesn’t have much of a moral leg to stand on. Self-serving rhetoric aside, look at the historical reality. In the colonial days, the West’s relationship with Africa was basically one of taking resources from the continent without giving anything back. When the colonial era ended, the West’s relationship changed from “resources for nothing” to “resources for cash.” Whether this helped African economies remains debatable, since much of the cash ended up in the Swiss bank accounts of corrupt African leaders.
China’s relationship—based on “resources for infrastructure”—has been radically different. While such deals are unlikely to be corruption-free, the scope for corruption is clearly lower. More important, in a continent like Africa, better infrastructure is massively critical for spurring growth in productivity.
India’s relationship, driven largely by the private sector and focused heavily on investing and creating jobs in Africa, has the potential to be even more beneficial for Africa. Aside from the above-noted moves by private-sector companies, the Indian government has launched a Pan-African e-Network project aimed at connecting all 53 nations in Africa by a satellite and fiber-optic network. The government has also launched a $700 million program for the development of educational institutions and training programs in Africa.
In short, China and India’s involvement in Africa is structurally different from that of the U.S. and Europe and is likely to have a bigger long-term impact on the creation of human and institutional capacities in African countries.
Myth No. 4: China’s investment in Africa’s natural resources threatens other resource-dependent economies such as Europe, the U.S., Japan, and India.
Even though Africa is resource-rich, it is not the only resource-rich region on earth. Other extremely resource-rich regions include Russia, Mongolia, the Middle East, Latin America, Australia, Canada, and the U.S. It is impossible for Chinese investments in Africa to give China any type of monopoly position in any commodity. In fact, what Chinese investment does is to boost the world’s supply of various commodities and thus prevent commodity prices from rising even faster than they otherwise would.
Take crude oil as an example. For a country such as India, it does not matter whether a barrel of oil was extracted from a well in Angola, Nigeria, Canada, or Russia. The only thing that matters is the positive impact of China’s investments in Africa’s oil resources on the world’s total supply of oil. Thus, China’s investments in Africa’s natural resources should be treated as a case of “win-win-win”—a win for China, a win for Africa, and a win for other resource-importing countries.
Myth No. 5: India cannot compete with China in Africa.
The only Africa-focused issue where India cannot compete with China is in bidding for concessionary rights to natural resources. China simply has more capital than India. Also, most Chinese investors in Africa are state-owned enterprises with access to extremely low-cost capital from state-owned banks. In contrast, it is the private sector from India that plays the leading role in Africa.
However, the last thing India should fret about is Chinese investments in Africa’s natural resources. In sectors other than natural resources, Indian companies have overwhelming advantages over their Chinese peers. In socioeconomic terms (such as low income levels, vast internal diversity, widespread use of English), Africa is much closer to India than China. Also, Indian private-sector companies are far more experienced at managing globally dispersed operations than Chinese state-owned enterprises.
Bharti Airtel is a striking example of India’s strengths over China. Bharti Airtel found it easy to become the second-largest mobile operator in Africa and has successfully transferred its frugal innovation model from India to Africa. Meanwhile, China Mobile has had great difficulty figuring out how it could create any value by acquiring an operator in Africa. The Bharti Airtel story is being repeated in other sectors of Africa’s economy such as autos, steel, agriculture, and education.