China and Africa – not a win-win situation?

Every time I visit South Africa at some point I end up in a store called Woolworths.  Now for people in the US Woolworths is synonymous with a failed chain of stores that catered mainly to the working classes and might be thought of as the Walmart of the 1960s.  There was also a Woolworths in the UK which went out of business but the Woolworths in South Africa used to be owned by the venerable UK chain store of Marks and Spencers known for its quality merchandise and good value for money.  In the 1980s Marks and Spencers decided to go global opening chains in Canada, South Africa and even France – in South Africa it decided to use the Woolworths brand name. When Marks and Spencers downsized in the 1990s it sold off its Woolworths chain in South Africa but the store still has the reputation of supplying quality merchandise.

On my latest trip to Woolworths I was surprised by certain changes.  For example, on previous visits there were always clothes and other items made in South Africa, Lesotho, Swaziland and Mozambique ( - all Southern African countries) – but this time I struggled to find anything that wasn’t made in China.  I eventually found some linen shirts made in Bangladesh, but absolutely nothing that was made in Southern Africa.  Now to me this is extremely disconcerting.  It means that African manufacturing companies are struggling to compete with Chinese manufacturers.  In fact the latest manufacturing output statistics for South Africa show a decline in output which continues a worrying trend for a country that relies on commodities and should be the manufacturing engine for most of the rest of Africa.  Recent statistics on capacity utilization at http://www.engineeringnews.co.za/article/low-capacity-utilisation-weighs-on-sas-2011-investment-outlook---absa-capital-2010-12-14 also underscore this.  

So why is this?  Unskilled wage rates are hardly high in Africa so this must be mostly to do with the Chinese exchange rate.  Now there has been plenty written about China’s undervalued exchange rate on the US and Europe, but not a lot has been made of the effects of China’s undervalued exchange rate on the rest of the world.  But China’s exchange rate policy has impacted developing countries as well, with Mexico’s maquilladoras struggling to compete and Indian companies also struggling with competing with China’s rapidly expanding industrial complexes. But although the US and Europe have criticized China, not much has been forthcoming on the issue from African politicians.  One of the most important reasons why Africa is not as anxious to criticize China as the developing world is that huge amounts of money have been flowing into Africa to buy up land and upgrade infrastructure – money that probably wouldn’t have flowed to Africa otherwise. 

The trade off with China in Africa (and indeed in other parts of the world) is a different one from that in the developed world.  In Africa the influx of money from China is not in the form of loans to fund the trade deficits run with China by the US and European countries, but instead is in the form of foreign direct investment in mining and mineral companies and land.  Either way the trade off is not a good one – it is a matter of short to medium term convenience to allow China to buy US and European bonds to keep interest rates low in the developed world, but the purchase of land and foreign direct investment in Africa, although supporting factor prices, is not easily reversed and comes with a major decline in the industrial base and also a sizeable loss of manufacturing jobs. Of course this differs by country with some of the extremely poor agrarian African economies benefitting from the inflow but not losing any industrial base ( - as they never had one to begin with), but the losses for other more industrialized countries (like South Africa and Nigeria) are likely to be much more serious in the long term.

In my mind there is another really important question here which is largely ignored by economists.  Is it in the rest of the world’s interest to have so many products made solely in China and hardly anywhere else?  What happens if there is major political unrest in China or striking workers limit output?  With virtually only one (monopoly) producer of certain articles this means that prices for these articles would skyrocket around the world until manufacturing capacity could be expanded elsewhere.  It would then be in the rest of the world’s interest to allow the Communist authorities to suppress any unrest on economic grounds, while on political grounds there would unlikely be much support for what the authorities end up doing ( - given their record on human rights).