China, Australia and the African frontier

For three decades until 2011 China produced an unprecedented growth miracle.

That miracle was built upon high and rapidly increasing levels of investment, industrial activity and urban infrastructure especially. This in turn was underpinned by a steady flow of workers migrating from rural to urban areas serving to keep down wage inflation.

That rural-urban worker flow has now dried up. China’s response, at home and abroad, will have global consequences. Australia is an exception – as one of the most China-dependent economies in the world it will be particularly affected.

From China’s to Africa’s Demographic Dividend
China’s emerging trade and investment ties with sub-Saharan Africa (SSA) is driven by the potential to further develop its own and African economies.

Decline of China’s working age population share is driven by lower fertility rates. That trend is producing a rising dependency ratio – an increasing share of dependent old and young on a relatively diminishing working population share. Higher productivity per capita is in turn required of those working to maintain the same rate of national output per person.

SSA’s working age population share in contrast is increasing. Relatively high fertility rates and declining child mortality also mean that the parallel share of young has decreased only marginally.

In Africa’s two most populous countries, Ethiopia and Nigeria, for example, the median age is less than 20 years.

Since the mid-1990s the United Nations-led Millennium Development Goals have prioritised primary school education spending. This means the proportion of children finishing primary school education in SSA has also increased, from 48.8 per cent in 1975 to 69.1 per cent in 2013. Such trends converge to offer the potential for an imminent demographic dividend in SSA.

Sowing the seeds for China’s outbound investment-led growth

China has been advancing links to support the development of African economies while simultaneously capitalising of the SSA demographic dividend since the late 1990s, when it initiated the “Going Out” policy to encourage outbound foreign investment.

The policy provides incentives to Chinese firms to invest abroad to acquire natural resources, to offshore selective industries, and to build global Chinese brand names.

Africa’s youthful population, in combination with the region being relatively resource-rich and a comparative global investment green-field, make it - like Australia - a target of that investment policy.

The inter-governmental platform for steering China-Africa relations is the Forum on China and Africa Cooperation (FOCAC). Through FOCAC a head of state-level gathering is held every three years on a rotational basis between China and an African country.

The next head of state gathering takes place in early December in South Africa. Regular minister-level meetings and government working groups operationalise the resulting decision-making.

Under President Xi Jinping, China launched the “One Road One Belt” initiative to geographically target investment, especially and initially in infrastructure and e-connectivity. The intent is to generate economic opportunities for China and partner countries and regions.

In SSA, Kenya is the focus of the initiative. The country’s coastal areas were visited by Chinese maritime fleets during the Ming Dynasty, and are home to the port of Mombasa, trade gateway to East Africa.

A prominent Chinese-invested project in Kenya is a six-nation railway line (Map 2). This seeks to better connect Nairobi, Kenya’s capital, and Mombasa. Phase two of the project will improve connectivity between Nairobi and Kenya’s port infrastructure and surrounding landlocked countries, including Burundi, Democratic Republic of Congo (Congo DRC), Ethiopia, Rwanda, South Sudan and Uganda.

Three of these – Congo DRC, Ethiopia and Rwanda – presently rank among the world’s fastest growing economies. They are also members of an emerging tripartite free-trade area (TFTA), with promising demographic and growth prospects.

The June 2015 agreement reflects an arrangement of the three SSA economic blocks – the Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC) and the Southern African Development Community (SADC).

Investors inside the united TFTA area now, have access to a duty-free export zone that is home to some 600 million persons, a rapidly emerging middle class and a geographic area four times larger than the European Union.

Exports from countries within this zone that are categorised as Least Developed Countries, including Ethiopia, presently benefit from selective trade preferences in trade with high-income countries and also China.

China is not alone as an investor in African economies. China’s investments and trade with Africa have, however, been fundamental in positioning the continent as a prime investment destination.

By the end of 2013, China reported stocks of US$26bn in Africa (China Bureau of Statistics, 2014). This represents a fraction – some 3 per cent - of total foreign direct investment in Africa.

China’s official FDI statistics, however, tend to underestimate the country’s investment. Investment covers many sectors, including resources, infrastructure construction. Selective cases of labour-intensive manufacturing and outsourcing and also in renewable energy investments increasingly place demographically youthful Africa as an emerging economic frontier.

Australia’s emerging ties across the Indian Ocean

From the Pacific-facing east coast of Australia the rate of change in Africa, and between Africa and China, is easily outside of focus. From the east coast, in fact, it is easy to miss the rate of deepening economic ties between Australia and Africa from their frontier – Western Australia.

In 2014, the WA state government formalised those ties with the signing of a Memorandum of Understanding (MoU) with the Common Market for Eastern and Southern Africa (COMESA). The MoU agrees sharing of knowledge and technology in the fields of mining, petroleum and agriculture. COMESA is one of the three arms of the 26-nation TFTA promising to better integrate economies and growth across the region.

The increasing importance of WA in building ties between Australia and the emerging developing economies of SSA was highlighted at the annual 2015 Africa Down Under meeting hosted in Perth in September.

Foreign Minister Julie Bishop and WA Premier Colin Barnett joined mining industry and government representatives from the two continents to discuss how to utilise Africa’s mineral resources for development and mutual investment gain.

Alongside the gathering of mining interests, the Africa-Australia Universities Research Network convened at Murdoch University was convened to share related academic research. My presentation, China-Africa Steel Pipe Dreams: A Guinea-China lens of prospects for Simandou’s iron ore, explored trends in China’s investments in Africa’s iron ore reserves, and related downstream steel industries. That research built upon intensive and cross-sector Africa and China-focused discussions at the 2015 Australian Leadership Retreat in Hayman Island in May.

Making the most of regional economic change

China’s response to the emerging shifts in its economic drivers will impact Australia’s economy. China’s outbound response to domestic economic change includes increasing investment plans in third countries and regions. This, too, should be in focus in Australia.

In the near future, African economies could play a more important role in shaping selective commodity markets, manufacturing and even services. They will invariably take an increasing slice of goods and capital flows.

Australia was the ‘lucky country’ in riding on the sheep’s back when economies of the North Atlantic dominated the world economy proportionately more than today.

Last century, Australia was proximate to and complementarily endowed to supply booming North East Asian economies the raw commodities and English-based services to support their industrial growth.

Australia is the only OECD country that is home to an Indian Ocean coastline, as well as advanced and large-scale mining and agricultural sectors and the related services. With appropriately crafted economic outreach, presently led from WA, Australia might yet be third time the lucky country.

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