Tuesday, July 6, 2021

The Road to Who Knows Where: What one highway project in Cameroon can tell us about the complexities of Chinese lending in Africa

This post is by former CARI Research Assistant Alex Hardin and CARI Director Deborah Brautigam. Alex Hardin is now an M&E Associate at Winrock International.

Photo credit: The Taxi Photographer via Wikimedia Commons
Narratives of China’s lending to Africa are often oversimplified, focusing on the Belt and Road initiative writ large, and leveling accusations of “debt-trap diplomacy.” Yet, a peek beneath the surface reveals an increasingly complex web of Chinese financiers and contractors, African government planning and finance bodies, and numerous other infrastructure agencies. Each project reveals a story that both complicates the reductively simple narrative and helps to paint a clearer portrait of the process by which these projects are realized.

One such story is that of the first phase of a Cameroonian highway construction effort intended to link the country’s political capital, Yaoundé, to its economic center, Douala, by way of another major metropolitan hub in Edéa. To this end, in the first phase, as described by a project overview from the Ministry of Economy, Planning, and Regional Development (MINEPAT), Cameroon set out to construct a road between Yaoundé and Bot-Makak, a town approximately one third of the way toward the ultimate endpoint in Douala. To finance construction works, the Government of Cameroon signed a loan with Eximbank China in the form of a preferential export buyer’s credit (PEBC) worth US$482,800,000 on March 8, 2012. China First Highway Engineering Co., Ltd. (CFHEC) was selected to build the project. From this point on, progress would be anything but straightforward.

In December 2013, China Eximbank made its first disbursement of US$96,560,000. Yet the start of construction was unexpectedly delayed by the  Cameroonian authorities, who intervened at this late date to modify the project specifications by raising the speed limit from 100 km/hour to 110 km/hour as well as increasing the number of planned lanes. This, in turn, led the contractor to warn that the budgeted project cost would allow for construction of only 47 of the contracted 68 kilometers, if built under the new stipulations. 

On March 27, 2014, the Chinese Embassy’s Economic and Commercial Office posted a commentary on the project on its website (in Chinese). The commentary explained that the highway had been originally designed to meet Chinese standards for highway construction. The decision by the Cameroonian authorities would bring the road in line with French standards, which are closer to Cameroonian requirements. The Embassy further remarked that China hoped to see its counterparts in Cameroon (i.e. the Minister of Public Works) provide feedback on the final technical standards of the project as soon as possible, hinting at a growing frustration at the sudden adoption of specifications that differed from those originally negotiated. Adding to the air of exasperation, the author underscored a desire that Cameroon identify its “sole interlocutor” for the project, which it deemed necessary “because several ministries and commissions of the Cameroonian government are involved in the project at the same time”. The author assured readers that Cameroon had promised an official start date before April 15, 2014, despite lingering issues over land acquisition and compensation, a responsibility of the Cameroon side. 

That optimism was misplaced. Work on the project finally began sometime in the first quarter of 2015 and was scheduled for completion in 2018. However, progress was continually beset by obstacles. Chief among these were delays in compensating residents whose property fell along the proposed route. Cameroon’s defaults and restructuring of Chinese loans in 2019 also affected the project. 

After making six disbursements amounting to US$202,675,284 up through October 29, 2019, the Chinese bank had stopped disbursements. “Yaoundé does not present any repayment guarantee,” a well-placed source said. China Eximbank proposed a new repayment guarantee mechanism, of an unclear nature. Yaoundé had not yet signed it as of October 2020. For all these setbacks, however, work on the 60km section of road was reported to have reached a “physical execution rate” of 91% by the start of 2021. 

The Chinese contractor is bearing the cost of the delay—each day of delay is likely to come at very high cost, as the contractor must pay staff, workers, and perhaps service the company’s own loans. The question now is who will blink first: will the government provide an acceptable guarantee, or will the contractor finish the project, essentially providing its own loan to Cameroon? 

In the larger context of China-Africa relations, this project serves to demonstrate that, contrary to the image of a one-sided asymmetry of power dominated by a strong China, African borrowers can exercise a certain degree of agency. Within the constraints of an established relationship involving a Chinese state lender and a Chinese contractor, the borrowing country was able to reconfigure project plans to suit its own ends, seemingly without first consulting its Chinese partners. 

This is not to say that doing so was necessarily the most prudent decision—and the repeated delays and missing payments indicate that local Cameroonians are likely to bear some of the negative consequences. For example, the last steps for finishing roads include a final layer of black top that seals the road, and the construction of culverts that channel water away from the road. Will the contractor complete these steps without being paid? Or will the road start to wash away in the rainy season? 

Nevertheless, the story highlights the fact that examining individual projects reveals the complexity and unpredictability of the relationships that develop between African countries and Chinese actors.

Note: At the time of publication, the Cameroonian government website where the authors sourced a large portion of the data necessary for this analysis (http://dad.minepat.gov.cm/) has ceased to be accessible online. We hope that it will become accessible again soon.

Thursday, June 10, 2021

Evaluating the Impact of China-Financed Power Projects on Electricity Access

This guest blogpost is by SAIS PhD student Keyi Tang 

Photo credit: ZSM
In the last decade, China has overtaken the World Bank and the African Development Bank to become the biggest financier of infrastructure projects in sub-Saharan Africa. The CARI loan database now housed at Boston University provides extensive data on these projects. Yet little research has been done on how Chinese loans affect the social welfare of African countries. Africa is the region with the highest percent of people who do not have access to electricity. Electric power is the second largest sub-sector in Chinese lending, making up 20 percent of all loans (transport makes up 54 percent). 

Has Chinese lending improved the access to electricity for Africans? This blogpost proposes a research idea that attempts to answer this question using the SAIS-CARI China-Africa Loan Data and other databases. We hope other researchers will take up this challenge.

Research period: 2010-2019

Although SAIS-CARI documents China-financed energy projects in Africa since 2000, the bulk of the loan projects are recorded as being signed post-2010. A focus on the 2010-2019 period could allow a higher number of samples, which translates to more observable events. 

Unit of analysis:

Because the SAIS-CARI data is at the country level, the easiest way to answer the question is to look at the impacts of China-financed energy projects in different African countries at an aggregate level. Researchers can also use the subnational unit of analysis by searching the subnational location of these projects through Google Map.

Databases

Variables

Name

Database

Note

Dependent Variable

Proportion of population with access to electricity

International Energy Agency

Access to electricity by country and year, 2000-2019

Main Independent Variable

China-financed energy projects

SAIS-CARI China-Africa Loan Database

China’s loan to Africa, by country, year, and sector, 2000-2019

Control Variables

OECD countries’ bilateral finance to African countries’ energy projects

OECD Development Finance Data

By recipient country, donor, year, and sector, 2010-2019

Spatial distribution of population and population density

Worldpop

Other socio-economic and geographical indicators that might influence access to electricity through channels other than investment on energy infrastructure.

 

Armed conflicts location and event data

ACLED Database

Nighttime lights

VIIRS Data

GDP per capita, PPP, by country and year

The World Bank

 

Mines in African district

Data in Space project

 

International commodity price by year

The IMF Primary Commodity Prices

 

Empirical strategy:


The following econometric methods are generally applied to evaluate the impact of large-scale infrastructure. Researchers can check the literature below.

a. Ordinary least square (OLS):  Humphrey & Michaelowa (2019)
b. Difference-in-differences: Martorano et al. (2020), Tang & Shen (2020)
c. Instrumental variables: Duflo & Pande (2007)

If you do undertake this research, send us a copy at sais-cari@jhu.edu!

Helpful References:

Duflo, Esther and Rohini Pande. (2007). Dams. The Quarterly Journal of Economics, Volume 122, Issue 2, Pages 601–646.

Humphrey, Chris and Katharina Michaelowa. (2019). China in Africa: Competition for traditional development finance institutions? World Development, Volume 120, Pages 15-28.

Martorano, B., Metzger, L., & Sanfilippo, M. (2020). Chinese development assistance and household welfare in Sub-Saharan Africa. World Development, 129, 104909.

Tang, Keyi & Yingjiao Shen. (2020). Do China-financed dams in Sub-Saharan Africa improve the region's social welfare? A case study of the impacts of Ghana's Bui Dam. Energy Policy, Volume 136, 111062.

Thursday, May 13, 2021

Don’t miss our CARI/Washington Post Monkey Cage collaboration series



From February to April 2021, the Washington Post’s Monkey Cage and the China Africa Research Initiative brought you a series exploring a variety of China-Africa issues. Almost all of these eleven pieces were written by our 2019 writing workshop participants and/or CARI staff. We have compiled below short teasers from each article. To read more, click on the hyperlinked title. 

  • U.S. policymakers often criticize Chinese investment in Africa. The research tells a more complicated story,” by Yoon Jung Park and Lina Benabdallah, February 19, 2021
    • China policy is a top priority for the Biden administration, who will likely face domestic challenges on how it deals with China’s role in the world. A number of legislators in Congress have, over the past several years, tried to outdo themselves with their hard-line positions on China. Nowhere has this been clearer than in their scrutiny of Chinese activities in Africa.

  • The pandemic has worsened Africa’s debt crisis. China and other countries are stepping in,” by Deborah Brautigam, Kevin Acker, Yufan Huang, February 26, 2021
    • With the coronavirus crisis exacerbating the economic crisis in Africa’s low-income countries, economists and other experts argue that debt relief is essential. While the Trump administration and others have been skeptical about China’s willingness to offer debt relief, our research shows that these fears may be overblown.

  • Don’t believe the hype about China’s ‘vaccine diplomacy’ in Africa,” by Lina Benabdallah, March 5, 2021 
    • Commentary in U.S. and European news media and policy circles have stirred cynical concerns about China using vaccines as a soft-power move to further its political and economic interests in Africa. Academic research, however, shows that China’s humanitarian assistance to Africa, including medical aid, is nothing new. 


  • African countries are helping China go green. That may have a downside for Africans,” by Meredith DeBoom, March 12, 2021
    • The details of China’s new 5-year plan, released earlier this year, suggest China has put off the difficult steps necessary to become carbon neutral by 2060. How will Beijing pursue this goal — and at what cost? China’s plans for more nuclear power plants could mean that its reliance on Namibian uranium may transfer on to Namibians the price to pay for cleaner energy in China.

  • Will Chinese funding help strengthen Africa’s climate change response? It’s complicated,” by Michael Addaney, March 19, 2021 
    • Many African governments see projects initiated under China’s massive Belt and Road Initiative as a way to help build much-needed infrastructure and help 46 participating African countries industrialize, strengthening their ability to cope with the effects of climate change. Addaney’s research, however, suggests that other factors matter as well.

  • Chinese firms — and African labor — are building Africa’s infrastructure,” by Frangton Chiyemura, April 2, 2021 
    • The proliferation of Chinese enterprises involved in Africa has attracted a great deal of attention from academics, policymakers and other observers in recent years. Of particular concern to many are China’s employment practices for large infrastructure projects on the continent. Chiyemura’s research shows that Chinese companies hire a large number of local employees. 

  • Chinese companies have different ways of managing African employees,” by Ding Fei, April 9, 2021 
    • When local Africans work for Chinese companies, the stereotype suggests, their employment is precarious. But Chinese companies do not manage employees in Africa in any universal way: their diverse backgrounds and investment in different industrial sectors influence their management practices.



  • Huawei is trying to avoid U.S. sanctions. That may change the U.S.-China tech rivalry in Africa,” by Henry Tugendhat, April 30, 2021 
    • A battle is unfolding between U.S. and Chinese tech firms over who will control what millions of people in Africa can see, hear, read and say. The launch of Harmony, Huawei’s mobile phone operating system, represents the first major Chinese foray into the world of operating systems that two U.S. companies, Apple and Google, have dominated to date.

Wednesday, February 24, 2021

In Memoriam: Professor Ian Taylor

African Studies, International Relations, and our small world of China-Africa researchers, lost one of its towering figures on February 22. Professor Ian Taylor died at the age of 52, after a short and brave battle against cancer. 

Ian was at the peak of an astounding career: the author or editor of 12 books, with over 80 refereed journal articles in his vita. He leaves behind his wife Jo, two children, Archie and Blythe, a brother and other family members and colleagues. He was very well-loved. 

For those who were fortunate to know him, Ian was literally larger than life:  tall, handsome, and kind, a generous mentor who taught a generation of students at St. Andrews University. He had a wry humor, and his energy was meteoric. And now it turns out that his life, too, was like a shooting star that explodes in a burst of color, light and energy and then is over, much too soon.

I first met Ian through his work. In the 1980s and 1990s, Philip Snow (who wrote a fantastic book The Star Raft in 1989) and I seemed to be the only people interested in the obscure topic of China and Africa. I had published an article in 1994 in the Journal of Commonwealth and Comparative Politics on China's export of development ideas through its foreign aid to Africa, an article which quickly fell into obscurity. And then, out of the blue, I had a letter from the JCCP editors asking me to peer review a paper they'd received that was also about China and Africa. This became "The 'Captive States' of Southern Africa and China: The PRC and Botswana, Lesotho and Swaziland,' Ian's first refereed journal article. 

Ian started his China journey in Hong Kong, where he studied Mandarin at the University of Hong Kong, earning an MPhil there in the mid-1990s. Our paths crossed increasingly often after that initial paper. Ian was always up for a long discussion about African development, or China's role on the continent. Our encounters often highlighted his zest for life outside the academy. Once, for example, Ian and I were both at a China-Africa conference near Charlottesville, Virginia. Afterwards, instead of heading directly to the airport, he rented a car and spent a couple of days driving and hiking in the Shenandoah mountains, exploring Virginia. In April 2010, he invited me to a conference at St Andrews. After my talk, he brought me home, where I met Jo, Archie and Blythe. We then spent the rest of that sunny Saturday on a memorable mini-tour of the coast of Scotland, visiting the church where he was an elder, walking in the villages along the coast. In 2015, Ian joined our new CARI team as a research affiliate, helping us launch our ESRC China-Africa research project at an event in Addis Ababa. 

Ian wrote to me in June last year to share the news of his grave diagnosis. In his usual full-hearted way, he was embarking on this journey with optimism, fortitude, energy, and deep appreciation for the people who were now going to be his new colleagues. "It looks like I have got a bit of a trek ahead of me," he said. "Definitely getting my taxes back through the treatment! The health people have been brilliant, and I can't complain about anything at all." 

Ian leaves behind a vast legacy, on a personal and professional level. His many honors bear witness to his vibrant mind, always questioning, seeking answers, and sharing what he learned with all of us around the world. And this will live on. 

Monday, December 14, 2020

French-language Webinar on French-Chinese Business Cooperation in Africa (Nov 10, 2020)

Speakers:

  • Thierry Pairault, Director Emeritus of Research, French National Centre for Scientific Research; Director, Research Center on Modern and Contemporary China, School for Advanced Studies in the Social Sciences (EHESS)
  • Jérémy Rubel, Director of International Business Development, SETEC ITS (Société d'études techniques et économiques/Technical and Economic Studies Company, Intelligent Transportation Systems division)
  • Amadou Sy, Director of Investments, Meridiam; Founding Member, Afrikamaono

Welcome by Deborah Brautigam, Director, SAIS-CARI

Moderated by Marie Foster, Program Coordinator, SAIS-CARI

______________________

Many aspects of Sino-African relations receive biased or simplistic media coverage. This is especially true of highly nuanced issues, like the dynamics between Chinese and Western business activity in African countries. While most former colonial powers have seen their market shares across Africa decrease as China has grown its economic footprint on the continent, their total volume of trade with African countries has increased. In raw numbers, trade between the European Union and Africa has grown more than China-Africa trade over the past decade. These developments, along with various rumors and misconceptions, are often used to frame the situation as a zero-sum competition between China and the EU. The truth of the matter, however, is far more complex.

On November 10, the China Africa Research Initiative (CARI) hosted a panel discussion on the evolving landscape of French-Chinese business cooperation on the African continent. The event, conducted entirely in French, featured experts on the subject from both academia and the private sector. The panel followed the publication of “French and Chinese Business Cooperation in Africa,” a CARI policy brief written by Professor Thierry Pairault, who was one of the featured speakers at the event.

While media outlets often portray a narrative of direct contention between Western and Chinese businesses in Africa, Prof. Pairault’s fieldwork shows that French and Chinese contractors often cooperate on projects. Historically, these partnerships arose in an accidental or informal manner, but in the past few years firms have started proactively seeking out concrete partnerships. Chinese companies in Africa have naturally begun to partner with other foreign contractors as they have diversified their holdings. The French firm CGA CGM and China Merchants Port, for example, co-manage a number of African ports. Increasingly complex economic ties, both formal and informal, continue to mitigate conflict between French and Chinese companies. The Chinese government has sought a more active role in encouraging business cooperation, but French businesses and government officials prefer informal cooperation.

Jérémy Rubel explored the BRT (Bus Rapid Transit) project in Dakar, Senegal as a case study of collaboration between Chinese firms, European firms, African government entities, and multilateral organizations. The BRT is organized as a public-private partnership (PPP) between the World Bank, the private sector, and the Dakar government. In 2019, the World Bank awarded the contract for the infrastructure and systems portion of the project to Chinese firm CRBC (China Road and Bridge Corporation), which went on to subcontract systems work to the French company FARECO and the Chinese Jiangsu Huimin Traffic Facility Co. Ltd. Other European contractors are currently competing for the private sector operations portion of the PPP. The electric buses for the BRT will likely be sourced from a Chinese firm. Rubel made the case that as a whole, the Chinese framework is increasingly attractive for African public transit projects because it comes with Chinese systems technology, which is less normative but highly innovative, and the services of ambitious Chinese government-backed firms, which are willing to maintain a long-term presence in the client country to operate the project.

Amadou Sy closed the presentation portion of the panel by using his decade-long career working with Chinese firms in Africa as a starting point to discuss the evolution of the landscape. In his role at Egis International, Sy worked with Chinese contractors in the Congo to pioneer a rigorous new program that sent bilingual, highly-trained Chinese engineers to Beijing, Paris, and the Congo. The program led to a partnership between Egis and Chinese firms for the development and provision of services, which allowed Egis to work directly for Chinese contractors rather than for African governments. He noted that in 2014-2015, more Chinese companies began to arrive in the region, signaling a shift towards more intense competition. Sy now helps launch large and technically complicated invitations to tender in Africa, a role that has led him to conclude that the still-widespread belief that Chinese companies are less competitive is mistaken. Several large and technically complicated contracts have recently gone to Chinese firms thanks to recent cutting-edge advances in Chinese technology.

One key takeaway from the Q&A session following the presentations: unlike the Chinese, French companies and government agencies have not defined a cohesive narrative in which to frame French business activities in Africa. This reduces the visibility of French involvement relative to their Chinese partners. The speakers weighed in on several other topics during the Q&A, including the increased hiring of local workers for Chinese projects in Africa. Because Chinese firms now compete on more equal footing with other international contractors, wage levels determine the composition of their workforce. Recent salary increases in China mean that African labor is usually less expensive. Mr. Sy also noted that technology transfers from Chinese firms to African countries have become more substantial in recent years due to an influx of Chinese contractors, more aggressive competition, and greater African demand for technology. Finally, the panel explored the channels of influence available to French and Chinese actors abroad. French embassies are mostly political entities that operate separately from the AFD (French Development Agency), while Chinese embassies can be both political and economic tools due to the presence of a Ministry of Commerce-affiliated minister counselor in addition to an ambassador.

The video recording of the event (in French only) can be found below, and a longer English-language summary of the event is available upon request.



Monday, November 23, 2020

CARI Debt Analysis Outputs since April 2020

Photo credit: Shutterstock

Recent analysis by CARI researchers on Chinese lending in Africa

In assessing China’s approach to debt relief, CARI Research Manager Kevin Acker goes beyond China’s participation in the G-20 Debt Service Suspension Initiative (DSSI) and takes a look at the past two decades of Chinese debt relief. From these scenarios, Acker provides insight as to how China might handle the financial stress of the COVID-19 era. 

David Malpass, World Bank president and a Trump appointee, claimed that China Development Bank was a significant provider of development assistance to the low-income African countries covered by the G-20 Debt Service Suspension Initiative (DSSI) and should join the initiative. In fact, CARI data show that CDB lending in the DSSI countries is relatively small, and it is significant only in Angola. By pointing a finger at CDB, is Malpass deflecting attention from the World Bank's own failure to join the DSSI? Or is Malpass allowing the rising hostility between the United States and China to add additional challenges to cooperative action over debt debt relief in Africa?

Due to the pandemic, the G-20 announced an unprecedented agreement in April to suspend official bilateral debt service payments for the world's low income countries for the remainder of 2020. The Council on Foreign Relations suggested that China Export Import Bank would not join the DSSI. In this blog post, Deborah Brautigam analyzes the PRC’s intention to live up to its COVID-19 pledge on debt relief, suggesting that the CFR misread Chinese intentions. 

From modest beginnings in 1960, China has recently become a highly visible actor in Africa’s lending landscape. African borrowers have built roads, installed electrical grids, and modernized their airports with Chinese finance. When commodity prices and growth rates began to tumble in 2015, the specter of a new debt crisis arose. This briefing paper discusses CARI's latest data release on Chinese loan commitments to Africa. 

After several years of lacking data on outstanding debts to China among developing countries, Yufan Huang and Deborah Brautigam bring clarity to the subject by elaborating on the World Bank’s recently published debt statistics of 72 low-income nations. From the new numbers, they draw several conclusions based on how much debt these governments have and how much is owed to Chinese lenders. 

In the past two years, news headlines have periodically speculated that African borrowers are at risk of losing their sovereign assets to Chinese lenders. In this policy brief, Deborah Brautigam and Won Kidane explore what is known about the legal aspects of Chinese lending, including waiver of sovereign immunity clauses and the consequences thereof, and provide policy recommendations.

As China is poised to become the world’s largest creditor, concerns about debt sustainability have grown. Yet considerable confusion exists over what is likely to happen when a government runs into trouble repaying its Chinese loans. In this paper, Kevin Acker, Deborah Brautigam, and Yufan Huang draw on CARI data to review the evidence on China’s debt cancellation and restructuring in Africa, in comparative and historical perspective. Cases from Sri Lanka, Iraq, Zimbabwe, Ethiopia, Angola, and the Republic of Congo, among others, point to patterns of debt relief with distinctly Chinese characteristics.

Dr. Deborah Brautigam discusses the increased pressure China is facing to forgive its loans to Africa due to the recent pandemic and how it will react. By drawing upon examples of how China has managed tricky debt situations in the past, Brautigam debunks claims that China will seize assets or that it has written off half of Africa’s debt.

This blog post responds to a working paper by Horn, Reinhart, and Trebesch (HRT) about Chinese overseas lending, which states that half of China’s loans to low-income nations are hidden. Deborah Brautigam and Kevin Acker dispute their review of China’s “hidden lending” by comparing it with SAIS-CARI’s data, noticing some numbers have been underestimated and others overestimated. The analysis ends with a discussion about the key difference between loan commitments and loan disbursements, using Nigeria as a case study.

Monday, August 17, 2020

What are Taiwan, China, and the United States Doing in Somaliland?

Typical sign for Taiwan's representative offices
(revised August 20). Taiwan has been courting Somaliland, a breakaway region of the failed state of Somalia. As Wikipedia puts it, "Somaliland, officially the Republic of Somaliland, is a self-declared state, internationally considered to be part of Somalia." 

Some were wondering if China would react with a heavy hand.

I originally thought they would ignore it. But that didn't happen. As Eric Olander has noted at the China Africa project: China's response was delayed and so far remains rhetorical, but they took (sharp) notice.  

Why did China not ignore this new office, as it has Taiwan's establishment of representative offices around the world? This is not simply a Taiwan-Somaliland-China-Somalia dispute. It involves the US. And it involves Hong Kong. 

What Happened in Somaliland?

What happened in Somaliland was Taiwan's establishment of a representative office, not an embassy. This is common practice for Taiwan around the world in the countries that have switched recognition (i.e. official diplomatic ties) from Taiwan to Beijing. (The photo here is courtesy of Wikipedia and shows a similar office in the UK.)

Taiwan has had a representative office just like this since 1979 in Washington, DC and in 12 other locations around the United States. It has similar offices in at least 57 other countries that are important for Taiwan's trade and consular activities. 

Beijing doesn't fight these, aside from pressure to have them located in commercial centers (e.g. Lagos, in Nigeria's case) rather than diplomatic capitals (Abuja). After all, despite the tension of geopolitics, the island and the east coast of China 100 miles away have had their own thick web of family and business ties: around $180 billion in cumulative investment from Taiwan into China as of 2019. The world has welcomed investors from Taiwan, and trade with Taiwan, just as China has. 

It's no doubt annoying to Beijing, but the office established in Somaliland (a region of the legally recognized state of Somalia) is juridically no different than the 12 regional offices Taiwan has in the United States. Or the dozens of similar representation offices in Nigeria, South Africa and around the world. It was not the act of a sovereign state. 

Diplomatic recognition with a real, internationally recognized sovereign state, is a different kettle of fish. And Taiwan gaining an official seat in international organizations that are reserved for states: that's politics, not commerce. That's why Beijing fights with tooth and nail to keep Taiwan out of international organizations. It's not just de facto recognition, it's de jure.

Then why did Beijing react so strongly this time? It's about the United States, and it's about Hong Kong. Somaliland (like Hong Kong) was originally a British colony, “one of Britain’s least rewarding possessions”.  The timing of the Taiwan courtship, and the US connection to this, has to be seen against the background of China's recent crackdown on Hong Kong's hopes for increased autonomy.

About the United States role, here's Taiwan's press release on the opening of the office: "Taiwan’s Minister of Foreign Affairs Joseph Wu (吳釗燮) posted on Twitter on Aug. 9 to welcome [the arrival of Taiwan's representative in Somaliland] and thank the U.S. National Security Council for its positive feedback on the emerging ties between Taiwan and Somaliland."

It's helpful also to remember--especially these days as we seem to be sliding blindly into a new Cold War--how the Taiwan-China diplomatic struggle came about, and the role the United States played. So here's a quick history lesson.

Appendix: Short History of US-China-Taiwan Relations and Why it Matters for Africa

I lived in Taiwan from 1979 to 1980 doing four hours a day of intensive Mandarin and teaching English to support myself. I remember this as one of the happiest years of my life. But my time in Taiwan was also a time of great uncertainty for the island. 

At the end of 1978 the United States had finally established diplomatic ties with Beijing, breaking them with the Republic of China (Taiwan). The US withdrew the large military garrison we had established there. No one was sure what would happen next.

It seems to be largely forgotten in Washington today that the "Taiwan issue" was jointly created by Japan, which took the island of Taiwan from China in 1895 after attacking the crumbling Qing empire (see 1895 Treaty of Shimonoseki) and the United States, which used our naval forces to (peacefully) intervene in the Chinese civil war during the 1950s.

Here's a quick reprise of our US role. 

In 1945, after losing World War II, Japan returned the island of Taiwan to China, then governed by the Kuomintang (KMT, the National People's Party), which was fighting a civil war against the Chinese Communist Party (CCP). 

In 1949, when the communists were about to win the war in China, the KMT fled to Taiwan, 100 miles offshore. 

In 1950, after the outbreak of the Korean War, the US established a naval blockade between Taiwan and mainland China, sending the Seventh Fleet to patrol the Taiwan straits. We then signed a mutual defense treaty with the KMT in Taiwan. We organized an international trade embargo against China that lasted for 21 years (Nixon lifted it in 1971). And between 1949 and 1971, the United States blocked Beijing from taking the China seat in the United Nations, keeping the KMT government artificially propped up as "China". 

So why does all this Cold War history matter for Africans? 

First, it was largely the African governments of countries emerging from colonialism in the 1960s that provided the votes in 1971 that enabled Beijing to be seated at the United Nations. The 54 legally recognized countries on the African continent were (and remain) hugely important in China's diplomacy. 

Second, the Cold War, of course, is no longer a distant memory. And the fingerprints of the Trump administration are not a mystery in the Somaliland story.

Let's hope that the ripples from this little story in far away Somaliland do not go down in history as one of the first shots of something worse than a cold war. 

It can't be repeated often enough that in the Cold War as it was fought across Africa--from Mozambique to South Africa, from the Congo to Angola--there were no winners when the elephants fought. The grass was trampled.

This post was revised on August 20 to reflect the Chinese reaction to Taiwan's move and to note the relationship between current events in Hong Kong and Somaliland's historical status as a British colony. 

 




Monday, August 3, 2020

Guest Post – Investment in Africa: China vs “traditional partners” – Part 2

This guest post, the second of two, is by Dr. Thierry Pairault, research director at France's Centre National de la Recherche Scientifique (CNRS). [1]

In the first part of this post, I used Eurostat (the statistical office of the European Commission) statistical data issued in March 2020 to assess the investment efforts of traditional partners in comparison with China. My conclusion was twofold. It was, of course, the confirmation of the importance of China's role with the caveat about the effects of offshore financial centres. I will discuss this further in the first section of this post. Secondly, it appeared that the traditional partners had by no means forsaken Africa as a narrative repeated ad nauseam would have it. The question is therefore whether or not European countries show a preference for Africa. That will be the second point I will address.

Offshore Financial Centres

There is no single, clear and objective criterion for identifying a country as a tax haven or an offshore financial centre. What will often distinguish such a haven will be that it enables companies (but also individuals) to carry out tax and financial operations otherwise considered fraudulent in their own country or in a third country.

In the case of the Netherlands, a report commissioned in 2016 by the Dutch Ministry of Foreign Affairs concluded that at least one third of companies operating in developing countries’ extractive sector were directly or indirectly financed or owned by Dutch shell companies on behalf of multinationals. These multinationals, from a wide range of countries, used these shell companies for the sole purpose of avoiding corporate income taxes payable to developing country governments. According to Eurostat, in this highly opaque background, during the six years 2013-2018, almost a third of Dutch investment flows were intended for war-torn Libya. Regardless of the statistical weight of flows labelled as Dutch, it is impossible to ascribe them to any specific country or even to consider them as genuine investments. 

Hong Kong is not only a tax haven but also a judicial haven (a territory, which is not subject to the laws commonly accepted in most other countries). It is also a bridge through which China has more easily connected with the outside world. Official Chinese statistics reveal that, at the end of 2018, 81% of China's outward FDI stock (present value of accumulated annual FDI flows) is reportedly held in tax havens, of which Hong Kong accounts for more than two thirds (69%). This phenomenon is not expected to stop in the coming years even if the share of annual flows decreases slightly. Hong Kong statistics tell us how these funds are then redirected from the former colony.

Hong Kong's outward direct investment statistics are published online by the Census and Statistics Department, Table 1 gives the figures for the last four years (2015,  2016, 2017 and 2018). These figures show a very significant distribution of destinations (see Table 2). The first thing to note is that, despite the change in tax rules benefiting foreign companies on the Chinese mainland, the old practice of round-tripping seems to be perpetuated to such an extent that 62% of Hong Kong's FDI flows in 2018 were rerouted to mainland China. It is also noteworthy that 44% of Hong Kong's FDI stock has been accumulated in tax, banking, and even judicial havens (offshore havens), including the Netherlands. This means that only 11% of Hong Kong's FDI stock has been accrued in countries other than China and the six mentioned tax havens, i.e. accrued in 190 countries, 54 of which are African. Furthermore, only 2.5% of Hong Kong's total FDI stock is invested in the manufacturing sector. As such, the potential impact on the industrialisation of the African continent would be very limited, even if a small boost might be significant in some countries. 



China vs Africa

In a previous post in the CARI Blog (China in Africa: Much Ado about Investment) and elsewhere, I made it clear that China's investment in Africa is a very small percentage of Chinese outward investment. The same is true for all other countries investing in Africa: according to UNCTAD, in 2019, only 2.9% of global FDI flows went to this continent of 54 countries. This is not a one-time drop since Africa's inward FDI stock was only 2.6% of the world stock in 2019. No wonder. Most FDI originates from developed countries (76%) which invest primarily in other developed countries (67%). The question then is whether traditional partners treat Africa differently from the way it treats China (see Table 3).


In Table 3, I have included only European countries with a colonial past in Africa, except for the Netherlands because of its investments' uncertain origin (see supra). For comparison, I have added the USA and Japan for which Eurostat gives figures. In 2018, the stock of European direct investment (28 countries) in Africa was one and a half times higher than that of the same 28 countries in China. The stocks of France, the United Kingdom, Italy and Spain in Africa would have been about two and a half times higher than their investment stock in China. As for Portugal, while it invests in Africa, it recorded no investments in China. 

Conversely the German FDI stock in China is about six times higher than in Africa. Belgium, for its part, expresses an infinitesimal preference for China, but neither Africa nor China are important targets for its FDIs. As a rule, northern and eastern European countries (with the exception of Germany) hardly invest in Africa or China. Except for Belgium, European countries that invest preferentially in Africa are maritime countries with an African colonial past. 

I would posit that history and geography are therefore very significant factors in explaining such a situation. Therefore, it comes as no surprise that the United States and Japan are targeting China instead of Africa for investment: both were much more active players in China before 1949 than European countries (except the United Kingdom). 

The question that might now arise is whether comparisons between countries or groups of countries still make sense from an economic point of view when multinationals, including Chinese ones, enjoy de facto autonomy that international institutions can hardly control.

Friday, July 31, 2020

Guest Post – Investment in Africa: China vs “traditional partners” – Part 1

This guest post, the first of two, is by Dr. Thierry Pairault, research director at France's Centre National de la Recherche Scientifique (CNRS). [1]

The highly active and multifarious presence of Chinese companies in Africa and the unrelenting reiteration of a perfectly crafted narrative, have all contributed to the feeling that former colonial powers and other developed countries have disengaged from Africa. Until recently, the lack of Western investment statistics in African countries to compare with China's own statistics and reports of China’s investment and financing (see my post on CARI blog China in Africa: Much Ado about Investment) had convinced Africans of this abandonment. However, in June 2019, Eurostat (the statistical office of the European Commission) published its most recent Foreign Direct Investment (FDI) statistics, referenced in an earlier paper (Investissements en Afrique : La Chine et les « partenaires traditionnels »). On 20 March 2020, Eurostat updated these statistics on European direct investment abroad. In this note I will briefly compare these statistics with those produced by MOFCOM and the Chinese State Bureau of Statistics.

According to Eurostat, in 2018, if I eliminate the Netherlands (internationally known as a tax haven, hence whose FDI is not properly Dutch), France continues to have the largest stock of FDI in Africa (€46 billion). This primacy could very soon be breached by China, which ranks second with a stock lower by only 5 billion euros (€41 billion). The USA are still in third place (extrapolated from 2017 figures because 2018 statistics are still unavailable) ahead of the United Kingdom (€2 million less than China), Italy (€15 million less than China), Germany (€29 million less than China). Luxembourg and Cyprus operate systems similar to the Netherlands, albeit to a lesser degree.

China's expansion is, indeed, very striking, as shown in Table 1. However, it cannot be concluded that traditional partners no longer invest in Africa because Western investors, in order to maintain a given level of investment stock, must at the very least reinvest some of their profits, but also replenish obsolete capital. Indeed, what we are witnessing is NOT that traditional partners have abandoned Africa, but that Africa has gained a new and powerful partner - China.


To go further in the analysis, I undertook a suite of principal component analyses to better understand the structure of the data and to better appreciate the proximity [correlation or lack thereof] between observations. These analyses reported in the above-mentioned paper showed that China's behaviour was just as “capitalist” and “mercantile” as that of Western countries, especially European ones. However, the traditional partners do not favour all the African countries receiving their FDI in the same way... I selected 25 African countries that either had in 2017 FDI stock of at least 1% of the European investment stock or that held a stock of at least 1% of Chinese investment. The year 2017 has been selected here and not the year 2018 for which many statistics are still missing.

These 25 countries benefitted from a total of 96% of the European stock of FDI in Africa and 89% of the Chinese stock.  In other words, European investment was targeted at a smaller number of African countries as compared to Chinese investment. If I assume European investment to be purely economic, the question arises as to whether the greater dispersal of Chinese investment might also be expressing more political (for instance, building a client network for support within UN agencies) than economic objectives. As far as Western countries are concerned, I selected only those with an investment stock in Africa of more than ten billion euros (Germany, the United States, France, Italy and the United Kingdom) for comparison with China. The results are shown in Table 2, Map 1.

Table 2. – Recipient countries and main investor countries



In 2017, three countries climb to the top of the investor countries’ list with the most first, second and third places: China (with twenty places) followed by France (with nineteen places) and the United States (with fourteen places). China's advance is even clearer if I only take into account the number of recipient countries where it tops the list of investor countries (eleven), while France tops the list with eight and the United States with three. This growing Chinese preeminence is politically very important from an African political point of view; however, France and the United States remain the most important investors from an economic point of view. 

It should be noted, however, that a high ranking does not always mean more investment. For example, China is the leading investor in Namibia, but its investment stock there is very small – only a quarter of its investment stock in Algeria. In Algeria, however, China only ranks fourth. It should also be noted that China has taken over the position of a “traditional partner” which today is relegated to second or even third place (e.g., France, Italy, and the United Kingdom). 

Special mention should be made of Algeria, which has distanced itself from France (third-largest FDI stock) without being economically lured by China (fourth-largest stock); instead it has opened its doors to both the United States (second-largest stock) and Italy (first-largest stock) which hold a large share of the exploitation and distribution of its oil and gas resources. China's breakthrough is also still very limited in Egypt, Morocco and Tunisia. In fact, North Africa does not appear to be a privileged land for investments by Chinese companies – even in the case of Egypt, which is nevertheless endowed with a "Chinese" special economic zone, the only one in Africa that is reputed to function to the satisfaction of the parties [2].

A final point:  one must avoid any absolutist interpretation of both the Eurostat data and the findings they suggest. Generally speaking, available FDI statistics are not yet very reliable; they capture financial flows that may underestimate actual investment. Furthermore, if one has doubts about the quality and comprehensiveness of Eurostat's FDI statistics and those of UN Comtrade, similar doubts about the quality of those produced in China should also be entertained. For the former, the role of tax havens, as in the case of the Netherlands clearly skews their FDI figures. In the case of China, statistics do not tell us the amount of investment that goes through offshore financial centres (starting with Hong Kong) possibly en route to Africa.

Saturday, July 18, 2020

Did Benn Steil Get it Wrong About China's Intentions for BRI Debt Relief?

On April 15, 2020, the G-20 announced a response to Covid-19's economic distress:  an unprecedented agreement to suspend official bilateral debt service payments for the world's low income countries for the remainder of 2020. The G-20 finance ministers are meeting again and there's one question everyone will be wondering:

Does China intend to live up to its Covid-19 pledge on debt relief? 

One of the most influential stories about Chinese debt relief intentions was an April 24 piece on Foreign Affairs' website, "Chinese Debt Could Cause Emerging Markets to Implode," by prominent Council on Foreign Relations economists Benn Steil and Benjamin Della Rocca.

Steil and Della Rocca argued that China had “added caveats that make a mockery” of its G-20 debt relief commitment.  Beijing planned to exclude hundreds of large Belt and Road Initiative (BRI) loans in low income countries, they charged.

Their source for their analysis was an op-ed in the English language Global Times, widely seen as a source of official views. The op-ed was by Song Wei.

Song, who works at a Chinese think-tank under the Ministry of Commerce, was a Fulbright Fellow a few years ago at Columbia University. She writes frequently on Chinese foreign aid and on African issues.

Her piece on Africa's debt problems was clearly written before the G-20 announcement and did not reference it.  She made the unremarkable point that only China's interest-free loans were eligible for debt write-offs. But then she added that “preferential loans are not applicable for debt relief.”

This was confusing. And I can understand why Steil and Della Rocca misunderstood Song's statement.

So let us (belatedly) help them out.

In April, our team (myself, Kevin Acker, and Yufan Huang) was deeply immersed in the final stages of researching and writing our latest Johns Hopkins University SAIS-CARI working paper:  "Debt Relief with Chinese Characteristics"(June 2020). We had collected and analyzed dozens of examples of debt relief, including China Eximbank's (the sole source of preferential loans in China) restructuring of a number of concessional and preferential loans between 2000 and 2018.

Steil and Della Rocca wouldn't have known -- as we did by then -- that the Chinese term “债务减免” (debt reduction and cancellation) is often mistranslated into English as “debt relief”.

So when we saw the same piece in Global Times, we read the statement "preferential loans are not available for debt relief" differently. Song Wei was simply stating something most China-Africa watchers already knew: Africans should not expect debt write downs or cancellation of anything but interest-free loans, consistent with China's debt cancellation actions in Africa over the past 20 years. Other loans would not be cancelled.

Notwithstanding this confusion, Song's article had plenty of other information that clarified her point.

Most importantly, she described how rescheduling and payment delays (i.e. debt service suspensions like the G-20 pledge) were among the many non-write off measures available for China Eximbank’s preferential loans:
"If any debtors encounter difficulties to pay on time, there may be tailored plans including rescheduling [emphasis added]… adding grants to help bring projects back to life, conducting debt-equity swaps, or hiring Chinese firms to assist operations. . . adopting such measures to help the projects get back on track and gain profit has advantages over simply offering write-offs which may only solve issues on the surface and are unsustainable." 

So clearly, although we still do not have much detail on what has happened in the first month of the DSSI, Song Wei's op-ed is not evidence of a Chinese plan to renege on its G-20 commitments.

Unfortunately, Steil and Della Rocca's piece was cited as the source for other articles, for example "China Squeezes Debt Repayments From Virus-Hit Nations" (Asia Times, May 5). But what's sad--and more important--is the way this piece has become part of the conventional wisdom.

Just two days ago David Leonardt, a NYT columnist I follow and respect, wrote that China has "tried to squeeze low income countries for debt payments during the pandemic."

No evidence or links provided, but look closer: Leonardt's charge is simply a clear restatement of the Asia Times headline, which is based on Steil and Della Rocca's piece, which, I hope I've shown, was in error.

Sigh.

If China was simply more transparent none of this would be necessary. But until then, we'll keep trying to tell "the real story".