Africa: the stage for the next US–Chinese economic clash?

Africa: the stage for the next US–Chinese economic clash?

Investment strategies and national interests are colliding with development realities in the continent.

WHAT’S HAPPENING?

The US is set to invest $5 billion in Ethiopia through the International Development Finance Corporation (DFC).

KEY INSIGHTS

– The US investment typifies the shift to Africa as the next arena for US-Chinese economic competition
– While profuse, China’s investment record in Africa is a mixed bag, with some considerable shortcomings
– Security will likely be an important factor in determining how the US chooses to invest in Africa
– Emerging trends may lead the US to broker deals with African trading blocks rather than individual countries

THE DFC AND ITS PLAN FOR AFRICA

The US International Development Finance Corporation (DFC) has allocated $5 billion to improve Ethiopia’s telecommunications, geothermal energy, logistics and agricultural sectors. The US aims to upend the African powerhouse’s state-led development model through the acceleration of privatisation in the aforementioned industries. Ethiopia has also promised to reform its financial sector by changing the rules that govern offshore accounts, the repatriation of foreign currency and the settlement of financial disputes. US investment plans for Ethiopia are a direct jab at China, which has quickly gained significant influence across Africa with its development assistance over the last decade. Washington hopes that a pivot to Africa can spur the economic dynamism experienced by Ethiopia — which has had the highest annual growth of any African state in the last five years — and win the hearts and minds of leaders across the continent.

In the last decade, China has eclipsed the US as Africa’s largest trading partner, lender and foreign direct investor. As laid out in the 2018 Beijing Forum on China–African Cooperation, China’s investment strategy in Africa has largely focused on grand infrastructure projects through extremely generous lines of credit — exemplified by the $4 billion Standard Gauge Railroad project in Kenya. Such investments have bought the Chinese Communist Party (CCP) hard and soft power on the continent. In 2017, China opened a military base in Djibouti, its first in Africa. China and Africa have had a robust cultural and educational exchange, such as performances, language centres, and art festivals that dot the continent. The China-Africa Press Exchange Centre programs, for example, have proliferated Chinese pop culture and news projects throughout countries including Kenya, Tanzania and Zambia.

With the invigorated DFC, Washington has made clear that it seeks to challenge China’s growing influence in Africa with an enterprise-driven, private sector engagement policy.

BEIJING AND WASHINGTON’S MIXED RECORD

Photo: Michael Gross/US State Department

The DFC grew out of the Overseas Private Investment Corporation and USAID’s Development Credit Authority. Unlike its predecessor, the DFC has significant lending capacity — up to $60 billion — and specific foreign policy aims. Washington is preparing to secure its interests by supporting private companies with loans, insurance and equity. But despite the Trump administration’s push for trade and investment under the ‘Prosper Africa’ strategy, its record has been mixed. US aid and FDI to Africa under the Trump administration has trailed the Obama administration’s second term on a year-by-year basis. In Kenya, the US government had to temporarily shelve a $4.5 billion Nairobi–Mombasa expressway due to high levels of debt, and though Secretary of State Mike Pompeo signed memorandums of understanding with Senegal’s president last month, little has been accomplished there in terms of hard, tangible investments. America’s failure to deliver is reflected in tapering public opinion from some of its most important business partners in Africa, such as Kenya.

Beijing’s state-led investment model has also struggled. China’s use of its financial might to promote interconnectivity and national security has come back to bite Beijing in several ways. In pursuit of strategic initiatives (such as securing access to resources through construction and transportation), China has come under pressure for creating debt burdens that have fuelled a problematic statistic: over 30 African countries have surpassed the 55% debt to GDP ratio. This debt ratio will limit government options in the event of a recession and increases the amount of money that African governments must commit to debt servicing rather than development. In April 2019, Djibouti cancelled a $420 million contract awarded to the China Civil Engineering Construction Corp for an airport because President Ismail Omar Guelleh feared he would fall in the debt trap.

Another shortcoming of China’s Africa investment policy is the efficacy of greenfield funds to assuage underlying societal issues. While the Kenyan Standard Gauge Railroad helped connect a country, China’s inability to ameliorate low literacy rates, wage abuse, health issues, and unemployment resulted in Kenyans developing a less favourable view of the CCP. Perceptions of China fell from 78% “favourability” in 2013 to 54% in 2017. Ghana’s President Nana Akufo-Addo has attributed China’s slipping local favourability to the proliferation of corruption, flooding of local markets with Chinese goods and exponential increase in pollution.

Furthermore, to the chagrin of its African counterparts, China has shown that its own interests are its preeminent concern. In January 2018, China was censured for bugging the African Union (AU) building in Addis Ababa — the very building its loans helped finance. The data collected from AU computers was transferred from Ethiopia to Shanghai so that China could be ahead of the curve for the bloc’s next economic course of action.

WHAT THE FUTURE OF US INVESTMENT IN AFRICA MIGHT LOOK LIKE

Photo: Nina Stock/Pixabay

At the Africa Investment Forum in Johannesburg, Dr. Akinwumi Adesina, the President of the African Development Bank, said, “Africa is not going to be developed by aid. It will be developed by investment.” Such rhetoric is coalescing within African states — Kenya’s president has equated Chinese investment to that of colonial Europe — creating an opportunity for the US to sell its approach as the alternative. Secretary of State Mike Pompeo’s speech at the UN Economic Commission for Africa in February warned that “countries should be wary of authoritarian regimes and their empty promises.” However, Washington is steering its investments into combating radical Islam, which may lead it to neglect sectors it has historically exported well, such as education and healthcare, and where it has an advantage over the underperforming Chinese greenfield FDI that has failed to create jobs in Africa compared to other parts of the world.

US investment choices will include uncomfortable decisions about which regimes to support. Historically, China has been an equal opportunity investor on the continent, turning a blind eye to corrupt governments and internal conflicts. In many ways, this has been received well. If Washington extends lines of credit to compete in countries like war-torn South Sudan — where China now dominates the key oil sector — it will likely have to tolerate unsavoury governance practices in order to achieve geopolitical goals. For the time being, Washington is supporting political and economic liberalisation through the DFC, as in Ethiopia, where the US is expediting Prime Minister Abiy Ahmed’s political reforms and promises of free and fair elections through a financial boon. But there is a high probability that the competition for influence will evolve into bidding wars to win partnerships — a policy that will supplant much needed bottom-up growth and development.

The US may abandon its traditional investment strategy of working bilaterally with African states for a multi-stakeholder approach. In the last two years, the AU has pushed to lead multilateral investment talks as a unified bloc, and Western allies have expressed a desire to deepen economic relations with African states. China’s multilateral operations, such as the China-Africa Co-operation Summit, have proved to be Beijing’s most efficient means of furthering progressive economic cooperation. The US might be forced to adopt a similar strategy.

Africa is shaping up to be a key arena for a Washington–Beijing economic competition. But both states may soon learn that they cannot write the rules of the game. As African leaders become increasingly aware of the power of the unified bloc and more cognizant of the complex needs of their populations, the US and China will likely have to design their investment strategies for a new era of geopolitics that favours mutually beneficial development over debt-laden and security-oriented appeals.