The Future of Chinese Funding to Africa
The next years and decades of growth in the African continent may be reliant on the influence of China and foreign investment within the region. Much of foreign direct investment (FDI) has grown at an average compounded rate of 18 percent in the years between 2004 and 2016. Not only that, but China has been the largest exporter to Africa, accounting for 17.5 percent of all African imports and roughly peaking in funding at $55 billion USD in Chinese contracted projects during 2015. Numerous Chinese firms have also opened up their operations in the region. This inflow of funding indicates China sees the African continent as a long-term investment for its future.
Many of these firms are involved in manufacturing, trade, construction, and real estate. Manufacturing alone accounted for roughly 12 percent of Africa’s industrial production, and 50 percent of all projects in the internationally contracted construction market are operated by Chinese firms. Chinese firms, including state-owned enterprises, are responsible for a lot of development in the region. Since 2010, a third of the continent's power and grid infrastructure has been financed and constructed by Chinese state-owned developers - a sign that the country seeks to insert itself into domestic affairs as well.
Chinese investment in development has brought several positive economic benefits to the region. Relying on China’s efficient costs of production for goods and services has been helpful. Because of this, Chinese firms have lowered prices by 40 percent through improved technology and efficiencies of scale. Additionally, loans provided by Chinese firms and the government in the region are more loose in how they can be paid back. Some have been paid back through alternative sources. For example, loans provided to Angola have been repaid to China in oil shipments. It is important to note however, the size of loans given to countries are contributing to massive debt. Angola remains the country with the largest amount of loans received totaling $42.6 billion USD.
FDI alone can contribute to rising incomes and a growing industrial economy. Moreover, it can play a large role in advancing technologies, labor training, and knowledge transfer. The five fastest growing industries on the continent are currently Fintech, E-Commerce, Real Estate, Food Business, and Logistics. These fast-growing industries would attract an increased amount of investment to be poured into the region. Higher incomes allow citizens to be able to afford basic necessities and improve public health. Investments in nations, like Ethiopia, Nigeria, and Tanzania, have created thousands of jobs for workers in the region in manufacturing industries by constructing textile industrial parks.
The inflow of FDI into the region is also seen to benefit China’s long term plans for the region too. The region is undergoing a population explosion. By 2050, it is predicted that the African population will grow to 2.5 billion people, while China’s population will decline to below 1 billion, and its labor force will be expected to surpass China and Indea combined, a major reversal in population trends. Africa is seen as a reliable and fast-growing consumer market with a rising middle class that has tripled over the last three decades to 313 million (roughly 34% of the entire continent’s population). China believes that this market can supplement an aging and declining population in terms of purchasing power and potentially, a major destination to export goods to.
There are also concerns about the implications of this influx of funding and the labor rights involved at many of the projects being financed by state-owned or private enterprises. For example, in terms of job creation, a mere 44 percent of local managers at the Chinese-owned companies surveyed were African. Additionally, there have been reports of major labor and environmental violations by Chinese-owned businesses. Inhumane working conditions and illegal extraction of natural resources, including timber and fish, have been among the common occurrences.
Additionally, there are major political implications. It was not long ago that China was considered an unimportant ally, that it was “bereft of friends”. No longer the case, one of the country’s foreign policy goals is to allow cooperation with other countries to build an international system that protects its interests in global politics. Along with the economic incentives of the Belt and Road Initiative, the country is seeking to expand its economic influence in the region. As the world’s second largest economy, it has significant political strength and could cause political realignments in the region as well. As they become more dependent on loans from China, it could indicate that African countries may decrease their alignment with the U.S. and become more aligned with China because of the sheer amount of money being poured into the region. Some early indicators are the number of countries that have exited diplomatic relations with Taiwan, which China is seeking to isolate and reduce support from.
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