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China-Africa and an Economic Transformation$

Arkebe Oqubay and Justin Yifu Lin

Print publication date: 2019

Print ISBN-13: 9780198830504

Published to Oxford Scholarship Online: June 2019

DOI: 10.1093/oso/9780198830504.001.0001

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Catalysing China–Africa Ties for Africa’s Structural Transformation

Catalysing China–Africa Ties for Africa’s Structural Transformation

Lessons from Ethiopia

Chapter:
(p.282) Chapter 14 Catalysing China–Africa Ties for Africa’s Structural Transformation
Source:
China-Africa and an Economic Transformation
Author(s):

Fantu Cheru

Arkebe Oqubay

Publisher:
Oxford University Press
DOI:10.1093/oso/9780198830504.003.0014

Abstract and Keywords

Economic cooperation between China and Africa has deepened in scope and scale in recent times, and FOCAC has emerged as the largest South–South economic partnership platform. However, evidence suggests that the catalytic effect of China–Africa engagement on the economic transformation of African countries has been uneven, primarily shaped by the strategic response of the respective African countries. This chapter proposes that China–Africa economic ties should be examined from a structural transformation perspective to adequately evaluate the catalytic effect of Chinese engagement on the economic growth and diversification of African economies, the development of domestic capabilities, and lastly on Africa’s successful insertion into the globalized economy of the twenty-first century. Based on the experience of Ethiopia, the chapter unpacks the pathways to structural transformation in the African context, and the role of the state in guiding the economy through a proactive and strategic approach to economic transformation. The chapter concludes with pathways to the future.

Keywords:   China–Africa, Africa, Ethiopia, economic transformation, productive investment, trade, finance, infrastructure development, state, policy learning

14.1 Introduction

The development landscape for Africa has changed drastically with the emergence of new development partners from the South, such as China, India, Brazil, and Turkey. While the OECD countries will remain important partners for Africa for the foreseeable future, the centre of gravity is irrevocably shifting South–South and eastwards (Alden, 2007; Cheru and Obi, 2010; Manning, 2006). The impressive growth registered over the past decade in many African countries has been underpinned by the insatiable appetite of emerging economies for African oil, gas, and mineral resources, coupled with expanded investment in Africa’s infrastructure sector, which has enabled African countries such as Ethiopia to raise their productive potential, diversify their economic base, and move goods to local, regional, and global markets relatively quickly (The Economist, 2011; UNECA, 2013). Improved access to transport and energy has been critical in the observed productivity gain in agriculture and other sectors.

This positive portrayal of China’s role in Africa does not suggest that there are no tensions between the two trading partners over economic policy. As a rising global power with a huge stake in the global economy, China behaves in the same way as the United States or any other developed country in the conduct of its economic relations with Africa. Despite the official rhetoric of mutual interest and solidarity with African nations, China’s national interest is always paramount. Possible areas of tension between China and Africa could (p.283) include, among others: (a) direct competition in domestic markets from cheap manufactured Chinese goods, displacing small and medium-sized African producers; (b) indirect competition in export markets of interest to Africa, namely in sectors such as textiles, footwear, and leather (Geda and Meskel, 2010); (c) limited local in-sourcing and sub-contracting opportunities for medium-sized African firms (Axelsson and Sylvanus, 2010; Wethal, 2018); and (d) poor environmental and labour practices by Chinese firms operating in Africa (Human Rights Watch, 2011). While these tensions are unavoidable, it is up to individual African countries to craft the necessary regulatory frameworks and enforcement mechanisms to resolve emerging tensions and to ensure that Chinese investment becomes a catalyst for Africa’s industrialization and structural transformation (Cheru and Obi, 2011; Mohan et al., 2014).

This chapter examines the strategies adopted by the government of Ethiopia to engage China strategically in its quest for industrialization and structural transformation. The chapter aims to decipher the role of Ethiopia’s developmental state in framing a long-term development vision for the country to harness the catalytic effect of economic ties with emerging powers from the East, particularly China, to achieve rapid economic growth and diversification, and develop domestic capabilities for sustained growth through a process of experimentation and learning by doing (Oqubay, 2015, 2019a). The chapter concludes by distilling the lessons learned in policymaking, negotiation strategy and capacity, knowledge acquisition, and absorption that might be relevant for other African countries seeking new pathways to structural transformation.

14.2 Beyond Theory and Ideology: the Role of History and African Agency

The literature on China–Africa relations has proliferated over the past decade. There are contending perspectives in the literature purporting to identify the real impact of China on Africa’s development, and these can be classified into two broad camps: the ‘alarmists’ and the ‘cheerleaders’. The first frames China as an ‘imperialist’ power intent on exploiting African resources and dominating the African market (Moyo, 2013; Sautmann and Hairong, 2008; Southall and Melber, 2009), while the second portrays China as a natural partner that will catalyse Afro-centric development in the context of South–South solidarity (Wenping, 2007: 23–40; Brautigam, 2009; Cheru and Modi, 2013; French, 2014). Bordering on xenophobia, scholars in the ‘alarmist’ camp characterize China’s foray into Africa as being synonymous with a ‘new form of imperialism’ (Naim, 2007; Pillsburry, 2015; Zakaria, 2008).

By contrast, the second camp—the ‘pragmatic cheerleaders’—regard the rise of China and other emerging southern actors as an opportunity rather than a (p.284) threat. These scholars take the position that the rise of China and other emerging countries could open new possibilities for African countries to experiment with alternative development models without the strong-arm tactics of Western aid agencies and creditor institutions (Brautigam, 2009; Carmody, 2013; Cheru and Obi, 2010; Mohan and Power, 2008; UNCTAD, 2010). They further point to the fact that China, in a relatively short thirty years, overcame the legacies of colonialism, built one of the most powerful economies in the world, and lifted more than 700 million of its people out of poverty. Therefore, African countries can learn many lessons from the Chinese economic reform experience without having to export them to Africa in their entirety (see Chapters 3 and 14).

The relationship between China and Africa is more complex than the contending perspectives suggest. In this chapter, we try to put centre stage the issue of ‘African agency’ (Mohan and Lampert, 2013). We take the position that the rise of China neither necessarily produces a new ‘colonial-type’ relationship nor does it automatically guarantee African countries the freedom to determine their own development path without external intrusion. Transforming the new relationship with China into a ‘win–win’ partnership will ultimately depend on the nature of the state and political leadership in each African country; whether the government has articulated a long-term national development vision and strong institutions to drive the structural transformation agenda (Zenawi, 2012). In short, the government must set priorities, decide policy content, create necessary conditions, be responsible for implementing and monitoring projects, and be prepared to engage its external partners strategically and without surrendering its sovereignty.

Recent empirical evidence shows that, far from being powerless in the face of China’s economic might, some African states have been able to turn the opportunities and resources provided by Chinese engagement to their own advantage (Mohan and Lampert, 2013: 92–3; Cheru, 2016). Ethiopia represent one such example where the EPRDF-led government has been able to strategically harness its relationship with new as well as traditional Western development partners to implement its ambitious programme of industrialization. What is even more unique in the case of Ethiopia has been the government’s ability to use its strategic partnership with China as an explicit bargaining chip in its negotiations with European donors and vice versa (Cheru, 2016). This has allowed the EPRDF elites to choose from a wider range of development models that are relevant to Ethiopia than was previously the case. Indeed, Ethiopia features economic philosophy, policy capability, and growth performance that are more akin to those of East Asia’s industrializing economies. The country also exhibits a high degree of political ownership and reasonably well-developed institutional capacity for implementation of policies and strategies.

(p.285) It must, however, be pointed out at the outset that Ethiopia’s successful development experience in the post-1991 period cannot be understood without a full grasp of the ideological underpinnings and strategic orientations of the post-liberation Ethiopian ‘national project’. Since assuming power in May 1991, the EPRDF-led government has been engaged in a highly political state-building project, underpinned by a long-term political and development vision aimed at empowering the 90 per cent of Ethiopians who happen to be impoverished small-scale subsistence farmers. Central to the post-liberation national development project was the urgent need to radically transform the economy away from subsistence agriculture and towards agricultural-led industrialization to lift millions of subsistence farmers out of abject poverty, achieve full food security, and tap into the growing opportunities of the global economy. It is in this broader quest for structural transformation that China–Ethiopia relations must be examined.

14.3 Ethiopia–China Relations: Background and Context

Ethiopia is one of a few African countries that has taken a more ‘strategic’ approach to engaging China while maintaining strong ties with its traditional Western development partners. As it is a non-oil exporting country, Ethiopia’s policymakers have enabled the country to embark on its ambitious industrialization agenda by mobilizing large amounts of investments both from China and other emerging economies, and from traditional Western development partners (e.g. WB, AfDB, OPEC Fund).

From the mid-1970s until the collapse of communism in Eastern Europe in the late 1980s, Ethiopia’s foreign policy was strategically aligned with the Soviet Union. From the mid-1990s onwards, things began to change. The late prime minister Meles Zenawi visited China in 1995 and the Chinese reciprocated when Chinese president Jiang Zemin visited Ethiopia in 1997. During his first visit to China, Prime Minister Meles personally persuaded Chinese investors to come and invest in Ethiopia and assured them that his government was prepared to offer them all the necessary incentives for success. During the two exchange visits, Ethiopia and China signed several bilateral economic and educational agreements. A year later, in 1998, a Joint Ethiopia–China Commission (JECC) was established between Ethiopia’s Ministry of Finance and Economic Development (MOFED) and China’s Ministry of Commerce (MOFCOM).1 The JECC serves as a platform for coordinating economic and technical cooperation agreements between the (p.286) two parties. Technical teams from both sides meet every two years and the meetings are held alternately in Beijing and Addis Ababa. Decisions on large-scale loans from China take place on a case-by-case basis, often at the highest political level.

A second channel that facilitates relations between China and Ethiopia is the respective political parties of both countries—the Ethiopian People’s Revolutionary Democratic Front (EPRDF) and the Chinese Communist Party (CCP). Each year up to two hundred officials from Ethiopian regional and national administrations travel to China to attend training and experience-sharing programmes. Party-to-party meetings provide a channel to discuss development experiences, the role of the party in the state, or party succession strategies.

The decision to engage China constructively coincided with the strategic shift in economic policy that was underway in Ethiopia from the mid-1990s onwards. While the EPRDF reluctantly embraced neoliberal policies in the first decade after assuming power, its commitment to bring about structural transformation under the guidance of the state predates the party’s accession to power in May 1991. During the transition period in the early 1990s, Western donors consistently pressed the government to open the economy to foreign investors and introduce far-reaching market-oriented reforms. Despite having serious misgivings about the relevance of a neoliberal economic policy in post-conflict Ethiopia, the EPRDF reluctantly began to implement IMF/World Bank-supported market-oriented reforms in exchange for accessing badly needed donor funding to kick-start the economy and undertake post-conflict reconstruction and rehabilitation projects. These donor-supported reform programmes had, by and large, limited impact on reversing the productivity decline in Ethiopian agriculture and on generating enough jobs for the population.

The poor state of the economy called for more radical and counter-hegemonic thinking on development policy. After a series of internal discussions and debates within the party in the early 2000s, a consensus was reached within the EPRDF on the need to counterbalance the excessive meddling of Western donors by diversifying Ethiopia’s foreign and economic relations through closer engagement with the emerging countries of Asia, and to place centre stage the role of the state in national development. South Korea and Taiwan were Prime Minister Meles’s favourite examples of developmental states that had succeeded in subverting the neoliberal dogma (De Wall, 2012; Zenawi, 2006).

Central to the East Asian economic miracle, according to Meles, was the role played by the Chinese state in guiding the market through disciplined planning, and the willingness of the state to experiment with ‘heterodox’ policies to revive the economy, compete in global markets, and reduce poverty in the (p.287) process while moving in a free-market direction. This strategy is in stark contrast to the failed policies of the Washington Consensus that Ethiopia and other African nations followed faithfully without any success.

While the ideological roots of a ‘developmentalism and developmental state’ approach appears to date from the period of the liberation struggle, its substantive parts were developed in successive development plans, starting with the Programme for Accelerated and Sustained Development to End Poverty (PASDEP–2005/10). PASDEP aimed at moving Ethiopia from dependence on subsistence agriculture towards industrialization and the export of value-added products under the guidance of a strong and development-oriented state (MOFED, 2005; Zenawi, 2012). Based on the lessons learned from implementing PASDEP, the government formulated the first Growth and Transformation Plan (2010–15) in 2010 (MOFED, 2010). The GTP’s approach of ‘state-led’ systemic transformation drew its inspiration from the East Asian model of development.

The key vectors of interaction between Ethiopia and China include measures to expand trading opportunities, soft loans for infrastructure projects, direct investment, technical assistance, and training programmes.

14.3.1 Trade Patterns

As a non-oil exporting country, Ethiopia’s trade with China has grown dramatically over the past decade. China is Ethiopia’s second most important trading partner, behind the European Union, but ahead of the United States. However, it is important to note that Ethiopia’s exports to China are negligible: a mere US$288 million compared to its imports from China which stood at US$4.8 billion in 2017, leaving a trade deficit of US$12.16 billion in China’s favour. Imports from China grew at the rate of 37 per cent during the period 2000–10 and 17 per cent from 2011 to 2017 (ERCA, 2018; see also Appendix, Table A14.2).

14.3.1.1 Export Growth and Composition

While Ethiopia’s export to China has grown substantially over the last decade, reaching US$288 million in 2017, the European Union remains Ethiopia’s top trading partner (US$881.45 million), followed by the Middle East (US$553.82 million). China accounts for 10 per cent of Ethiopia’s total exports while the United States and the European Union accounted for 29.1 per cent of total Ethiopian exports in 2017 (Figure 14.1).

Catalysing China–Africa Ties for Africa’s Structural TransformationLessons from Ethiopia

Figure 14.1. Ethiopia’s export comparison, 2000–17

Source: Ethiopian Revenue and Customs Authority (2018) (based on Appendix Table A14.1 unpublished)

Ethiopia’s exports to China are dominated by unprocessed agricultural products such as sesame seeds, oil seeds, leather, and spices. Ethiopia benefits from the preferential trade arrangement that China announced in 2006. The number of products covered under the zero-tariff programme grew from 190 (p.288) in 2006 to 440 in 2012 (Anshan et al., 2012). There is still considerable room for Ethiopia to take advantage of the preferential trade arrangement with China through expanded value addition to its agricultural products and by developing niche markets in highly selected agricultural products to meet the demands of a growing Chinese middle class. The rapid growth of the Ethiopian wine industry and its success in penetrating the Chinese market is a good illustration of what Ethiopia can do to expand its trade with China.

14.3.1.2 Import Volume and Structure

Imports from China have grown exponentially since the adoption of Growth and Transformation Plan I in 2010, reflecting the high level of investment by the government in mega infrastructure projects and the boom in private construction of housing and office buildings. Ethiopia’s imports from China include finished manufactured goods, machinery, iron and steel, construction materials, power generation and transmission equipment, and industrial parts. As shown in Figure 14.2, the total value of imports in 2000–17 was US$142.39 billion, of which imports from China accounted for 26 per cent (or US$37 billion) of the total import bill. The other import destinations for the same period were: India US$11.6 billion (8 per cent), Europe US$26.93 billion (19 per cent), the Middle East US$30.96 billion (22 per cent), and other countries US$36.32 billion (25 per cent) (ERCA, 2018).

Catalysing China–Africa Ties for Africa’s Structural TransformationLessons from Ethiopia

Figure 14.2. Ethiopia’s import comparison, 2000–17

Source: Ethiopian Revenue and Customs Authority (2018) (based on Appendix Table A14.2, unpublished)

(p.289) The structure of Ethiopia’s import–export trade with China is heavily in favour of China and the trade deficit between the two countries has grown substantially in recent years, contributing to the balance-of-payments crisis. Ethiopia’s inability to export its way out of the crisis has further deepened the debt burden with China and other trading partners. Overall Ethiopia incurred a trade deficit of US$11.8 billion in 2017, down by 14.2 per cent from the US$13.8 billion in the red for 2016 (see Table 14.1). These cashflow deficiencies clearly indicate Ethiopia’s competitive disadvantages, but also present key opportunities for Ethiopia to develop country-specific strategies to strengthen its overall position in international trade.

Table 14.1. Ethiopia’s trade deficits with key trading partner countries, 2017 (in US$ millions)

China

–4,600

India

–1,000

United States

–984

Italy

–584

Japan

–579

Kuwait

–563

Turkey

–557

Malaysia

–340

Morocco

–286

Saudi Arabia

–247

Note: Rounded to single digit.

Source: UN Comtrade data and Trade Map, International Trade Centre

(p.290) 14.3.2 The Productive Nature of Chinese FDI Inflow

Although Ethiopia is not an oil-exporting country, it has been successful in attracting investment from many countries and covering a wide range of sectors. The total number of new manufacturing firms in Ethiopia from 2000 to 2017 was China (407), India (123), Europe (60), and Middle East (112). Of the 407 Chinese firms, eighty-seven were joint ventures (ERCA, 2018).

In terms of the value of FDI inflows in the manufacturing sector from 2000 to 2017, the total amount was close to US$5.65 billion. This is distributed as follows: China (US$851.74 million), India (US$261.95 million), Europe (US$292.08 million), Middle East (US$1.71 billion), and others (US$2.53 billion) (Figure 14.3). Chinese companies have been the second-largest foreign investors in Ethiopia, after Saudi Arabia and the Gulf States (Figure 14.4).

Catalysing China–Africa Ties for Africa’s Structural TransformationLessons from Ethiopia

Figure 14.3. Total number of new FDI manufacturing firms in Ethiopia, 2000–17

Source: Ethiopian Investment Commission (2018) (based on Appendix Table A14.3, unpublished)

Catalysing China–Africa Ties for Africa’s Structural TransformationLessons from Ethiopia

Figure 14.4. FDI inflow to Ethiopia, 2000–17

Source: Ethiopian Investment Commission (2018) (unpublished)

Chinese investments are spread across a wide number and range of projects. Of the 657 manufacturing projects registered with the Ethiopian Investment Commission (EIC), 407 are in the operational phase, ninety-one are under implementation, and 174 are in the pre-implementation phase (Figure 14.5). Construction and real estate are the second most important areas of Chinese direct investment in Ethiopia. On the other hand, Chinese investment in the agricultural sector has been negligible and involves only thirty-nine investment projects, with thirty-three of them in a pre-implementation phase. This evidence disproves the allegation that China is engaged in extensive ‘land grabbing’ in Ethiopia.

Catalysing China–Africa Ties for Africa’s Structural TransformationLessons from Ethiopia

Figure 14.5. New Chinese manufacturing firms in three phases

Source: Ethiopian Investment Commission (2018) (unpublished)

(p.291) (p.292) Data from EIC show that there are eighty-seven Chinese joint venture (JV) companies in the operational phase, twenty-six in the implementation phase, and twenty-seven in pre-implementation phase. The total value of Chinese FDI inflow in the manufacturing sector from 2000 to 2017 stood at US$852 million, of which US$351 million involved joint ventures.

14.3.2.1 Contribution to Productive Employment

Foreign investors have contributed to job creation in the Ethiopian economy (Figure 14.6). As shown in Figure 14.6, foreign investors created a total of 183,661 manufacturing jobs between 2000 and 2017. Of this, Chinese firms accounted for 21 per cent of the total jobs created in the manufacturing sector. The rest came from investors from the following countries: India 27,822 (15 per cent), Europe 4,866 (3 per cent), Middle East 25,871 (14 per cent), others 85,808 (47 per cent).

Catalysing China–Africa Ties for Africa’s Structural TransformationLessons from Ethiopia

Figure 14.6. Employment generated (cumulative) by foreign firms

Source: Ethiopian Investment Commission (2018) (unpublished)

14.3.2.2 Skills and Know-How Transfer

The most visible part of the Chinese attempt to transfer knowledge and skills has been the experiment to set up special economic zones (SEZs). The first export processing zone (EPZ) was set up in Lebu, on the outskirts of Addis Ababa in 2015. The EPZ aimed to employ 30,000 workers and provide housing and schooling on site. Initial funding for Lebu came from the Huajian Group—a Chinese leather shoe manufacturer—and interested investors (p.293) include the China–Africa Development Fund (CAD) and the International Financial Corporation (IFC). The developer claims that the zone is projected to require US$2 billion dollars of investment and yield US$4 billion dollars in return over ten years. Six private new SEZs or industrial parks were planned during the period of GTP II (2015–20).

In addition, China supported the establishment of the Ethiopia–China Polytechnic College in 2009 and continues to grant scholarships to large numbers of Ethiopian students to study in Chinese universities, including short-term training for large numbers of government officials and technocrats from line ministries.

14.3.3 Financing and Infrastructure Development

In addition to Chinese private investment, Chinese firms are extensively engaged in huge infrastructure projects carried out by the government of Ethiopia. These projects, which cover roads, rail, hydro-power, and telecommunications, are largely financed by multilateral institutions, such as the World Bank, the African Development Bank, the Arab Fund, the China Development Bank, and the Export-Import (Exim) Bank of China.

Accurate figures on the total amount of loans (concessional and non-concessional) that Ethiopia has been able to secure from China are difficult to come by (see Chapter 7). The best available data is provided by the China Africa Research Initiative (CARI) at Johns Hopkins University. According to a CARI briefing paper issued in August 2018, ‘Chinese creditors have loaned at least US$12.1 billion to Ethiopia since 2000, yet Ethiopia has also borrowed heavily from the Middle East, the World Bank, and others, with a total debt of US$29 billion’ (CARI, 2018: 2). We have attempted to provide a more comprehensive overview of the scale of Ethiopia’s external borrowing, for example, but a complete breakdown of lending countries and institutions was difficult to come by due to the different reporting requirements of government institutions responsible for power, roads, and rail transport. In addition, there are sensitivities on the part of the government regarding disclosures on foreign loans. In some other cases, the reasons were more prosaic and practical. For example, Table A14.4 (in Appendix) presents a listing of Chinese loans for various infrastructure projects in 2012/13.

14.3.3.1 Power Sector

Under the GTP, the Ethiopian government aims to enhance power projects from 2,178 MW to 10,000 MW. The Chinese are involved in nearly all power generation projects in the country. In addition to dam construction and transmission tower construction, Chinese engineering companies, such as Bonle International, China Wanbao Engineering Corporation, Zhejiang (p.294) Holley International, and China National Electric Equipment Corporation, have been the main suppliers of electrical accessories for several AfDB II-financed universal access projects worth millions of dollars (see Table A14.5 in Appendix).

14.3.3.2 Transport Infrastructure

Chinese companies have dominated the transport infrastructure sector in Ethiopia. Chinese firms have been engaged in about 60 per cent of the road works being carried out in the country and have brought with them the financing for over 2,000 kilometres of the national rail network and about 30 kilometres of the Addis Ababa railway construction. The railway deal with China is estimated a total commercial loan of US$3 billion, which included US$2.5 billion for the Ethiopia–Djibouti railway and the remaining US$500 million for light city railways in Addis Ababa.

It is important to point out, however, that not all large-scale construction projects in Ethiopia are financed by official Chinese entities. As shown in Table A14.6 in the Appendix, most of the road and rail network projects are Ethiopian government investments financed either from Ethiopia’s own resources or from loans secured from IDA, AfDB, and other Gulf-based Arab development finance institutions. The Chinese construction companies happen to be the ones who ended up winning.

14.3.3.3 Telecommunications

The third area of Chinese engagement in Ethiopia is the telecommunications sector. The government granted exclusive rights to two Chinese telecommunication companies, ZTE and Huawei. ZTE, which is owned by the Chinese state, offered the Ethiopian Telecommunication Corporation a credit line (vendor financing) to the tune of US$1.5 billion on condition that the company secured the contract without competitive bidding. A second line of credit was granted by ZTE in 2013 to extend 4G services to Addis Ababa and 3G services to the rest of the country. In a reversal of fortunes, however, the Ethiopian government decided to award the ZTE portion of the contract to a Swedish telecoms company, Eriksson, in December 2014 when ZTE failed to fulfil its contractual obligations.

While the IMF and the World Bank have been urging the government to open the telecommunications sector for competition, the government has until recently refused, claiming that if it was left to private providers, millions of customers on low incomes would be denied access to telecoms services. Instead, the government opted for technological upgrading of the system to reduce costs for consumers and improve efficiency as a better option than (p.295) wholesale privatization.2 With the appointment of a new prime minister in March 2018, however, several state-owned companies, including Ethio Telecom, are slated for privatization. This is bound to affect the operations of Chinese telecoms companies in Ethiopia as competition between service providers will intensify.

In summary, Chinese trade with and investment in Ethiopia have been extensive over the past two decades. While Ethiopia’s exports to China remain miniscule at present, Chinese loans and investment in the infrastructure sector have played an important role in unleashing Ethiopia’s productive potential.3 By improving trade logistics, Ethiopia is becoming a manufacturing hub in East Africa to which Chinese investors wishing to escape the high labour costs in China can easily relocate. This gives another boost to Ethiopia’s economy. With the government’s GTP II firmly focused on expanding manufacturing’s share in GDP by 20 per cent in 2025, China’s role as an investor and as a source of concessional loans will remain important if Ethiopia is able to service these debts by expanding its export volume.

14.4 Engaging China Strategically: Learning from Ethiopia

Ethiopia is one of a few African countries that has taken a more ‘strategic’ approach in its engagement of China while continuing to maintain strong ties with its traditional Western development partners. In practice, this involves the adoption of ‘heterodox’ policies of strategically opening the economy to world markets as opposed to ‘indiscriminate opening’. Through disciplined planning, policy actions are properly evaluated, based on how they support the national interest of the country in terms of promoting economic growth and structural change, before they are adopted. This pragmatic approach has given the government enough policy space to embark on an ambitious industrialization agenda. Among the key ingredients for Ethiopia’s success are the following.

(p.296) 14.4.1 Articulation of Long-Term Development Vision

The architects of Ethiopia’s industrialization agenda point to two factors that were central to the industrialization strategy of China and the other East Asian countries: (a) the freedom of the governments to control basic economic policy; and (b) the development of the administrative, legal, and regulatory capacity of the state to guide the market in a way favourable to national development. Following this logic, the Ethiopian government developed a long-term vision for the country’s industrialization and structural transformation that does not subscribe to the dominant neoliberal dogma of the Washington Consensus (Oqubay, 2019a, 2019b). The late prime minister Meles Zenawi emphasized the critical importance of securing ‘policy space for countries like Ethiopia to pursue alternative development strategies’ (Zenawi, 2006).

The first Growth and Transformation Plan (2010/15) was the culmination of many years of thinking within the EPRDF on the appropriate development path that Ethiopia should follow (MOFED, 2010). The GTP aimed at transforming the economy away from subsistence agriculture and towards industrialization and value addition in agriculture with the goal of becoming a middle-income country by 2025. Given the big emphasis accorded by the government to infrastructure as a foundation for growth, the decision to engage China made good political and economic sense since the Chinese, besides having the expertise, were willing to provide the necessary financing for large-scale infrastructure projects.

14.4.2 Committed Political Leadership and Strong Political Ownership

Ethiopian authorities made sure that they had the freedom to set priorities, decide policy contents, create necessary conditions, and be responsible for implementing and monitoring projects. The state developed the administrative, legal, and regulatory capacity of the government to guide the market in a way favourable to national development and Ethiopia’s insertion into the global economy (Oqubay, 2015). A highly committed political leadership, backed by strong institutions for implementing and monitoring projects, has made it possible for Ethiopia to benefit from its strategic engagement with China.

14.4.3 Prioritizing Investment in Infrastructure and Energy

Investment in infrastructure has a central role in the development agenda and is critical for supporting economic growth and poverty reduction. Infrastructure affects growth through two channels: directly through physical capital (p.297) accumulation and indirectly through improvement in productivity. At a micro level, investment in infrastructure enhances private-sector activities by lowering the cost of production and opening new markets, presenting new production and trade opportunities. At the same time, infrastructure investment in power generation, water, sanitation, and housing improves the social well-being of citizens. Ethiopia currently invests about 15 per cent of its GDP in infrastructure—roads, rail, dams—enabling the country to unlock its productive potential and to position itself as the manufacturing hub in East Africa.

14.4.4 Learning by Doing and Emulation

Latecomers such as Ethiopia cannot hope to industrialize by simply copying models that worked elsewhere. Nor can they afford to flatly reject external models as irrelevant. Smart governments are those that take a systematic and pragmatic approach to learning from international best practices (and even failures) and to designing their own policy package. In this regard, industrial policy has been at the heart of development policies and strategies in Ethiopia. Ethiopia has made efforts to learn from the Chinese experience while recognizing the local context and peculiarities which matter in learning (Oqubay, 2019a; Oqubay and Ohno, 2019; Oqubay and Tesfachew, 2019). For instance, Ethiopian policymakers critically studied (both positive and negative lessons from) the Chinese experience of hub development and industrial parks, together with those of other countries, such as Singapore, South Korea, Vietnam, and Mauritius. Lessons on building national champions, successive insertion into the global production network, the use of SEZs for the successful promotion of FDI and technological upgrading, and the shift from investment-led to innovation-led transition can be learned from the industrial policy of China (Lin, 2012; Lin, Xu, and Hager, 2019; Nolan, 2014; Oqubay, 2019c).

Policy learning in Ethiopia is an ongoing process. Training was conducted, institutions were created, funds were mobilized, and officials and experts were mobilized to execute projects stipulated in the long-term plan. The government built its own policy capability through trial and error, and hands-on struggles to attain specific nationally defined targets—not targets developed and imposed by donors (Oqubay, 2015; Oqubay and Tesfachew 2019). This pragmatic approach has several advantages: concentration of limited human and financial resources on priority projects, clear criteria by which to assess performance, flexible shifting of resources and organizations where they are needed, and the sense of pride and achievement that emerge as concrete projects are accomplished one by one.

(p.298) 14.4.5 Pragmatism and Policy Flexibility

Despite its socialist background, the post-1991 government adopted a pragmatic approach to economic reforms (as happened in China from 1976 onwards) and adapted the capacity of its economic agents to this process. This implies being open to foreign ideas but selectively picking out elements that are considered useful and adapting them to local context. While the long-term goal is to leapfrog technologically, Ethiopian policymakers take a more realistic approach to industrialization and lay emphasis on climbing the ladder in proper steps (Oqubay, 2019b). In this regard, priority has been given to ensuring road connectivity and stable power supply, including technical education programmes—things that are needed before plunging into programmes and projects aimed at achieving high industrial goals. The government has devoted a lot of energy not only to learning from best practices, but also to how to learn.

14.5 The Bigger Picture: Constraints and Pathways to Africa’s Economic Transformation

The economic ties between Africa and China have expanded in recent years. China is today Africa’s largest trading partner, and the leading contributor to Africa’s development of infrastructure. As President Xi Jinping pointed out at the fifteenth anniversary of FOCAC, ‘The past fifteen years have seen fruitful progress in China–Africa practical cooperation across the board. Two-way trade and China’s total non-financial investment in Africa in 2014 were 22 times and 60 times that of 2000 respectively, which shows China’s contribution to Africa’s economic development has risen significantly.’4 The contributors to this volume concur with President Xi’s assessment of the state of China–Africa economic ties.

Despite these positive developments, however, the catalytic effect of Chinese economic engagement with Africa has been uneven. The authors in this volume argue that the key driver for variation of outcomes is a strategic approach and policy ownership by the host African country. Ethiopia is a typical case study of a country that has benefited from China–Africa economic cooperation, demonstrating the proactive policy of the government as well as the extensive room for improvement that is available. There is considerable room for enhanced China–Africa economic ties in the years ahead. However, (p.299) there are a number of issues that both partners must address to create conditions for ‘win–win’ outcomes. These include the following.

14.5.1 Persistent Trade Imbalances

The trading partnership is marred by major weaknesses. First, there are fundamental imbalances in terms of the volume and composition of exports/imports. African exports are dominated by primary commodities, which are characterized by declining value, while Africa is a net importer of both cheap manufactured goods (such as garments and footwear), machinery, and high-value goods from China. This will limit the growth dynamics and sustainability of trade. Promotion of Chinese FDI in manufacturing will help to improve and substitute the low-value imports to Africa, which also helps to create employment and improve purchasing power (Yueh, 2013, and Chapters 2 and 13). This will help to relax the constraints on the balance of payments, as well as helping African countries develop production capabilities. Additional instruments of duty-free access to China’s market may be explored to fully support this strategy.5

14.5.2 Excessive Debt Burden and Finance Sustainability

The financing of infrastructure through concessional and commercial loans has immensely helped accelerate rapid economic growth and promote industrialization, as observed in Ethiopia. However, high dependence on commercial loans has become unsustainable as countries struggle with debt-servicing problems. The major drawbacks are that Africa’s exports are too weak to cover the foreign exchange requirements, domestic savings too weak to reduce overdependence on external financing, and investment and economic activities too weak to fully utilize the infrastructure outlays. The current financing scheme, which is dominated by commercial loans, must give way to an alternative financing scheme that is not punitive to African countries. This requires a new approach to expand the concessional loans component (see Chapter 7). New modalities to widen opportunities for private–public partnerships in various infrastructure developments should also be explored to reduce the burden on African governments. However, these measures will not bear fruit unless they are linked to improving the trade imbalance, supporting the export sector, and expanding productive investment.

(p.300) 14.5.3 Quality FDI and Productive Capacity

From the perspective of the economic transformation of African countries, arguably the most critical component of China–Africa cooperation is the FDI inflow in productive sectors as it helps address structural constraints. Such investments are central to developing the export sector and relaxing the balance-of-payments constraints, to generating employment and improving income levels, to developing domestic linkages and boosting productive investment, and to improving technological capability. According to the McKinsey survey (2017) and other studies, Ethiopia has succeeded in attracting massive manufacturing investment relative to the rest of Africa. But this is limited, considering the much larger investment that can be harnessed, given China’s position as a leading economy and a manufacturing powerhouse.

14.5.4 Limited Knowledge Transfer Impact

The transfer of know-how and domestic capability has been limited and is below the desired level. Designing infrastructure projects to develop technological capability and know-how transfer as well as coming up with new models to improve post-construction operation and management is critical to gain the best value for money and to better serve the goal of economic transformation of host countries. A special fund for capacity building and know-how transfer, and incentives to encourage local products and services, is critical for sustained benefits to African countries.

14.5.5 Transforming FOCAC as an Effective Platform

FOCAC has emerged as the largest South–South economic partnership, and this partnership has been based on robust principles of mutual respect, non-intervention in internal affairs, and a prime focus on mutually beneficial economic development (PRC, 2006). China continues to demonstrate its commitment towards Africa by increasing its financial and economic support from year to year. As an example, at the 2015 FOCAC VI Summit in Johannesburg, China pledged a US$60 billion package to Africa, a significant proportion of which has been implemented (CARI, 2018). At the opening session of the FOCAC VII meeting held in Beijing on 3–4 September 2018, President Xi Jinping announced US$60 billion of development financing for African countries, centred around an eight-point plan.6 The pledged resource includes:

(p.301)

  • US$15 billion in aid;

  • US$20 billion credit line;

  • US$10 billion for developing financing;

  • US$5 billion special fund to accelerate non-resource-based imports to China; and

  • US$10 billion investment from Chinese companies.

China will remain an important source of development finance and investment for African countries. Yet, many African countries have so far not taken advantage of the FOCAC platform to strategically engage China in enhanced economic relations, or to systematically use the platform to address any contentious issues that might emerge in the relationship. It is imperative that the African countries concerned develop coherent policies and take a strategic approach to economic partnerships with China. Governments that lack homegrown policies and strategies would fail not only on this front but also when it comes to broader economic transformation. This strategy must be supported by evidence-based research and analysis. It is imperative that African countries invest heavily in the development of strong national think tanks and research institutes that can provide an accurate picture of China’s role in the world economy and its implications for Africa. Currently, think tanks that focus on such cooperation are few and far between, or are ideologically driven.

14.5.6 Improving the Business Climate on Both Sides

Chinese investors face major obstacles that could potentially be addressed by both African countries and China. African host economies should improve the business climate and provide much more effective support.7 Industrial parks and SEZs have played an important role in this respect (Lin, Xu, and Hager, 2019). But these interventions alone will not be enough to have a strategic impact. Financing for Chinese investors cannot be addressed by host countries, considering the resource constraints they face. Incentives and additional support by host countries as well as China will be required because of the difficult conditions in which they operate and the constraints they face. As studies show, the focus on training and upgrading local skills, networking with local firms, and promoting domestic linkages is uneven and relatively weak (McKinsey, 2017; Oqubay, 2019c; World Bank, 2012). Chinese investors have perception gaps when it comes to Africa and lack an understanding of Africa’s potential. (p.302)

14.5.7 Narrowing the Knowledge and Cultural Gaps

Knowledge of Africa on the part of the Chinese and African understanding of China remain underdeveloped on both sides. As a result, Chinese investors prefer to invest in Asia, which is familiar and perceived as less risky to most investors. Chinese policymakers and think tanks have a limited understanding of Africa and the economic potential of the continent. Promotion of Africa as an investment destination for Chinese investors by the central government, provinces, and local governments has not been uniform and consistent. More proactive joint action from China, African host governments, and private-sector associations is needed to deepen economic and cultural ties between China and Africa. Similarly, there is also a lack of understanding on the part of African institutions about how economic partnership initiatives such as FOCAC and the Belt and Road Initiative are structured and how they might be of relevance to Africa. There is a clear need on both sides to communicate better to citizens and the private sectors about the nature of China–Africa economic ties and to improve cultural understanding between the peoples of Africa and China. Greater engagement by non-state actors from both sides can broaden common understanding of both societies.

Addressing the above-mentioned challenges through joint action will go a long way to improving and strengthening China–Africa relations in the coming decades.

14.6 Conclusion

Africa’s relations with China and other development partners are changing fast and the future is uncertain. The word ‘turbulence’ best captures the state of the world today. China’s ambition to reorganize the old-world order brings with it risks but also opportunities; however, Africa cannot wait for its partners to define the nature of the relationship. It must take control of its own future. The continent must move from being a passive onlooker to global debates and rulemaking to become an active participant in shaping those rules.

Second, African countries must do their homework before jumping into complicated trade and investment relationships with China in the hope of replicating the Chinese development experience. It is too naïve to assume that Africans can simply transplant institutional practices from China with little attention to their fit in the African context. The focus must be on ‘learning’, not on ‘copying’. As Premier Deng Xiaoping, the architect of Chinese economic reform, once told a visiting young Ghanaian leader, Jerry Rawlings, in 1985: ‘Please don’t try to copy our model. If there is any experience on our (p.303) part, it is to formulate policies in light of one’s own national conditions. Seek truth from facts.’ There is indeed a lot that African countries can learn from China’s experience. The key, however, is to adapt that experience to African realities.

Appendix Table A14.1. Destination of Ethiopia’s exports, 2000–17

Export value in US$ millions

% share (of total export)

Growth rate (%)

Year

2000

2005

2010

2017

2000

2005

2010

2017

2000–8

2009–17

China

1.05

78.93

228.21

288.16

0.28

9

11

10

62

3

India

8.29

8

27.51

44.69

2

1

1

2

6

10

Europe

220.50

370.35

774.47

881.45

46

41

36

28

12

4

Middle East

72.40

168.11

386.68

553.82

15

19

18

19

19

6

Others (US$ bn)

0.18

0.27

0.73

1.09

36.72

30

34

41

1

77

Total (US$ billions)

0.48

0.90

2.15

2.86

100

100

100

100

100

100

Source: ERCA (2018) (unpublished)

Appendix Table A14.2. Ethiopia’s import comparison

Import value in US$ billions

% share (of total import)

Growth rate (%)

Year

2000

2005

2010

2017

2000

2005

2010

2017

2000–10

2011–17

China

0.10

0.55

2.02

4.86

8

15

24

32

37

17

India

0.07

0.25

0.62

1.09

5

7

7

7

25

10

Europe

0.40

0.90

1.40

2.43

32

24

17

16

14

10

Middle East

0.36

0.95

2.08

2.55

28

25

25

17

23

7

Others

0.34

1.15

2.21

4.09

27

29

27

28

1

56

Total

1.27

3.80

8.33

15.02

100

100

100

100

100

100

Source: ERCA (2018) (unpublished)

Appendix Table A14.3. Total number of new manufacturing (foreign) firms

Number of firms

Cumulative no. of firms

Cumulative no. of firms in %

Year

2000–5

2006–11

2012–17

2000–17

2000–17

China

41

167

199

407

32

India

21

51

51

123

10

Europe

19

25

16

60

5

Middle East

13

61

38

112

9

Others

97

263

197

557

44

Total

191

567

501

1,259

100

Source: EIC (2018) (unpublished)

(p.304)

Appendix Table A14.4. Chinese loan commitments to Ethiopia, 2012/2013 (by creditor and type)

Signature date

Economic sector

Amount in US$ millions

Terms

Interest rate %

Grace period (years)

Maturity (years)

Central government

Exim Bank of China

27/03/13

Electric light and power products

292,250,000.00

2

8

20

Government guaranteed

CDB

19/12/12

Sugar manufacturing

25,000,000.00

Libor+2.6

3

10

China Elect.Power

26/04/13

Electrical distribution

1,002,970,414.05

3.08

3

15

Exim Bank of China

15/05/13

Rail transport infrastructure

220,471,000.00

Libor+3.0

6

15

Exim Bank of China

15/05/13

Rail transport infrastructure

981,260,000.00

Libor+3.0

6

15

Exim Bank of China

15/05/13

Rail transport infrastructure

1,289,029,000.00

Libor+3.0

6

15

Non-government guaranteed

Huawei

10/01/13

Telecommunications

800,000,000.00

Libor+1.5

3

13

ZTE

10/01/13

Telecommunications

800,000,000.00

Libor+1.5

3

13

Source: MOFED (2012), ‘Public Sector Debt Statistical Bulletin No. 9’ (2007/8–2011/12), Debt Management Directorate, Ministry of Finance and Economic Development, Addis Ababa, October

Appendix A Table 14.5. Chinese engagement in the Ethiopian power sector

Project

Company

Type of work

In US$ millions (at 2009 rate of 12.45/$)

POWER GENERATION

Tekeze Hydroelectric Project

CWGS JV

Construction of Arch Dam head race tunnel

220.57

Tekeze Hydro project

CWBEC

Design, supply, and electro-mechanical equipment

23.60

Tekeze Hydro

JV JPCC & CCC

Design, supply, and erection of 230Kv S/S

4.26

Tekeze Hydro

JPCC

Design, supply, and construction of transmission line

6.32

Finchaa-Amertimulti-purpose project

CGGC

Design, procurement, and construction of plant

97.92

Beles Hydroelectric

CMEC

Design, manufacture CIF supply, transport, building materials

49.26

Genale Dawa hydro project

CGGC

Design, manufacture CIF supply

463.51

Chemoga-Yeda power project

Sinohydro

Design, manufacture CIF supply

570.32

(p.305) Harena Messobo & Adama Nazret wind power project

Hydro China

Design, manufacture CIF supply and transport, loading/unloading equipment test

256.90

Power generation total

1,692.65

POWER TRANSMISSION PROJECTS

Tekeze-IndaSelassie-Humera

China

12.05

Tekeze-IndaSelassie-Humera

China

16.99

Bedele-Metru power transmission

China

9.24

Bedele-Metu power transmission

China

7.60

Bahir Dar-Debre Markos-Addis Ababa power transmission project

China CAMC Engineering Ltd

32.98

Bahir Dar-Debre Markos-Addis Ababa power transmission

Shingai Electric Group Co. Ltd

31.23

Bahir Dar-Debre Markos-Addis Ababa transmission project

Shingai Electric Group Co. Ltd

48.97

Gibe III-Addis Ababa transmission line contract

TBEA (China)

75.00

Fincha-Gedho-Gefersa power transmission project

CWBEC (China)

10.84

Fincha-Gedho-Gefersa power transmission project

CGGC (China)

19.82

Koka-Dire Dawa power transmission project

CWBEC & JPPC (China)

89.28

Transmission total

353.99

UNIVERSAL ACCESS PROGRAMME

Sawla Afer project

China Wanabo Engineering Co.

Supply of S/S and power transformer

4.57

ADB II-financed project

CAMCO International

Supply of OHL accessories

0.79

ADB II-financed project

China National Elec. Equip. Corp.

Supply of MV & LV insulators

2.29

ADB II-financed project

Zhejiang Hilley Int. Co.

Supply of MV & LV switch gears

2.01

ADB II project

China Wnbao Engineering Corp.

Equipment

6.51

EAREP I

Bonle, China

Supply of MV and LV insulations

2.11

EAREP I

CE Lighting Co.

Supply of energy-saving compact fluorescent bulbs

3.40

EAREP I

Bonle, China

Procurement of street lighting

0.49

Total universal access

23.17

Source: Ethiopian Electric Power Corporation

(p.306)

Appendix Table A14.6. Partial listing of Chinese companies engaged in Ethiopia’s road sector (2009)

Name of Chinese firm

Name of project

KM road constructed

In US$ millions

Financed by

CGGC

Shire-Siraro-Humera Lugdi lot 1

156

49.51

GOE

HUNAN HUNDA

Shire-Shiraro-Humera lot 2

161

50.42

GOE

Hunan Hunda

Gonder-Humera

117

27.40

GOE

CGC Overseas

Kombolcha-Gundewoin, Contract 1

173

55.75

GOE

CGC Overseas

Kombolcha-Godewoin, Contract 2

136

72.63

GOE

Hunan Hunda

Harar-Jijiga

106

28.11

GOE

CGC

Dodola-Junction-Goba

130

29.85

IDA

CGC Overseas

Magna-Mechara

120

37.60

IDA

CGC

Dondola-Junction-Goba

130

7.60

IDA

China Railway Eng.Corp.

Adigrat-Adiabun

108

22.75

IDA

Sinohydro Corp.

Nazreth-Assela

79

14.24

IDA

Sinohydro Corp.

Nekempt-Mekenajo

127

24.15

IDA

CRBC

Butajira-Hossana

95

17.47

ADB

China Sichuan Int.

Mekenajo-Dengoro-Billa-Hena

61

11.13

OPEC

CRBC

Nejo-Mendi

74

11.87

OPEC

CRBC

Merawi-Gonder

208

31.77

IDA

CRBC

Alemgena-Butajira

120

17.96

ADB

CRBC

Awash-Hirna

140

20.61

IDA

CRBC

Kulubi-Dengego-Harar

80

13.03

IDA

China Won.

Woldiya-Alamata

78

12.07

IDA

China Won

Betemariam-Wukro

117

16.34

IDA

China Won.

Debre Markos-Merawi

220

26.27

IDA

CRBC

Gashena-Woldiya/Woreta-Woldya

108

29.78

IDA

Total

628.34

Source: Based on Ethiopian Road Authority data

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Notes:

(1) Interview with programme officers at the China Coordination Desk of MOFED, Addis Ababa, 17 August 2015.

(2) Personal communication with Dr Arkebe Oqubay, minister and special adviser to the prime minister, 12 May 2015.

(3) In August 2018, the Ethiopian government opened the logistics industry to international companies for 49 per cent joint ventures with local firms. In June 2018, the Ethiopian government decided to allow up to 49 per cent joint ventures in telecom and railway sectors and also to divest the sugar sector which was under the Ethiopian Sugar Development Corporation. Despite the fact that MOFEC does not make the loan figures public, estimates show that out of the total US$10 billion commercial loans, the railway projects account for 30 per cent, the telecom sector accounts for 30 per cent, and the remaining percentage is accounted for by the energy and sugar sectors (for instance, see China Africa Research Initiative (CARI) database at Johns Hopkins University).

(4) President Xi Jinping’s speech on 5 December 2016 at FOCAC VI, Johannesburg Summit, http://english.cri.cn/12394/2015/12/05/4083s906994.htm.

(5) The duty-free opportunities to Europe and the United States through ‘Everything But Arms’ and AGOA are examples that would potentially help fulfil the strategic aim. As a newcomer to production of industrial goods, a period of duty relief would help to develop the competitiveness of the African manufacturing sector.

(6) FOCAC Secretariat (2018), ‘Full Text of Chinese President Xi Jinping’s Speech at the Opening Ceremony of 2018 FOCAC Beijing Forum’, (https://focacsummit.mfa.gov.cn/eng.

(7) See Kidane (2011, 2019) on bilateral investment agreements between China and African countries.