The World Economy: Global Trade Policy 2009 (World Economy Special Issues)

THE WORLD ECONOMY

THE WORLD ECONOMY GLOBAL TRADE POLICY 2009 Edited by David Greenaway Leverhulme Centre for Research on Globalisation and Economic Policy, University of Nottingham

A John Wiley & Sons, Ltd., Publication

This edition first published 2010 Originally published as Volume 32, Issue 11 of The World Economy Chapters © 2010 The Authors Editorial organization © 2010 Blackwell Publishing Ltd Blackwell Publishing was acquired by John Wiley & Sons in February 2007. Blackwell’s publishing program has been merged with Wiley’s global Scientific, Technical, and Medical business to form Wiley-Blackwell. Registered Office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom Editorial Offices 350 Main Street, Malden, MA 02148-5020, USA 9600 Garsington Road, Oxford, OX4 2DQ, UK The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, UK For details of our global editorial offices, for customer services, and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com/wiley-blackwell. The right of David Greenaway to be identified as the author of the editorial material in this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. Library of Congress Cataloging-in-Publication Data The world economy : global trade policy 2009 / edited by David Greenaway. p. cm. – (World economy special issues ; 7) Includes bibliographical references and index. ISBN 978-1-4051-9704-5 (pbk.) 1. Africa–Foreign economic relations–Asia. 2. Asia–Foreign economic relations– Africa. 3. Agriculture and state–Europe–History. I. Greenaway, David. HF1611.Z4A788 2010 337.605–dc22 2010009771 A catalogue record for this book is available from the British Library. Set in 11/13 pt Times by Toppan Best-set Premedia Limited Printed in Malaysia 01 2010

Contents Foreword List of Contributors

vii viii

SPECIAL FEATURE ON AGRICULTURAL PROTECTION 1 The Growth of Agricultural Protection in Europe in the 19th and 20th Centuries . . . . . . . . . . . . . . . . . . JOHAN F. M. SWINNEN

1

SYMPOSIUM ON CHINA AND AFRICA 2 The Asian Drivers and Africa: Learning from Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ANDREA GOLDSTEIN, NICOLAS PINAUD, . . . . . . . . . . . . . . . . . . . .HELMUT REISEN and DOROTHY MCCORMICK

40

3 The Chinisation of Africa: The Case of Angola . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RENATO AGUILAR and ANDREA GOLDSTEIN

45

4 The Developmental Impact of the Asian Drivers on Senegal . . . . . . . . . . . . . . . .ERIC HAZARD, LOTJE DE VRIES, . . . . . . . . . . . . . . MAMADOU ALIMOU BARRY, ALEXIS AKA ANOUAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . and NICOLAS PINAUD

64

5 The Developmental Impact of Asian Drivers on Kenya with Emphasis on Textiles and Clothing Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .PAUL KAMAU, . . . . . . . . . . . . . . . . . . .DOROTHY MCCORMICK and NICOLAS PINAUD

86

6 The Developmental Impact of Asian Drivers on Ethiopia with Emphasis on Small-scale Footwear Producers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TEGEGNE GEBRE-EGZIABHER

112

7 The Asian Drivers and SSA: Is There a Future for Export-oriented African Industrialisation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RAPHAEL KAPLINSKY and MIKE MORRIS

137

Index

155

Foreword Each year an entire issue of The World Economy is devoted to some aspect of global trade policies. This generally includes some combination of: commentaries on WTO Trade Policy Reviews, Special Features and Mini-Symposia. The composition varies from year to year, depending on what is current and topical. Because of the wider interest of readers, students and commentators on the topics covered by the Special Issue, it is always subsequently published as a stand-alone book. Global Trade Policy 2009 had two themes: agricultural protection and China and Africa. Agricultural markets have been heavily protected over a long period of time and much has been written on the costs and benefits of protection. Despite the balance of research favouring further liberalisation, agriculture has consistently been a stumbling block in the Doha Round. That and growing global concerns with food security mean that the sector is again in the spotlight. In the first contribution to this volume Johan Swinnen provides a comprehensive and authoritative analysis of the evolution of agricultural protection in Europe in the nineteenth and twentieth centuries. The analysis not only brings out the complex dynamics underpinning the growth in protection, but some important messages for current research. One of the most remarkable developments of the past 30 years has been the emergence of China, its growing integration into the world economy and its astonishing growth. An important by-product of that growth has been China’s voracious appetite for natural resources to fuel it. Africa is a continent rich in natural resources and as a consequence we have seen a dramatic increase in trade between Africa and China and an equally dramatic increase in FDI. The research community is only just beginning to evaluate the dynamics of these flows and their consequences for economic development in Africa. This issue of Global Trade Policy therefore includes an OECD sponsored Symposium on the topic. There are contributions on Angola, Senegal, Kenya and Ethiopia as a well as an appraisal of the future of export oriented industrialisation in Sub-Saharan Africa. The lessons from these case studies are nicely appraised by Andrea Goldstein, Nicolas Pinaud, Helmut Reisen and Dorothy McCormick. I am grateful to all of the authors for their contributions to this volume hope that readers will find the two topics covered interesting and useful. David Greenaway, Leverhulme Centre for Research on Globalisation and Economic Policy, University of Nottingham

Contributors Renato Aguilar Alexis Aka Anouan Mamadou Alimou Barry Lotje de Vries Tegegne Gebre-Egziabher Andrea Goldstein Eric Hazard Paul Kamau Raphael Kaplinsky Dorothy McCormick Mike Morris Nicolas Pinaud Helmut Reisen Johan Swinnen

Gothenburg University enda Prospectives Dialogues Politiques enda Prospectives Dialogues Politiques enda Prospectives Dialogues Politiques Addis Ababa University OECD Development Centre, Paris enda Prospectives Dialogues Politiques University of Nairobi Open University University of Nairobi University of Cape Town and University of KwaZulu-Natal OECD Development Centre, Paris OECD Development Centre, Paris University of Leuven

1 The Growth of Agricultural Protection in Europe in the 19th and 20th Centuries Johan F. M. Swinnen

1. INTRODUCTION

T

HE collapse of the Doha trade negotiations in the summer of 2008, again, put the spotlight on two important realities of international trade policy. The first is that, despite the strong decline of agriculture in terms of employment and output in rich countries, agriculture remains disproportionately important to rich countries in their trade negotiations – even to the extent that they are willing to let the WTO negotiations collapse over disputes on agricultural policy. The second reality is that despite hundreds of years of economists’ arguing the optimality of free trade, political factors are more important than these economic arguments in both rich and poor countries. The political economy of agricultural policy is crucial to understanding the positions of the developing and developed countries in their trade negotiations, as well as their apparent inability to reform unilaterally or to reform as part of a broader trade negotiation outcome. Europe is a fascinating case for the study of growth in agricultural protection because it has gone from one extreme to another in the course of one century. European countries currently spend tens of billions of euros annually – the EU alone more than 50 billion – on subsidising their farmers and protecting farmers against imports from other countries through import tariffs. While countries such I thank Kym Anderson, Sabine Bernabe, Harry de Gorter, David Harvey, Alessandro Olper, and participants at conferences at the World Bank and in Ghent (EAAE) for useful comments on an earlier version of the chapter; and Liesbeth Colen, Els Compernolle, Anja Crommelynck, Gunilde Simeons and Joris Stiers for assistance with the data collection and analysis. The research project was financially supported by the World Bank, the Flemish Research Foundation (FWO) and the KU Leuven Research Council (OT, EF and Methusalem projects).

1

2

JOHAN F. M. SWINNEN

as Norway and Switzerland also heavily protect farmers, the most important form of protection in European agricultural markets is undoubtedly the Common Agricultural Policy (CAP) of the European Union (EU). In the 1960s the EU introduced a highly protectionist and distortive CAP. This is in remarkable contrast with Europe’s agricultural policies a century earlier. In the 1860s, Europe was characterised by free trade in agricultural and food products. The abolishment of the Corn Laws in 1848 signalled the end of import protection in England, and the English–French trade agreement of 1860 was the start of a series of trade agreements across Europe, effectively removing most trade constraints in agricultural markets. The first objective of this chapter is to quantify the changes in protection that have occurred and to propose a series of hypotheses to explain these changes. The second objective of the chapter is to offer a series of hypotheses to explain the measured changes. The analysis in this chapter is related to a series of other studies which have analysed agricultural protection in Europe and elsewhere and its causes. Important studies on other parts of the world include Anderson and Hayami (1986), Gardner (1987), Krueger et al. (1992) and Anderson (2009). Other European studies have either focused on the EU period when protection was already high (e.g. Grant, 1997; Olper, 1998; Moyer and Josling, 2002; Pokrivcak et al., 2006; Josling, 2009), on a shorter time period or a specific policy change (e.g. SchonhardtBailey, 1998; Swinnen, 2008), on broader trade issues (Williamson, 2006; Rogowski, 1989; Findlay and O’Rourke, 2007), or on a single country (e.g. Swinnen et al., 2001).1 The current chapter is most closely related to two excellent historical studies, i.e. Michael Tracy’s (1989) mostly qualitative analysis of the growth of government in European agriculture and Peter Lindert’s (1991) study on the history of agricultural policy for an even broader set of countries (including developing countries). The present chapter is, however, the first attempt to quantify the changes in agricultural protection by calculating annual indices of agricultural protection over the century when the dramatic policy changes took place (i.e. from the 1870s to the 1960s) for several European countries, including France, the UK, Germany, Belgium, the Netherlands and Finland. The period covered starts from when data were initially available until the countries joined the Common Agricultural Policy 1

The vast majority of statistical studies on the political economy of agricultural protection are crosssection studies or those using panel data with relatively short time periods. While they yield important insights, the estimated relationship, mask strong occasional fluctuations in protection levels. These fluctuations in support to agriculture are clearly visible in the few historical studies using time-series data and econometric analyses, such as Gardner (1987) and Swinnen et al. (2001); however, these studies focus on a single country, making it difficult to generalise. The main exception is the early study by Anderson and Hayami (1986) and the recent global study by Anderson (2009).

AGRICULTURAL GROWTH PROTECTION IN EUROPE

3

of the European Union – which is at the end of the 1960s for the initial members of the EU. In the second part of the chapter I will relate the variations in protection indicators to changes in policies and protection to changes in political institutions and organisations, economic development, and specific events, such as the two world wars. I propose a set of hypotheses on the causes of the changes in protection and relate those to insights from the literature on the political economy of agricultural protection.2

2. MEASURING AGRICULTURAL PROTECTION

There are several indicators (methodologies) that can be used to measure sectoral protection.3 To generate a comparable set of numbers over extended periods and a range of countries, the preferred methodology needs to be relatively simple and somewhat flexible (Anderson et al., 2008). For this reason, I follow Anderson et al.’s (2008) approach in measuring agricultural protection by calculating the nominal rate of assistance (NRA). The NRA is defined as the percentage share by which government policies have raised (or lowered) gross returns to producers above what these returns would have been without the government’s intervention (see Appendix for details). In this study the most important element of the NRA is based on comparisons between domestic and international prices. This part of the NRA compares the prices of commodities in the domestic economy (at the port) with the international prices of commodities at the border (that is, c.i.f. in the port for importable goods; f.o.b. in the port for exportable ones).4 These price comparisons provide indicators of the incentives for production, consumption and trade, and of the income transfers associated with government interventions. For a more complete measure of protection I also added domestic subsidies to producers to these price distortions. The NRA thus captures the total protection to agricultural producers. The data are collected for six countries (Belgium, France, Finland, Germany, the Netherlands and the UK) and several commodities. The quantity and quality of the data varies importantly among countries. In the tables I have only presented indicators and data for which I was relatively confident that they represented reality. The missing variables in the tables and figures thus reflect either that no

2

See de Gorter and Swinnen (2002) and Swinnen (2009) for surveys of this literature. Other measures include the OECD’s PSE (Producer Support Estimate). 4 Within the framework of this study it was impossible to collect consistent data on quality adjustment, transport, storage and handling costs in moving commodities from the farm to the wholesale level; so we try to be careful in interpreting the calculated indicators in order to allow for bias in the numbers due to these omissions. 3

4

JOHAN F. M. SWINNEN

data were available or that the calculated indicators appeared unrealistic due to poor quality of the data. In compiling the data, choices needed to be made regarding the coverage of the commodities included in the study. Across the century and countries covered, the importance of certain commodities varies importantly. The choice of commodities was determined by importance in production and consumption, by data availability – and accuracy and consistency, by their relevance for country comparisons, and by the commodities’ importance in the major policy debates in the countries concerned. Overall the analysis concentrates on the main commodities (such as grains and livestock products). The analysis uses annual data from 1870 to 1970. The start of the period is determined by the availability of data. The end of the period is determined by the integration into the CAP.5 France, Belgium, the Netherlands and Germany were initial members of the European Economic Community (EEC), which implemented the CAP as of 1968. The UK joined the EEC in 1973 (although there was some transition period). Since Finland and Sweden joined the EU much later (in 1992) I have collected data for these countries until 1990. The results of the calculations are summarised in Figures 1 and 2, which show yearly and five-yearly averages, respectively, of NRAs across countries. An important conclusion from these indicators is that the growth of agricultural protection, FIGURE 1 NRA Average over Main Commodities, 1870–1969 2.50 Belgium

Netherlands

France

UK

Germany

Finland

2.00 1.50 1.00 0.50

–0.50

1870 1873 1876 1879 1882 1885 1888 1891 1894 1897 1900 1903 1906 1909 1912 1915 1918 1921 1924 1927 1930 1933 1936 1939 1942 1945 1948 1951 1954 1957 1960 1963 1966 1969

0.00

–1.00

Note: Belgium: wheat, barley, butter, beef, sugar; Netherlands: wheat, barley, butter; France: wheat, barley, butter, pork, sugar; UK: wheat (including deficiency payments), barley, butter; Germany: wheat, barley, beef, sugar; Finland: wheat, barley, milk, sugar. Source: Own calculations.

5

See Josling (2009) and OECD (2009) for agricultural protection indicators for more recent periods.

AGRICULTURAL GROWTH PROTECTION IN EUROPE

5

FIGURE 2 Average NRA for Belgium, Netherlands, Germany, France and UK, 1910–69 1.20 1.00 0.80 0.60 0.40

1965–69

1960–64

1955–59

1950–54

1945–49

1940–44

1935–39

1930–34

1925–29

1920–24

1915–19

0.00

1910–14

0.20

Note: Belgium: wheat, dairy, beef, sugar, barley; Netherlands: wheat, dairy, barley; France: wheat, pork, dairy, sugar, barley; Germany: wheat, beef, sugar, barley; UK: wheat (including deficiency payments), butter, barley. Source: Own calculations.

as measured by the NRA, has not been a linear process between the 1860s and the 1960s. Instead there has been substantial fluctuation. The average NRAs are close to zero in the 1870s and increase in the 1880s and 1890s. They fall again somewhat in the beginning of the 20th century, and increase substantially in the 1930s, before declining rapidly in the 1940s. In the 1950s and 1960s the NRAs increase strongly, to a level close to 1 in the second half of the 1960s. In the next section I relate these calculated indicators to actual policy decisions.

3. THE EVOLUTION OF AGRICULTURAL POLICIES AND PROTECTION

At the start of the 19th century there was substantial government intervention in agricultural markets in Europe. Probably the most well-known form of protection was the Corn Laws in the UK. The Corn Laws were introduced centuries earlier to regulate grain prices and imposed import tariffs on grains in the early 19th century (Kindleberger, 1975; Schonhardt-Bailey, 2006). Other European countries also had import tariffs for agricultural commodities. For example, in the Netherlands, import tariffs were increased in the 1820s in response to a strong increase of grain exports from the Black Sea region which caused a sharp decline in grain prices in Western Europe in 1818 (Vander Vaeren, 1930; van den Noort, 1980).6 6

In 1825 import tariffs were 22 per cent for wheat, 7 per cent for oats, 11 per cent for barley and 15 per cent for rye (Jansma and Schroor, 1987; Priester, 1991).

6

JOHAN F. M. SWINNEN TABLE 1 Import Tariffs in Prussia, the Zollverein and Germany (in Dmark per ton, 1857–1914)

1857–1864 1865–1879 1880–1885 1885–1887 1887–1891 1892–1902 1902–1914

Wheat

Rye

Barley

Oat

5 0 10 30 50 35 75

1 0 10 30 50 35 70

2 0 5 15 23 20 70

2 0 10 15 40 28 70

Source: Hoffmann (1965).

a. The Liberalisations of the Mid-19th Century Most of the 19th century, from the late 1820s to the late 1870s, was characterised by a move towards free trade. In the UK, reforms in 1828 and 1842 relaxed the import regulations of the Corn Laws, which were finally abolished in 1846 (Schonhardt-Bailey, 1998, 2006). Around the same time import tariffs on live animals, meat, potatoes and vegetables were abolished. In the Netherlands, as grain prices recovered after 1835, the government reduced import tariffs under the Grain Laws in the mid-1840s and abolished all import tariffs in the 1870s (Sneller, 1943; Bieleman, 1992). Similarly in Prussia, import tariffs were reduced after the Napoleonic wars in the early 19th century. These reduced tariffs were extended to other parts of Germany with the establishment of the Zollverein. In 1853 grain tariffs were abolished. As Table 1 shows, tariffs were zero or very low in the 1850s until the 1870s. A series of trade agreements contributed to the spread of free trade throughout Europe. The first was the English–French trade agreement in 1860 which was followed by several other trade agreements between European countries, including the 1862 French–German trade agreement, reducing tariffs also on manufacturing goods.7 The French–German Peace Treaty of 1871 renewed trade relations indefinitely and established the principle of the ‘most favoured nation’ on a reciprocal basis. The German agricultural sector was strongly in favour of free trade. The large Junker estates in Prussia benefited from grain exports and feared that import tariffs on industrial goods would increase their costs or could lead to reprisal grain tariffs (Tracy, 1989). The NRA calculations are consistent with these policy evolutions. During the earliest period for which I have data (for grains from 1870 onwards) the NRAs 7

Between 1861 and 1867 France concluded 11 commercial treaties: with England, Belgium, the German Zollverein, Italy, Switzerland, Sweden and Norway, the Hanseatic League, the Netherlands, Spain, Portugal and Austria; and each of the treaties included the most favoured nation clause (Tracy, 1989).

AGRICULTURAL GROWTH PROTECTION IN EUROPE

7

TABLE 2 NRA Wheat, 1870–1969

1860–69 1870–79 1880–89 1890–99 1900–09 1910–19 1920–29 1930–39 1940–49 1950–59 1960–69

Belgium

Netherlands

France

UK

Germany*

Finland

. 0.01 −0.01 0.03 −0.02 −0.02 −0.08 0.13 0.35 0.31 0.48

0.09 0.07 −0.01 . . . −0.07 0.99 −0.19 −0.08 0.26

−0.05 −0.01 0.06 0.18 0.18 0.00 0.01 0.32 0.19 0.31 0.27

. 0.01 −0.03 −0.04 −0.07 −0.07 −0.09 0.35 0.16 0.03 0.09

. . 0.13 0.27 0.25 0.25 0.03 0.95 . 0.26 0.46

. . . . . . . 0.64 −0.02 0.54 1.02

Note: * Germany refers to West Germany after 1945. (This applies to all tables and figures.) Source: Own calculations.

indicate no protection in the grain market in the 1870s. The NRA for wheat was around zero in Belgium, the Netherlands, France and the UK during the 20-year period 1860–80 (Table 2). While the move towards free trade is associated with the intellectual contributions of Adam Smith and his colleagues, it comes as no surprise that liberalisation of imports came in a period of relative prosperity for farmers. The 1840s, and through to most of the 1870s, was generally a period of relatively high incomes and productivity growth.8 In England it is referred to as the period of ‘high farming’. It was also a period of relatively high grain prices partly due to the Crimean War which reduced exports from Russia and the Black Sea region. 8

Productivity growth in agriculture was interrupted in the mid-1840s by the first appearance of Phytophtora infestans (‘potato disease’) in Europe which caused disastrous potato harvests in 1845 and the following years. The effects were worsened by poor grain harvests. This led to a period of food shortage and hunger in 1845–48 in several European countries. Prices increased dramatically. In Belgium, prices for potatoes increased three-fold between 1845 and 1846, wheat prices increased by 70 per cent and rye prices doubled. Urban consumers and landless rural workers were hurt most. In reaction, the Belgian government abolished all import tariffs on food products and prohibited the export of staple foods (Vander Vaeren, 1930). In Holland, the central government refused to intervene and relied on the market mechanism to solve the crisis. However, local governments introduced maximum bread prices to protect urban consumers and compensate bakers (van Tijn, 1977). It took three years before the food crisis was fully settled; and many suffered from hunger in the meantime or migrated: for example, the hunger induced massive migration to the US from Ireland. Following the food crisis, governments initiated a series of policies to support innovation and productivity growth in agriculture, including investments in agricultural schools, extension agencies, demonstration fields, etc. It was to be the last food shortage crisis in Europe. From then on, except for the two world wars, there would only be surplus crises.

8

JOHAN F. M. SWINNEN b. The Agricultural Crisis of the End of the 19th Century

The period between 1880 and 1895 was marked by a sharp reduction in grain prices due to a dramatic increase in imports from Canada, the United States, Argentina and Russia. There are two reasons for this. First, there was a major expansion of agricultural production, especially in the United States where land was abundant and cheap. Second, technological innovations dramatically decreased production costs, both through agricultural machinery which allowed for the exploitation of vast areas, and through transport prices, as the steam engine allowed much cheaper transport via trains and the steamboat. The dramatic fall of transport costs is summarised in Table 3. As a consequence of these changes, imports in Western Europe surged and wheat prices fell by almost 50 per cent over the period 1880–95. The decline in wheat prices was particularly intense during the periods 1881–86 and 1891–94 (see Figure 3). With wheat being an important part of the agricultural sector and TABLE 3 Evolution of Transport Costs (1870–1900, in pence/quarter) 1870–74 Freight Costs Chicago–New York (by train) New York–Liverpool (by steamboat) Price of US wheat (c.i.f. Liverpool)

1875–79

1880–84

1885–89

1890–94

113

72

63

61

53

47

66

60

35

25

20

23

625

568

531

402

379

356

Source: Tracy (1989).

FIGURE 3 Evolution of Wheat Prices (as percentage of the price in 1960) 2.5

France

Germany

UK

2.0 1.5 1.0 0.5 1960

1950

1940

1930

1920

1910

1900

1890

1880

1870

0

Source: Swinnen (2010).

1895–99

AGRICULTURAL GROWTH PROTECTION IN EUROPE

9

because of the spillover effects on other (especially arable) commodity markets, incomes of arable farmers decreased significantly throughout Europe. The dramatic changes in the agricultural markets induced strong pressure from farmers on governments to intervene. The reactions of European governments to these changes and pressures were mixed. It is impossible to summarise in this chapter all the details of the policy proposals, debates and decisions, but I can distinguish different patterns in government reactions. The wheat NRAs, as summarised in Table 2, reflect these different government reactions. After 1880 the NRA stays very low (less than 10 per cent) for Belgium and the UK for the entire period until 1930, while it increases in France and Germany after 1880. In France the NRA increases to 18 per cent on average in the 1890s. In Germany the NRA increases in the 1880s to 13 per cent on average and further increases to an average of 25 per cent for the 30-year period between 1890 and 1920. These variations in NRAs reflect real differences in policy choices: the UK and Belgium (as well as other countries such as the Netherlands and Finland) did not impose import tariffs, while the French and German (as well as the Swedish) governments protected their farmers by increasing import restrictions. First, the governments in Belgium and the UK refused any increase in import tariffs in grains.9 Both countries were already quite industrialised by the time of the agricultural crisis. In both countries a coalition of industrial capital owners and workers opposed protection to arable farmers. Workers and industry opposed tariffs because they benefited from low food prices (and thus low wages) with cheap grain imports. While the UK landlords had always been very powerful (e.g. through the representation system in parliament) their influence was waning and they were now confronted with a strong opposition of labour and industrial capital, who had gained increasing political power.10 In addition, the ‘agricultural sector ’ was far from united in its support for import tariffs. This was particularly pronounced in the UK, which had very heterogeneous interests within agriculture. The main group hurt by the low grain prices were 9

Import tariffs were only introduced for tea, tobacco and alcoholic beverages (to raise taxes) in the UK and for butter and oats in Belgium. 10 Other interest groups also played a role in the political debate. For example, in Belgium, import tariffs on oats were opposed by the transport industry and the coal mines, where horse power was important. Tariffs on barley were opposed by the brewing industry. This coalition prevented protection against barley imports, although oats tariffs were later introduced as a compromise, with more farmers producing oats and no opposition from brewers (Van Molle, 1984, 1989). An additional player was the Antwerp harbour. The harbour has been an important industrial employer in the past (and still is). Given the size of Belgium and the fact that Antwerp is a major city – for a long time the largest – the economic and political power of the city and its harbour were important. Until recently, all Antwerp politicians – independent of their party – opposed any agricultural protection that would hurt the interests of the Antwerp harbour. For example, tariffs on grains would limit the trade volume in Antwerp. Representatives of the Antwerp region have consistently voted against any tariffs on agricultural products. This opposition has declined throughout the 20th century as agricultural products have become a smaller share of total trade volume.

10

JOHAN F. M. SWINNEN

large landlords, mostly located in the southern regions of England. However, many of the other actors in agriculture actually favoured low grain prices. This was the case for livestock farmers, mostly located in the northern part of the country who benefited through low feed prices. Moreover, livestock had become more important. At the time of the crisis, grains only accounted for 12 per cent of agricultural output, while meat (42 per cent) and milk (21 per cent) were much more important.11 In fact, the divergent interests of the farms caused a split among farm organisations. Furthermore, the English landlords were not even supported in their demand for protection by those who worked on their farms (Burnett, 1969). Farm workers were paid in wages.12 They were generally very poor and they benefited more from low prices of staple food (grains) than they lost from the negative pressure on their wages, which were strongly influenced by industrial wages. A budget survey from 1874 shows that farm workers spent 90 per cent of their income on grains and potatoes; and that meat or milk was an unknown luxury. Their welfare actually increased during the agricultural crisis (Royal Commission on Labour, 1893). While farm worker interests had little influence during most of the 19th century, this changed with the political reforms of 1885 which gave them equal voting rights, and thus substantial political representation in parliament (see further). Second, in contrast to the free trade position of the UK and Belgium, the governments of France and Germany introduced import tariffs to protect their grain farms. Both countries were characterised by a large agricultural population, a less industrialised economy and a more important crop sector.13 For example, in France crops made up more than 70 per cent of total agricultural production during all of the 19th century, and still accounted for 60 per cent by 1950 (Table 4). In France the government initially opposed import tariffs, but when grain prices kept falling the government gave in to strong pressure from the French grain farms, and import tariffs were introduced in the 1880s (Agulhon, 1976).

11

The share of the livestock sector grew from 55 per cent in 1860 to 70 per cent of agricultural output in 1900. 12 Tenants and landlords suffered when prices fell. However in the UK in the mid-19th century about 70 per cent of the farm population were farm workers, although this share declined significantly during the 19th century with rapid industrial migration (Burnett, 1979). In countries such as France and Belgium the share of farm workers was only 50 per cent in the mid-19th century (and 25 per cent by 1940) as more family farms had their own land following the French Revolution which transferred land from the feudal landlords and the Church to farmers. 13 The other European countries for which no NRAs could be calculated for the 19th century can also be separated into these different patterns. Sweden, another country with a large part of employment and output in agriculture (and then still part of the Sweden–Norway political union), introduced import tariffs for grains in 1888 which were adjusted a few times over the next decade. In contrast, Finland (then still part of Russia) provided little or no protection (Crommelynck et al., 1999). Similarly, the Dutch government opposed import tariffs and instead argued that policy should focus on farm modernisation and stimulating more efficient production (Van Zanden, 1986).

AGRICULTURAL GROWTH PROTECTION IN EUROPE

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TABLE 4 Value of Crops and Livestock as Percentage of Total Agricultural Output, 1867–1903 UK

1815–24 1865–74 1885–94 1925–34 1950–54 1965–74

France

Germany

Crops

Livestock

Crops

Livestock

Grains

Beef, Pork

. 0.45 0.38 0.30 . .

. 0.55 0.62 0.70 . .

0.76 0.76 0.71 0.65 0.59 .

0.24 0.24 0.29 0.35 0.41 .

. . 0.37 0.41 0.30 0.27

. . 0.22 0.38 0.43 0.54

Sources: Toutain (1961), Hoffmann (1965) and Fletcher (1973).

In Germany, the introduction of grain tariffs signalled a major reversal of policy, not just of the government but even more of the main farmers’ organisations. In the second half of the 19th century it was German industry which lobbied for import tariffs as it sought protection from competition from British industrial products. But until the 1870s the large grain farmers of Prussia opposed any tariffs. They were the main proponents of the German free trade regime to protect their export position. However, as grain started arriving on the world market and even inside Germany at prices below which the Prussian farms could compete, they changed position. During the 1880s there was considerable debate among farmers as to what the best position was, but when prices kept falling they ultimately shifted to a protectionist stance. Since the German industry had already demanded trade protection, import tariffs were introduced across the entire economy and gradually increased in Germany, also for grains (see Table 1). Third, all governments introduced some protection in the livestock sector when the crisis spread to this sector a decade later. Initially there was no surge of imports in livestock or meat and livestock farmers benefited from declining grain prices as their feed costs fell. However, a decade after the surge in grain imports, technological innovation, in particular the dispersion of new freezing technology, then also allowed long-distance transport of frozen meat. When freezing technology spread in the meat processing and trading sectors, meat imports from overseas grew and prices started falling also in the European livestock sector. As livestock prices also started falling in the 1890s there was additional pressure on the government to intervene, now also from the livestock farms. This occurred despite the fact that the price decline in livestock was considerably less than in grains: in the UK, crop prices fell on average by more than 40 per cent between the 1870s and the 1890s, while by only around 25 per cent for livestock (Tracy, 1989). France early on raised import tariffs on livestock products. Its NRA for meat increased from 12 per cent on average in the 1890s to 40 per cent on average in the 1900s. Belgium also introduced small import tariffs on livestock and meat in

12

JOHAN F. M. SWINNEN

1887 and import tariffs on butter and margarine in 1895. NRAs for dairy in Belgium increased from around 0 in the 1880s to 7 per cent in the 1890s and 16 per cent in the 1900s. In addition a series of payments were made from the budget in the animal disease prevention programme. Governments use a combination of instruments to protect the livestock sector. They use tariffs, subsidies and non-tariff barriers, such as animal disease controls. In fact, with the implementation of import tariffs on livestock, border controls increased and, with that, the use of health arguments as protectionist instruments also increased. This type of hidden protectionism through sanitary regulations increased particularly in the 1890s. In Germany in 1880 a law restricted the import of live animals, ostensibly for sanitary reasons. By 1889 the government had all but closed the border to imports of live animals; and meat imports were restricted as well. Also in the other countries borders were closed regularly to prevent the ‘import of infections’. In 1892, the French government imposed a ban on imports of cattle and the UK introduced the ‘Animal Disease Act’ which prohibited the import of live animals under cover of safety rules; while it allowed frozen meat imports. The impact on consumers was mixed: the Act mainly hurt richer consumers since poor consumers could continue to benefit from cheap frozen meat imports. Fourth, there were substantial investments by governments to support the restructuring of the agricultural sector from grains to livestock production, particularly in countries which did not introduce import tariffs (or limited them), such as Belgium, the Netherlands and Finland. The governments of these countries considered that the modernisation and restructuring of agriculture through the stimulation of livestock production, was the only realistic development strategy in the face of cheap grain imports, which made competition in grains more difficult but also made feed costs cheaper for the livestock sector. A series of government initiatives were taken to stimulate and help farmers shift to livestock production: research and extension; the subsidisation of activities that provided incentives for improved quality of livestock breeding; and compensation for farmers for the slaughter of infected animals.14 Furthermore, some governments stimulated the creation of dairy marketing and processing cooperatives. 14

For example in the 1890s, the Belgian government approved important increases in the system of damage refunds in case of livestock diseases. This system existed since the 1860s, but in 1892, 1893 and 1894 the refunds were increased substantially, tuberculosis of cows was included as a refundable disease, preventive measures were increased and local livestock farmers’ organisations were subsidised for their initiatives in the fight against animal diseases. These government actions were the main reasons for a strong increase in the budget of the Ministry of Agriculture between 1891 and 1894. In 1891, damage refunds made up 10 per cent of the total budget. By 1894 they accounted for 25 per cent. The increase in compensating amounts and an extension of the diseases or infections for which they could be claimed, continued after 1984. By 1900, the total amount of compensation payments accounted for 40 per cent of the budget of the Ministry of Agriculture. The strong increase in government expenditures on compensation for animal diseases halted and yearly expenditures stabilised after 1900, when agricultural incomes had improved considerably.

AGRICULTURAL GROWTH PROTECTION IN EUROPE

13

More generally, European governments increased investment in public goods, such as agricultural research, extension and education, to increase agricultural productivity. Policies to reduce fraud and to improve rural transport were introduced. Ministries of Agriculture and agricultural schools and universities were established. c. 1900–1920: The Pre-War Period and the First World War In the 1900–1910 period the crisis started subsiding. Prices started increasing because production costs increased in grain exporting countries and because industrial growth increased demand for food, in particular for livestock and horticultural products. The demand for protection by farmers declined with an improvement in their incomes. In a review of the political debates on agricultural policy in Belgium, Van Molle (1989) concludes that, in strong contrast to the long and ardent debates in the 1880s and 1890s, there was no substantial debate on agricultural protection in most of the period between the turn of the century and the First World War.15 The members of parliament representing farm interests voiced little interest or did not sponsor new laws for supporting agriculture between 1910 and the end of the 1920s.16 The First World War started in 1914 and brought destruction and disruption in the food production and distribution systems. International trade broke down with warships controlling the sea and blockades being set up. During and immediately after the war, food markets were strongly regulated. The policy focus shifted from protecting producers to protecting consumers. Food was generally scarce and expensive and government regulation was introduced in order to secure sufficient food for consumers under war conditions. Maximum prices, compulsory deliveries and export restrictions were introduced. However, where governments imposed maximum prices and mandatory deliveries on farmers, a black market emerged, yielding high prices. Hence, despite the war-related problems, the war years typically yielded high prices for farmers. 15

Van Molle (1989, p. 288) provides details: in contrast to the long debates in the 1880s and 1890s, in 1902, 1910 and 1911 the budget of the Ministry of Agriculture was discussed and voted on in a single day; on three days in 1912 and 1914. In 1905, there was no debate at all. In 1901, 1906, 1907 and 1908 there were complaints about absenteeism in the Parliament. The budget increases on average with 2.5 per cent annually between 1901 and 1914, compared to a 7 per cent average annual increase for 1885–1900 and 4.1 per cent between 1879 and 1884. And, on 30 October, 1908, the Ministry of Agriculture was, as before 1884, reduced to a department within the Ministry of the Interior. 16 There are two minor exceptions over this period. One of the discussions involved Belgian beer. Belgian hop producers were increasingly confronted with imports of cheaper and better quality hop. Two proposals for hop protection were presented in Parliament in 1903 and 1907. They were defeated because of the perceived negative effects on the breweries and on the ‘price of the worker ’s beer ’.

14

JOHAN F. M. SWINNEN d. The Interwar Period: 1920–40

Immediately after the war, food was still expensive and many governments continued to apply strict regulations to food consumption, production and trade. With the high prices, important farm investments took place immediately after the war. More land was taken into production and the number of the livestock increased, as well as yields. At the same time, land prices and rents increased both due to increasing prices and the large war savings of farmers. Protection rates were low, in particular for basic food such as grains. On average NRAs for wheat were close to zero (or slightly negative) in the 1920s in Belgium, the Netherlands, France, the UK, Germany and Sweden (see Table 2). However, things changed again in the late 1920s and 1930s. With the liberalisation of war regulations, in the early 1920s, agricultural prices fell. This price decline was further reinforced in the late 1920s as the investments by farmers resulted in substantial increases in productivity and supplies. At the same time, demand fell with the general economic crisis following the 1929 stock market crash on Wall Street. As a result real farm prices fell substantially in the 1930s. Figure 4 illustrates this general trend in Europe with data from the Netherlands: agricultural prices fell by around 40 per cent between 1920 and 1923 and fell another 30 percentage points between 1927/28 and 1932. While costs also declined, their decline was lesser (about 20 percentage points). As in the late 19th century, this resulted in strong pressure on the governments to intervene and support farmers. However, at the same time the government faced strong pressure from industry and workers to keep basic food prices low in the midst of the depression. Again I see different reactions among European governments with some more likely to protect agriculture than others. Yet, overall, there

FIGURE 4 Farm Prices and Costs in the Netherlands, 1920–40 100 80 60 40 20

Crop prices Livestock prices Costs 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938

0

Source: Centraal Bureau voor de Statistiek.

AGRICULTURAL GROWTH PROTECTION IN EUROPE

15

was a greater willingness of governments to protect farmers than in the 1880s, and import constraints were introduced in many countries, in particular in the early 1930s. Compared to a decade earlier (the 1920s), the average NRAs increased substantially in the 1930s in all the countries. I have data for: from 8 to 35 per cent in Belgium; from 34 to 61 per cent in the Netherlands; from 32 to 98 per cent in France; from 6 to 32 per cent in the UK; and from 39 to 115 per cent in Germany (see Table 5). Moreover, these average NRAs are substantially above those in the 1880s and 1890s, i.e. during the previous agricultural crisis, in all countries. Governments increased protection to livestock, a sector which they had already invested in during the preceding decades, and whose products were less crucial for the poorest workers. Substantial increases in import protection emerged in the 1930s for animal products. For example, NRAs for butter increased from 4 to 44 per cent in Belgium, from 13 to 80 per cent in France, and from 16 to 46 per cent in the UK (Table 6). There was much more opposition from industry and workers to raising import tariffs on (bread) grains. For example, a 1935 proposal by the Belgian government, under pressure from farmers, to increase grain import tariffs caused a general strike which resulted in the fall of the government, after which the tariff proposal TABLE 5 NRA Average over Main Commodities, 1880–1969

1880–84 1885–89 1890–94 1895–99 1900–04 1905–09 1910–14 1915–19 1920–24 1925–29 1930–34 1935–39 1940–44 1945–49 1950–54 1955–59 1960–64 1965–69

Belgium

Netherlands

France

UK

Germany

Finland

. . −0.04 0.00 −0.02 −0.03 −0.01 . 0.11 0.04 0.36 0.32 . 0.19 0.20 0.16 0.49 1.21

. . . . . . 0.10 0.15 0.34 0.33 0.82 0.44 −0.48 −0.27 −0.10 −0.03 0.25 0.43

. . . . 0.17 0.16 0.21 0.27 0.36 0.29 1.00 0.96 0.51 0.51 0.20 0.45 0.35 0.49

. . . . . 0.06 0.03 −0.02 0.06 0.06 0.45 0.45 0.57 0.00 0.03 0.22 0.18 0.17

−0.09 0.02 0.13 0.19 0.22 0.21 . . . 0.39 1.05 1.28 . . 0.54 0.87 0.90 1.51

. . . . . . . . . . . 0.87 0.27 0.41 0.76 1.18 1.32 2.04

Note: Belgium: wheat, barley, butter, beef, sugar; Netherlands: wheat, barley, butter; France: wheat, barley, butter, pork, sugar; UK: wheat (including deficiency payments), barley, butter; Germany: wheat, barley, beef, sugar; Finland: wheat, barley, milk, sugar. Source: Own calculations.

16

JOHAN F. M. SWINNEN TABLE 6 NRA Dairy, 1870–1969

1870–79 1880–89 1890–99 1900–09 1910–19 1920–29 1930–39 1940–49 1950–59 1960–69

Belgium Butter

Netherlands Butter

France Butter

UK Butter

Finland Milk

−0.01 0.00 0.07 0.16 0.14 0.04 0.44 0.14 0.09 2.06

. . . . 0.13 0.98 0.24 −0.37 −0.09 0.65

. . . 0.00 0.11 0.13 0.80 0.33 0.61 0.66

. . . 0.09 0.06 0.16 0.46 0.05 0.32 0.28

. . . . . . 0.45 0.22 0.66 1.32

Source: Own calculations.

was abolished. Because of this strong opposition from industry and workers, support to grain farmers occurred to an important extent through other measures than through import tariffs. One policy measure which was used in several European countries was the compulsory use of domestic grain by millers. Millers were obliged by the government to use a minimum percentage of domestic grain in their flour. Another measure was government payments to grain producers, such as deficiency payments in the UK and per hectare subsidies in Belgium – measures which did not increase grain prices, quite the contrary.17 Despite the stronger opposition against tariffs for grains than for livestock, the NRA for wheat increased substantially in the 1930s compared to the 1920s: from 1 to 32 per cent in France, from −8 to 13 per cent in Belgium, and from −9 to 35 per cent in the UK (Table 2).18 In the UK tariff protection remained roughly the same (from −9 per cent to −3 per cent) but spending on deficiency payments increased the NRA from −9 per cent to +35 per cent.

17

Governments also intervened in other ways to assist farmers, particularly if the measures did not affect consumers. During the ‘good years’ of the 1920s, farmers rented more land and signed contracts with high land rents, which they were unable to pay as agricultural prices fell. Both in the Netherlands and Belgium, the government intervened to assist tenants. Examples are the Belgian ‘Crisis Land Lease Law’ in August 1933 that restricted ‘exaggerated’ lease contracts. Land leases were, since the tenure law of 1929, based on nine-year contracts. Under the ‘Crisis Land Lease Law’ the government gave the authority to the local courts to judge whether some lease contracts included ‘exaggerated’ rents, and this with special reference to the ‘extreme economic conditions’ (Desmecht, 1987). 18 The very strong increases in the Netherlands and Germany should be interpreted with care as they are strongly affected by macroeconomic factors, in particular hyperinflation and a collapse in their exchange rates in the 1930s.

AGRICULTURAL GROWTH PROTECTION IN EUROPE

17

By the end of the 1930s, prices recovered as war preparations began. Many protectionist measures were sustained until 1939, but relaxed from the mid1930s onwards as farm profits started recovering (Bublot, 1980; Tracy, 1989). e. The Second World War and the Post-War Period There are major changes in protection as indicated by the NRAs over the 1940–70 period. In the 1940s there was a reversal of the protectionism of the 1930s in most countries: average NRAs fell back to substantially lower levels in Belgium, France, Finland, the Netherlands and the UK. While there was variation across countries, the period 1950–70 was characterised by, again, substantial increases in NRA. Average NRAs increased steadily in the 1950s and 1960s, to 43 per cent in the Netherlands, 49 per cent in France, 121 per cent in Belgium and 151 per cent in Germany; and 204 per cent in Finland. These variations in NRAs reflect important policy changes. During the Second World War, food production and consumption were strongly regulated. As in the First World War, food prices were high on the black market and farmers’ incomes soared, certainly compared to incomes in the rest of the economy. Figure 5 illustrates, using long-run income data from Finland, how farm incomes were lower than incomes in the rest of the economy during the entire 20th century, except during the two world war periods when food was scarce. The developments after the Second World War were similar to those after the First World War. During the war, food production and consumption were strongly regulated. Immediately after the war the existing regulatory system was sustained in most European countries and used to ensure a sufficient and ‘affordable’ food supply. Maximum prices were imposed and harvests and stocks were claimed by the government. In the next years the strongly regulated agricultural markets were slowly liberalised.

FIGURE 5 Income in Agriculture as Percentage of Incomes in Industry in Finland, 1900–90 140 120 100 %

80 60 40 20 0 1900

1910

1920

Source: Crommelynck et al. (2001).

1930

1940

1950

1960

1970

1980

1990

18

JOHAN F. M. SWINNEN

Agricultural prices started declining again from the late 1940s onwards. Farmers’ incomes started falling behind incomes outside the agricultural sector (Figure 5). Economic growth was strong in the rest of the economy and the income gap between farmers and people working in other sectors increased strongly in favour of the non-agricultural sectors. There were two reasons for the income gap. The first was the strong growth in the industrial and service sectors of the economy. The second was the introduction of labour-saving technologies in agriculture. Because demand for food had become more inelastic, there was downward pressure on agricultural incomes. From the 1950s onwards and for the next decades, ‘income parity’ became a central issue in agricultural policy. In the speeches of politicians, in political discussions and in the agricultural press, the relative income situation of farmers was at the top of the agricultural policy agenda. Farmers pressured European governments to intervene in the market to correct these growing income gaps by introducing a series of measures to support farm incomes. This led to a series of government interventions in European agriculture in the 1950s and 1960s. Minimum prices, target prices, import quotas etc. were introduced. The regulatory system installed during the war now became an instrument to support farm incomes by intervening in markets in favour of farmers. An argument often invoked to support these measures, especially in continental Europe, is the importance of food security (self-sufficiency). On a continent twice devastated in a 50-year period and twice facing food shortages during war times, the argument of sufficient food through local production touches a nerve. Politicians who had to address the nation’s basic concerns and consumers who faced hunger and food shortages during times when food imports and long-distance food supplies were interrupted were sympathetic to the call for local food production. In the 1960s several of these national policy measures became the building blocks on which the EU’s Common Agricultural Policy was constructed. The CAP was designed at the Stresa Conference in 1958 and introduced in 1968. The introduction of high guaranteed prices at the EU level in the 1970s and 1980s resulted in large trade distortions. This led to the EC’s wine lakes and butter and grain mountains and a budget crisis in the 1970s and 1980s, and to increasing tensions with the traditional agricultural exporting countries on the world markets (Josling, 2009).

4. THE POLITICAL ECONOMY OF AGRICULTURAL PROTECTION: KEY FACTORS

In a recent review of the literature on the political economy of agricultural protection, Swinnen (2009) highlights three sets of variables that have been identified as important causes of (changes in) agricultural protection in the literature: (a) comparative advantage and market fluctuations which affect market returns

AGRICULTURAL GROWTH PROTECTION IN EUROPE

19

and incentives to demand government protection from market forces; (b) the structure of the economy – which is typically affected by economic development and which affects both the costs of distribution and the ability to organise politically; and (c) political institutions and organisations. I will first briefly review the conceptual arguments and the evolution of these factors in Europe over the relevant time period and then relate these developments to the policy changes. The last part of this section discusses a series of additional factors. a. Relative Income and Market Returns A first set of variables relate to the relative income situation of farmers. Both theoretical and empirical studies show that changes in market returns will affect political activities of farmers as well as changes in political incentives for governments to intervene.19 This creates political incentives, both on the demand (farmers) side and the supply (politicians) side, to give up government transfers in exchange for political support. Empirically, one can identify at least two ‘variables’ which affect agricultural protection through this mechanism. The first is (potentially) short-term changes in, for example, world markets, exchange rates etc., which affect the relative income position of farmers; the other is more long-term (structural) and has to do with economic development and comparative advantage. With economic development, incomes in the rest of the economy typically grow faster than in agriculture causing both a reduction of the share of agriculture in the economy and incentives for those who remain in agriculture to seek government support. In all European countries agriculture was a much more important share of the economy in the 19th century than it is today. With the Industrial Revolution, agriculture’s share declined strongly, albeit with major differences between countries (see Figure 6). In the UK, where the Industrial Revolution started, agricultural employment had fallen to 20 per cent of total employment by 1880. On the continent, the shares were lowest in Belgium and Finland (less than 30 per cent) and the Netherlands (35 per cent). In contrast, farmers and farm workers still accounted for almost one-half of the population in France and Germany in 1880. By the 1960s, the employment share was close to 5 per cent in the UK and Belgium and around 10 per cent in the Netherlands, Finland, Sweden and in Western Germany, as the more agricultural part of the country was separated into East Germany.20

19

Theoretically, the relative income hypothesis in agricultural policy is developed formally in de Gorter and Tsur (1991) and Swinnen and de Gorter (1993). A related general theory is by Hillman (1982). Empirical evidence is in Anderson and Hayami (1986), Gardner (1987) and Swinnen et al. (2001). 20 Agricultural technology and factor use changed dramatically as well. Agricultural production became increasingly capital intensive, capital intensity increased particularly in the 1950s and 1960s.

20

JOHAN F. M. SWINNEN FIGURE 6 Share of Agriculture in Active Population (%) 60

Belgium

50

Netherlands France

40

UK Germany

30 20

Finland

10 0

1875

1905

1935

1965

Source: Swinnen (2010).

FIGURE 7 Share of Agriculture in GDP (%) 40 Belgium

30

France UK Germany Finland

20 10 0

1875

1905

1935

1965

Source: Swinnen (2010).

Only France still had a much larger share of its population in agriculture (around 20 per cent). Everywhere and always the contribution of agriculture to total output was even lower than its share in employment (Figure 7). By the late 19th century the share of agriculture in GDP had fallen to around 10 per cent in Belgium and the UK while it was around a quarter of total output in France and around a third in Germany. By the 1960s these shares had fallen to around 6 per cent or less in all the countries in this study.21 When farm incomes from market decline relative to other sectors, farms look for non-market sources of income such as government support, either because returns to investment are larger in lobby activities than in market activities, or because willingness to vote for/support politicians is stronger as the impact on utility is relatively stronger. For similar reasons governments at a given stage of development are more likely to support sectors with a comparative disadvantage than sectors with a comparative advantage. These explanations are consistent with 21

Within agriculture, the share of crop production has consistently fallen, while livestock (including meat and dairy production) and horticulture have become relatively more important (Table 4).

AGRICULTURAL GROWTH PROTECTION IN EUROPE

21

observations of agricultural protection being countercyclical to market conditions and protection being higher in countries with less comparative advantage in agriculture. As I explained already in the previous sections, over the 1870–1969 century, there were three periods when either world market prices were depressed and imports increased strongly, putting pressure on domestic farms, or when the gap between incomes in farming and those in the rest of the economy grew significantly. This was at the end of the 19th century (1880–95), during the interbellum (and especially the period 1928–35), and the post-1950 period. Inversely, during and in the years after the world wars, food prices were high and incomes of farmers were high relative to the rest of the economy. b. Structural Changes in the Economy Changes in the structure of the economy affect the distribution and the size of political costs and benefits of agricultural protection and thus the governments’ political incentives in decision making.22 For example, with a higher share of food in total consumer expenditures, the opposition of consumers to agricultural protection will be stronger as they are hurt more. Similarly, the opposition of industry – or capital owners in other sectors – will be stronger since the (wage) inflation pressures that come from increased food costs with agricultural protection are larger. Another factor is that with a larger share of farmers in the economy, the (per unit) burden of farm support on the rest of society is higher.23 I already documented (Figures 6 and 7) that the share of agriculture in employment and output fell strongly over the 1870–1970 period. Also the share of food in consumer expenditures reduced substantially. Food expenditures remained a very large share of total consumer expenditures well into the 20th century in several countries (Figure 8). However, these aggregate figures hide the fact that there were major differences among groups in society, with the poorest spending much more on food and major changes within the broad category of ‘food’ consumption. For example, in Belgium the share of staple foods, such as bread and potatoes, declined from around 40 per cent of total expenditures in 1850 to around 10 per cent by 1920, despite that the aggregate share of food expenditures remained almost constant over this period (at 60 per cent) (see Table 7). The food shares declined particularly fast in the decades after the Second World War. 22

See e.g. Swinnen (1994) and Anderson (1995) for theoretical analyses of the impact of these structural variables on agricultural policy. 23 In addition, political economy theories predict that exports will be subsidised less (or taxed higher) than imports because of differences in demand and supply elasticities, affecting the induced distortions. The distortions (deadweight costs) and transfer costs of policy intervention typically increase with the commodity’s trade balance, i.e. when its net exports increase (Gardner, 1987). These arguments depend to some extent on the policy instrument that is used.

22

JOHAN F. M. SWINNEN FIGURE 8 Share of Food in Consumption Expenditures (%) Belgium Netherlands France UK Germany

2000–2005

1990–1999

1980–1989

1970–1979

1960–1969

1950–1959

1940–1949

1930–1939

1920–1929

1910–1919

1900–1909

1890–1899

1880–1889

Finland 1870–1879

70 60 50 40 30 20 10 0

Source: Swinnen (2010) and Eurostat.

TABLE 7 Food Expenditures as Share of Total Consumer Expenditures in Belgium (%)

1853 1891 1928 1947 1961 1973 1985

Bread

Potatoes

Beef

Pork

Poultry

Butter

Eggs

Sugar

Beer

30.08 18.38 7.92 6.90 5.06 3.65 1.09

10.72 7.20 3.11 2.15 1.01 0.64 0.17

1.71 4.07 5.34 4.41 3.12 2.75 2.10

2.04 4.36 5.04 3.13 1.54 1.49 1.12

0.33 1.26 2.29 3.77 6.06 4.65 3.78

4.76 6.61 8.50 4.90 2.88 0.65 0.51

1.25 1.75 2.25 1.77 1.01 0.88 0.31

0.56 0.77 1.00 0.93 0.68 0.30 1.11

0.72 1.00 1.29 0.98 0.96 1.10 1.36

Source: Creten (1982) and N.I.S.

c. Political Organisations and Institutions The impact of political systems on protection has been the subject of a series of recent theoretical and empirical studies (e.g. Beghin and Kherallah, 1994; Olper, 2001; Swinnen et al., 2001; Dutt and Mitra, 2005; Grossman and Help-man, 2005; Olper and Raimundi, 2009). The political regime determines the degree of ‘insulation’ of policymakers.24 Greater insulation of decision-makers implies that 24

While the importance of political systems for policy (and thus agricultural policy distortions) has long been emphasised, for example in the seminal work by Buchanan and Tullock (1962), the past decade and a half has witnessed a growing set of studies analysing the role of political regimes and ideology on policy making. These issues not only relate to the differential effects of democracy and autocratic regimes, but also between different electoral systems – such as proportional versus majoritarian systems, and the autonomy given to bureaucrats and implementing institutions (see e.g. Persson and Tabellini, 2003; Acemoglu and Robinson, 2006; Prendergast, 2007, for important contributions and Swinnen and Rozelle, 2009, for an overview of applications to land and agricultural policy issues).

AGRICULTURAL GROWTH PROTECTION IN EUROPE

23

they can follow their private preferences – or those of the ruling class – to a greater extent. Changes in the political system, either because of changes in the institutions (such as changes in voting rights) or because some interest groups become better organised, will affect the policy outcome. Important political reforms occurred in all the European countries in the second half of the 19th century (see Table 8). In the first part of the 19th century votes were restricted to the richest in society, often the landed nobility. France was the first to allocate voting rights to all men, in 1848. In England, a series of voting reforms gradually eroded the parliamentary power of large landowners. While landlords maintained 60 per cent of parliamentary seats in 1880, even after the changed social relationships led to votes being given to industrial workers in 1867. However, this share fell dramatically after the extension of voting rights to farm workers and tenants in the late 19th century (see Table 8, section B). In Belgium and the Netherlands voting rights were given to middlesize farmers at the end of the 19th century and to all men in the wake of the First World War. There were also major changes in the political organisation of farmers. Studies drawing on Olson’s (1965) logic of collective action have long argued that a declining share of agriculture in employment makes political organisation of farmers less costly and is therefore likely to increase effective lobbying of farmers. However, the empirical observations on the political organisation of farmers in Europe is only partially consistent with this. Prior to 1880, political organisation of farmers was limited and mostly included large farms or landlords.25 However, following the agricultural crisis and industrialisation, the political organisation of farmers grew significantly at the end of the 19th and the beginning of the 20th century. The agrarian crisis in the 1880s induced farmers to organise themselves to pressure for government support.26 This process of organisation of small farmers and rural households is also related with

25

In most countries there were also agricultural organisations with educational and extension objectives, such as agricultural committees or the ‘Chambres d’Agriculture’ in France. 26 In Germany, mainly large landowners formed the ‘Association of Tax and Economic Reformers’ in 1876, but the main political organisation of the Prussian landlords occurred with the Bund der Landwirte in 1893 when Germany was negotiating a series of trade agreements to lower tariffs in the midst of falling grain prices. In France, the first, and most influential, political organisation of agricultural interests is ‘La Societé des Agriculteurs de France’ (SAF) which was already founded in 1860 and represented mainly large farm and former nobility interests. A series of additional farm organisations emerged in the 1880s. In Belgium, several farm organisations were formed in the 1880s, including the Belgische Boerenbond (Belgian Farmers Association) in 1890 which later became the dominant political farm organisation. In some countries farmers formed their own political parties, such as the Agrarian Party in Finland and in Sweden. In other countries the farm organisations associated themselves politically with specific parties, typically conservative and often Christian/Catholic. Both the German Bund der Landwirte and the French Societé des Agriculteurs de France were right wing and conservative. In Belgium, the Boerenbond was closely aligned with the Catholic Party – later the Christian Peoples Party (CVP).

TABLE 8 Voting Rights Reforms in Western Europe A. France 1814: 1831: 1848: 1944:

Voting rights restricted to large landowners (those who paid more than 300 FF taxes, equivalent to taxes on 50 hectares property); i.e.100,000 people out of 30 million total. Reduction to 200 FF minimum tax: now 200,000 people can vote. Voting rights for all men. Voting rights for women.

B. England

1832 1867 1880 1885 1885-post election 1906 1918 1919

Voting Reform Act

Main Beneficiaries

I II

Farm managers Industrial workers

III

Farm workers and tenants

Share of Parliamentary Seats by Large Landowners (%)

60% 30% 20% IV

Women 10%

C. The Netherlands Before 1887: 1887: 1917:

Census voting rights Extension of voting rights to 27% of the population, including many larger (richer) farmers General voting rights

D. Belgium Before 1893: 1893:

Cijns voting rights Plural general voting rights

1919:

Singular general voting rights Voting rights for women

1948:

Votes based on tax payments All men over 25 years old at least one vote, but number of votes depends on education and wealth (taxes) One man, one vote One person, one vote

E. Germany 1871: Before 1918: 1918:

Singular general voting rights (two votes per man; second vote counts when no majority is obtained by first votes) Prussia: three classes have equal voting rights One-third of votes attributed to class of rich landowners (4% of population) Voting rights for women

F. Finland Before 1906: 1906: Source: Swinnen (2002).

Under Russia: Lantdag with representatives of four classes (nobility, clergy, citizens, farmers) Voting rights for women

AGRICULTURAL GROWTH PROTECTION IN EUROPE

25

the intensified political competition that was characteristic of the democratisation process at the end of the 19th and early 20th centuries. With voting rights being extended to the general population, conservative parties saw rural households as an important source of votes. A crucial political strategy of conservative and religious parties in continental Europe at the end of the 19th century was the social and political organisation of the rural areas to create a strong power base and a reliable source of 27votes.27 Farm organisations were often dominated by large farmers and nobility but, in order to enhance their political clout, they tried to project an image of defending interests of all farmers. Sometimes they were successful in this, sometimes not.28 In the next section I will relate (changes in) agricultural protection, as identified in the previous section, to (changes in) these three sets of variables.

27

This social organisation included the political organisation of farmers and the establishment of a broad social and educational network of Catholic schools, hospitals and other rural organisations. Village priests often played a key role in the local organisation. This strategy was very successful in several countries. For example, in Belgium the Catholic Party created a dominant political and social network in the rural areas in collaboration with the Catholic Church and the farmers’ union. Similarly, in France, the conservative coalition of the Catholic Church and the (former) nobility in France was organised through the Societé des Agriculteurs de France (SAF) – and in reaction the Republican political movement established alternative farm organisations, focusing on small farmers (see further). In Germany in the 1920s and 1930s, the National Socialist (Nazi) Party in Germany rose to power initially targeting urban areas. However, the Nazi Party soon realised the potential voting strength of a discontented peasantry and designed rural policies to address farmers’ concerns. While their strategy focused strongly on the broad rural population, which dominantly voted for them in the 1930 elections, at the same time they joined forces with the large Prussian landlords with whom they shared preferences about the importance of protecting domestic food production and an autocratic political regime. 28 The German and Belgian farm unions were relatively successful in keeping all farmers within one farm organisation. For example, the Belgian Boerenbond succeeded in keeping this unified organisation despite the fact that for a long time small farmers had no voice at the highest level of decision making. This was reserved for leaders of the Catholic Party, Church officials and large farmers and landowners. One reflection of this bias was the organisation’s support of the existing land tenure laws, which in the first part of the 20th century were heavily criticised by small farmers and mainly benefited landowners (Craeybeckx, 1973). In France and the UK small and large farmers separated into two organisations. In the UK, the large inequalities in tenure relationships and in land ownership were such that they induced tenant farmers to organise themselves to defend their interests against large landlords, rather than forming a coalition with them. In France, the (former) rural nobility was organised in the Societé des Agriculteurs de France (SAF), in a conservative coalition with the Catholic Church. Small farmers organised in other farm organisations, including the Societé National de l’Encouragement à l’Agriculture (SNEA). This small farmer organisation was actively supported by the Republican political movement which wanted to counter the conservative influence of the nobility and the Church in the rural areas. Interestingly, these conflicts were typically reflected at the village level in the local priest representing and organising the SAF while the Republican organisations (SNEA) were represented by the local schoolteacher.

26

JOHAN F. M. SWINNEN 5. AN EXPLANATION OF THE GROWTH OF AGRICULTURAL PROTECTION IN EUROPE

As documented in previous sections, important changes took place in agricultural policies in Europe in the 19th and 20th centuries. In the 1860s free trade spread across the continent. A century later, in the 1960s, European integration coincided with an agreement on heavy government intervention in agricultural markets and strong protection against imports. In the final section of this chapter I will argue that the growth of agricultural protection in Europe is due to a combination of factors, in particular the combination of increased incentives for farmers to demand protection, decreased opposition to protection from the rest of society, and political changes that have given farmers’ demands greater influence at the decision-making level. If I want to explain the growth in protection, it is important to realise – and account for – the fact that agricultural protection in Europe did not increase monotonically over time. There were very important fluctuations over time. From the mid-19th to the end of the 20th century, there were three periods when European farmers intensely demanded protection from international competition. This was at the end of the 19th century (1880–95), from the late 1920s to the late 1930s, and in the post-1950 period. In other periods, there was less or no demand for protection. In some periods consumers demanded that governments protect them from increasing food prices, in particular during and just after the two wars when food was scarce and food prices very high. However, while farmers’ demands for protection were intense during three periods in the century when incomes from market returns were relatively low (the end of the 19th century, the interbellum and the post-1950 period), there was a very different government response to these demands for protection by farmers. Governments mostly resisted protectionist demands at the end of the 19th century, except in France and Germany. European governments provided more protection in the 1930s, and substantially more so from 1950 onwards. Hence, governments responded more favourably to farmers’ demands to provide protection as decades passed. First, a key factor is that with economic development the importance of expenditures on food, and in particular on staple foods, declined. This reduced opposition to import protection by the coalition of workers and industrial interests. This opposition coalition was so strong at the end of the 19th century, and for some basic food commodities still into the 1930s, that they were able to block substantive import tariffs for agriculture, and in particular for (bread) grain farms. The opposition was strongest in the most industrialised countries, such as the UK, Belgium and the Netherlands. There, the share of employment in agriculture was lowest and both capital investment and employment in industry was largest (see Figures 6 and 7). In France and Germany, the economic importance of agriculture

AGRICULTURAL GROWTH PROTECTION IN EUROPE

27

was comparatively larger (and that of industry still smaller). In those countries grain tariffs were introduced in the late 19th century. Second, differences in comparative advantage in industry and in farm structure appear to have been important factors in explaining the difference in protection policies between the UK on the one hand and France and Germany on the other in the early 20th century. In all three countries large grain farms were important, and relatively well organised. However, in the UK they were unsuccessful in obtaining protection against imports as the opposition from industry, workers and the rest of agriculture (see further) was stronger. In Germany and France they were able to obtain support. Both countries had an industry (manufacturing sector) which was under pressure from imports from more advanced industrial nations such as the UK. Both in Germany and France the manufacturing industry wanted import protection. In Germany the main group opposing import tariffs were the Prussian grain-exporting farms. But this changed when cheap grain swamped the European markets in the second half of the 1870s. With French and German farmers now switching sides in favour of protection, an anti-free-trade coalition of industry and agriculture emerged in both countries – in contrast to the UK (and Belgium) where industry wanted export opportunities and cheap food. This caused the introduction of general import tariffs, not just on agricultural products but also on industrial products, in 1879 in Germany and in 1892 in France.29 Interestingly, in Germany this alliance was only temporary. By the 1890s, German industry was in a much stronger competitive position and started becoming worried about the negative effects of high food costs and high wages. In addition, it was being harmed by tariffs which the United States had imposed in reaction to the German agricultural tariffs. However, by the 1890s industrial interests had changed. Industry, and industrial workers, wanted cheaper food and access to international export opportunities. This effectively led to a reversal of German trade policies: despite strong opposition from farming interests, especially the Prussian landlords, a series of new trade agreements in the 1890s lowered agricultural tariffs and brought benefits for manufacturing (see Table 1). New trade agreements with Romania and Russia, through the most favoured nation principle, also reduced tariffs on grains from the US and other grain exporters (Tracy, 1989; Schonhardt-Bailey, 2006). Third, so far I have mostly discussed the political coalitions in fairly simple terms, referring mostly to those with agricultural interests as ‘farmers’. However there were important heterogeneities among ‘farmers’ both in terms of their economic interests and their political organisations. These heterogeneities had important impacts on the policy decisions. One element is that livestock farms typically opposed grain import tariffs. In countries where livestock farming was well 29

In France, the main exceptions were agricultural raw materials used as inputs in industry, such as wool, skins, cotton, flax etc.

28

JOHAN F. M. SWINNEN

established (for example, in the UK, livestock farms represented more than 60 per cent of agricultural output by the 1880s, compared to less than 30 per cent in France), livestock farms formed a powerful lobby against import tariffs for grains, rather than forming a coalition with grain farms. In addition, in feudal systems (as in the UK) the role and divergent interests of farm workers are important. In lowincome societies, such as the UK at the end of the 19th century, farm workers – even those working on grain farms – opposed import tariffs on staple foods because they were to lose more as consumers (poverty was widespread and 80 per cent of a farm worker ’s expenditure was on bread) than they would gain through increased wages. Moreover, in feudal systems small farms and tenants were more concerned with their tenure rights than with import tariffs at the end of the 19th and early 20th centuries. They saw landlords and large grain farms as their main problem, not cheap imports. Their political struggle focused on improving tenure conditions by opposing landlords, rather than forming a coalition with them to increase farm prices.30 Fourth, the impact of political reforms and organisation on agricultural protection is complex. A simple comparison between 1860 and 1960 would suggest that agricultural protection had increased with the political organisation of farms. However, such simple comparison ignores important periods in the course of this century when farms were well organised and when protection was not given to agriculture. While landlords and large farms were already powerful and politically well organised in the 19th century, many new farm organisations, in particular representing small farmers, emerged during the crisis at the end of the 19th century, and a network of rural organisations linked to farming grew in importance in the first decades of the 20th century. In addition, voting rights were extended to small farmers and farm workers in the beginning of the 20th century. Yet, both factors seem to have had relatively limited impact on the protection debate at the end of the 19th century because by the time the organisations were working effectively and small farmers and workers had voting rights, the agricultural crisis had subsided (the late 1890s and 1900s). However, these political developments did enhance the influence of farmers when the next crisis emerged: in the late 1920s and 1930s.

30

The agrarian crisis in the 1880s not only induced farmers to politically organise themselves to defend their interests against other interest groups (such as industrial capital) and to demand protection, but also to fight for changes in relationships within agriculture. This was particularly clear in the UK. As farmers were forced off their land as they could no longer pay their rents with declining prices, the crisis induced social revolts by small farmers and tenants against the feudal relationships. In England tenants and small farmers organised themselves to defend their rights in the Farmers Alliance (1879) and the Society of the Land for the People (1883). Their main objectives were to get a better deal from landlords, rather than import tariffs, as reflected in their demands for ‘the Three F’s’: Fair land rents, Fixity of land tenure, and Free sale of their commodities (Cannadine, 1992).

AGRICULTURAL GROWTH PROTECTION IN EUROPE

29

But opposition from industry and workers was still strong in the 1930s. Food still accounted for a major part of worker expenditures, and, moreover, the general economy was hit by the economic crisis of the late 1920s and early 1930s, making cheap food an important concern. As a result there was an increase in agricultural import tariffs, but less on food staples such as bread grains or potatoes. For these commodities support was more likely given under the form of non-tariff measures such as direct payments (in the UK) and milling ratios (in other countries). After the Second World War, all factors in favour of more protection and more support to agriculture came together and opposition was reducing fast. Most importantly, after the Second World War, opposition of industry and workers in the rest of the economy fell strongly. With strong growth in the rest of the economy, the share of food in total consumer expenditures and its impact on wages declined strongly and with this so did opposition to protection from workers and industry. At the same time, farm incomes fell increasingly behind incomes in the rest of the economy, increasing demands for agricultural support. Farm demands were now politically influential since political organisations of farms were well established and because of their votes. In addition, farm-related cooperatives and business organisations in the agri-food sector became important interest groups, with, for example, dairy and sugar processing companies joining farm unions in actively lobbying for government support and import protection for their sectors. The combination of these factors caused an important and structural shift of the political equilibrium towards more protection – resulting in high levels of government intervention and support to agriculture in the decades following the Second World War.31 Finally, it is important to explicitly discuss the impact of the wars in Europe. I already explained above that the specific circumstances during the wars affected the relative income position of farmers and consumers, and hence government interventions. But agricultural policies were affected also in the years leading up to the wars and the following years. For example, Imperial Germany in the early 20th century sought re-armament and made food self-sufficiency an important consideration on the home front. During the Weimar Republics the Nazi’s nationalistic (emphasising the importance of domestic production) and right-wing ideology found a close ally (and many votes) in the conservative rural population and the large Prussian landlords. The farm organisations reorganised in a Nazidominated Green front. After the war, the political cause of supporting domestically-produced food resonated well with consumers who had suffered from trade blockades, food shortages and high food prices in the war. The emergence of the ‘cold war ’ in the 1950s 31

In Germany this occurred despite – or as some would argue because – of the fact that an important part of agriculture is now separated from Western Germany. The farms in western and southern Germany were smaller and less well structured to compete in international markets, making them significant demanders of protection.

30

JOHAN F. M. SWINNEN

and 1960s reinforced these arguments. In some countries these arguments resonated earlier concerns. For example, in Finland food shortages following its separation from Russia and the disruption of trade ties in the early 20th century, made food self-sufficiency an important political objective during the first half of the 20th century and was reinforced later by the experience in the wars. After the Second World War, when West Germany had lost most of its grain production areas, it became preoccupied with stimulating domestic food production through high prices on the smaller western and southern farms.

6. CONCLUSION

Important changes took place in agricultural policies in Europe in the 19th and 20th centuries. In the 1860s free trade spread across the continent. A century later, in the 1960s, European integration coincided with an agreement on heavy government intervention in agricultural markets and strong protection against imports. In this chapter I quantified the extent of agricultural protection and related it to the history of agricultural policies and offered a series of hypotheses on the causes of these dramatic changes in agricultural and trade policies. The growth of agricultural protection was not linear, but there was substantial fluctuation in the century that was analysed. Factors that appear to have played an important role in causing the increase in agricultural protection in Europe are: the decline of income from markets for farmers, in particular in comparison with incomes from the rest of the economy; the reduced share of consumer expenditures for food; the farm structure; the political organisation of farmers and the growth in government administrative capacity for regulating markets; the food shortages during the world wars in Europe, and democratisation. However, the impact of each of these factors is complex and almost always interrelated with other factors. Periods of substantial increases in agricultural protection were characterised by three conditions. First, farmers had substantive political influence, either through votes in parliament of through extra-parliamentary political organisations. Second, a crisis in agriculture or growing income gap with the rest of the economy triggered strong political action by farmers to influence governments. Third, the opposition to protection was sufficiently low, either because support to agriculture had relatively little effect on consumers and the rest of the economy, or because the rest of the economy had relatively little political influence. The combination of these three factors was needed to induce major increases in protection. Such a combination was present to some extent in the 1930s, but especially in the 1950s, when protection grew strongly. An interesting element addressed in this chapter which is the subject of important current research is the impact of democracy on (agricultural) protection. The growing literature on this issue suggests a subtle and non-linear effect of democ-

AGRICULTURAL GROWTH PROTECTION IN EUROPE

31

racy on agricultural protection.32 The conclusions from the analysis in this chapter seem to be consistent with this argument. Extending voting rights ‘from the rich to the poor ’ (as is the standard evolution) shifts parliamentary power from the landlords and industrial capital (the rich) to industrial and farm workers and small farmers (the poor). Conceptually, it is not clear why this would lead to an increase in agricultural protection in general. While democratisation and the growth of farm associations have enhanced the political influence of small farmers, tenants, and farm workers, it also enhanced the influence of industrial workers and labour unions. Those benefiting from the vote extensions and improved political organisation have opposing interests on protection. And this is consistent with the empirical evidence in this chapter. In fact, the evidence here suggests that in the UK agricultural protection was negatively affected by democratisation during the 19th and the first half of the 20th centuries: almost all the poor, even the farm workers and small livestock farms, benefited from cheap grains and therefore opposed import protection which landlords and grain farmers demanded. As electoral reforms gave these groups voting rights this reinforced the political opposition against grain import tariffs in the 19th and early 20th centuries. The enhanced political influence of small farmers and farm workers in the first part of the 20th century seems to have been more important in affecting the distribution of rents within the agricultural sector rather than average protection for agriculture as a whole. Tenure rights of tenants were enhanced through a variety of regulatory changes in many continental European countries, as well as increases in land taxes and inheritance taxes contributing to the break-up of large estates and the growth of (smaller) operator-owned farms in the UK (Swinnen, 2002). Finally, there are a number of important elements that require further analysis and attention than is paid to them in this chapter. One element is the relation between agricultural protection (distortions in agricultural markets) and government policies such as land reforms and public investments in infrastructure, research, extension etc., which benefit farmers through enhanced productivity. Another element is the relation between trade protection and macroeconomic variables, in particular exchange rates and the budget. Several studies point at important interactions.33 These effects require further research. 32

This is consistent with Swinnen et al.’s (2001) econometric findings that the impact depends crucially on the details of the political reforms, i.e. who precisely benefits from the electoral changes. They find that over the course of a century only one out of four political reforms in Belgium had an impact on agricultural/trade policy. The extension of voting rights in the early 20th century, which disproportionately benefitedsmall farmers and landless rural workers, was associated with an increase in agricultural protection, ceteris paribus, in the following years. 33 For example, both in Germany and in France in the 1880s governments wanted to increase tariffs for public revenue purposes: Bismarck, the German leader, needed revenues for his imperial objectives and so did the French (in the wake of the French–German war) (Tracy, 1989). Similarly, European governments ran into budgetary problems in the 1930s, which led to increased taxes and devaluations and to important changes in relative prices for farmers.

32

JOHAN F. M. SWINNEN APPENDIX A: METHODOLOGY OF CALCULATING NRA

The methodology used for measuring agricultural protection is based on Anderson et al. (2008). In the most simple open and distortion-free economy the domestic farm product price and domestic consumer price of a product equals E.P, which is the currency price of foreign exchange, E, times the foreign currency price of this identical product in the international market, P. Agricultural protection is measured as the diversion from this equality between the distorted domestic and the undistorted international market price, as a fraction of the undistorted price. Our measure of the nominal rate of assistance (NRA) includes trade distortions through an import tariff tm and direct producer support through production subsidies s1f .The overall measure of distortion is then: NRA = [( Pd + s f ) − E .P ] E .P = [((1 + t m ) E .P + s f ) − E .P ] E .P , where P is the (undistorted) unit price at the border (c.i.f. import or f.o.b. export price), expressed in the local currency using the exchange rate E. The (distorted) price Pd is the price observed in the domestic market Pd = (1 + tm) E.P and sf is a production subsidy.

APPENDIX B: ADDITIONAL TABLES TABLE A1 Self-Sufficiency Rates 1A. SSR Belgium (1870–1969)

1870–79 1880–89 1890–99 1900–09 1910–19 1920–29 1930–39 1940–49 1950–59 1960–69

Wheat

Barley

Sugar

Dairy Butter

Meat Beef

0.45 0.36 0.20 0.19 0.17 0.26 0.26 0.57 0.55 0.68

0.37 0.34 0.29 0.24 0.19 0.28 0.17 0.75 0.42 0.69

. . 0.93 0.89 0.91 . . . 1.08 1.30

. 0.83 0.87 . 0.87 0.91 0.89 0.89 0.88 0.90

. 0.81 0.86 0.90 0.89 0.93 0.94 0.92 0.97 0.90

TABLE A1 Continued 1B. SSR France (1870–1969)

1870–79 1880–89 1890–99 1900–09 1910–19 1920–29 1930–39 1940–49 1950–59 1960–69

Wheat

Barley

Sugar

Dairy Butter

Meat Pork

92.25 87.92 88.98 97.76 77.77 85.36 96.23 93.56 106.39 116.21

105.91 101.55 88.68 88.77 82.93 95.95 84.40 92.59 104.43 .

74.09 93.06 113.92 105.24 45.71 78.05 87.04 102.59 105.09 .

. . . . . . 101.46 . 82.71 .

. . . . . . 113.77 100.50 99.56 .

1C. SSR Germany (1870–1969)

1870–79 1880–89 1890–99 1900–09 1910–19 1920–29 1930–39 1940–49 1950–59 1960–69

Wheat

Barley

Sugar

Meat Beef

98.50 87.00 77.50 66.94 69.89 72.11 91.27 51.82 58.75 76.08

97.41 86.85 75.37 64.35 62.45 74.46 91.61 86.44 65.69 75.30

208.63 251.20 258.97 177.90 160.96 105.56 103.28 66.94 85.16 92.31

105.04 103.21 98.02 97.28 97.59 85.48 100.79 97.17 96.81 90.77

1C. SSR Finland (1930–1989)

1930–39 1940–49 1950–59 1960–69 1970–79 1980–89

Wheat

Barley

Sugar

Dairy Milk

Meat Beef

45.30 65.30 44.70 90.70 94.80 92.84

105.72 92.69 110.42 98.73 111.60 111.54

18.61 23.89 18.13 24.94 41.96 62.51

102.56 76.01 122.47 100.33 101.09 102.79

100.15 98.57 100.00 100.23 102.10 114.34

Source: Swinnen (2010).

TABLE A2 Additional NRAs, 1870–1969

2A: NRA meat, 1870–1969

1870–79 1880–89 1890–99 1900–09 1910–19 1920–29 1930–39 1940–49 1950–59 1960–69

Belgium Beef

France Pork

UK Beef

. 0.00 −0.10 −0.12 −0.07 0.13 0.93 0.60 0.19 0.66

−0.24 −0.17 0.12 0.40 0.99 0.89 0.76 0.39 −0.07 −0.19

. 0.15 0.23 0.39 0.45 0.65 0.62 . . .

Mutton

Germany Beef

Finland Beef

. 0.57 0.58 0.69 0.65 0.64 0.61 . . .

. −0.12 0.00 −0.07 . 0.79 1.03 . 0.79 0.64

. . . . . . −0.86 −0.83 0.56 0.43

2B: NRA sugar, 1870–1969

1870–79 1880–89 1890–99 1900–09 1910–19 1920–29 1930–39 1940–49 1950–59 1960–69

Belgium

France

Germany

Finland

. . −0.03 −0.16 0.02 0.20 0.17 0.44 0.20 0.88

. 0.09 0.02 0.13 −0.01 0.49 2.74 0.65 0.79 1.17

. −0.15 0.13 0.39 0.28 0.38 1.69 −0.01 1.20 3.18

. . . . . . 2.46 1.48 2.60 3.80

2C: NRA barley, 1870–1969

1860–69 1870–79 1880–89 1890–99 1900–09 1910–19 1920–29 1930–39 1940–49 1950–59 1960–69

Belgium

Netherlands

France

UK

Germany

Finland

. 0.00 −0.02 0.00 0.00 0.04 0.09 0.20 0.08 0.10 0.29

. . . . . . 0.09 0.61 −0.13 0.06 0.07

0.11 0.02 0.02 0.10 0.10 0.11 0.09 0.29 0.18 −0.03 0.01

. 0.30 0.27 0.32 0.18 0.03 0.11 0.54 0.79 0.04 0.00

. . 0.08 0.32 0.36 0.43 0.41 1.53 . 0.42 0.73

. . . . . . . −0.05 −0.07 0.09 0.46

AGRICULTURAL GROWTH PROTECTION IN EUROPE

35

APPENDIX C: ADDITIONAL FIGURES FIGURE A1 NRA Wheat. 1870–1969 2.50

Netherlands

Belgium

France

Germany

UK

Finland

2.00 1.50 1.00 0.50

–1.00 Source: Own calculations.

FIGURE A2 NRA Barley, 1870–1969 3.00 2.50 2.00 1.50 1.00 0.50

–1.00

Source: Own calculations.

Belgium

Netherlands

France

UK

Germany

Finland

1965

1960

1955

1940

1935

1930

1925

1920

1915

1910

1905

1900

1895

1890

1885

1880

1875

1870

0.00 –0.50

1965

1960

1955

1945 1950

1950

1940 1945

1935

1930

1925

1920

1915

1910

1905

1900

1895

1890

1885

1880

1875

–0.50

1870

0.00

FIGURE A3 NRA Dairy, 1870–1969 5.00 4.00 Belgium

Netherlands

Finland

UK

France

3.00 2.00 1.00

1965

1960

1955

1950

1945

1940

1935

1930

1925

1920

1915

1910

1905

1900

1895

1890

1885

1880

–1.00

1875

1870

0.00

Note: Belgium, Netherlands, France, UK: butter; Finland: milk. Source: Own calculations.

FIGURE A4 NRA Meat, 1870–1969 3.00 Belgium

2.50

UK

Finland

Germany

France

2.00 1.50 1.00 0.50 1870 1873 1876 1879 1882 1885 1888 1891 1894 1897 1900 1903 1906 1909 1912 1915 1918 1921 1924 1927 1930 1933 1936 1939 1942 1945 1948 1951 1954 1957 1960 1963 1966 1969

0.00 –0.50 –1.00

Note: Belgium, UK, Germany, Finland: beef; France: pork. Source: Own calculations.

Netherlands

France

1905

Belgium

7.00

1890

FIGURE A5 NRA Sugar, 1870–1969 UK

Germany

Finland

6.00 5.00 4.00 3.00 2.00

Source: Own calculations.

1965

1960

1955

1950

1945

1940

1935

1930

1925

1920

1915

1910

1900

1895

1885

1880

–1.00

1875

0.00

1870

1.00

AGRICULTURAL GROWTH PROTECTION IN EUROPE

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Hoffmann, W. G. (1965), Das Wachstum der Deutschen Wirtschaft seit der Mitte des 19. Jahrhunderts (Berlin: Springer Verlag). Jansma, K. and M. Schroor (1987), Tweehonderd jaar geschiedenis van de Nederlandse landbouw (Leeuwaarden: Intercombi van Seyen). Josling, T. (2009), ‘Distortions to Agricultural Incentives in the European Union’, in K. Anderson (ed.), Distortions to Agricultural Incentives: A Global Perspective, 1955–2007 (London: Palgrave Macmillan and Washington, DC: World Bank). Kindleberger, C. P. (1975), ‘The Rise of Free Trade in Western Europe, 1820–1875’, Journal of Economic History, 35, 1, 20–55. Krueger, A. O., M. Schiff and A. Valdes (1992), The Political Economy of Agricultural Protection in Developing Countries. A World Bank Comparative Study (5 volumes) (Baltimore: Johns Hopkins University Press). Lindert, P. H. (1991), ‘Historical Patterns of Agricultural Policy’, in C. P. Timmer (ed.), Agriculture and the State (Ithaca, NY: Cornell University Press), 29–83. Moyer, H. W. and T. E. Josling (1990), Agricultural Policy Reform: Politics and Process in the EC and the USA (New York: Harvester Wheatsheaf). Nationaal Instituut voor de Statistiek (N.I.S.), Annual Statistics 1890–1990 (Brussels: NIS). Olper, A. (1998), ‘Political Economy Determinants of Agricultural Protection in EU Member States: An Empirical Investigation’, European Review of Agricultural Economics, 24, 463–87. Olper, A. (2001), ‘Determinants of Agricultural Protection: The Role of Democracy and Institutional Setting’, Journal of Agricultural Economics, 52, 2, 75–92. Olper, A. and V. Raimundi (2009), ‘Constitutonal Rules and Agricultural Protection’, in K. Anderson (ed.), The Political Economy of Distortions to Agriculture (Washington, DC: World Bank Publications). Olson, M. (1965), The Logic of Collective Action (New Haven, CT: Yale University Press). Organisation for Economic Co-operation and Development (2009), Agricultural Policies in OECD Countries: Monitoring and Evaluation (Paris: OECD Publications). Persson, T. and G. Tabellini (2003), The Economic Effects of Constitutions: What Do the Data Say? (Cambridge, MA: MIT Press). Pokrivcak, J., C. Crombez and J. Swinnen (2006), ‘The Status Quo Bias and Reform of the Common Agricultural Policy: Impact of Voting Rules, the European Commission and External Changes’, European Review of Agricultural Economics, 33, 4, 562–90. Prendergast, C. (2007), ‘The Motivation and Bias of Bureaucrats’, American Economic Review, 97, 1, 180–96. Priester, P. (1991), De economische ontwikkeling van de landbouw in Groningen 1800–1910: Een kwalitatieve en kwantitatieve analyse (Wageningen: Afdeling Agrarische Geschiedenis). Rogowski, R. (1989), Commerce and Coalitions. How Trade Affects Domestic Political Alignments (Princeton, NJ: Princeton University Press). Schonhardt-Bailey, C. (1998), ‘Parties and Interests in the “Marriage of Iron and Rye” ’, British Journal of Political Science, 28, 291–330. Schonhardt-Bailey, C. (2006), From the Corn Laws to Free Trade. Interests, Ideas and Institutions in Historical Perspective (Cambridge, MA: MIT Press). Sneller, Z. W. (ed.) (1943), Geschiedenis van den Nederlandschen landbouw 1795–1940 (History of Dutch Agriculture 1795–1940) (Groningen, The Netherlands: Wolters). Swinnen, J. (1994), ‘A Positive Theory of Agricultural Protection’, American Journal of Agricultural Economics, 76, 1–14. Swinnen, J. (2002), ‘Political Reforms, Rural Crises, and Land Tenure in Western Europe’, Food Policy, 27, 4, 371–94. Swinnen, J. (ed.) (2008), The Perfect Storm: The Political Economy of the Fischler Reforms of the Common Agricultural Policy (Brussels: Centre for European Policy Studies Publications). Swinnen, J. (2009), ‘The Political Economy of Agricultural Policies: The Literature to Date’, in K. Anderson (ed.), The Political Economy of Distortions to Agriculture (Washington, DC: World Bank Publications). Swinnen, J. (2010), A Historical Database on European Agriculture, Food and Policies, Leuven: LICOS Centre for Institutions and Economic Performance, forthcoming.

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Swinnen, J. and H. de Gorter (1993), ‘Why Small Groups and Low Income Sectors Obtain Subsidies: The “Altruistic” Side of a “Self-Interested” Government’, Economics and Politics, 5, 3, 285–96. Swinnen, J. and S. Rozelle (2009), ‘Governance Structures and Resource Policy: Insights from Agricultural Transition’, Annual Review of Resource Economics, 1, 1, forthcoming. Swinnen, J., A. N. Banerjee and H. de Gorter (2001), ‘Economic Development, Institutional Change, and the Political Economy of Agricultural Protection. An Econometric Study of Belgium since the 19th Century’, Agricultural Economics, 26, 1, 25–43. Toutain, J.-C. (1961), ‘La croissance du produit de l’agriculture entre 1700–1958’, Cahiers de l’I.S.E.A, 115, 1–287. Tracy, M. (1989), Government and Agriculture in Western Europe 1880–1988 (London: Granada). Van den Noort, P. C. (1980), Inleiding Tot de Algemene Agrarische Economie (Leiden, Antwerpen: Stenfer Kroese Uitgevers). Van Molle, L. (1984), ‘100 jaar Ministerie van Landbouw’, Agricontact (Brussels: Ministèrie van Landbouw). Van Molle, L. (1989), Katholieken en Landbouw. Landbouwpolitiek in Belgie 1984–1914 (Leuven: Universitaire Pers Leuven). van Tijn, G. (1977), Algemene Geschiedenis der Nederlanden, boekdeel XII (Bursum: Unieboek bv), 145–64. Van Zanden, J. L. (1986). ‘Modernisering en de toenemende betekenis van de overheid: 1800–1950’, in L. Noordegraaf (ed.), Agrarische Geschiedenis van Nederland (Gravenhage, The Netherlands: Staatsuitgeverij), 85–141. Vander Vaeren, J. (1930), De Voornaamste Feiten uit eene eeuw Geschiedenis van den Belgischen Landbouw 1830–1930 (Leuven: Ets Fr Ceuterick). Williamson, J. G. (2006), Globalization and the Poor Periphery before 1950 (Cambridge, MA: MIT Press).

2 The Asian Drivers and Africa: Learning from Case Studies Andrea Goldstein, Nicolas Pinaud, Helmut Reisen and Dorothy McCormick

1. INTRODUCTION

T

HE main drivers of economic globalisation have historically been Western developed countries, and, as such, they have impacted developing countries, in both positive and negative ways. This is seemingly changing rapidly. In this early part of the 21st century, developing countries – or emerging economies as they are increasingly labelled – have contributed more than 50 per cent of world GDP growth. In fact, it is fair to say that for the first time in modern history, nonOECD countries, and China in particular, are in a position to influence and perhaps shape the global economy. What can be expected from these new engines? Will they promote a more ethical economic development worldwide vis-à-vis other developing countries, or will they behave the same way Western developed countries have acted for most of the post-Second World War years – that is, through a mix of not always coherent policies, balancing realism and idealism, pragmatism and rhetoric, protectionism and development cooperation? The chapters included in this mini-symposium form part of a broader project that the OECD Development Centre, with support from the Swiss Development Cooperation and the French Development Agency, launched in late 2005 to document the economic, political and social impacts of China’s and India’s economic growth on sub-Saharan African (SSA) countries. Goldstein et al. (2006), in a macro-study, identify the conduits of China and India’s contribution to global growth, illustrated with examples like the rise of energy consumption, steel use and shares in world imports of the two Asian Drivers. Although the price of natural resources is volatile, its recent rise has contributed to the improvement in Africa’s purchasing power of exports and in its terms of trade. Over the last decade, Africa’s trade with China and India has also increased dramatically, reorienting trade away from OECD countries. In the case of Sudan, for example, 40 per cent 40

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of its exports in 1995 went to the industrialised countries. Ten years later, less than 20 per cent of its products are destined for these markets, and China’s share has increased from less than 10 per cent to 40 per cent. Likewise, Chinese and Indian foreign direct investment is very present in the case of natural resources and is also increasing in such sectors as telecommunications: for example, Distacom of Hong Kong became the strategic investor in Telecom Malagasy (Telma) in Madagascar. On the negative side, the African export mix remains dominated by raw materials, merely a small share of FDI supports diversification into new manufacturing and services activities and the risk of a rapid appreciation of the real exchange rate lingers behind the prospect of higher commodity prices. In a nutshell, the rise of China and India may be pushing Africa still further towards the ‘raw material corner ’. Governance issues are also attracting more and more attention. The Asian Drivers’ governments and companies are not very active takers of the rules embodied in different instruments, touching on issues such as standards and codes in extractive industries, transparency in government procurement, and corporate social responsibility, which are meant to govern the relationship between Africa and the rest of the world. The World Bank’s Silk Road report (Broadman, 2007) and others (Kennan and Stevens, 2005; Jenkins and Edwards, 2006) reach similar conclusions. Although conventional analysis still tends to regard Africa as a monolithic continent, not all African countries are on an equal footing when it comes to reaping the benefits of higher commodity prices spurred by China and India’s demand for commodities. Far from being homogeneously rich in natural resources, there are big differences among African trade patterns at the country level. A large number of African countries are net importers of mineral fuels, oils and distillation products, and some of them (although in limited number) are net importers of crude materials. In this context, in their search for commodities, resource-poor African countries may regard China and India as competitors. Some African countries may even bear the brunt of rising commodity prices. Hence the case for examining the impact of China and India at a micro-economic level throughout country and sectoral case studies. Four countries have been selected: Angola, Senegal, Ethiopia and Kenya (with a focus on the footwear and clothing industries, in Ethiopia and Kenya, respectively). A sectoral study pertaining to the clothing sector in SSA has also been conducted. Selection of countries with dissimilar endowments (raw commodity potential, degree of diversification, institutional development) makes it possible to assess the various forms of Asian Drivers’ involvement on the continent, their differentiated impacts on local economies and the specific challenges that are faced by each type of African economy. How do, for example, countries that have no raw material on offer benefit from the Asian increasing presence on the continent (outlets for their non-commodity exports, destination for FDI and development assistance)? Will the Asians’ relative

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indifference vis-à-vis governance standards potentially reinforce a resource curse? How does China’s and India’s presence in individual countries compare with Western countries’ involvement? What role do diasporas play? The countries examined in this issue have different characteristics, which in turn frame their respective interactions with the Asian Drivers. Aguilar and Goldstein study the case of Angola, a country that has emerged in very recent years as a major trading partner for China. In fact, this is one of the world’s few countries with which China registers a trade deficit and this is one of the underlying reasons for the enthusiasm with which Beijing is ready to extend new loans to Luanda. But Angola is also an increasingly important strategic source of oil for other countries, and the government has skilfully played out this rivalry to its advantage. The first lesson is in fact that dancing to the tune of China may be a mixed blessing for African countries, of which policymakers are well aware. According to Hazard et al., Senegal is in the peculiar position of having a more advanced partnership with India than with China. Authorities are now trying to make up the ground they have lost in the period from 1996–2006, when Dakar switched its diplomatic relations from Beijing to Taipei. It is easy to see the political gains and the possible benefits from investment, technology transfer or development cooperation that Senegal expects to reap from an enhanced partnership with the Asian Drivers. Outside of investments in phosphates and fisheries, the latter ’s interest in Senegal, however, appears limited. As a matter of fact, China’s already notable involvement in such sectors as fishing may worsen some of the country’s structural difficulties, i.e. overfishing and the depletion of sea resources. Overall, Senegal appears to be more of a logistical and commercial centre for Chinese and Indian importation and re-exportation, than as a production base for regional or foreign markets. Additionally, the amount of official development assistance put forward by China and India, although highly symbolic, is in fact almost irrelevant in financial terms. The image Senegal aims to portray is that of a regional gateway, thanks to its geographical position, good infrastructure (at least compared to other countries in the region), political stability and engagement with pan-African causes (especially insofar as NEPAD is concerned). While these arguments may win friends in America and Europe, a second lesson to be learned is that this line of reasoning may not be sufficient to cement ties with China and India. The cases of Kenya and Ethiopia are studied by Paul Kamau et al. and Tegegne Gebre-Egziabher, respectively. These countries have relatively diversified economies (at least by SSA standards), with light manufacturing industries in particular playing a significant (and until recently) growing role. The rise of Asian competition (locally, regionally and on third-country markets), partly due to the erosion of trade preferences for clothing and footwear, confronts these two countries with new challenges. The specific relevance of the clothing industry in the analysis of China’s and India’s impact on Africa is manifold: this is a low-skilled labour-intensive industry, and hence an avenue for African economies’ diversifica-

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tion; the competition from Asian producers vis-à-vis the SSA clothing industry is felt at the local, regional and global level (on thirdcountry markets): it is therefore direct and indirect; also, the Asian Drivers’ impact on African clothing industries has both a trade and investment dimension while being competitive and complementary. Kaplinsky and Morris assess the indirect impact on SSAs outward-oriented industry of China’s growing global manufactured exports in the context of a preferential trade access arrangement which favours such an industrialisation path. This is done through an analysis of SSA’s clothing and textile exports under the African Growth and Opportunities Act (AGOA) which provides preferential access to SSA exporters into the US market. Since, excluding South Africa, more than half of all SSA’s manufactured exports are made up of clothing alone, what happens in this sector may be a portent for SSA’s export-oriented industrialisation in the future. The authors produce evidence to suggest that SSA clothing and textile exporters who are able to draw on trade preferences are still largely able to rival their best competitors in the world. They also do so with the evidence of significant productivity improvement, in that during 2005 export values and volumes held up much better than employment in Kenya, Lesotho and Swaziland. The footwear industry in Ethiopia similarly highlights that history is not destiny – economic agents (firms in this particular instance) can find ways to invest, upgrade and escape from a deterministic fate made of demise and disappearance in the face of Chinese competition. The chapters make a modest contribution to the study of the impact of China and India on developing countries, an area of research that is still in its infancy. In the future, researchers may wish to consider more sophisticated methodologies, depending on the availability of data no less than on the ability to generate them when they are not available. Moreover, impacts should be analysed separately for China and India, because both the nature of these two giants and the nature of the countries interacting with them are sufficiently different that varied impacts are almost inevitable. An additional innovation may result from the adoption of (domestic and international) institutional approaches and value-chain analysis. An explicit treatment of the domestic and global institutional environment that mediates trade, FDI, aid and migration would enrich any analysis. The elimination of the Multilateral Fibre Agreement is just one example of how a change in institutions can have an impact on trade, manufacturing, and ultimately on growth and distribution in a given country. Value-chain analysis is also extremely useful in identifying not only the major actors and their roles in particular chains, but also the locus of power in particular chains. Such analysis is especially useful in providing pointers to appropriate industrial policy. Finally, three practical conclusions flow from this analysis. First, the size of both China and India means that the countries can swamp Africa on many fronts.

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If African countries are to grow and develop, they must adopt strategies that maximise the complementary impacts of these two giants and minimise their areas of direct competition. At the same time, the cases of the clothing and footwear sectors (also of furniture) make clear that African economies are unable to compete internationally on a level playing field: they require some form of policy intervention that will tilt global trade in their favour. Second, carefully designed industrialisation strategies are necessary that are complementary to the Asian Drivers’ development path. Clothing and footwear – especially in their export variants – are examples of industries with known technology, but rapidly changing markets. Industrial policy must provide the right balance of challenge and support to exporting firms to enable them to take full advantage of the opportunities available. This type of support for ‘selfdiscovery’ activities should complement standard prescriptions to improve business environments and reduce factor costs (in particular energy, transport, and goods handling). Third, sectors of mutual interest should be identified in order to develop longterm views on how to cooperate with China and India, and these views should be mainstreamed into national development plans. In Senegal, for instance, cooperation with India in the field of aquaculture and teleservices is seen as crucial to solve problems (overfishing) and develop comparative advantages (the country is equipped with a digital link connecting it with Europe and the United States). By way of contrast, in the same country the lack of a common vision regarding ICS – the phosphate mining and processing company in which Indian interests own a combined 30 per cent stake – has damaged the role and place of this flagship national industry in the local economy.

REFERENCES Broadman, H. G. (2007), Africa’s Silk Road: China and India’s New Economic Frontier (Washington, DC: World Bank). Goldstein, A., N. Pinaud, H. Reisen and Xiaobao Chen (2006), The Rise of China and India: What’s in it for Africa? (Paris: OECD Development Centre Studies). Jenkins, R. and C. Edwards (2006), ‘The Asian Drivers and Sub-Saharan Africa’, IDS Bulletin, 37, 1, 23–32. Kennan, J. and C. Stevens (2005), ‘Opening the Package: The Asian Drivers and Poor-Country Trade’, mimeo, Institute for Development Studies, Sussex.

3 The Chinisation of Africa: The Case of Angola Renato Aguilar and Andrea Goldstein

1. INTRODUCTION

T

HE relationship between the Asian Drivers and Angola has attracted a level of attention only paralleled by the one surrounding interactions with Sudan. Three closely related perspectives are important. First, the rapid expansion of the Chinese and Indian economies has sustained world market prices for natural resources, including oil of which Angola is the second-largest producer in subSaharan Africa (SSA). In the process, China has also become Angola’s thirdlargest trading partner, with a sizeable trade surplus favouring Angola. Second, from an international financing perspective, a chronic balance of payments deficit has been a central problem in Angola’s post-independence history due to war and an unfavourable international environment, as well as deficient macroeconomic management. In this setting, China’s keen interest in diversifying the portfolio of assets in which to invest its huge international reserves is only matched by Angola’s need to find alternatives to normal and concessional sources of international financing, from which it is excluded due to the lack of progress in negotiating with the Bretton Woods institutions. Third, all these issues must be understood in the broader and possibly more complex scenario of the political economy of the relationship between Angola and the world. Because of the country’s size and control over huge oil resources, the growing presence of China in Angola has reverberations across the rest of Africa. Also Angola joined OPEC in December 2006. While China’s interest in Lusofone Africa is not new, bilateral relations with Angola are relatively recent. Mao long harboured a strong conviction that the rural We thank other participants in the OECD Development Centre’s project on the economic, political and social impacts of China’s and India’s economic growth on sub-Saharan Africa, and in particular Nicolas Pinaud and Helmut Reisen; we remain solely responsible for the content of this chapter, which does not necessarily reflect the position of the OECD.

45

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approach in the struggle for independence that had been successful during the Chinese revolution had universal value in developing countries (Jackson, 1995). At one time or another, China supported each of the three main organisations fighting against Portuguese colonialism. At least initially, Beijing provided part of the military training to UNITA, and to Jonas Savimbi himself. Still, Angola was firmly in the Soviet camp and it was only on 12 January 1983 (more than six years after independence) that diplomatic ties with China were established.1 In the case of India, despite a common adherence to the Non-Aligned Movement, diplomatic relations were not established until July 1985. Since the early part of the new century, a constant flow of diplomatic contacts and visits has taken place and there are already clear indications that Angola’s leadership considers the new relationships with China and India to be key anchors for its relationship with international financial institutions. The next section provides a short description of Angola’s economy; Section 3 discusses the oil market from the perspective of both the Asian Drivers and Angola, followed by a section on trade. Section 5 discusses Angola’s financing problems and the role played by the Asian Drivers. The final section analyses the political economy of the relationship between Angola and China and India.

2. ANGOLA TODAY: THE STYLISED FACTS

Angola’s economy has developed through a series of massive external shocks. Earlier contacts with Europe, mostly through Portugal, were strongly based on the slave trade, depriving the economy of the most productive part of its labour force and sparking domestic conflict. Still, during the first half of the 20th century, a relatively prosperous economy, including a large Portuguese immigrant minority, developed, and by 1970 Angola had a relatively large industrial sector by subSaharan African standards. Insofar as Angola was strongly integrated with the metropole, independence in 1975 was mainly a consequence of the Portuguese Revolution. A large share of the Portuguese settlers, together with many assimilated (assimilados) Angolans, emigrated, taking with them productive assets (such as lorries and machines) and leaving the economy in paralysis. Independence was immediately followed by civil war, including foreign military intervention from the then Zaire, South Africa and Cuba. This protracted war would last, with varying degrees of intensity, until 2002.2 1 China and Angola signed a trade agreement in 1984 and set up a Mixed Economic and Trade Commission in 1988. 2 In February government troops killed Jonas Savimbi, the leader of UNITA, the main rebel group fighting the government which subsequently turned into a formal political party.

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After Independence, Angola became a ‘People’s Republic’ and received technical support and advice from the Soviet Union, Eastern Europe and Cuba. Ownership of land and most productive units became public, prices were tightly controlled, and subsidies were introduced, together with an extensive rationing system. However, some private subsistence agriculture survived, as did traditional open markets. Moreover, the oil sector was developed and exploited by private Western firms, associated with SONANGOL, the state oil company.3 In fact, the management of the oil contracts was surprisingly effective and carefully isolated from the political situation. The government was never able to set up a proper central planning mechanism. The plans were vague documents, full of philosophical considerations, only weakly related to Angola’s real economic conditions. By the mid-1980s the country operated almost as a barter economy, with large shortages of food and other basic consumption goods met by the black market.4 A hidden but strong inflationary pressure emerged, the domestic currency (kwanza) became more and more overvalued, with an official exchange rate much below the black market rate. While fiscal revenues were mostly collected in US dollars, most spending occurred in increasingly overvalued kwanzas. Thus, fiscal revenues were continuously depreciated and fiscal expenditures were continuously overvalued. A burgeoning system of generalised subsidies created larger and larger deficits that the government mostly covered with Central Bank financing, generating even more inflation. The overvaluation of the kwanza aggravated the budget burden imposed by huge military expenditures and weakened Angola’s international financial position. In 1987, the MPLA resolved to abandon the socialist experiment and move towards a market-oriented economy. Angola became a member both of the International Monetary Fund (IMF) and the World Bank. Although some slow progress towards a market-oriented economy was made during the 1990s, deep contradictions plagued the effort. At the beginning of each year the government produced a policy programme, including some reforms and an anti-inflationary package, and started talks with the IMF in the hope of reaching an agreement. By mid-year the programme was abandoned and by the end of the year the economy was in crisis, the talks with the IMF abandoned, and the government reshuffled with a new economic team in charge. A couple of attempts to start a Staff Monitored Programme (SMP) failed. Thus, at the beginning of the 2000s, Angola’s economy suffered from enormous distortions – excessive reliance on the oil and diamond sectors, with few linkages to the domestic sector, a small services sector, a large army with non-transparent expenditures, and a large and overstaffed public sector. In the second half of the 1990s, the destruction of infrastructure, especially in the hinterland, was enor3 4

Sociedade Nacional de Combustiveis de Angola. Low and unstable oil prices were an additional contribution to this crisis.

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mous, as were the human costs – half a million dead and four million internally displaced people. The deterioration of the infrastructure and the presence of mines have had a particularly high cost on agriculture. Although the external debt was not very large in terms of GDP, its profile was exceedingly short.5 As most of the debt consisted of arrears, including to the Paris Club of official creditors, Angola could not access regular and concessional international credit markets and had to rely instead on much more onerous, but easily available, short-term loans secured by oil. That Angola could still grow during most of the 1990s and early 2000s, and in fact quite rapidly in the last few years, may come as a surprise. Most of this growth is explained by the oil and diamond sectors, while the non-oil economy was stagnating or even contracting, although in the last few years it has also shown a significant dynamism. However, it should be noted that GDP is much larger than gross national income (GNI), as there is a significant deficit in the payment of factors abroad. Thus, Angolans benefit only partially from this growth. Peace has consolidated rapidly since 2002, including the return of UNITA to pacific political struggle and a surprisingly rapid demobilisation of ex-combatants. Oil prices, production and exports have increased rapidly, both in volume and value. Macroeconomic management improved and a considerable degree of monetary stabilisation was reached. Although balance of payments data suffer from limited reliability, Angola has recorded an increasingly large trade surplus (that may reach about US$12 billion by 2006) which now exceeds heavy services and factor payments abroad. Still, many problems remain. While long-term financing is available for projects related to the oil sector, the development, maintenance and recovery of infrastructure, especially outside Luanda, demands additional concessional resources. However, the response of the Western creditors and the international donor community has been slow and limited. This response was determined partly due to their commitment to the Paris Club rules and to the IMF, and partly because previous experiences made them excessively cautious. The continuous discussion with the IMF became strongly focused on two remaining issues: good governance and corruption. While the IFI (international financial institutions) and the Paris Club countries argue that the lack of transparency is simply too large to have confidence in the ability of the authorities to make a good use of foreign assistance, the government contends that this is mostly a problem of inadequate accountancy and

5

This situation developed mainly because the government was unable to control both the expansion of the debt and its service. In fact, during a long period several state agencies, including SONANGOL, were able to take loans or service the debt without informing the Central Bank or the Ministry of Finance. Thus, statistics about the external debt are still not entirely reliable.

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training.6 A second argument is that agreements had been reached with countries with supposedly more serious problems of corruption and governance. Finally, the government also argues that advancing too fast in the struggle against corruption could put the government’s stability at risk. During the last few years, new actors have been offering Angola fresh financing without making linkages to the normalisation of relations with Paris Club creditors or the IMF, the usual framework for Western conditionality. They could offer large loans, often with concessional terms, aimed at financing a number of infrastructure projects. A US$2 billion loan from China in 2004 was the first of such operations to draw general attention from the international community.

3. OIL IN ANGOLA

Oil was discovered in the onshore Kwanza valley in 1955 and a refinery was later constructed in Luanda. In the late 1960s Cabinda Gulf discovered offshore oil in Cabinda and by 1973, on the eve of Independence, oil had become Angola’s main export. In the late 1970s, the government initiated a programme to attract foreign oil companies. The Angolan coast, excluding the Cabinda enclave, was divided into several exploration blocs, which were leased to foreign companies under production-sharing agreements. Foreign oil majors have invested more than US$10 billion in the upstream area. In addition, more than 30 other oil companies have partial interests in the various oil fields. Output is estimated at an average of 1.25 million barrels per day. In January 2006, known recoverable reserves were estimated at almost 5.4 billion barrels and the rate of new findings was keeping pace with the rate of old reserves’ depletion (EIA, 2006). Discoveries made in the past few years in the deep-water blocs have caused much excitement. Globally, companies hope to strike oil in four out of every ten exploration wells drilled. In Angola, that strike rate has been almost ten out of ten. The government is also studying ways to produce LNG, methanol or LPG using the 700,000 standard cubic feet of gas that is flared per day. The Petroleum Law (Law 13/78) made the Angolan state the sole owner of the country’s petroleum deposits. As the exclusive concessionaire for oil exploration and production, SONANGOL is authorised to acquire a 51 per cent share in all oil companies operating in Angola, although operational management may remain

6

In April 2006 the government began negotiations with the Paris Club to reschedule its estimated US$2.3 billion of debt. Although several members, in particular Spain and Germany, are in favour of a rapid settlement, Angola will probably need some form of IMF-approved programme to pave the way for a comprehensive Paris Club debt write-off.

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under foreign control.7 These associations may be joint ventures in which SONANGOL and its partners split investment costs and production according to their shareholding; or production-sharing agreements by which foreign companies serve as contractors to SONANGOL, bear the full cost of exploration and development but recoup their investment through ‘cost oil’ and ‘profit oil’. SONANGOL’s dominance over the industry, both upstream and downstream, at the same time as it acts as the industry regulator, has been criticised. At the same time, it is difficult to see how Angola could set up an independent regulating agency, and direct intervention seems to be a second-best solution. The 1979 Production Sharing Agreement model has provided the basis for all licences, except the Cabinda concession. Exploration permits are awarded for an initial three-year period with two optional one-year extension periods. Areas where commercially exploitable hydrocarbons are located may be retained for a maximum period of 20 years after the end of the exploration phase. Further extensions may be granted at the discretion of the government. The most significant variable terms in these contracts are the exploration work commitments, signature bonuses and the production-sharing proportions. Other terms include fixing maximum cost oil provisions at 50 per cent (although this can be increased under certain circumstances), making operating costs recoverable in the year in which they are incurred, applying a development capital uplift of 40–50 per cent and straight-line depreciation for 3–5 years, basing profit oil-sharing tranches on cumulative production (company shares generally vary from 60 per cent in the lowest tranche to 10 per cent in the top one), and levying a petroleum income tax of 50 per cent on the contractor ’s share of profit oil. A price cap fee of 100 per cent is paid to SONANGOL on all revenue generated by oil prices in excess of the price cap. Thus, an increasing share of higher oil prices accrues to Angola. Foreign oil companies working in Angola are subject to special foreign exchange terms that allow them to retain outside the country, and to dispose of, the proceeds derived from oil sales. However, all oil companies are required to transfer into Angola the foreign currency needed to satisfy local obligations, including taxes. Special legislation and regulatory measures have protected foreign companies from any negative impact of the local currency’s successive devaluations.

4. TRADE

Angola’s trade patterns are changing rapidly, but unfortunately trade statistics are one of the weakest spots in a rather weak statistical system. They are unreliable or simply non-existent. Thus, the analysis is mostly based on data collected by Angola’s trade partners. 7

SONANGOL also owns an airline company to support the petroleum operations.

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TABLE 1 Angola. Composition of Exports (in percentages)

Oil Diamonds Extractive Non-extractive Total Exports

2000

2001

2002

2003

2004

2005

2006 (est.)

90.6 9.4 99.2 0.8 100.0

89.4 10.6 99.3 0.7 100.0

92.3 7.7 99.5 0.5 100.0

91.7 8.3 99.6 0.4 100.0

94.1 5.9 99.5 0.5 100.0

95.9 4.1 98.7 1.3 100.0

95.4 4.7 98.9 1.1 100.0

Source: Own elaboration on IMF and World Bank data.

a. Exports Angola’s exports have increased rapidly during the last few years (Table 1). Oil exports have been rising rapidly, not only thanks to higher prices, but also because of increasing volumes – although Angola’s average price is still below international prices (Table 2). Table A1 in the Statistical Appendix shows the destinations of these exports. Table 3 shows the direction of Angola’s exports and its increasing diversification. The US is the main buyer of Angola’s oil, but with a decreasing share, while China has seen its share increase dramatically and in 2005 bought roughly a third of Angolan oil. Insofar as oil is traded on open markets, this development does not reflect any policy decision or strategic planning. On the contrary, these shifts away from traditional trading partners and towards China and other emerging economies reflect changes in global oil consumption and demand patterns. Likewise, for China, Angola has become a major supplier of oil, in fact overtaking Saudi Arabia sometimes in 2006 to become the firstlargest. The European Union has become a less important export partner for Angola, while South Africa has become a more significant one.8 The Herfindahl (H) and the Equivalent Number (EN) indices allow a more synthetic and systematic analysis of this diversification process.9 After experiencing a sharp increase between 1999 and 2001, the degree of geographical diversification has remained relatively stable during the last few years (Table 3, Figure 1 and Figure 2). 8

Angola was one of the founding members of the Southern African Development Coordination Conference (SADCC), which had the main aim of coordinating development projects in order to lessen economic dependence on the then-apartheid South Africa. 9 The Herfindahl index is equal to the sum of the squares of the share of each country in total exports. This is an inverse index, which decreases with a higher degree of diversification. It is equal to one when just one country takes all the exports. The Equivalent Number index is simply the reciprocal of the Herfindahl index. It represents the number of countries with equal shares in total exports that would be needed for obtaining a given value of the Herfindahl index. Thus the EN index equals one for total concentration and increases with increased diversification.

52

RENATO AGUILAR AND ANDREA GOLDSTEIN TABLE 2 Angola. Oil Exports, 2000–06

Crude Oil US$ million Million barrels Price (US$/barrel) Oil-derived Products US$ million Thousand metric tons Price (US$/metric ton) Gas US$ million Total Oil (US$ million)

2000

2001

2002

2003

2004

6,951.0 256.1 27.1

5,690.0 250.7 22.7

7,538.7 311.1 24.2

8,530.4 302.6 28.2

12,441.9 344.5 36.1

132.0 733.5 179.8

93.0 675.0 137.3

95.5 673.5 141.7

138.5 717.5 193.1

147.6 749.6 196.9

37.0 7,120.0

20.0 5,803.0

10.0 7,644.2

15.7 8,684.6

30.4 12,619.9

Source: Ministry of Finance (special annual study that was discontinued).

TABLE 3 Angola’s Exports by Destination, 1997–2006 (percentage) 1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

62.6 12.7 14.1 1.0

64.1 4.0 17.0 0.1

53.2 7.4 17.0 0.7

45.6 20.8 17.7 0.5

47.7 10.5 26.3 0.6

41.0 13.6 26.6 0.6

47.7 23.4 13.4 0.6

40.2 29.9 10.4 2.4

39.8 29.6 14.7 1.5

38.6 34.7 8.7 1.3

3.8

2.8

13.4

8.3

3.2

2.2

2.8

2.9

0

0

Herfindahl Index

0.43

0.45

0.34

0.29

0.32

0.27

0.31

0.30

0.27

0.28

Equivalent No.

2.32

2.22

2.95

3.43

3.17

3.70

3.23

3.36

3.73

3.61

Total World US China EU South Africa Korea

Source: Own elaboration on IMF data.

b. Imports Imports have also grown rapidly (Table 4). The most important source of imports is the European Union, with Portugal as the main commercial partner. While Europe’s relative importance has decreased,10 the share of Portugal has remained stable at about 18 per cent. This strong presence of Portugal is associated with the common language, close historical and commercial links, and the dominance of Portuguese banks for financial services related to international trade. The 10

In many European countries, exporters face financial restrictions related to the Paris Club rules.

THE CHINISATION OF ANGOLA

53

FIGURE 1 Angola’s Direction of Exports 100 90 80

Per cent

70 60 50 40 30 20 10 0 1997

1998 US

China

1999 India

2000

European Union

2001 Taiwan

2002 Korea

2003

South Africa

2004 Others

FIGURE 2 Exports, 1997–2006, Diversification Indices 4.00

0.50

3.50

0.45 0.40 0.35

2.50

0.30

2.00

0.25

1.50

0.20 0.15

1.00 0.50 0.00

Herfindahl

EN

3.00

EN

Herfindahl

0.10 0.05

1997 1998 1999 2000 2001 2002 2003 2004 2005

0.00

US accounts for about 12 per cent of imports, while South Africa has been losing ground – not only in terms of market shares, but also in absolute terms. On the other hand, Brazil, China and India (to a lesser extent) have increased their market shares.11 Table A2 in the Statistical Appendix shows the detail of these import flows.

11

The main items of exports from India to Angola are meat and preparations, drugs and pharmaceuticals, dairy products, machinery and instruments, cotton yarn, fabrics and made-ups.

54

RENATO AGUILAR AND ANDREA GOLDSTEIN TABLE 4 Angola’s Imports by Destination, 1997–2006 (percentage) 1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

World 100.0 Total China 2.6 India 0.4 US 12.2 EU 52.2 – Portugal 20.1 South 8.3 Africa Brazil 3.6

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

3.1 0.5 17.5 51.7 20.2 9.6

1.4 0.3 12.4 44.1 14.4 9.4

2.7 0.6 11.0 46.5 17.1 15.6

1.9 0.4 8.6 38.0 14.0 11.8

2.8 0.5 13.0 46.2 18.9 14.5

4.2 0.5 12.2 52.9 18.2 12.4

5.1 1.7 12.8 43.8 13.1 10.3

5.0 1.8 12.5 33.8 13.4 7.4

8.3 1.5 14.3 35.2 14.1 6.3

5.9

3.1

5.3

4.7

7.3

6.1

6.6

7.0

5.9

Herfindahl Index

0.12

0.14

0.14

0.14

0.13

0.14

0.12

0.14

0.16

0.18

Equivalent No.

8.00

6.99

7.35

7.12

7.53

7.12

8.03

7.00

6.21

5.59

Source: Own elaboration on IMF data.

FIGURE 3 Imports by Origin 100 90 80 70 Per cent

60 50 40 30 20 10 0 1997

1998 Portugal

1999 South Africa

2000 US

France

2001 Brazil

2002 China

2003 Korea

2004

Others

The emergence of China and Brazil as commercial partners has contributed to an increased diversification of Angola’s imports (Figures 3 and 4). This diversification is positive for Angola and, by putting different countries in some form of competition, may have contributed to the country’s welfare. As few consumption

THE CHINISATION OF ANGOLA

55

9.00 8.00 7.00

EN

6.00 5.00 4.00 3.00

EN

Herfindahl Index

2.00 1.00 0.00

0.20 0.18 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00

Herfindahl Index

FIGURE 4 Imports, 1997–2006, Diversification Indices

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

goods are produced in Angola, there are strong complementarities with countries such as China and (to a lesser extent) India which have a strong competitive edge in manufacturing. Moreover, China and India do not threaten the interests of Angolan entrepreneurs and workers, as very few jobs are at risk. However, this process is characterised by high instability, with wide year-on-year variations which are at least partly explained by imports from Korea. This instability may derive from various reasons – the data are not very reliable, some imports are related to large one-off investment projects,12 mostly in the oil sector, and others to occasional financing opportunities.

5. CHINA, INDIA AND THE ANGOLAN ECONOMY

Which features of Angola’s economy are relevant for the new relationship with China and India? These can be grouped under three headings – oil, finance and migration. First, an unstable economy strongly oriented towards producing and exporting oil is a clear target for Chinese and Indian planners and policymakers. The Asian Drivers are also emerging as marginal actors in the exploitation business. In 2005, Shell came close to completing a deal with Indian oil companies to sell its 50 per cent equity-stake in deep-water Bloc 18, operated by BP.13 SONANGOL exercised its right of first refusal and gave the stake to China’s Sinopec. That same year,

12 13

South Korea’s Samsung signed an agreement in August 2000 to construct the Sonaref refinery. See Financial Express, 8 March 2005.

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RENATO AGUILAR AND ANDREA GOLDSTEIN

with Angolan–French relations clouded by the so-called ‘Angolagate’ affair,14 SONANGOL refused to extend Total’s concession over one part of offshore oil Bloc 3. Again, Sinopec was the end beneficiary of the new arrangement. In the most recent round of bidding in 2006, the SONANGOL–Sinopec consortium (SSI) made record-breaking bids amounting to US$2.2 billion in signature bonuses to obtain rights in relinquished areas of deep-water Blocs 17 and 18.15 SSI has also formed a consortium to build a major new refinery in Lobito. SONANGOL and the Ministry of Petroleum had previously attempted to attract the oil majors to invest in the project but were unsuccessful because of concerns about the project’s financial viability. China has also shown interest in copper and is expected to be given preferential access to Angola’s unexploited uranium deposits, the largest of which is located in Paconda, in the enclave of Cabinda, in exchange for technical assistance in developing one or two nuclear power plants.16 Chinese companies have also made other deals in Angola. Haier, a producer of household appliances, has invested some US$11 million since 2000 to establish a factory which employs 700 people. Hong Kong’s China International Fund has funded the construction of a car assembly plant in Luanda, which aims to produce 5,000 vehicles per year using Japanese technology. In 2006, 26 Chinese companies established a Chamber of Commerce in Luanda. Second, in a post-conflict country like Angola, taking decisions is riskier than usual. As the reasonably expected rate of return required to commit to an investment is very large, investment is scarce.17 Even if the consolidation of peace makes new non-oil projects feasible, the level of risk remains higher than in most countries in the world. Thus, Angola today is an attractive market for those investors that are ready to assume large risks. China has an enormous global trade surplus, which exceeded US$177 billion in 2006, and a large trade deficit against Angola. The main pillar in the financial relationship between China and Angola is a US$2 billion credit from China Eximbank, agreed in March 2004.18 The conditions include repayment over 17 years, a period of grace of up to five years, and a 1.5 per cent interest rate per annum. The deal seems to mark a change in the relation-

14

French prosecutors say East European arms worth nearly US$800 million were supplied to the Angolan forces illegally during the civil war. The weapons included tanks, helicopters, ammunition and six warships. Legal proceedings went to trial in October 2008 and the judgment was announced in October 2009. 15 In an earlier round, ENI, the Italian oil company, bid over US$900 million to win operating rights for the relinquished areas of Bloc 15. SSI received a 20 per cent share in that bloc. 16 A new law on atomic energy was passed in June 2007, just two weeks after a four-day visit by the Angolan defence minister to North Korea, during which he praised the excellent bilateral cooperation between the two countries. 17 See Addison (2003). 18 China also wrote off all Angolan expired debt which should have been repaid by the end of 1999.

THE CHINISATION OF ANGOLA

57

ship between the country and the international community – a communiqué by the Angolan embassy in London presented the deal as an example of South–South cooperation. In March 2006 the local press reported that China had agreed to extend the credit line by a further US$1 billion, putting its share of foreign loans and credit lines at 58 per cent in the four years since the civil war ended (EIU, 2006b, p. 31). The credit has both advantages and disadvantages for Angola. Although the conditions seem quite advantageous, it is important to bear in mind that this is an Eximbank credit, not a cash loan, and as such it must be applied to imports of goods and services from China. So, the real cost is higher than that implied by the published rates, since non-Chinese suppliers are excluded, negatively affecting the prices of imports of goods and services. Despite their labour-intensive nature, construction projects are also unlikely to generate employment and reduce poverty, as 70 per cent of the work is reserved for self-contained Chinese construction firms that have imported all of their workforce and the rest has been allocated to a few large, well-connected companies.19 Still, Angola has urgent and large need of financing to support a rapid programme of investments for the recovery of its infrastructure, and Chinese financial support most probably came at the right time and in the right orientation. In fact, most contracts covered by the trade credit are for road building and the reconstruction of Luanda railroads. Under the ambit of the US$2 billion loan, Chinese companies are engaged in a host of projects throughout Angola, constructing schools, clinics, hospitals and low-cost housing and building basic infrastructure, such as roads and bridges. The most ambitious undertaking is the rehabilitation of the Benguela railroad, linking the port of Lobito on the Atlantic with the Democratic Republic of Congo and Zambia. Other major projects include a new airport and a railroad linking Luanda with Malange, a major town in the interior of the country. In June 2006, four goods and service contracts totalling US$273 million between Angola Telecom and three Chinese companies, CMEC, Alcatel Shanghai Bell and Huawei, were signed. In addition, ZTE supplies communication services for the electoral process, investing in military communications and establishing a telecommunications training facility. Another Chinese company is working on the production centre for Angola’s television station. A Chinese company, Jiangsu Construction Group, was awarded the US$28 million contract to construct a marketplace on a 25 ha site at Panguila, 18 km north of Luanda, to replace the sprawling Roque Santeiro Market above Luanda port.20

19

In addition, the Angolan government had intended that equipment for the Chinese projects would be imported by a locally-based transport company, Sécil Marítima. 20 Roque Santeiro is one of the largest markets in Africa, but the government views it as dirty, overcrowded and unregulated. Its closure and the displacement of more than 5,000 traders who sell their goods there is a highly unpopular policy.

58

RENATO AGUILAR AND ANDREA GOLDSTEIN

In November 2006, the Energy and Water Minister revealed details of eight Chinese projects, worth a total of US$154 million, to improve energy supplies.21 In April 2006, US$1.8 billion of the original US$2 billion Chinese credit line had already been spent, although the government has not yet published a breakdown of expenditure. In the case of India, a US$40 million line of credit for the Angola Railway Rehabilitation Project (including the recovery of the Benguela Railroad) was extended in 2004 and RITES Limited has started the implementation. This is the first government-to-government cooperation project between the two countries. India has been especially active, providing agricultural equipment and inputs. This is also a critical sector, where a rapid recovery is likely to have a strong effect on poverty reduction. India’s Eximbank has also extended a US$5 million credit line for the supply of agriculture equipment. In the field of telecommunications, Telecommunication Consultants India Limited (TCIL) has signed a Memorandum of Understanding with the Ministry of Telecommunications. Few concrete examples of Indian investments could be found, although Indian investors and technology seemed to have been important in the recent establishment of a diamond-cutting plant in Luanda. Third, the mutual reinforcement of migration, trade and investment flows has been observed in other African countries (e.g. Brautigam, 2003). In the long term, increasing trade flows will depend on the development of an adequate network of commercial contacts and financial channels. Today, both the Indian and Chinese communities in Angola are quite small and easily outnumbered by the Portuguese traders. According to sketchy border control data, Indian citizens have been visiting Angola for longer than Chinese citizens. For both nationalities, inflows increased strongly after 1998–99. However, a few Indian traders may have been present in the country for a long time, possibly in connection with the Portuguese enclave of Goa in India. The domestic business community assimilates them to a group loosely known as ‘the Lebanese’, mostly people from the Middle East with tight commercial ties among them. The Indian community in Angola is very small, comprising 250 individuals according to the embassy. There is also a rather active community of Chinese traders on the Namibian–Angolan border.22 The number of visiting Chinese has been rising fast in recent years and it is rumoured that an

21

These include the Capanda–N’Dalatando electricity line, which is due for completion during the first quarter of 2007; a new electricity line from the Cambambe dam to Luanda, to be completed by June 2007; a series of electricity distribution and transformation centres around Angola, to be finished by the end of 2006; and a power line from Quifangondo to Caxito, which is due for completion by February 2007. China is also financing a US$70 million project to electrify Luanda’s suburban areas. 22 See Dobler (2005).

THE CHINISATION OF ANGOLA

59

estimated 50,000 Chinese workers are currently reconstructing Angola’s infrastructure (Economist Intelligence Unit, 2006b, p. 10). To give a sense of proportion to these figures, currently at least 6,000 US citizens operate and work in Angola (Mozena, 2006).

6. A POLITICAL ECONOMY INTERPRETATION

The size and speed of the emergence of the Asian Drivers into Angola’s economic scenario has given a special political relevance to this process. In fact, most discussion in Europe and the United States seems to focus on the risk that China (and India, to a lesser extent) may weaken the bargaining power and influence of the West – meaning Western oil companies and governments, as well as the Bretton Woods institutions. Chinese oil companies’ progressive engagement in Angola can be explained on three grounds. First, China (and India, for that matter) have become important overseas investors and investing in Angola’s oil sector is simply good business. Second, as Chinese oil firms are either state-owned or under strong influence of the state, there is some kind of long-term strategic purpose behind their behaviour – i.e. to ensure a more stable supply of oil and access to technology. Third, Chinese refineries are configured for domestic crudes, which tend to be low in sulphur, making Angolan crude more attractive than the more sour Middle Eastern crudes. Still, this does not mean that Chinese companies are in any way likely to dominate the Angolan oil business. First, Angola has consistently and successfully kept the oil business insulated from domestic politics and international relations. In fact, in spite of its close and intimate relationship with the Soviet Union, the government developed the oil sector exclusively with Western companies. In this context, close political relationships give no advantages to Chinese and Indian oil companies. Second, SONANGOL already has a well-developed network of business contacts with a broad range of international oil companies and faces no difficulties in raising capital or accessing technology, especially in view of the fact that Angolan oil contracts are not riskier than elsewhere. Third, most of the new oil in Angola is in deep or ultra-deep water and requires very sophisticated technology, which Chinese and Indian companies lack. Although SSI has the major equity stake in the relinquished areas of Bloc 18 (40 per cent), Petrobras will be the operator because the Chinese lack the capability to develop deep-water areas. Similarly, it is difficult to evaluate the consequences of the new financial situation from a political point of view. Consistent with Beijing policy of nointerference with other countries’ domestic affairs, aid and financial support from China, and to a lesser extent India and Brazil, lack the conditionality elements

60

RENATO AGUILAR AND ANDREA GOLDSTEIN

required by the Western partners and the IFIs.23 This new financial relationship, together with higher oil prices, provides breathing space for the government, which seems to have less and less interest in opening its books and policies to the IMF as a pre-condition for a Paris Club debt rescheduling. The risk is that decreasing international pressure on the government may slow advancements towards good governance, transparency, and in the struggle against corruption. At any rate, Western conditionality was never especially effective in Angola, not least because financial flows were always small in size and because these flows originate from many different sources, often with divergent approaches to conditionality. However, it is important not to confuse absence of conditionality with lack of controls. This is reflected in frequent evaluation by Chinese officials, including visits by Yang Zilin, president of China’s Eximbank, and Vice Premier Zeng Peiyag in 2005. Also, Angolan officials visit China frequently in order to inform the creditors about the development of their loans. According to several Angolan public servants, Chinese officials are very rigorous and demanding when it comes to the use of the credit line and the meeting of its conditions. That Angolan–Indian relationships suffered a serious setback in early 2005, when the Chinese obtained the 50 per cent stake in Bloc 18 which Shell had already agreed to sell to ONGC, may be seen as evidence in this sense. On the other hand, ONGC had negotiated directly with Shell without previously consulting with SONANGOL. The Angolan oil company stressed then its role as the umpire in Angola’s oil market. Another indication of the complexity of Sino-Angolan relations is provided by the emergence of the first signs of dissatisfaction in Luanda. Several of Angola’s leaders are reportedly ‘disgusted’ that Chinese companies are excluding Angolan companies, including those owned by Angola’s elite, and building ‘cardboard structures’ (Economist Intelligence Unit, 2006b). Chinese companies have also failed to submit to independent audits, as required by their contracts, and have failed to use Sécil Marítima, a local transport company, for importing equipment. The cost of projects is also generally higher than expected. The third important issue concerns the future direction of economic policies. Little systematic discussion about long-term economic policy and development problems takes place in Angola.24 In fact, high oil prices and the availability of new sources of financing are relieving financial pressures, making the negotiation with the IFIs and, eventually, the Paris Club less and less of a priority for the government. Nonetheless, at the informal level and in an unstructured way, policymakers often refer to the appeal for Angola of the Chinese model (whatever this consists of). 23

Angola signed a three-year, US$580 million oil-backed credit line with Brazil, to be spent on Brazilian goods and services, in May 2005, which was increased to over US$700 million in late 2006. 24 The possible and partial exception is the Ministry of Planning, where some serious efforts have been made for a systemic discussion of priorities under different scenarios.

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61

There are some prima facie similarities between the two countries, such as the close interconnection between business and politics and the increasing role played by market forces and private initiative.25 However, there are also clear differences. While in China sub-national governments enjoy considerable decision-making autonomy, in Angola regional and local governments are small, weak or simply non-existent. Also, while politicians in both countries share a certain distrust regarding the ability of ‘chaotic’ market forces to coordinate the real economy, China has been very pragmatic in allowing foreign investment and engaging with the international financial institutions. In Angola, politicians routinely argue that the IMF and the World Bank have a bad record in Africa and that giving them a voice in economic policymaking could result in social and political instability. 7. CONCLUSIONS

The rapid growth of oil exports to China (and India) has clearly contributed to an enhanced geographical, when not sectoral, diversification of Angola’s trade. On the import side, on the other hand, both China and India are still minor partners compared to OECD countries and Brazil. Angola hence runs a large surplus with China and a small deficit with India. China and India are now making efforts to expand their market shares, through different trade agreements and an active support from the Chinese and Indian export– import banks. China and India are also taking leading positions in the financing and execution of projects related to the recovery of infrastructure. The Asian Drivers’ expansion in Angola is possibly happening faster than elsewhere as it is taking place after traditional partners have disengaged from the country during the civil war and during a period of rapid growth and structural change. Although Sudan has received more attention, Angola is possibly the clearest example of increasing Chinese involvement in African economic and political affairs. Angola is a post-conflict country, with many formidable obstacles to clear if it is to reach a path of sustainable and inclusive growth, but it is also a country with a few well-functioning (albeit not necessarily transparent) institutions. Moreover, other countries, including France, Portugal, Russia and the United States, have built their own powerful networks of influence in Angola over the past few decades. In this sense, it would be naïve to expect Chinese interests to simply dominate over those of competitors. If anything, the government is keen to avoid dependence on Chinese credit, and so the development of economic ties with Brazil, India and Russia will also be important.26 25

See Taube (2005). In October 2006, just before the FOCAC summit, President dos Santos made a three-day visit to Russia, signing economic, trade and political accords. In fact, the Angolan delegation in Beijing was headed by Prime Minister da Piedade Dias dos Santos. 26

62

RENATO AGUILAR AND ANDREA GOLDSTEIN

Will benefits eventually outweigh risks? There are three main elements to the answer. First, very little is known about the distributional dimension of this relationship as the necessary data is simply not there. Nonetheless, it is clear that Chinese and Indian financial and technical support has allowed the government to go ahead with the recovery of the infrastructure and of the agricultural sector at a much faster rate than otherwise. Moreover, finding new suppliers of cheap consumer goods and agricultural inputs and equipment can make a positive contribution to poverty reduction. Second, what does this relationship imply for Angola’s possible and feasible development strategies? The difficulty in this case is to disentangle the many things that have changed dramatically during the last few years: the end of the war, rapidly expanding oil reserves, much higher oil prices, the new relationship with China and India. At a minimum, however, the Asian Drivers are contributing significant amounts of concessional financing that are cheaper than alternative sources of financing, especially as long as no agreement is reached with the IMF. Finally, what margins do Angolans have to steer this relationship in a way that is beneficial not only to those in power but also to the impoverished masses? The main downside risk of this relationship is in the political field. Chinese and Indian aid and financing have no policy or value-based conditionality. Thus, there is less pressure on the government for designing and implementing better policy, improving governance and transparency, reducing poverty and fighting corruption. Still, it is unclear whether in the past Western conditionality contributed decisively to improving the general situation in Angola.

STATISTICAL APPENDIX TABLE A1 Exports by Destinations (US$ million)

Total DOT China India Taiwan US South Africa Korea European Union Others

2000

2001

2002

2003

2004

7,210.0 1,497.3 0.0 273.0 3,285.1 36.7 594.9 1,276.3 246.7

6,248.8 656.5 0.0 405.5 2,979.4 40.5 199.7 1,642.3 324.9

7,265.3 988.4 0.0 544.1 2,977.6 43.9 161.6 1,929.0 620.8

8,582.6 2,005.9 0.0 686.2 4,096.6 55.6 243.3 1,151.9 343.1

11,579.3 4,121.2 0.5 0.0 4,360.8 260.7 124.9 1,106.2 1,605.0

Source: IMF, ‘Directions of Trade’.

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63

TABLE A2 Imports by Origin (US$ million)

Total DOT China India US Portugal South Africa Singapore Brazil European Union Korea Japan Asia France United Kingdom Netherlands

2000

2001

2002

2003

2004

2,185.2 58.5 14.1 240.9 372.7 340.2 28.7 116.9 1,016.8 18.3 28.0 182.5 130.9 125.2 79.8

3,531.1 68.6 15.5 303.7 493.0 418.2 40.9 167.6 1,340.9 765.1 33.7 963.2 162.9 146.5 120.9

3,140.1 88.5 16.8 409.8 595.0 453.9 38.5 229.1 1,449.2 20.4 38.5 236.6 197.8 110.2 117.2

4,444.4 184.5 20.3 541.1 810.0 550.3 55.7 269.2 2,349.6 27.2 58.1 395.9 290.8 185.5 517.5

7,047.4 214.6 74.8 653.7 921.6 524.9 62.5 392.3 2,217.9 1,995.5 341.5 2,529.9 307.2 239.4 179.8

Source: IMF, ‘Directions of Trade’.

REFERENCES Addison, T. (2003), From Conflict to Recovery in Africa (Oxford: Oxford University Press). Aguilar, R. (2005), ‘Angola 2004: Getting Off the Hook’, Macroeconomic Reports Sida. Brautigam, D. (2003), ‘Close Encounters: Chinese Business Networks as Industrial Catalysts in Sub-Saharan Africa’, African Affairs, 102, 408, 447–68. Crompton, P. and Y. Wu (2005), ‘Energy Consumption in China: Past Trends and Future Directions’, Energy Economics, 27, 195–208. Dobler, G. (2005), ‘South–South Business Relations in Practice: Chinese Merchants in Oshikango, Namibia’, mimeo, Institute for Social Anthropology, Universität Basel. Economist Intelligence Unit (2006a), Angola Country Report, June (London: The Economist). Economist Intelligence Unit (2006b), Angola Country Report, September (London: The Economist). Energy Information Administration (Department of Energy, US Government), http://www.eia.doe. gov. Energy Information Administration of the USA. Jackson, S. F. (1995), ‘China’s Third World Policy: The Case of Angola and Mozambique, 1961– 1993’, The China Quarterly, 142, 388–422. Mozena, D. (2006), ‘Angola’s Long Delayed Elections’, Statement before the House International Relations Committee, Subcommittee on Africa, Global Human Rights & International Operations, 20 July. Taube, M. (2005), ‘The Chinese Economy: How Much Market – How Much State?’, CESifo Forum, 3, 3–7.

4 The Developmental Impact of the Asian Drivers on Senegal Eric Hazard, Lotje De Vries, Mamadou Alimou Barry and Alexis Aka Anouan, with Nicolas Pinaud

1. INTRODUCTION

C

HINA and India’s integration into the world economy has translated into the deeper commercial and diplomatic relationships that they have built with the African continent. It can also be seen in the presence of a larger number of economic actors from China and India in Africa, and by the creation of a Chinese diaspora, whilst there have been Indian communities in Africa for a long time. Senegal does not seem to be an exception. Senegal has enjoyed a long-lasting and stable diplomatic relationship with India, its principal commercial partner. Even though the trade relationship between the two countries has begun to diversify, as seen in the transport sector, it is still dominated by the exportation of Senegalese phosphates and phosphoric acid to India. Relations with China, on the other hand, have been erratic, to say the least. After an eight-year break (from 1996 to 2003), much to the advantage of Chinese Taipei, Senegal officially renewed its diplomatic links with the People’s Republic of China in October 2006. The Chinese economic actors in Senegal are principally interested in retailing. Taking into account the imbalance of available resources between Senegal and the two Asian Drivers, India and China,1 the question of whether Senegal can form a reciprocally advantageous alliance with these two superpowers is crucial. China and India’s investment in African territory appears to be motivated by the hope of guaranteeing themselves access to Africa’s natural resources, of conquering new markets and of forming political partnerships. In this context, it is reasonable to

1

Throughout the rest of this study ‘Asian Drivers’ means the People’s Republic of China and India.

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wonder what interest these two countries would have in forming a relationship with Senegal who, unlike other African countries, does not possess large quantities of natural resources. Nor does it have a large consumer market, as is the case in Nigeria for example. We therefore have to look at the political benefits the two Asian superpowers could stand to gain from maintaining a good relationship with a country like Senegal, whose political influence tends to be stronger than its economic power. After giving an overview of the main trends in trade and foreign direct investment (FDI) between Senegal and the Asian Drivers, this study will explore the geopolitical and diplomatic questions that have linked Senegal with the Asian Drivers over the past 15 years, including from the perspective of development cooperation. The final section will evaluate the different political and economic opportunities and challenges posed by a strengthened relationship between Senegal and the Asian economic giants. 2. TRADE AND INVESTMENT: THE DIFFERENT SITUATIONS OF THE ASIAN DRIVERS

The economic relations between India and Senegal are little publicised although they have existed for a long time through the Industries Chimiques du Senegal (ICS). On the other hand, numerous threats have been made concerning the People’s Republic of China, or more specifically concerning the size of its diaspora in Dakar. Although the activities of the Chinese community in Dakar are more visible when compared to those of India, they account for only a negligible part of Senegalese trade. Taking this into consideration, if the question of China’s contribution to economic growth in Senegal is important in the long term, for the time being it seems just as important to understand the economic dynamics between New Delhi and Dakar, especially since this relatively enduring partnership is facing a difficult period due to problems in the Senegalese phosphate industry. Senegal certainly shows willingness to take advantage of the opportunities presented by China and India to develop its economy, and of opportunities to develop more diverse relationships, especially vis-à-vis its traditional partners (such as France). Correspondingly, the Senegalese market could appear limited, and the country’s production capacity restricted in regard to the needs of the two Asian Drivers. Senegal therefore appears to be a rather limited source of export opportunities for India and China. a. Trade: India as an Outlet, China as a Supplier India has overtaken France as the primary destination for Senegalese products. It absorbs on average 15 per cent of the total of Senegal’s exportations.

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At the same time India’s part in Senegal’s global imports has fallen from 7 per cent to 3 per cent between 1996 and 2005. China, on the other hand, while becoming an increasingly active contributor to Senegalese trade, continues to play a smaller role. Over the past decade, China was accountable for less than 0.5 per cent of total Senegalese exportations on average, but its contribution to the total importation value continued to grow, passing from 2 per cent to 4 per cent in the period 1996–2005, showing a significant increase after 2000. Senegal thus appears to be a peripheral commercial partner for the two countries. In 2005, India’s imports from Senegal totalled US$190 million, while its global imports came to US$149.7 billion.2 Exports of Senegalese products to China are almost non-existent (totalling US$7.8 million from a total of US$660 billion in 2005).3 (i) Senegalese imports from Asia: India losing ground, China gaining market shares Diversification and growth of Senegalese imports from China. Until 2003, tea was the main Senegalese import from China, representing 17 per cent of total imports. But in 2004 imports of tea were overtaken by textiles, then by construction materials in 2005. Tea is now the third largest import from China. The net growth in Senegalese imports from the People’s Republic of China, and their diversification (construction materials, textile, tomato concentrate etc.) can be attributed to the dynamic Chinese business community in Senegal, as well as the desire of Senegalese wholesale dealers to diversify their supplies. Interestingly, this growth and diversification continued despite the disruption in diplomatic relations between the People’s Republic of China and Senegal in January 1996, and despite the increasingly obvious discontent of Senegalese companies faced with growing competition from Chinese commerce (cf. infra). Reduction in imports from India. Rice has always been the main Senegalese import from India. These imports, however, are beginning to decrease,4 whilst imports of other products remain relatively marginal. Senegal also imports agricultural equipment (such as tractors, combine harvesters and cotton gins). But this equipment arrives in the context of certain bilateral cooperation mechanisms in place between the two countries. Other products, such as transport vehicles, have seen a rapid increase in trade. In 2005 they made up almost 20 per cent of Senegalese imports from India. However, they were purchased with a loan of

2

Figures from UN Comtrade. Figures from UN Comtrade. 4 This situation is due to competition from Thai and Vietnamese rice which are enjoyed and sought after by Senegalese consumers. But they also get attention from Senegalese importers who are trying to diversify their supply sources to increase their profit margin or guarantee their supply. 3

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US$18 million given in the context of cooperation with India. In other words, these importations could be considered to be tied aid. To be properly considered as commercial imports, these products would have to fully enter the Senegalese competitive markets and sub-regional markets, which is not yet the case. Since 1996, imports from India have been unstable and, apart from a few products (vehicles, agricultural machinery, pharmaceuticals), other Indian goods (such as rice and textiles in particular), are facing competition from other suppliers, notably from China. (ii) Senegalese non-diversified exports to the Asian Drivers India: a key partner in Senegalese phosphate exports. India is the main destination for Senegal’s exports, and accounts for 15 per cent of their total exports over the past five years. In addition, the trade balance between these two countries is tipped in Senegal’s favour. However, this situation should not mask the concentration of exports in two major products: phosphoric acid and phosphates. In 2005, other products such as cashew nuts, animal skins and leather, and gum arabic contributed less than 1 per cent to the total global exports to India. Phosphoric acid and phosphates, however, accounted for over 90 per cent of all Senegalese exports to India. As shown in Figure 1, during recent years these figures have grown, due to the growth in exports of phosphates and phosphoric acid.

FIGURE 1 Senegal’s Exports of Phosphoric Acid and Phosphates/Total Exports to India, 1996–2005 (CFA francs, billion) 160.00 140.00

CFA francs, billion

120.00 100.00 80.00 60.00 40.00 20.00 0.00 1996

1997

1998

1999

2000

2001

2002

2003

Exports of phosphoric acid and phosphates to India Senegal’s total exports to India Source: Direction de la prévision et des études économiques (DPEE), Senegal.

2004

2005

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ERIC HAZARD ET AL. TABLE 1 Growing Diversification in Exports to India (Senegalese exports to India in CFA francs)

Product

Cashews Cotton Scrap Metal

Year 2001

2002

2003

2004

2005

3,537,367,195 911,235,888 0

2,344,300,130 2,184,678,187 25,659,381

73,019,279 0 392,624,743

213,445,917 796,124,279 804,285,822

604,560,825 0 463,021,376

Source: Direction de la prévision et des études économiques (DPEE), Senegal.

India’s economic growth is in fact still largely based on services and agriculture. Due to the importance of its agricultural sector, India consumes large amounts of fertiliser.5 The chemical industries associated with agriculture need large amounts of phosphoric acid and phosphates, two essential elements in the manufacture of chemical agricultural fertilisers. India has imported two million tonnes of phosphoric acid per year on average over the past 10 years. The Industries Chimique du Sénégal (Senegalese Chemistry Industry, ICS), the only exporters of phosphates and phosphoric acid in Senegal, have an estimated production rate of 650 tonnes per year and supply 30 per cent of the demand of India’s chemical industry. Due to the intervention of the Indian agricultural cooperative IFFCO, who hold 26 per cent of the shares in ICS, it was decided in 2001 to extend their mining field. The main objective of this move was to double their production capacity so as to respond to the heavy Indian demand for their products. This allowed ICS to increase exports of phosphoric acid and phosphates, and by doing this cover 58 per cent of the demand of the agricultural cooperative IFFCO. The doubling of production capacity from 320,000 to 650,000 tonnes per year explains the record exports in 2002 (totalling 132 billion CFA francs). In this context, despite unfavourable circumstances internationally since 1998, and the rise in prices of certain primary resources necessary to the manufacture of phosphoric acid, as well as the appreciation of the euro against the dollar, ICS’s exports of phosphoric acids have continued to grow to guarantee permanent and continuous supply to their Indian partner IFFCO. Equally interestingly ICS’s case is an example of commercial flows (exports of phosphates to India) and foreign direct investments in Senegal (IFFCO’s investment in ICS) working together to cement enduring partnerships. Exports to China: small in number and dominated by fish products. The Chinese market offers a new source of outlets for Senegalese exports, which 5

Fertilisers were key ingredients in the ‘green’ and ‘white’ revolutions. Less well known than the ‘green revolution,’ the ‘white revolution’ used agricultural resources to develop cattle breeding and a strong dairy product industry in India.

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tripled to China between 2000 and 2005. However, these exports still only account for 0.5 per cent of the value of Senegal’s global exports. Over the past decade, sea products have been the main export to China, accounting for up to 99 per cent of all Senegal’s exports to China in 2000 (63 per cent in 2005). Despite the breakdown in diplomatic relations between the People’s Republic of China and Senegal, their commercial links have continued through two important commercial enterprises, Senegal Pêche (fisheries) and Sénégal Armement (ship-owners), subsidiaries of the state-run China National Fisheries Association (CNFC) who specialise respectively in the processing and exporting of sea products, and in ship management. Sénégal Armement has a fleet of around a dozen boats at its disposal, which makes it the largest of Senegal’s ship-owners. Because of its geographical positioning, the port of Dakar has become a hub for processing, packaging and re-exportation of the sea products caught by the 200 boats owned by the CNFC in the region. (iii) A cautious move to diversify exports to the two Asian Drivers While commercial exchange between Senegal and India is dominated by two products, a small but real attempt was begun in 2000 to diversify exports, thanks to exports of cashews, animal skins and leather, gum arabic and scrap iron. Even if these products are not in great demand on the Indian market, quantities of their exports are growing, showing a diversification of Senegalese exports to India. If there is a progressive change in commercial exchanges between Senegal and China, while India remains a key partner for exports, the Asian Drivers’ contribution to foreign direct investment (FDI) in Senegal is still not really making itself felt. Any significant investments from India or China so far have tended to highlight the difficulties Senegal has in attracting FDI, at least in attracting ‘greenfield’ FDI investment.

b. The as yet Modest Quantities of Chinese and Indian Investment Since 2003, Senegal has been the third biggest destination for FDI in its region (behind Côte d’Ivoire and Mali). According to the United Nations Conference on Trade and Development (UNCTAD), US$70 million of FDI went to Senegal in 2004, which translates to around 35 billion CFA francs. Yet these flows appear modest in comparison with other countries of similar levels of development (outside the African continent). The size of these figures is indicative of the country’s difficulties in attracting ‘greenfield’ investments. Senegal also benefits from its links with its old colonial power: the Senegalese economy is still very much affected by the presence of French business. France accounted for 80 per cent of FDI received in 2003. FDI from China and India is still rare, with the notable exception of investments in ICS. We can also see

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transactions taking place with the Indian groups Thappar and Tata, as well as the Chinese group Sénégal Pêche et Armement. Indian operators are keen to point out that their investment, while modest, also involves a transfer of technology and skill. It is true that in certain cases these investments have resulted in a real transfer of technological skill. But it is often given in the context of tied aid, given to Senegal to purchase Indian materials and technologies, without leaving the Senegalese authorities the opportunity to explore possibilities presented by similar products proposed by other countries. In the following section we will explore the logic behind these Chinese and Indian investments. (i) ICS: a symbol of the economic relationship between India and Senegal As we have already mentioned, Indian economic actors invest principally in the mining sector and ICS, as dictate their interests. A shareholder of the company since its origin, ICS’s main partner IFFCO has substantially increased its participation in the company’s capital and has helped the latter extend its production capacity through sizeable investments. From 9 per cent at the beginning, IFFCO has increased its involvement to 24 per cent of the company shares in order to deal with the fall of the world prices for phosphate-derived products. Indian investment remains concentrated in the mining sector. Its involvement in other economic sectors, such as transport and textiles, is developing much more slowly. (ii) TATA: a prudent implantation strategy The current involvement of the TATA group illustrates to a certain extent the difficulties of attracting FDI to Senegal. It at least highlights the caution of foreign investors in Senegal. The Indian multinational Tata has invested in the Senegalese market through a concessional loan of US$18 million, therefore tied aid, given in the context of Senegal–India cooperation. This payment was to cover the replacement of 350 buses for the main Senegalese public transport company: Dakar Dem Dikk (DDD). The ensuing contract allowed the Indian firm to enter the Senegalese market and to receive other offers from Senegalese partners. Moreover, their office opened in Dakar is to cover the whole sub-region. TATA later received an offer from the World Bank (WB) to replace the 3,000 ‘fast coaches’ which made up Dakar ’s urban transport system. They were favourable to TATA’s proposition, as it included an element of technological transfer. A factory was set up to manufacture these buses 80 km from Dakar, in the town of Thiès. Nevertheless, until 2006, the TATA group’s contribution to their Senegalese partners was mainly in the form of transfers of expertise and technology. Their investment mostly consisted of the provision of replacement parts and staff training by the Indian executives. Additionally, the likelihood of an extension of these investments remains dependent on several factors. Notably upon the improvement of the business environment, as discussed in the third section of this study.

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(iii) The textile sector: a source of confrontation between China and India While Senegalese textile companies are complaining of the heavy competition from the Chinese textile industry, the main Indian textile groups are making new investments. The fact that Senegal is only a nine-day boat journey from most major American ports, compared to the 24 days for China and 21 days for India, gives it a strong geographical advantage. This advantage is then reinforced by the African Growth and Opportunity Act (AGOA) which gives, in certain cases, dutyfree entry on textile and apparel goods manufactured in Senegal for the American market (see Goldstein et al., 2006, for more information). For the time being, the total production cost, especially the energy used in production, transport and goods handling add to the costs, and make producing competitively priced textiles in Senegal difficult. Additionally, Western African regional markets are swamped with low-cost textiles imported from China. Perhaps because of this, the Thappar group, which planned in 2003 to invest almost US$4 million in Senegal, seems to have lost some of its original enthusiasm, and seems to be less inclined to make additional investments in this sector, unless, as its investors have requested, substantial improvements are made to the business environment that improve conditions for textile manufacture. (iv) Chinese investment almost only in the fishing industry Although they appear to be ambitious, Indian investors are still relatively cautious in their dealings with Senegal. This situation is also seen in the case of Chinese direct investments in Senegal. Sénégal Pêche and Sénégal Armement are among the few Chinese companies who continued to invest in Senegal during the period of breakdown in diplomatic relations. Their investments totalled in the region of 10 billion CFA francs between 1994 and 2005. Aside from these sister companies, Chinese investment has been virtually non-existent over the past 10 years. This can almost certainly be explained by the lack of diplomatic relations at the time. But it above all gives us insight into the strategy of Chinese business in Senegal, who to date have mainly only invested in a few specific commercial sectors, typically the fisheries industry which provides faster and more certain return on investment than the industrial sectors which require heavy investment. In this way China and India do not really seem different from the traditional foreign investors in Senegal. Their investment strategies with regards to Senegal are still cautious. Although in a better position than its neighbours, Senegal still does not attract enough financing in the form of foreign direct investment to cover its outgoings, not least a trade deficit of 713 million CFA francs in 2003. To reverse this pattern and be able to take advantage of the opportunities offered by China and India, the Senegalese authorities will have to convince their partners to invest in the priority areas identified in the Stratégie de la Croissance Accélérée (SCA, Senegal’s economic growth strategy; see Section 4b).

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ERIC HAZARD ET AL. FIGURE 2 Senegal’s Exports to China (CFA francs, million) 8000.00 7000.00

CFA francs, million

6000.00 5000.00 4000.00 3000.00 2000.00 1000.00 0.00 1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: Direction de la prévision et des études économiques (DPEE), Senegal.

3. BILATERAL COOPERATION: CHINA AND INDIA, TWO STRATEGIC PARTNERS FOR SENEGAL

Despite the contrasting and in some places disappointing (lack of diversification of Senegalese exports and low FDI) economic relationships we have looked at, the growing economic and geopolitical importance of the two Asian Drivers has prompted a rethink in Senegalese diplomacy. At the same time Senegal, due to the pivotal role it plays in West African politics, has the potential to be a key partner for China and India in the region. Nevertheless, China and India contribute little to the official development assistance (ODA) allocated to Senegal at the moment. We should therefore ask whether, given the lack of raw materials in Senegal other than phosphate, if the economic gains of a reinforced political partnership with China and India would be enough for the needs of the Senegalese economy. a. Moving Towards a Reinforced Political Partnership between Senegal and the Asian Drivers (i) Senegal: potentially a key partner for the Asian Drivers in Africa China and India’s interest in Africa is economic (starting with energy resources), but also geopolitical. India, candidate for a permanent seat on the UN Security Council alongside Germany, Brazil and Japan, intends to become one of the

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world’s foremost economic actors. India has been perceived as playing a central role in democratic stability in Asia since mid-1990 and has been making efforts to create external links with the United States, Russia and even the European Union. At the same time India is hoping to promote new South–South partnerships, a role very similar to the one it played within the nonaligned movement following the Bandung Asia–Africa conference. Although the context has greatly evolved since then, India plays no less of a role, along with Brazil and South Africa, in the international trade negotiations at the World Trade Organization (WTO) with the G21, by forming political alliances with these countries, notably with Africa. For China also, the idea of a multipolar world is the driving factor for a voluntary strategy of diplomatic and political partnership with the African continent, despite their preoccupation with securing supplies of raw materials. Thanks to an active and subtle diplomacy, Senegal is today widely represented in numerous international institutions (The United Nations Commission and the Food and Agriculture Organization of the United Nations (FAO), for example). Senegal also acts as a key mediator on the African continent, as shown by its role in the conflict in Côte d’Ivoire, the Madagascan crisis and its participation in the peacekeeping activities of the African Union. Likewise, whatever difficulties President Wade himself encountered in setting up the NEPAD, it is clear that Senegal was keen to play an active role. In showing its political stability and its capacity to change political leaders by democratic and peaceful elections, Senegal is undertaking careful communication work to promote itself as a ‘democratic window’ on francophone Africa. This diplomatic willingness, which allowed the country to form varied collaborations and to become a favourite with development partners, also allows it to be a key country on the political front for China and India in their attempts to develop a strong political partnership with Africa. (ii) China and India as pillars of an evolving Senegalese diplomacy The political change-over in 2000 did not damage the traditional diplomatic activism of the Senegalese authorities. The Senegalese diplomacy did not try any less to renew itself, the most symbolic illustration of this being Senegal’s moving closer to the United States and the People’s Republic of China. Senegal is indeed progressively distancing itself from its traditional partners (Europe and France in particular) while keeping its historical links with these countries. The breakthrough of new countries with significant political and economic power onto the world stage has pushed Senegal to remodel its diplomatic strategy around four main points: respecting international law, willingness to promote peace, the problem of supporting better African integration and wanting to develop an economic diplomacy for the country. This last objective, as well as the problem of diplomatic independence and the consideration of new worldwide geopolitical balances, accounts for the creation

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of new and diverse geographical partnerships. An economic representative office has been opened in India, and another will soon be opened in China. China and India potentially (although only potentially at this stage) represent very important markets for exportation and suppliers of investment to Senegal. b. India, China and Senegal: Cooperation Remains on a Modest Scale Next to the apparent ambitions and diplomatic willingness, the reality is a rather small level of cooperation. (i) The depth of the India–Senegal partnership: less than meets the eye Help given by India is nowhere near as much as that from France, Spain, the United States and Germany, who between them provided 74 per cent of the official development assistance received by Senegal in 2005. Additionally, Indian financing is essentially tied aid. We have to recognise, however, that India accompanies their well-adapted and low-cost technologies with training. India follows a cooperation plan whereby it focuses its efforts on areas in which its businesses already have a clear advantage, promoting technology transfers through the bias of commercial contracts. As we have already seen, the recent implantation of the Tata group in 2003 is a good example of the link between Indian cooperation and the commercial interests of their national businesses. Their cooperation in rail transport and agriculture is also tied aid, since the Indian companies are providing equipment paid for by concessional loans from the Indian government. (ii) Senegalese diplomatic pragmatism tested by Chinese ambition The re-establishment of the diplomatic relationship between the People’s Republic of China and Senegal (in October 2005) is still too recent to begin analysing the Chinese cooperation policy with regard to Senegal. Although the situation has since vastly changed, it should be noted that from 1971–96, the People’s Republic of China had contributed to the sum of 1 billion yuan. This makes an average of 25 million yuan per year, making China a small donor. In 1996 President Abdou Diouf cut diplomatic ties with the People’s Republic of China for mainly financial reasons. The Secretary of State at the time, the present President Wade, supported his choice. The ‘cheque book diplomacy’, as it was agreed to call the strategy of Chinese Taipei, proposed substantial financial backing to any state that was prepared to officially recognise its sovereignty. In these conditions, and with 200 billion CFA francs over the past four years, Chinese Taipei was a favourite with bilateral donors, pouring financing into numerous areas, including projects dear to President Wade such as the Université du Futur Africain to which Taipei recently donated more than two million CFA francs. Although the funds from Chinese Taipei were

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large and not tied to specific projects, the funds given by Chinese Taipei were no longer sufficient to justify estrangement from the People’s Republic of China who had become omnipresent on the continent and was on the look-out for new partnerships in Africa. The diplomatic reconciliation between these two countries shows us an example of foreign relations in the middle of reconstruction, driven by political realism. It shows the need to regulate the situation with a political partner who has now become undisputed. Senegal’s desire to take one of the seats which are destined for African countries on the United Nations Security Council certainly helped to speed up negotiations with a state which has the power of veto. The growth of commercial exchanges between Senegal and the People’s Republic of China since 2000, while Taipei’s seem to have been falling, certainly helped matters. China attaches very few conditions to its cooperation with other countries. Apart from the absence of diplomatic relations with Chinese Taipei, China imposes no real political conditions: ‘Beijing allows the African nations to decide their vote within the United Nations (UN), hasn’t suggested deploying any soldiers on their territory, and above all refrains from giving democratic lessons to these governments’ (Lafargue, 2005). China has given some money to mark its official return to Senegal, but nothing indicates that it will be as generous as Chinese Taipei. Beyond the political aspects of cooperation, Senegal, on restoring ties with the People’s Republic of China, look to them as a potential investor in Senegal or at least as a future destination for Senegalese exports. The relationship with China is far from equal: it carries great risks for Senegalese economic actors and raises many questions. (iii) The uncertain economic gain from a partnership with China From a political viewpoint, Senegal is an important country in West Africa; they have little to offer China, however, in terms of raw materials. What could then be the benefits for Senegal from intensifying economic relations with China? We could highlight that the few natural resources available in Senegal are already being heavily exploited. The growth in fisheries production risks leading to over-fishing, and is threatening this sector. As for phosphates, they are mainly tied into the partnerships with private actors in India. Deposits of gold in the south of the country are small and few, and oil resources are almost non-existent. It seems like it will be a difficult task for Senegal to attract significant Chinese investment under these circumstances. Senegal could make the most of its political stability to act as a bridge to the sub-region. But it remains the case that in the eyes of many Chinese groups, political stability is far from being necessary to their activities: some have set up in politically unstable countries or even in civil wars (as in Sudan and Angola). At the same time, it is difficult for Senegalese products to find their place in the Chinese market. The Senegalese Prime Minister, on his visit to Beijing in 2006, confirmed Senegal’s difficulties in proposing

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attractive products to the Chinese market. Prime Minister Macky Sall brought up the question of access for Senegalese products to the Chinese market, but his request was principally concerned with groundnut, and not very many other products besides this. The economic gain from a stronger relationship with the People’s Republic of China is even less likely now that it might increase the number of Chinese entrepreneurs migrating to Senegal; the impact of this on the local economic fabric is uncertain (cf. infra). Certainly, with a population of barely 10.8 million and a relatively high level of poverty, Senegal’s interior market does not hold much potential. Nevertheless, it is still attracting a large number of Chinese economic actors who seem to have adopted a strategy of ‘space occupation’ on African territory. This strategy, as we will see in the third part of this study, has raised worries from national economic actors, whose own positions might be at risk. Chinese entrepreneurs do not necessarily bring a reinforcement of certain activities (notably in the formal sector), already weakly structured, or any improvements in employment conditions in the job market. The spillover effects are therefore limited.

4. THE SENEGALESE ECONOMY FACED WITH THE ASIAN DRIVERS: RISKS AND OPPORTUNITIES

As we have already seen, the economic benefits to Senegal from forming relations with the two Asian Drivers have been limited and contrasting. As a market for Senegalese exports, China is a marginal importer, and exports to India are not sufficiently diverse. To add to this, Chinese and Indian FDI in Senegal remain limited and concentrated in specific sectors, phosphates in the case of India and fisheries for China. What are the consequent prospects, risks and opportunities that can be predicted for Senegal in its future relations with China and India? a. Senegal and the Asian Drivers: New Commercial Dynamics with an as yet Uncertain Impact (i) Chinese and Indian Traders: friend or foe of the Senegalese consumer? Since 2000, Chinese and Indian communities in Senegal have grown rapidly. At present there are around 140 Indians registered through the Indian Embassy in Senegal, to which can be added 50 ‘floating people’.6 In 1997, the Indian community consisted of only three families outside of Embassy staff. According to official statistics from the Department of Interior Affairs of the Ministry of 6 ‘Floating’ people are those who have not got permanent residency in Senegal, but who trade with the country and stay there for extended periods of time.

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Commerce, the Chinese community counted 515 expatriates in 2005. Other sources quote a hypothetical figure of 1,500 Chinese nationals in Dakar. Consequently, the number of Chinese commercial establishments multiplied by seven between 2002 and 2005. Unlike the Indians, the Chinese are only in Dakar. The Chinese community is concentrated in the Boulevard du Centenaire area, where they live and own shops. It is also made up of construction workers working mainly for the company Henan Chine. This company is at the root of the expansion of the Chinese community in Dakar.7 The Senegalese union for traders and industrialists (UNACOIS), the Senegalese business association for the informal sector, appears to be worried by the size of the Chinese network. This position is based on several observations. Most of all, business people in Senegal are surprised at the extremely low prices that products from China are being sold at. A Chinese trader explains the low prices by the special deals that the Chinese companies have with factories producing the goods in China. UNACOIS also brings up frauds concerning the importation of Chinese products discovered by Customs and the Ministry of Commerce. Investigations are being made into the size of the problem, and the involvement of some Senegalese customs officers. Finally, some members of the Chinese community are not living up to their administrative responsibilities (starting with tax obligations), which also raises questions about the effectiveness of the monitoring of tax payments. Most Chinese shopkeepers come from a poor region of China called Henan. How do they therefore manage to fill, transport to the port and get their containers through customs? Two explanations are offered.8 The first imagines that the Chinese traders organise within their families and save together to invest in the containers. The second suggests that these Chinese traders are involved in a large network that stretches beyond just Senegal, and guarantees them a regular supply of new products. These networks would perhaps offer them preferential financing. How could the fact that the Chinese shopkeepers manage to pay commercial rents, equivalent in some cases to five times the market price, or to invest in business premises be otherwise explained? The limited nature of their trade, and the small returns, do not easily allow this type of investment. The lack of available information means these hypotheses can neither be confirmed nor disproved. The persistent rumours about the business practices of the Chinese community produces a reaction of secretiveness, which increases the mistrust between local and Chinese traders. At the same time, consumers and even

7

For a detailed study of the growth of Chinese migration to Dakar, see Bredeloup and Bertoncello (2006). 8 These hypotheses were discussed during the interviews conducted by the authors.

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local businesses in the informal sector seem to benefit from the low prices of Chinese shopkeepers. Relationships with the Indian business community seem much easier. Representatives of UNACOIS, who were interviewed for the purposes of this study, said they consider their collaborations with Indian operators to be mutually beneficial. Their investment is often accompanied by transfers of knowledge and skill. They are involved in much more diverse sectors (the rail industry, pharmaceuticals – cf. infra). (ii) Competition from Chinese textiles: the impact on Senegalese manufacture and second-hand clothes sales Competition with the Chinese actors is without doubt at its strongest in the textile industry. For Senegalese consumers, particularly those from the most disadvantaged sections of the population, these products give them the opportunity to purchase new clothes at affordable prices. But the local textile industry, and particularly the clothing industry, is suffering from the competition from clothing imported from China for sale on the domestic market.9 The importation of copies of certain models made in Senegal does not entirely explain the difficulties these industries are facing, although it serves to highlight the lack of competitiveness of the Senegalese clothing industry.10 The cost of factors such as electricity are too high, and the electricity cuts that Senegal is once more experiencing since 2005 are doing even more damage to the competitiveness of local industries. The rising price of electricity at the beginning of 2006, justified by the rising petrol prices, has increased utility prices for companies who already had some of the highest prices in the region. Also, as shown in Table 2, the cost of sending freight to the United States from Senegal is higher than from competing countries, stopping Senegal from benefiting on the American market from the fact that it is close by (measured in days by boat) and from seizing the opportunities offered by the AGOA. (iii) Potentially promising sectors? The large growth of cashew exports to India at the end of the 1990s has already been touched upon. But this sector is still extremely dependent on the Indian market, from the fixing of prices to the quantities sold. Already well established in India, scrap metal recycling also represents a new area of activity for Indian 9

The Senegalese clothing industry is currently going through a crisis which is at risk of undermining its structure. At the beginning of the 1980s there were 14 textile factories in Senegal. By 2005 there were only eight, three of which were not in full-time operation. All the factories are in financial difficulties. 10 The consequences of the dissolution of the Mutifibre Agreement on exports of Senegalese clothing products to external markets have not yet been evaluated, but there is no doubt that it will create more problems for the sector (for more on this subject see Goldstein et al., 2006, Annex B).

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TABLE 2 The Cost of Transporting Freight to the United States (2002) Country of origin

Mexico China India/ Honduras Brazil Sub-Saharan Senegal Pakistan Africa

Freight sent Price in 1,600 to the US$ for United a 40 ft States container Average Days of 3 time of travel travel

3,500

3,500

1,900

2,900

3,500

4,000

28

24

7

18

21

9

Source: Nouvelles Sociétés Textiles du Sénégal (2002).

economic actors in Senegal. Their presence has not yet attracted large quantities of direct investment, but they have started businesses where previously there were only small informal businesses which were poorly adapted to the global or international market in recycling. The construction sector and the transport industry seem have the most potential. The construction sector: less expensive infrastructure but limited skills transfer. Before the breakdown of the relations with China, at the beginning of the 1980s, the Chinese state offered Senegal a sports stadium. The company that constructed this stadium, Henan Chine, never left Senegal and is now one of the most competitive public works companies in the country. The competitiveness of Henan Chine raises many questions. If the answers are complex and badly documented, the explanation can perhaps be found in the company’s working methods. They use Chinese machinery which is less expensive than that from Europe. Additionally their engineers are very familiar with these machines and have access to spare parts and after-sales service. Henan Chine also works non-stop, with teams working day and night shifts. A final explanation could come from employing Chinese engineers, who are a lot cheaper than their Senegalese counterparts. When necessary, Henan Chine forms alliances with other local businesses which have the skills they need. For toll roads, for instance, it added its experience in constructing bridges and viaducts to that of its local partner, Jean Lefebvre Sénégal, who specialises in road construction. The low cost of Henan Chine could prove to be an advantage for infrastructure development in Senegal. On the other hand, Henan Chine makes very little investment. It brings the skills it needs from China, which means that very little local employment is created, establishing a new form of dependence on Chinese skills and technology. The transfer of technologies and skills to local employees, notably to Senegalese engineers, is very limited. The transport industry: a future outside of the ‘development niche’? As we have seen, TATA’s installation in Senegal happened in a very cautious manner,

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and is linked closely to the development market and to actions taken by Indian cooperation. Although these investments have contributed to technological and skills transfers, the financial size of the investment is limited. It is not certain that TATA will stay in Senegal permanently, especially if the company does not manage to find a place in the local market outside of the contracts financed by development partners. TATA’s factory is already experiencing problems related to overcapacity. Furthermore, one of the company’s current problems is finding a steady supply of the components needed for its work. At the moment all the input for the group comes from India, which raises production costs for the subsidiary. The group’s policy is usually to manufacture low-cost vehicles from locally available components. b. Sectors with Mutual Economic Interests in a Difficult Situation: The Case of Phosphate (i) ICS: the limits of a South–South partnership ICS, the symbol of the economic relationship between India and Senegal, has been in acute financial crisis since 2001. According to sources,11 the accumulated deficit has been equal to or larger than the companies’ assets. Due to ICS’s economic weight in Senegal, the difficulties they have been experiencing had a significant detrimental effect on the Senegalese economy in 2006 (AfDB/OECD, 2007). This situation has been caused by several internal and external factors such as logistical and management issues and the fall in the international trade in phosphates and phosphoric acid since 1998. This combined with bad management and heavy investment in infrastructure has put ICS in a difficult financial position.12 This crisis also highlights the limits of an India–Senegal partnership, unequal since one of the partners (India) appears to have acquired too much weight given that it is the unique outlet for its partner, especially since ICS has put all its efforts into serving the Indian market, and has not really considered the options presented by the fertiliser market on a regional level. Of course, ICS produces 250,000 tonnes of fertiliser per year which are sold on the West African market, but they do not cover the full needs of the region. ICS’s commercial management justify this by the instability and weak promises made by the West African fertiliser market, compared to that of phosphoric acid. A more offensive strategy towards the West African fertiliser market would allow ICS to move away from its 11

ICS debt was estimated at 235 billion CFA francs at the end of 2005, of which 80 billion CFA francs was to suppliers, 75 billion CFA francs to development investment partners (Agence française de dévelopement, West African Development Bank, European Investment Bank) and 80 billion CFA francs to local banks. 12 The IFFCO group signed an agreement with Senegal outlining the conditions of recapitalisation of ICS: it foresaw the injection of US$80 million, or 40 billion CFA francs before 30 June 2007. ICS financial debt will be restructured.

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dependence on its Indian buyer and diversify its products. The problem, already raised in the context of cashew exports, lies in the processing and optimisation of products exported by Senegal to the Asian Drivers. c. How to Grasp the Opportunities Offered by the Asian Drivers? To reinforce its attractiveness and seduce new partners, the Senegalese government is at the moment creating an accelerated growth strategy (SCA – Stratégie de Croissance Accélérée) to accompany its Poverty Reduction Strategic Paper (PRSP). The SCA rests on five clusters identified as being motors of growth: (1) the agriculture and food industries; (2) marine products; (3) tourism, the craft industry and cultural industries; (4) cotton, textiles and clothing; and (5) communication and information technologies (CIT), as well as teleservices. Future collaborations could be formed with the Asian Drivers around any of these clusters. (i) Identifying complementary sectors with the Asian Drivers Senegalese fishing and clothing sectors: challenges to be overcome. Among the five clusters identified by the SCA, marine products on one hand, and cotton, textiles and clothing on the other, are already receiving investment from Chinese and Indian actors. However, these sectors are faced with challenges that are partly related to competition from the Asian Drivers. At the same time there is large potential for cooperation between Asian and West African countries in the development of aquaculture13 and fish breeding, a development which is also worth exploring to reduce pressure on Senegalese marine resources and support a revival of this sector. High-quality textiles and clothing was identified as a pillar of Senegal’s accelerated growth strategy. But, as has been highlighted by recent investments from the Indian group Thappar in the textile company NSTS, many questions remain concerning the competitiveness of an industry crippled by debt and high production and service costs. The United Nations Industrial Development Organization (UNIDO) recently highlighted again the relatively gloomy future of this sector in Senegal.14 If we go by the experience of Indian investors who moved to Senegal, their consistent strategy of using the niche created by the AGOA appears to have been

13

On the subject of potential cooperation between Africa and Asia in developing aquaculture, we can refer to a regional study entitled ‘Exploring Opportunities for Sustainable Shrimp Farming in West Africa: Focus on South–South Co-operation’ from the Sahel and West Africa Club (2006), as well as the round-table report on the same subject in Conakry, Guinea, 6–8 June 2006 (http://www. oecd.org/document/58/0,2340,fr_2649_33711_36810959_1_1_1_1,00.html). 14 Gherzi Textile Organisation (2005).

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largely unsuccessful. Chinese actors seem hesitant to invest in this sector in Senegal, and appear to prefer to export low-cost products made in China. Due to the competition and general pessimism, it would be reasonable to ask questions about the future of the ‘cluster ’ of textiles and clothing in Senegal.15 Retailing: the difficulties of formalising the activities of the Chinese immigrants. The retail sector, which is not mentioned in the SCA, is nevertheless attracting a lot of attention from the authorities. The contribution from the Chinese retailers to the Senegalese economy is limited since their activities, which are for the main part based in the informal sector, are likely to bring into question the efforts of the authorities to bring retail businesses owned by Senegalese actors into the formal sector. There is a real risk: it is estimated that only 10 per cent of Chinese store owners have a bank account in Senegal. It is true that this figure is not necessarily lower than that of Senegalese store owners, but it highlights the fact that the Chinese storekeepers are happy with this informal situation, despite the stance taken by the Senegalese government. The circumstances that surround the arrival, the presence and the development of commercial activities in the Chinese community illustrate certain incoherencies that the authorities currently practise in this area. In the future they will have to be more transparent. For example, the relative tolerance of the Senegalese authorities towards the installation of Chinese businesses that do not fulfil the administrative conditions required contradicts the firmness shown when recovering taxes from the Senegalese shopkeepers. As a general rule, it would be good for the conditions of their integration into economic life in Senegal to be clarified so as to reduce tension between the local population and the members of the Chinese community. Possible partnerships in the agriculture industry, information technologies and in construction. Two other ‘clusters’ identified under the SCA, the food and agriculture industries on one hand and communication and information technologies (CIT) and teleservices on the other, could be considered as being potentially interesting in terms of partnerships with China and India. A pillar of both the Senegalese and Indian economies, exchanges between the two countries in agriculture need to be developed to have knock-on effects in the rest of the Senegalese economy. More worryingly, the continuation of these exchanges is in question: the case of cashew nuts highlights Senegal’s difficulties in valorising its exported agricultural produce, while there exists an unsatisfied national, and even regional, demand for processed products. In the CIT and teleservice area, India has gained an international reputation. Although this sector is only just emerging in Senegal, it offers opportunities for

15

For more information on the future of the textile/ clothing industry in sub-Saharan Africa, see Goldstein et al. (2006) and Kaplinsky and Morris (2006).

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market conquest in the francophone areas of the market. With a digital link16 running through Senegal, the technical environment offered to potential investors seems interesting. But efforts will have to be agreed upon to increase Senegal’s attractiveness in this domain, especially in relation to competition from countries such as those from Maghreb that have large and sophisticated telecommunications sectors, which could convince Indian investors to move more permanently into the area. (ii) Attracting and taking advantage of Chinese and Indian investments in Senegal To be able to exploit the complementarities in the sectors, the Senegalese authorities should undertake the necessary reforms to create an attractive environment for investors, be they Indian or Chinese. They should also form a clear view of the areas in which they have conflicting interests, and in this way put the accent on those which are mutually beneficial. Besides which, they should be seen in the light of a more global strategy of economic development and allow the development of businesses capable of adding value to basic products and to supporting technology transfers. Developing technology transfers. Although it is necessary to take a step back to appreciate the real benefits from TATA’s investment in Senegal, the latter is undoubtedly interesting as it comes with transfers of technical knowhow. Certainly Senegal does not have the scope to choose its investments. Still, it could try to use the model for encouraging investments that took place in Mauritius in the 1990s, asking investors to accompany their operations with real transfers of technology and skills. Enhancing the value of local products. The case of ICS is very illustrative in regards to valorising raw materials, be they mineral or agricultural, produced in Senegal. Without again putting into question the role of the partnership with India in the phosphate sector, we can however highlight the lack of vision on the part of the political authorities regarding the role and place of this industry within the national economy. Senegal has been content with the spillover effects of this industry, without putting in place a more global development plan for this industrial sector or integrating it into the West African region. Obtaining a larger access to the Chinese market. While the Economic Partnership Agreements (EPAs) between the European Union and the Economic Community of West African States (ECOWAS) are creating a lot of discontent in the region, particularly with the Senegalese authorities, the negotiation of commercial agreements with the Asian Drivers could be a path to explore for Senegal.

16

Senegal has a digital network that covers the entire national territory and consists of over 2,200 kilometres of fibre optic.

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In fact, access of foreign products to their markets is largely protected, apart from metal and fuel raw materials.17 Granting enhanced market access could contribute to encouraging diversification of the Senegalese economy and the development of non-traditional exports from the country. (iii) Political dividends of a reinforced relationship with the Asian Drivers In a general sense, the historical place of India in the non-aligned movement, as well as its current key role in international commercial negotiations, could make it a useful ‘political resource’ for countries like Senegal. Although countries like India and less developed countries like Senegal have conflicting interests in certain areas, they also have points of common interest, whether it be the reform of the World Trade Organization’s Dispute Settlement Body or reductions in agricultural subsidies. India’s expertise coupled with its political power has allowed it to demand, along with Japan, Brazil and Germany, a reform of the UN Security Council. Senegal itself plays a big role on the continental scale. Political alliances should be able to be formed within international government organisations, starting with the UN.

5. CONCLUSION

Senegal is in the peculiar position of having a more developed partnership with India than with the People’s Republic of China. While these two commercial superpowers are growing on an international and continental level, the Senegalese authorities are trying to make up the ground they have lost in their relationship with the People’s Republic of China since the diplomatic break in 1996. It is easy to see Senegal’s interest in developing partnerships with the two countries, whether it be for political gain, or for the possible benefits from investment, technology transfer or development cooperation. They might be disappointed however. The Asian Drivers’ interest in Senegal seems limited. Outside of investments in phosphates and fisheries, FDI from the two countries is limited. Additionally, the amount of official development assistance put forward by China and India, although highly symbolic, is nonetheless relatively anecdotic in terms of financial size. The image Senegal enjoys of a firstclass actor on the continent (especially where NEPAD is concerned) certainly seems to play a role in cementing its ties with China and India. Senegal has the 17

On this topic, see Phil Alves’ presentation entitled ‘Trade and Market Access: Can China and Africa Cooperate?’ given at the conference ‘China in Africa in the 21st Century: Preparing the Forum on China–Africa Cooperation’, organised by the South African Institute of Foreign Affairs, 16–17 October 2006, in Johannesburg.

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role of gateway and springboard for the sub-regional market, not only because of its geographical position, but also because of the good state of its infrastructure compared to other countries in the region and from its relative political stability. It benefits from a geographical closeness to the American and European markets and from trade agreements such as the AGOA with the United States and the Everything But Arms initiative with the European Union.18 For the moment the Chinese and Indian promises are taking their time coming and Senegal has not yet managed to take advantage of these relationships to become a large FDI recipient. Whatever the reasons given (the business environment, the limited market, the end of the Multifibre Arrangement, etc.), the difficulty of securing sustainable commercial and economic partnerships remains the same. Senegal appears to be more of a logistical and commercial centre for importation and re-exportation, than as a production base for regional or foreign markets. It would be wrong to think that, as shown in the example of the phosphate industry or the exploitation of Senegalese cashew and fishery resources, partnerships with China and India are by definition equal for the simple reason that they are borne of South–South cooperation. If public policy alone is not enough to induce economic development in a country, the State in Senegal traditionally plays an important role. In these conditions it is essential that the authorities be clear on their economic development and social priorities. It is only by doing this that they will have the tools to build more equal and beneficial partnerships with the Asian Drivers.

REFERENCES AfDB/OECD (2007), African Economic Outlook (Paris and Tunis: OECD). Bredeloup, S. and B. Bertoncello (2006), ‘La migration chinoise en Afrique: accélérateur du développement ou sanglot de l’homme noir ’, Afrique Contemporaine, 218, 199–224. Gherzi Textile Organisation (2005), ‘Diagnostic et éléments d’une stratégie nationale d’appui au secteur textile confection au Sénégal dans le contexte international’, paper prepared for United Nations Industrial Development Organization (UNIDO) and the Ministry of Industry and Culture of Senegal, 16 March 2005. Goldstein, A., N. Pinaud, H. Reisen and Xiaobao Chen (2006), The Rise of China and India: What’s in it for Africa? (Paris: OECD Development Centre). Kaplinsky, R. and M. Morris (2006), ‘The Asian Drivers and SSA: MFA quota removal and the portents for African industrialisation’, updated version of paper presented at workshop on Asian and Other Drivers of Change, St Petersburg, January. Available at: http://www.cssr.uct.ac.za/ publications/research-report/2006/392. Lafargue, F. (2005), ‘La Chine une puissance africaine’, Perspectives Chinoises, 90, 2–10. République du Sénégal (2007), ‘Stratégie de croissance accélérée. Présentation résumée’, Available at: siteresources.worldbank.org/INTSENEGAL/Resources/Doc2_SCA.pdf. Last accessed 8 October 2009.

18

The original rules attached to these agreements were very restrictive; see Goldstein et al. (2006).

5 The Developmental Impact of Asian Drivers on Kenya with Emphasis on Textiles and Clothing Manufacturing Paul Kamau, with Dorothy McCormick and Nicolas Pinaud

1. INTRODUCTION

R

ESEARCH on the impact of Asian Drivers on Africa is fairly recent, with most studies having been undertaken no earlier than 2005. Furthermore, most of these studies have focused on the wider African region by examining impacts on several countries. However, there is consensus that individual African countries are affected differently by the growth of China and India (Jenkins and Edwards, 2005; Broadman et al., 2006; McCormick, 2006; Kaplinsky et al., 2007). Therefore, as the body of research grows, there is a need for country- and sectorspecific studies (see Alemayehu, 2006; Goldstein et al., 2006; McCormick, 2006; Stevens and Kennan, 2006). As a response to this research gap, this chapter is designed to examine the impact of Asian Drivers on Kenyan textile and clothing manufacturing. The chapter utilises four main vectors: trade flows, financial flows, foreign aid and human resource flows. This chapter adds to the literature in the following ways. First, it is a contribution to the young body of literature that examines the impact of the rise of China and India on developing countries. Second, with the exception of McCormick et al. (2006), it is the only other country-specific study that examines the impact

Thanks to Ann Weston for constructive comments on earlier drafts of this chapter, and the OECD Development Centre for financial support to undertake the study from which this chapter is drawn. The authors remain responsible for the views expressed and any errors or omissions.

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of Asian Drivers on clothing and textile manufacturing in Kenya. Third, this chapter examines the opportunities and the threats in the sector arising from the ascendancy of Asian Drivers through trade, investment, foreign aid and human resource channels. The chapter is organised into six sections. Section 2 examines trade flows between Kenya and the Asian Drivers. Section 3 enumerates the patterns of FDI from Asian Drivers in Kenya and the effects of drastic growth of FDI in the Asian Drivers on Kenya. Section 4 discusses the recent evolution of development aid and the role being played by the Asian Drivers. Section 5 examines political– economic issues between Kenya and the Asian Drivers as well as the concerns about human resource flows. Finally, Section 6 concludes the chapter and provides some policy recommendations. 2. KENYA’S TRADE FLOWS AND THE EFFECT OF CHINA AND INDIA

Trade between the Asian Drivers and Africa has significantly grown during the last decade, although the impact varies among different countries depending on the relations and commodities involved (Jenkins and Edwards, 2005; Broadman et al., 2006; Kaplinsky and Morris, 2006). While the natural resource-rich countries have gained out of the Asian Drivers’ economic surge, the natural resourcepoor (particularly those relying on export of textile and clothing) are losing (Zafar, 2007, pp. 10–12). Unfortunately, Kenya is in the latter category: its manufactured products face stiff competition from Asian Drivers in both the domestic and the export markets. a. Kenya’s Exports and Imports Table 1 shows Kenya’s top-10 trading partners in both the export and import trade in 2005. On the export side, the top-10 trading partners accounted for nearly 60 per cent of total exports in 2005; while on the import side, the top-10 trading partners accounted for 68 per cent of total imports. This illustrates how Kenya’s international trade is concentrated in just a few countries. Uganda and Tanzania combined account for more than 25 per cent of Kenya’s exports in 2005. Notably, the Kenyan exports to these two countries constituted agro-based and industrial manufactured products. The next major export destination is the UK, which absorbed close to 10 per cent of Kenya’s exports in 2005. Other developed countries that feature in the list of the 10 major export destinations include the Netherlands, France and the US, and accounted for close to 10 per cent of Kenya’s export. With the exception of the US, Kenya’s exports to developed countries consist of raw agricultural materials including cut flowers in the Dutch Flower Auction. The US market is different from other OECD markets as close to 90 per cent of Kenya’s exports to the US constituted clothing products.

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PAUL KAMAU ET AL. TABLE 1 Top-10 Kenyan Trading Partners in 2005 (Kshs million and % of total exports)

Exports by Destination

Imports by Country of Origin

Country

Value

% of total

Country

Value

% of total

1 Uganda 2 United Kingdom 3 Tanzania 4 Netherlands 5 Pakistan 6 Egypt 7 Rwanda 8 France 9 USA 10 India Total Exports in 2005

42,545 23,371 19,887 18,316 14,072 8,839 7,273 5,086 4,518 4,000 248,198

17.1 9.4 8.0 7.4 5.7 3.6 2.9 2.1 1.8 1.6 100

1 United Arab Emirates 2 USA 3 South Africa 4 Saudi Arabia 5 United Kingdom 6 India 7 Japan 8 China 9 Germany 10 France Total Imports in 2005

62,130 14.4 42,493 9.9 42,305 9.8 27,580 6.4 26,134 6.1 24,236 5.6 23,021 5.3 19,764 4.6 15,761 3.7 13,883 3.2 430,740 100

Source: Kenya (2006).

With regard to the Asian Drivers, India absorbs more of the Kenyan exports than China. For instance, in 2001, India and China accounted for 1.601 per cent and 0.016 per cent, respectively; while in 2005, India accounted for 1.638 per cent and China 0.518 per cent1 (Kenya, 2006). Further observation reveals that in 2005, food and beverages (raw and processed) products accounted for 47 per cent of exports, while industrial products accounted for around 26 per cent (Kenya, 2006). In addition, the share of consumer goods was 21 per cent, while textiles and clothing exports accounted for only 1 per cent of the total Kenyan exports. On the import side, the picture is somewhat different as both India and China feature in the sixth and eighth positions, accounting for 5.6 per cent and 4.6 per cent of Kenya’s imports, respectively. Both China and India appear to have increased their exports to Kenya between 2001 and 2005. In 2001, India accounted for 4.4 per cent, while China accounted for 2.3 per cent of total imports in Kenya. This growth points to the fact that trade between Kenya and the Asian Drivers grew between 2001 and 2005. The prominence of trade between Kenya and the OECD countries is also clear. Five out of the 10 leading countries that Kenya imported from in 2005 were OECD countries, which jointly accounted for nearly 30 per cent of total imports.2 1 In 2001, Kenya’s exports were valued at Kshs.147,590 million while in 2005 total exports were Kshs.244,198 million. 2 The fact that the United Arab Emirates (UAE) accounted for the highest share of Kenya’s imports (14.4 per cent) raises questions because the UAE is known to be more of a trading centre than a production centre. Therefore, imports from the UAE could in actual fact be originating from China, India or other Asian countries. This figure therefore needs further investigation.

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FIGURE 1 Balance of Trade between Kenya and China, 1979–2004 400

US$ Million

300 200

Exports

Imports

Balance of Trade

100 0 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

–100 –200 –300

Years

Source: Government of Kenya, Statistical Abstracts (various issues).

Analysis of trade between Kenya on one hand and China and India on the other shows a growing deficit in favour of the Asian Drivers. Figures 1 and 2 show trade between Kenya and the Asian Drivers during the period 1979–2004. It is clear from these statistics that the trade grew more rapidly during the period 1995–2004. Kenya’s major exports to China include hides and skins, sisal, fibre, coffee, tea, fishery products, horticultural products and scrap metals; while imports from China include textiles, ready-made clothes, shoes, electronics, computer accessories, machinery and equipment, glassware, pottery, iron and steel wire, tubes and pipe fittings. In comparison to other African countries, trade between Kenya and China is small (see Broadman et al., 2006), because Kenya does not have either the oil or minerals that appear to propel trade between China and some other African countries. However, the recent entry of China into the oil exploration and titanium mining industry is a clear indication of the direction of China’s trade interests.3 Kenya’s major exports to India include cashew nuts, dyeing and tanning materials, hides and skins, scrap metal and precious stones, whereas imports from India include drugs, pharmaceuticals, chemicals, machineries, farm tools and implements, textiles, plastics and linoleum products, manufactured metal and steel, transport equipment and accessories, software, electronics, and processed and agro-based products. 3 In April 2006, during the state visit to Kenya by H. E. Hu Jintao, Kenya and China signed an ‘Oil and Gas Exploration Agreement’ which gave China National Offshore Oil Corporation (CNOOC) rights to prospect for oil and gas in six offshore blocs in Northern and Southern Kenya. Again on 28 April 2006, a Chinese company, Jichuan Group Ltd, bought about 10 per cent of Tiomin’s common shares, injecting Kshs.460 million into the capital of Tiomin, which is involved in the mining of titanium in Coast Province, Kenya (Daily Nation, 28 April 2006).

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PAUL KAMAU ET AL. FIGURE 2 Balance of Trade between Kenya and India, 1979–2004

US$ Million

400 300 200 100 0 –100 –200 –300

Exports

Imports

Balance of Trade

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Years

Source: Government of Kenya, Statistical Abstracts (various issues).

Percentage

FIGURE 3 Percentage Share of Asian Drivers’ Trade in Kenya, 1979–2004 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00

Exports to China % of Total Exports Exports to India % of Total Exports Imports from China % of Total Imports Imports from India % of Total Imports

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Years Source: Government of Kenya, Statistical Abstracts (various issues).

China and India are more important as sources of imports for Kenya than as market destinations (Figure 3). Between 1990 and 1995, for instance, imports from Asian Drivers increased steadily while Kenyan exports to these markets stagnated. As proportion of Kenya’s imports China and India combined accounted for 10.2 per cent in 2005 (Table 1). India ranks sixth as a major source of imports, while China ranks eighth. Many studies conclude that the rapid growth in China and India has resulted in increased demand for commodities that these countries need to sustain their growth. Therefore, exporters around the world find new market opportunities in China and India (Jenkins and Edwards, 2005; Broadman et al., 2006; Razmi, 2006). The increased demand for commodities by the Asian Drivers results in higher commodity prices and subsequently creates improvement in terms of trade for exporting countries (Goldstein et al., 2006). However, countries which rely on export of commodities which do not have high demand in China and India mostly experience erosion in their terms of trade. This is even more severe for countries competing with China and India in third-country markets. The export share in China’s and India’s markets indicates the extent to which a country has participated in the growth process and to a large extent the expected benefits. Table 2 shows these shares for different countries based on 2003 data.

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TABLE 2 Share of China and India in Exports of Selected African Countries, 2003 (%) Country

China

India

Total

Botswana Cameroon Ethiopia Ghana Kenya Lesotho Namibia Nigeria South Africa Sudan Tanzania Uganda

0.1 4.4 0.7 1.6 0.3 0.0 2.9 0.5 4.6 40.9 2.6 0.2

0.0 0.3 1.2 1.3 1.0 0.0 0.1 9.9 4.2 3.0 9.9 0.2

0.1 4.7 1.9 2.9 1.7 0.0 3.0 10.4 8.8 43.9 12.5 0.4

Source: Adapted from Jenkins and Edwards (2005).

From Table 2, one observes that Sudan is among the countries that have potential for a rise in terms of trade because approximately 43.9 per cent of its exports are directed to China and India. The other country is Nigeria with about 10 per cent, followed by South Africa with 8.8 per cent. Apparently for Kenya, the export share to China and India is only 0.3 per cent and 1.4 per cent, respectively. In total, the Asian Drivers account for only 1.7 per cent of Kenya’s total exports. Even if prices for Kenyan exports were to rise, the impact in terms of trade in Kenya would remain insignificant. The situation is even worse for countries like Lesotho and Botswana whose export shares to the Asian Drivers are close to zero. b. Competition between the Asian Drivers and Kenya Undoubtedly, the Asian Drivers, which are more competitive and technologically advanced, pose stiff competition to those countries that rely on similar export products as those exported by the Asian Drivers. This is more visible in the case of labour-intensive manufactured goods such as footwear, furniture, and textiles and clothing (Jenkins and Edwards, 2005; Kaplinsky and Morris, 2006). As the Asian Drivers gradually increase their supply of manufactured products in the world market, they are likely to crowd-out less competitive countries (Razmi, 2006). Table 3 shows the export similarity index (ESI) between the Asian Drivers and selected African countries.4 4

Normally, an ESI is expressed as a percentage ranging between 0 and 100 per cent. A low index implies that the two countries in consideration do not have export structures that are similar, while a high index implies that export structures are similar. In this case, a high ESI implies that the African country may face competition from the Asian Drivers.

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PAUL KAMAU ET AL. TABLE 3 ESI between African Countries and Asian Drivers

Country

Year

China (%)

India (%)

Botswana Cameroon Ethiopia Ghana Kenya Lesotho Namibia Nigeria South Africa Sudan Tanzania Uganda

2001 2003 2003 2000 2003 2002 2003 2003 2003

5.8 6.6 4.3 10.6 19.3 17.8 18.7 1.7 27.7

20.1 11.7 9.3 13.0 27.9 13.0 29.1 0.8 40.2

2003 2003 2003

2.6 11.7 8.0

10.1 20.6 12.3

Source: Adapted from Jenkins and Edwards (2005).

In the case of Kenya, the ESI is 19.3 per cent and 27.9 per cent with China and India, respectively. This clearly indicates that a higher proportion of Kenya’s exports face competition from China and India in the world market as opposed to, say, Nigeria and Ethiopia (Alemayehu, 2006). In this case, exports facing competition from Asian Drivers’ products in third-country markets are manufactured products in general, and clothing in particular. There is also evidence that about 34 per cent and 25 per cent of exports from Kenya face competition from China and India, respectively (Jenkins and Edwards, 2005). In contrast, Lesotho has about 89 per cent of its exports facing competition from China and 6.8 per cent from India. Similarly, 82.4 per cent and 73.4 per cent of Zambia and Mozambique exports face competition from China. Kenya has also experienced increased imports of manufactured products from China and India lately, which threatens the survival of the local industry. These percentages are much higher than the ESI would suggest. This is because both China and India have much larger economies than their African competitors with the result that even a small percentage of their exports devoted to a particular product can swamp the exports of many African countries. Although from a consumer welfare point of view, entry of cheap manufactured products is beneficial, local producers and workers who lose employment due to increased competition find it harmful. The net welfare effect remains therefore uncertain and actually difficult to measure. c. Impact of Asian Drivers on Trade in the Textiles and Clothing Industry The Kenyan clothing industry is quite diverse in terms of size, ownership, technology and market orientation. It consists of micro, small, medium, large and

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very large firms which form a pyramidal structure with three tiers.5 The base of the pyramid is formed by the micro and small enterprises (MSEs) that produce mainly for the domestic market. In 2003, it was estimated that there were about 60,000 enterprises in this tier (McCormick et al., 2007). The next tier consisted of firms ranging from medium to fairly large that produce mainly for the domestic market, with some forays into other countries within the region. It was estimated that this tier had approximately 150 firms. The third tier consisted of approximately 45 large and very large firms mostly export-oriented. Most of the firms in this tier were foreign-owned and fairly new having been established between 2000 and 2003. It is well documented that most of these firms were established as a response to the AGOA trade preferences. Indeed, the development of Kenya’s clothing industry has been fostered by the country’s eligibility with respect to the African Growth and Opportunity Act (AGOA). The export market for clothing products gained prominence in 2001 following the enactment of the US-AGOA for which Kenya qualified on 18 January 2001. Analysts argue that the AGOA has played a critical role in assisting Kenyan exports of apparel to the US (Kinyanjui et al., 2004). From Table 4, we see that the value of apparel exports increased from US$30 million in 2000 to US$195 million in 2005. In addition, the export of apparel under the AGOA accounted for nearly 90 per cent of Kenya’s total export to the US in 2005 (Kenya, 2006). The AGOA is a US programme that builds on an existing General System of Preferences (GSP) programme by expanding the dutyfree benefits to about 6,400 product lines including textiles and apparel manufactured from an eligible African country.6 By 2008, preferential treatment had been extended to 30 September 2015 (www.agoa.gov). The textiles and apparel products – not included in the GSP – benefit from the AGOA but are subject to specific rules of origin and visa requirements. The rule of origin is however waived for ‘lesser developed countries’ (in effect, most countries in sub-Saharan Africa) allowing them to use fabric from any other (third-country) source.7 Initially, this special rule of origin for apparel was to expire in September 2004 but it was extended, first to September 2007, and more recently to September 2012. Since Kenya is a beneficiary of this special rule of origin, most of the exporting firms have been dependent on imported

5

The basic size categorisation of Kenyan firms by McCormick et al. (2007) follows the Government’s enterprise survey (CBS et al. 1999), which uses the number of workers to classify firms as micro (1–10 workers), small (11–50 workers), medium (51–100 workers) and large (over 100 workers). Given the very low threshold for large firms, they created another category of ‘very large’ to include firms with 1,000 or more workers. 6 See also McCormick et al. (2006) and Morris (2006) for more details on the AGOA. 7 For the purposes of this special rule for apparel, ‘lesser developed countries’ is based on the World Bank classification in which a country whose GNP per capita was less than US$1,500 in 1998 is considered a less developed country. South Africa, Mauritius, Gabon and the Seychelles do not benefit from the waiver of the rule of origin.

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PAUL KAMAU ET AL. TABLE 4 Performance of the Kenyan EPZ Clothing and Textile Sector, 2000–05

Number of Enterprises Employment (number) Expatriates (number) Exports (US$ million) Investment (US$ million) Number of Visas Issued (AGOA) Average Unit Price (US$) Annual Average Exchange Rate (Kshs./US$)

2000

2001

2002

2003

2004

2005

6 5,565 235 30 16

17 12,002 314 55 48

30 25,288 701 104 88

35 36,348 912 146 128

30 34,614 837 221 108

22 24,234 740 195 132

983

1,060

1,986

2,979

4,185

4,867

4.96 76.2

4.82 78.6

4.19 78.7

4.30 75.9

4.26 79.3

3.66 75.6

Source: Export Processing Zones Authority (2005); McCormick et al. (2006).

raw materials mainly from China, Chinese Taipei, India and Pakistan. In this sense, China and India play a facilitative role in the Kenyan export of apparel. The textile and clothing industry in Kenya has its base in the export processing zones (EPZs). Export processing zones were established in 1990 mainly to attract foreign investments in the export-oriented manufacturing activities (Export Processing Zones Authority, 2005; USAID, 2005; Fukunishi et al., 2006). Incentives for firms operating under the EPZ include a 10-year tax holiday, unrestricted foreign ownership, 100 per cent repatriation of profits, duty and VAT exemption on all imported inputs, and an investment allowance on capital equipment. Table 4 shows how the EPZ programme has performed between 2000 and 2005, which is still dominated by foreign-owned firms.8 The eligibility of Kenya for the US-AGOA took place when global trade for textiles and clothing was highly regulated through the Multifibre Arrangement (MFA) which allowed major importing countries to set quotas for different producing countries. Therefore, many firms in Asia which were facing stiff competition at home found a window of opportunity to export to the US under the AGOA. In order to qualify for duty-free access, firms based in India, China, Bangladesh, Sri Lanka and Chinese Taipei established subsidiary or independent companies in Kenya mainly under the EPZ programme. To date, most of the apparel EPZ firms are foreign-owned. While the AGOA preferential trade access remains important for the Kenyan apparel industry, its benefits have been eroded by the termination of the MFA. We 8 Foreign investors in the EPZ in 2005 were from India, China, Chinese Taipei, Sri Lanka, Bahrain, United Arab Emirates, Qatar, the UK and the USA (Export Processing Zones Authority, 2005).

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observe that the value of apparel exports to the US declined by 12 per cent between 2004 and 2005. In addition, eight apparel manufacturing firms in the EPZ closed down, resulting in a loss of about 10,000 jobs. Even for those firms still in operation, a decline is reported in the capacity utilisation owing to declining orders from US buyers (see also McCormick et al., 2006). Anecdotal evidence suggests that most of the EPZ firms that closed down in Kenya relocated to China and India, while a few relocated to Uganda and Ghana. Our interviews with managers of some EPZ apparel firms indicated that the US buyers are slowly shifting their buying patterns to China and India where firms offer lower prices and shorter lead-times than firms in Kenya.9 Another impact has to do with the sourcing of apparel raw materials. Before the year 2005, raw materials were readily and cheaply available in China and India, but now they have gradually become less available and more expensive. This is due to increased domestic production in both China and India following the termination of the MFA. Therefore, Kenyan manufacturers are taking longer to source raw materials, resulting in long leadtimes. They also allege that the US buyers are pressuring them to lower their prices by approximately 25 per cent if they wish to continue getting orders (McCormick et al., 2006), and they are also being criticised by the buyers over the long leadtimes. However, their ability to address these concerns is limited by rising labour costs and the high costs of doing business in Kenya. Next, we examine the impact of China and India on Kenyan exports of clothing in third-country markets. Considering that the US market accounts for a high share of the apparel exports from the three countries helps us in understanding competition in a third-country market. We also take into account that the three countries export knitted and woven clothing products to the US. Table 5 shows the share of each country in the US clothing market between 2001 and 2006. Overall, we observe that China and India dominate in the US market for both the knitted and woven clothing products. In 2001, China accounted for about 11 per cent and India 3 per cent. Although market shares for both countries continued to rise, China has recorded more spectacular growth than India. In 2006, the Asian Drivers accounted for more than 30 per cent of the US clothing market. In the case of Kenya, the market share was less than 0.5 per cent between 2001 and 2006. The highest share was registered in 2004 when Kenya accounted for 0.41 per cent, but this declined to 0.36 per cent in 2006. Between 2004 and 2006, we observe that the market share for Kenya in the US declined, while that of China and India increased. Therefore, we can infer that the exports of woven and knitted

9

While the average lead-time for an order in China and India is 30 days, in Kenya the average lead-time is 120 days. In addition, China and India have better infrastructural systems and welldeveloped value-chain linkages. Wage rates in the Chinese and Indian manufacturing sector are more competitive than in Kenya (see also USAID, 2005; Export Processing Zones Authority, 2006; Kaplinsky et al., 2007).

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PAUL KAMAU ET AL. TABLE 5 Share of Exports to the US Clothing Market, 2001–06 (%)

Country

Clothing

2001

2002

2003

2004

2005

2006

China

HS61 Knitted or Crocheted HS62 Woven Total HS61–62 HS61 Knitted or Crocheted HS62 Woven Total HS61–62 HS61 Knitted or Crocheted HS62 Woven Total HS61–62

3.89 7.09 10.98 0.86 2.18 3.04 0.00 0.11 0.11

4.46 7.63 12.09 0.97 2.36 3.33 0.04 0.16 0.20

5.09 8.73 13.82 0.92 2.35 3.27 0.08 0.22 0.30

6.14 9.89 16.03 1.02 2.38 3.40 0.12 0.29 0.41

9.29 14.45 23.74 1.32 2.99 4.31 0.11 0.28 0.39

10.91 16.15 27.06 1.58 2.83 4.41 0.09 0.27 0.36

India Kenya

Source: Authors’ own calculations based on US import data.

clothing from Kenya face competition from China and India in the US market and are partly crowded out of the latter. Kenya is also facing competition from China and India clothing products in the East African market which has been a major market (CBIK, 2006).10 Finally, we now examine the impact of China and India in the domestic market for clothing, whereby increased imports of manufactured products from China and India have caused both positive and negative effects (see Table 6). On the one hand, the consumers’ welfare increases as they in most cases buy these products for lower costs than those supplied by domestic producers. On the other hand, these imports squeeze local producers out of domestic market opportunities. The net benefit of consumer welfare and loss of production determines the long-run impact of this trade. From Table 6, first, trade in textiles and clothing was much stronger between Kenya and India than it is between Kenya and China from 2000–05. Second, in both cases, trade has been in favour of China and India as Kenya imports more textiles and clothing products from the Asian Drivers than it exports to them. Third, the import of textiles constitutes the largest share of trade in textiles and clothing between Kenya and the Asian Drivers. This is mainly the fabrics for use by EPZ firms to assemble clothing products for the export markets. In 2001, Kenya’s trade with India in textile and clothing was almost double with China, Kshs.1,064.4 million and Kshs.622.02 million, respectively. However, by 2005, Kenya’s textile and clothing trade with China was more than that of India standing 10

Centre for Business Information in Kenya (CBIK) of the Export Promotion Council estimates that textile and clothing exports to Uganda and Tanzania declined by 55 per cent between 2000 and 2005. Interviews with managers of local garment firms also corroborated this allegation as some of the local firms which previously exported to Uganda and Tanzania have experienced drastic reduction in sales, due to imports from China and India as well as second-hand clothes.

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TABLE 6 Textile and Clothing Trade between Kenya and the Asian Drivers, 2000–05 (Kshs. million) 2000

2001

2002

2003

Exports to China

2004

Textiles 21.43 16.56 14.81 6.05 1.49 Clothing 0.34 – – 0.26 – Total 21.77 16.56 14.81 6.32 1.49 Imports from Textiles 454.91 915.57 567.58 592.71 1,030.23 China Clothing 145.35 156.24 62.94 119.50 217.59 Total 600.25 1,071. 81 630. 63 712.21 1,247.82 Trade T&C −578.48 −1,055.25 −615.82 −705.89 −1,246.33 Balance Exports to Textiles 0.55 2.69 1.70 0.60 0.32 India Clothing 4.39 0.016 – 0.39 – Total 4.95 2.71 1.70 1.00 0.32 Imports from Textiles 944.62 1,104.19 957.84 1,068.08 1,351.26 India Clothing 114.83 79.29 90.43 81.42 142.39 Total 1,059.45 1,183.48 1,048.27 1,149.49 1,493.25 Trade T&C −1,054.50 −1,801.77 −1,046.56 −1,148.49 −1,493.33 Balance

2005 2.24 0.19 2.43 2,125.71 383.55 2,509.26 −2,506.84 7.59 2.29 9.88 1,681.51 147.71 1, 8 29.22 −1,819.34

Source: Authors’ own calculations based on CBIK dataset (2006).

at Kshs.2,511.69 million and Kshs.1,839.1 million respectively (see Table 6). Due to the lack of data on local production of textiles and clothing, we were not able to determine the extent to which imports from China and India affect the domestic industry either through competitive or complementary impacts.11

3. FDI IN KENYA AND THE ASIAN DRIVERS

Over the last decade, China and India have emerged as the world’s most attractive destinations for foreign direct investment (FDI). Increasingly, China and India have become significant suppliers of FDI, particularly among developing countries. What is of interest to current research is the extent to which FDI flowing to China and India has had a‘crowding-out’ effect on other developing countries, as well as the impact of increased FDI from China and India on other countries. A number of studies conclude that the ‘crowding-out’ effect by FDI to China and India on African countries’ FDI is negligible because FDI in Africa is mainly resource-seeking and market-seeking (Eichengreen and Tong, 2005; Jenkins and Edwards, 2005; Kaplinsky and Morris, 2006). However, there could be competition between African countries and Asian Drivers, particularly in the 11

However, interviews with local producers indicated that they are being pushed out of the market by cheap imports. Further research is necessary to determine the impact of increased imports from China and India on consumer welfare and on domestic clothing and textiles production.

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manufacturing sector. Increasingly, there is consensus that in low-technology manufacturing activities such as footwear, textiles and clothing, a crowding-out effect is visible (Goldstein et al., 2006). In the case of textiles and clothing, observers argue that owing to the termination of the MFA, sourcing and investment decisions are no longer based on labour costs alone, but on economic fundamentals such as logistics, infrastructure, investment frameworks and governance (Appelbaum, 2005). In our case, we examine the implications of increased FDI in the Asian Drivers on Kenya. Data on sector and sources of FDI are critical for examining the extent of competition for FDI in Kenya and the Asian Drivers. Given that these statistics are not available our analysis is somehow limited. However, UNCTAD (2005) analysed FDI projects in Kenya based on registration with the Kenya Investment Authority (KIA) between 1997 and 2004. The analysis found that 27.6 per cent of FDI was in agro processing and 15.4 per cent in energy; 10.7 per cent in tourism; and 9.9 per cent in agricultural activities. Others included 4.4 per cent in petroleum trade; 2.5 per cent in mining; and 2.2 per cent in clothing manufacturing (UNCTAD, 2005). However, given the issue of reliability of data by KIA, these figures should be interpreted with caution. From UNCTAD (2005), FDI in manufacturing activities is almost 35 per cent. Studies have also shown that FDI in China and India is mainly in manufacturing activities (Jenkins and Edwards, 2005; Broadman et al., 2006). We can therefore infer that the increased FDI in manufacturing activities in China and India has a crowding-out effect in Kenya. In 2004, for instance, China alone attracted 17 per cent of global FDI in textiles and clothing (Appelbaum, 2005). In the same year, Kenya experienced a decline of 16 per cent of FDI in the textiles and clothing industry (Export Processing Zones Authority, 2006). There is an increased presence of FDI from China and India in Kenya. Based on data from the KIA we examine the value of FDI from these two countries between 2000 and 2005: a total of US$446 million in FDI was registered by KIA, of which US$32 million and US$79.4 million originated from China and from India, respectively (see Table 7). In total, China and India represented 7.2 per cent and 17.8 per cent of the FDI in Kenya.12 Moreover, a total of 57 projects from China and 28 from India were registered by the KIA during the period 2000–05 (Table 7). Using this information, we compute the average size of Chinese and Indian projects in Kenya. Although this measure is crude given the incompleteness of the data, we observe that on average an FDI project from China is US$0.56 million, while a project from India is US$2.82 million. Based on the average size,

12

In this case, we used data provided by the KIA because of their attempt to disaggregate FDI data by the country of origin. However, the caveat relating to the reliability and accuracy of FDI data still holds.

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TABLE 7 FDI from China and India in Kenya, 2000–05 Year

2000 2001 2002 2003 2004 2005 Total

Total FDI (US$ million)

No. of Projects

China Capital (US$ million)

Employment

No. of Projects

India Capital (US$ million)

Employment

127 50 50 82 46 91 446

9 13 6 11 8 10 57

3.48 5.55 1.33 11.95 7.10 2.61 32.01

775 1,313 170 493 1,442 207

4 1 4 5 6 8 28

4.97 0.18 1.74 11.28 41.28 19.85 79.30

980 364 395 1,222 1,185 1,151

Source: Authors’ own calculations based on the KIA dataset (2006).

we can then deduce that Chinese FDI projects in Kenya are comparatively smaller than those from India. Nonetheless, more research is needed given the incompleteness of the data on FDI in Kenya. Our discussion with respondents pointed out that, increasingly, FDI from China is concentrated in construction, telecommunication and resource-extraction activities, while that from India appears to be concentrated in manufacturing, financial services and information technology. In addition, we found that most FDI from China is by companies that in China are either wholly or partially state-owned even though in Kenya they operate as private companies (see also Zafar, 2007 pp. 21–23). In contrast, FDI from India is mainly by private sector companies. One of the outcomes of this kind of ownership is that Chinese companies by and large have access to low-cost capital and can be bailed out by the Chinese government in times of need. In an interview with one of the Chinese companies in Kenya, it was pointed out that, ‘since the entry of the firm into the Kenyan market the costs of road construction has gone down, quality of the road construction improved, and completion time adhered to’. Arguably, this was due to the fact that the Chinese company bids in the tendering are lower than most other companies. In addition, this company does a better quality job and in most cases it completes its construction work before the deadline. In that way this company claimed to have helped in setting high standards for government-related construction tenders. In the case of textiles and clothing, it is the continuation of liberal rules of origin and allowing Kenya to import inputs from cheap suppliers outside AGOA that has attracted FDI from Asian Drivers (Appelbaum, 2005; Brautigam, 2006). In 2005, a total of 24 apparel manufacturing firms were operating in Kenya’s EPZ. Out of these, 20 were foreign owned, three were joint ventures between foreign and

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Kenyan investors, and only one firm (4 per cent) was fully Kenyan.13 The origin of capital was somewhat diverse, but the dominance of China and India is evident. Of the 24 firms, eight had Indian ownership, while six had Chinese ownership, representing 33 and 25 per cent, respectively. Other countries from which investment originated included two firms from the US; three from Sri Lanka; two from Bangladesh; and one each from Bahrain, Qatar and Kenya. FDI in the clothing industry is fairly recent, as most firms were established between 2001 and 2003. Apart from one firm established in 1997, all the others were established after 2000, seven in 2001, 12 in 2002, and four in 2003. In 2004 and 2005, the Export Processing Zones Authority did not register any new investment in the clothing activities. With regard to textile manufacturing, there is only one firm in the EPZ programme, which was established in 2001, and is a joint venture between Kenya and the UK investors. On technology transfer, most of the Kenyan EPZ firms recruit people without experience in the garment industry who are then trained within the factory (Fukunishi et al., 2006). In this case, the EPZ firms do not compete directly with the local firms when recruiting their labour force. Equally, some former EPZ employees leave formal employment to start their own small-scale garment firms using the training and experience they got while working in the EPZ garment firm. Also, some production expatriate workers left EPZ firms to team up with local investors to establish garment factories. There are some locally-owned (non-EPZ) firms specialised in high-value activities such as embroidery, sand-blasting, stonewashing and printing, and they get regular subcontracts from EPZ firms. In this way, local firms are able to participate in the global apparel value chain indirectly. Last but not least, local garment firms are increasingly purchasing machinery from EPZ firms either when the latter upgrade their machinery inventory or at times when they close down. This has resulted in local firms using relatively modern technology in their production activities. The use of an expatriate labour force in Kenya’s EPZ programme is minimal and is limited to managerial positions.14 In this chapter, we did not find evidence of foreign investments by Kenyan companies in either China or India. However, a few Kenyan firms have entered these markets such as Kenya Airways, Copycat, Mabati Rolling Mills and Kenya Tourist Board (Business Africa, 2006). This concurs with other studies which have found that with the exception of South Africa, no other African country has foreign investment in either China or India (Broadman et al., 2006).

13

Data on local production in the textiles and clothing sector are not available from official statistics, which limits our analysis of FDI in the industry to firms operating in the EPZ programme for which data were obtained. However, studies find that in the local production, dominance of Kenyans of Indian origin is evident (Bigsten and Kimuyu, 2002: Kinyanjui et al., 2004; McCormick et al., 2007). 14 This is in contrast to EPZs in Mauritius and the Philippines where foreign workers are engaged in production activities (Adhikari and Yamamoto, 2006; Brautigam, 2006).

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4. DEVELOPMENT AID IN KENYA AND THE ASIAN DRIVERS

The recent increase in development aid15 from China and India to other developing countries has triggered a concern about its implications on development. On the one hand, developing countries are slowly shifting their allegiance to the East. As a result, the conventional North–South development aid architecture is becoming weak. On the other hand, critics have been concerned about the role of South–South development aid in governance and human rights issues. China is particularly criticised for giving development aid to countries without any concern about the quality of governance or human rights in the recipient countries, which largely contradicts with Western donors (Business in Africa, 2006; Tull, 2006; Kaplinsky et al., 2007). This section is devoted to examining how development aid from Asian Drivers impacts on Kenya. Kenya has a long history of receiving foreign aid. At independence, foreign aid was considered critical to economic reconstruction and over time foreign aid became a significant ingredient for economic development. More recently, foreign aid as a proportion of GDP was low with an annual average of 6.3 per cent between 1990 and 2004. Figure 4 demonstrates the percentage ratio of ODA in GDP for the period 1990–2004. The decline of ODA16 during the period 1996–2005 is clear from this graph. Unlike countries such as Tanzania and Uganda, which embraced economic reforms ardently, Kenya was moving sluggishly and at times backtrack-

Per cent

FIGURE 4 ODA as Proportion of GDP, 1990–2004 (%) 18 16 14 12 10 8 6 4 2 0

ODA as % of GDP

1991

1992

1993

1994

1995

1996

1997 1998 Years

1999

2000

2001

2002

2003

2004

Source: OECD (2007); World Bank (2007).

15 In this section, development aid provided by China and India is not referred to as Official Development Assistance, as the definition of the latter by the OECD Development Assistance Committee (DAC) is very specific (see http://www.oecd.org/glossary/0,2586,en_2649_33721_ 1965693_1_1_1_1,00.html#1965586). The characteristics of the Asian Drivers’ development aid remain partly unknown and do not necessarily fit with the official definition of ODA. 16 As officially defined by the OECD DAC.

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ing in the reform process. As a result, Kenya’s relationships with the donor community deteriorated in the 1990s. Besides being slow in the reform process, Kenya was also criticised for poor governance, low democratic space, high corruption rates and violation of human rights. Kenya’s utilisation capacity of foreign aid is considered low at about 40 per cent. Government officials argue that pre-disbursement and disbursement ‘conditionalities’ are some of the major factors behind the low utilisation rate. Moreover, the Kenyan government procurement framework has for a long time been weak, resulting in donors using either their countries’ or the World Bank procurement guidelines, oblivious to conflicts between the donors and the Kenyan government on this issue. Similarly, the ‘tying of aid’ and stringent accounting procedures (which vary with donors) have adversely affected the effectiveness of foreign aid in Kenya (source: interview with the Ministry of Finance). China and India have different histories of development and foreign aid to Africa. Until the mid-1990s much of the Chinese development aid went towards liberation movements in Africa (McCormick, 2006). In fact, in 1964, China provided Kenya with military support to counter a Somalian invasion but it declined to provide monetary support for the independent government to purchase former colonial farms (Daily Nation, 2006). China currently gives both monetary and non-monetary aid to Kenya while India concentrates on non-monetary aid. Development aid from China takes the form of investment in infrastructure, equipment and plant; academic training; technical training; human relief; and tariff exemptions. India, on the other hand, has a long history of supporting Kenya mainly through human development and technical assistance. India considers itself to be a poor country that is not yet able to give financial assistance to developing countries (Indian Technical and Economic Cooperation, 2007). It therefore limits its aid support to scholarships, technical training and technical assistance. Table 8 summarises areas supported by development aid from Asian Drivers between 2000 and 2005. TABLE 8 Main Types of Development Aid Given by China and India to Kenya, 2000–05 Type of Aid

General Budget Support Grants/Loans for Infrastructure, Plant & Equipment Scholarships for Academic Training Other Types of Training Opportunities Technical Assistance Tariff Exemptions Debt Relief Source: McCormick (2006).

Given by China

India

✓ ✓ ✓ ✓ ✓

✓ ✓ ✓

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Over the last five years China has given Kenya grants and loans for infrastructure, plant and equipment. These were mainly in road construction projects, modernisation of power distribution, rural electrification, water, renovation of an international sports centre, medical equipment and drugs for fighting malaria, as well as construction of a malaria research centre. China also offers scholarships to Kenyan students wishing to undertake their studies in China in diverse fields. Anecdotal sources indicate that about 100 scholarships are given by the Chinese government to Kenyans each year, 20 of which are in medical-related fields. Kenya was the first African country to receive Chinese financing of educational and cultural exchange programmes through the Confucius Chinese and Language Centre, currently hosted by the University of Nairobi in Kenya and Tia Jin Normal University in China (Xinhua, 2005). Table 9 shows the amount of loans and grants from China between 2002 and 2005. As a ratio of total loans and grants in Kenya, China accounted for 1.67 per cent in 2002 and 9.98 per cent in 2005. With the exception of 2004, the grant component of China’s loans and grants is relatively high. In fact, one of our respondents indicated that, ‘one of the reasons that Kenya is finding Chinese development aid more attractive than the Western one is the high percentage of “grant component”, long grace period of more than 10 years and a long repayment period of more than 25 years’. Development aid from China and India in Kenya differs substantially from that originating from Western donors. First, with regard to ‘terms and conditions’ imposed, and secondly, on the aspect of ‘tying’. China and India are not so much concerned about the issues of internal governance, human rights and democracy in Kenya as are the Western donors.17 Besides subscribing to the ‘One China Policy’, in the case of China, there is no other conditionality imposed on the TABLE 9 Loans and Grants from China, 2002–05 (US$ million)

Loans from China Grants from China Total Loans and Grants from China Total Foreign Loans Received in Kenya Total Foreign Grants Received in Kenya Total Foreign Loans and Grants Received in Kenya Share of Chinese L&G in Total Foreign L&G (per cent)

2002

2003

2004

2005

3.81 3.04 6.85 208.30 201.61 409.91 1.67

11.86 N/A 11.86 194.37 278.03 472.39 2.51

9.01 0.16 9.18 260.11 317.36 577.47 1.59

50.07 27.76 77.82 397.24 382.64 779.88 9.98

Source: Computed from the Ministry of Finance dataset (2006).

17

By offering aid without preconditions, China has presented an attractive alternative to conditional Western aid, and gained valuable diplomatic support to defend its international interests (Tull, 2006).

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recipient country. China ‘ties’ its aid to using Chinese companies and procurement of materials in China, but nonetheless, most government officials believe that China is perhaps one of the most price-competitive sources whether its development aid is ‘tied’ or not. On technical assistance, India requires that training and consultancy be done by Indian companies. On scholarships and technical training, decisions are made by the relevant Ministry in Kenya. Neither China nor India takes part in the donor coordination initiatives and each of these countries prefers to operate independently. In any case, India does not consider itself a donor country. In terms of accounting, officials in the public sector argued that both China and India are much more flexible than the Western donors in accommodating domestic constraints.

5. POLITICAL ECONOMY ISSUES AND HUMAN RESOURCE FLOWS

a. The Sino-Kenya Relationship Kenya and China trade and diplomatic relations have historical ties, starting with the Ming Dynasty.18 Although China embraced communism and Kenya at independence adopted a capitalist system, their relations have largely remained cordial. It is important to note that China was the fourth country to recognise Kenya’s independence in 1963 when the two countries exchanged diplomatic representations.19 The Chinese embassy in Kenya is arguably their largest embassy in Africa both in terms of size and employees (source: interview with a Chinese embassy official in Nairobi). It is strategically located in a relatively high-security neighbourhood near the Defence Headquarters, Kenya Army Barracks, and close to Kenya’s State House. Kenya subscribes to the ‘One China Policy’, which states that ‘there is only one China in the world and that Chinese Taipei is one part (a Province) of China’. The Sino-Kenya relationship, first established in 1964, was centred on promoting trade between the two countries. The trade component of this relation was further reinforced in 1978, when under the leadership of Deng Xiaoping, China started implementing trade reforms and outward-oriented programmes. Since the China–Africa Forum was established in 2000, Kenya has remained an active member of the forum.

18

A story is told of how through royal orders Zheng commanded seven expeditions to the western oceans in the early 15th century. Navigating by a compass and astronomical readings, Zheng’s fleet visited many African islands in the Eastern Africa region including Lamu and Mombasa, now in Kenya, and that some sailors may have settled on the Kenyan coast after a shipwreck (Business in Africa, 2006). 19 The first country to recognise Kenya’s independence was Germany (then West Germany), then Russia, Ethiopia and then China. This order of recognition is still reflected in the diplomatic numbers given to the embassies of these countries which are 1-CD, 2-CD, 3-CD and 4-CD, respectively.

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The exchange of official visits at the high levels of head of states, ministers, senior government officials and business delegations has strengthened relations between China and Kenya. Kenya’s first high-profile delegation to China was in 1964 led by the then Vice-President Jaramogi Oginga Odinga. In 1980, the then Kenyan President Daniel arap Moi led another high-profile delegation to China, followed by others in 1988 and 1994. In August 2005, President Mwai Kibaki led a Kenyan delegation to China which resulted in the signing of several bilateral agreements. In May 1996, the former President of China Jiang Zemin made a state visit to Kenya, which marked the first ever visit to Africa by a Chinese president. In April 2006, the Chinese president, Hu Jintao, visited Kenya in his tour of five African countries as the head of state. Over 15 Kenyan ministers have visited China since 2002. The Indo-Kenya relationship has a long history due to common past experiences between India and Kenya. For instance, the two countries were British colonies and as such remain members of the Commonwealth of Nations.20 They are also members of the Non-Allied Movement.21 The Indo-Kenya relationship dates back to 1963 when Kenya became independent and the two countries exchanged diplomatic representations. The relations between Kenya and India have been strengthened further by several official visits by senior government officials and delegates that have taken place between the two countries. Kenya has a diplomatic mission in New Delhi and has recently opened a consulate in Mumbai. Similarly, India has a diplomatic mission in Nairobi, which also serves the Democratic Republic of Congo and Eritrea. b. The Chinese and Indian Diaspora in Kenya Studies on the Chinese and Indian diaspora in Africa in general and Kenya in particular are few (Himbara, 1994; Brautigam, 2006; Dobler, 2006; McCormick, 2006). Generally speaking, the entry of people of Chinese origin in Kenya is fairly recent and their population is still low. It is only in the last decade or so that the presence of a Chinese community in Kenya has become noticeable. In Kenya, the small number of Chinese people and their separation from the rest of the people has contributed to the Chinese community being hardly visible. The majority of people of Chinese origin in Nairobi reside in a small neighbourhood, close to the location of the Chinese Embassy in Kenya and where most of the Chinese companies are located. These people are mainly engaged in importation, trading and 20

The Commonwealth of Nations is a voluntary association of 53 independent sovereign states, almost all of which are former colonies of the United Kingdom. 21 It is also important to note that as a result of the assistance that India has extended to most of the African countries and the inspiration from Mahatma Gandhi, it has an ‘Observer Status’ in the African Union.

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manufacturing activities. Most of them live close to one another arguably due to their unique lifestyle and also the fact that their number is small. As a community they meet regularly to share information and business ideas. One respondent reported that ‘we Chinese prefer to live exclusively while away from home’. Interestingly, even those Chinese people engaged in the clothing industry avoid dealing directly with the local workers as they tactfully employ local human resource managers and accountants to handle local labour matters. Anecdotally, it is currently estimated that there are approximately 8,000 Chinese people living in Kenya. However, there are no official statistics of PCO in Kenya. Kenya’s People of Indian Origin constitute just over 1 per cent of the population. Even though they are many more than the Chinese, they are still a tiny minority. The greatest influx of Indians in Kenya occurred in 1896 when about 31,000 labourers from Punjab and Gujarati were brought in to assist in the construction of the Kenya–Uganda railway (for detailed analysis see Himbara, 1994; Vick, 2000). After the construction of the railway line was completed, some of the people of Indian origin (PIO) were absorbed to work as train drivers, foremen, station-masters, telegraph-workers, mechanics, carpenters or upholsterers. Others were employed by the government as clerks, bookkeepers, health technicians or teachers. Those that were not absorbed by the railway or the government established small retail shops then known as duka-wallas in small urban centres that were developing near railway stations (Cowen and Scott, 1996). The aim of these duka-wallas was to serve people in the neighbourhood of railway stations and the travellers using the railway line (Himbara, 1994). Due to the fact that the PIO were highly regarded by the colonial government and also they were relatively well-off economically compared to the indigenous population, they remained largely disconnected from the local people (Vick, 2000). Their numbers dropped sharply in the years following independence, and have continued to decline. Indigenous people felt that the PIO were betraying them by being closer to the colonialists, and as a result their relationship was largely sour. At independence in 1963, people of Indian origin found themselves in a vacuum, as they were not sure whether to align themselves to the former colonialists or indigenous Africans (Himbara, 1994; Cowen and Scott, 1996). Some migrated to Britain while others remained in Kenya where they were given citizenship. Fearing the possible repercussions from the African government, only 10 per cent of the people of Indian origin opted to remain in Kenya. The rest migrated to Britain where they got automatic British citizenship until 1968, when the Immigration Act of 1968 that deprived automatic citizenship was passed (see Cowen and Scott, 1996; Vick 2000). Although PIO were engaged in trading activities, the Trade Licensing Act of 1967 prohibited the non-indigenous Kenyans from undertaking trade-related activities. This pushed PIO into manufacturing activities where they remain dominant to date. The number of PIO in Kenya is estimated at about 500,000 according

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to the 1999 population census. Nonetheless, this community has remained distanced from the local populace and they have retained their culture, religions and beliefs. Most of the PIO in Kenya live in areas originally designated for them by the colonial government.

6. CONCLUSIONS AND POLICY RECOMMENDATIONS

In this chapter we have analysed the impact of the ascendancy of China and India on Kenya based on trade flows, investment, aid and diaspora. Given the central theme of the study, we have mainly focused on textile and clothing manufacturing for which the entry of China and India has had great impacts. In conclusion, we highlight major findings of this study using the four trajectories and at the end we suggest some recommendations. a. Trade The study finds that trade between the Asian Drivers and Kenya has increased significantly during the last decade. India ranks higher than China in terms of both exports and imports. Moreover, bilateral trade has remained largely in favour of the Asian Drivers. Kenya’s export-basket comprises raw materials which unfortunately are not among the major Kenyan export commodities (with the exception of tea). On the other hand, Kenya imports machinery, manufactured products and medicine from these countries. Thus, Kenya has limited potential to increase its export share in China and India. On the other hand, China and India are likely to export more into the Kenyan market and indeed the world market given their competitiveness. The Kenyan clothing industry (in particular its export-oriented segment) has depended on India and China for supply of inputs. This dependency will continue unless Kenya develops its upstream cotton, yarn and fabric linkages, or a greater clothing and textile synergy is created within the region. Already signs are showing that the dependency on imported inputs is not sustainable in the long run. The Asian Drivers’ share of textile and clothing products in the Kenyan market is formidable and it is gradually threatening domestic production. Although this is good for consumers, it is clear that in the long run domestic industry is unlikely to compete. In the export market, China and India are also threatening Kenya. The chapter has shown that export share in the US market has declined while that of China and India increased for knitted and woven clothing. The entry of China and India in the global market for textiles and clothing is pushing world prices downwards. This is a threat to less competitive exporters like Kenya where cost of production is comparatively higher than in China or India. In the regional market, Kenya has lost a substantial share of its market as a result of imports from China and India.

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b. Foreign Direct Investment The study has demonstrated that FDI from China and India is rapidly increasing in Kenya. A notable feature of these investments is their spread in many sectors of the economy. These investments are in the construction, oil exploration, manufacturing, services and telecommunication sectors. In the case of the textiles and clothing industry, we find that China and India account for more than 60 per cent of FDI. Increasing FDI from China and India in this sector has played a critical role in employment creation, manufactured export promotion and technology transfer, but it is not clear how sustainable these gains are. The labour-intensive nature of the industry combined with the fact that Chinese and Indian FDI has been largely motivated by the desire to exploit preferential markets which are accessible to Kenya make these investments precarious. Investors can easily choose to shift their operations to other destinations when incentives to operate in Kenya wane. Apart from the case of textiles and clothing, however, we find no evidence of diversion of FDI from Kenya to China and India. Finally, lack of consistent, disaggregated and updated statistics on FDI in Kenya seriously limits our analysis. We suggest that more research is needed. c. Foreign Aid Although foreign aid from Asian Drivers to Kenya is increasing, it is still small compared to total aid. Loans and grants from China increased remarkably between 2002 and 2005. By the year 2005 China alone accounted for nearly 10 per cent of loans and grants received in Kenya. While India limits its development aid to technical assistance, scholarships and technical training, China extends beyond this to cover investments in infrastructure, plant and equipment. The fact that development aid to both China and India has declined substantially in the recent past may imply that more will be available for low-income countries like Kenya. Although the link between aid and development is still unclear, the types of aid given by China and India may in the long run have a positive effect on the economy and by extension on the textiles and clothing industry. d. Politics and Diaspora As far as Chinese and Indian diasporas are concerned, research and statistics are largely undeveloped. Nonetheless, this chapter has documented that the population of both Chinese and Indians in Kenya is rapidly growing, but there are no records to show the rate of growth. Different respondents in our survey gave different figures and rates of population growth of Chinese and Indians in Kenya. Limitation of data constrains our analysis in terms of the activities these diasporas are involved in, but we do show that their presence in the textiles and clothing industry is significant. Given the networks of these diasporas with their respective

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countries of origin, there is a possibility of utilising it for mutual benefit. A more detailed analysis is required to unravel costs and benefits of these diasporas in Kenya. e. Recommendations The textiles and clothing industry plays an important role in Kenya. The industry has its fair share of economic growth largely in export revenue, employment creation, industrial development and linking Kenya to the global economy. The most significant impact of the rise of China and India is the increased competition in both domestic and export markets. The only factor that has sustained Kenya in the export market is the preferential treatment in the US market which allows textile and clothing exports duty free. In order for Kenya to continue exporting into this market beyond 2012, there is a need to explore the possibility of developing its upstream cotton, yarn and fabric linkages. While Kenya should pursue trade preferences with other major importers besides the US, it is important to note that there is a need to upgrade production capabilities on an ongoing basis. This is perhaps more urgent for Kenya given that the textiles and clothing industry is characterised by rapid technical change and changing patterns of trade. While China and India are still present in the Kenyan EPZ, there is a need to establish policies that allow more interaction between the exported-oriented and domestic firms. This will facilitate more learning and technology transfer from foreignowned EPZs to local firms. Currently, EPZ firms wishing to interact with local firms by subcontracting to them find the policy regulations inhibiting as this will require approval from the Ministry of Finance. Increased industrial synergy will be created when local and export-oriented firms are able to learn from each other. It is unfortunate that Kenya is locked into the lower end of the clothing value chain with most export products being standard type, low-price and low-quality apparel. There is a need to move up the value chain by producing niche products in the medium term. This would reduce the vulnerability of an industry that has focused only on mass-market production. This calls for increased flexibility in order to adapt to the demands of new customers who will often prefer a wider product range, but in smaller quantities. More linkages need to be created between Kenyan producers and high-value buyers in developed countries rather than relying on mass retailers. Similarly, networks that Chinese and Indian investors in Kenya have either in Asia or in importing countries should be strengthened with a view to benefiting the industry. The investment framework in Kenya needs to be revised on a more regular basis to ensure that the legislation is attractive to new investors and also to retain the existing ones. Laws and incentives should be made more investor- and exporterfriendly. The government should also move to sign bilateral investment treaties and trade agreements with China and India so as to tap increasing investments from these sources. This will also facilitate more trade between Kenya and the

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Asian Drivers. Infrastructural obstacles such as dilapidated road transport, insecurity, electricity supply and customs clearance which increase the lead-time for Kenya need to be addressed urgently. Low labour costs in Kenya will no longer be the driving force in attracting foreign investors to the industry. Policies aimed at developing the labour force should be designed. There is an insufficient skill level when it comes to the use of new machines and technology in Kenya. Far too little has been spent on training of staff. Better trained staff will lead to increases in production and efficiency and will lower costs. In addition, acquisition of work permits for foreign technical workers in the industry should be made much easier than it is currently. There is a need to utilise foreign aid from Asian Drivers prudently to ensure maximum benefit to the entire economy. Finally, availability of data relating to production, trade, investment and ‘diaspora’ needs to be developed so as to enable more informed decision making.

REFERENCES Adhikari, Ratnakar and Yumiko Yamamoto (2006), Sewing Thoughts: How to Realise Human Development Gains in the Post-Quota World (Colombo: UNDP-RCC). Alemayehu, Geda (2006), ‘The Impact of China and India on Africa: Trade, FDI and the Manufacturing Sector ’, Paper presented at workshop on Impact of China and India on SubSaharan Africa, organised by the African Economic Research Consortium, 9–10 October 2006, Addis Ababa, Ethiopia. Appelbaum, Richard P. (2005), ‘TNCs and the Removal of Textiles and Clothing Quotas’, Series of Current Studies on FDI and Development (Geneva: UNCTAD). Bigsten, Arne and Peter Kimuyu (eds.) (2002), Structure and Performance of Manufacturing in Kenya (London: Palgrave Publishers). Brautigam, Deborah (2006), ‘ “Flying Geese” or “Hidden Dragon” Chinese Business and African Industrial Development’, mimeo, American University, Washington, DC. Broadman, Harry G., Gozde Isik, Sonia Plaza, Xiao Ye and Yutaka Yoshino (2006), Africa’s Silk Road: China and India’s New Economic Frontier (Washington, DC: World Bank). Business in Africa (2006), ‘Unpacking Africa’s Great Asian Opportunity’, Business in Africa, May (Nairobi). CBS, K-REP and ICEG (1999), A National Survey of Small and Micro Enterprises in Kenya, Nairobi, Central Bureau of Statistics, K-REP Holdings Ltd and International Centre for Economic Growth. Centre for Business Information in Kenya (2006), Kenyan International Trade Statistics, CBIK, a Division of Export Promotion Council, Nairobi. China Africa (2006), ‘Sino-Africa Connections: Work Together to Forge a New Type of China– Africa Strategic Partnership’, Beijing Review, 11, 5–11. Cowen, Michael and Scott MacWilliam (1996), Indigenous Capital in Kenya: The Indian Dimension of Debate (Helsinki: Interkont Books). Daily Nation (2006), ‘When Kenya Viewed Beijing Suspiciously’, Sunday Nation, 30 April 2006, Nairobi. Dobler, Gregor (2006), ‘South–South Business Relations in Practice: Chinese Merchants in Oshikango, Namibia’, mimeo, Institute for Social Anthropology, Universitaät Basel, Münstreplatz, Switzerland. Eichengreen, Barry and Hui Tong (2005), ‘Is China’s FDI Coming at the Expense of Other Countries?’, NBER Working Paper No. 11335 (Cambridge, MA: National Bureau of Economic Research).

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Export Processing Zones Authority (Various issues), Annual Reports, Nairobi: EPZA. Fukunishi, Takahiro, Mayumi Murayama and Tatsumi Yamagata (2006), Industrialization and Poverty Alleviation: Pro-poor Industrialization Strategies Revisited (Vienna: UNIDO). Goldstein, Andrea, Nicolas Pinaud, Helmut Reisen and Xiaobao Chen (2006), China and India: What is in it for Africa? (Paris: OECD). Government of Kenya (Various issues), Statistical Abstracts (Nairobi: Government Printer). Himbara, David (1994), Kenyan Capitalists, the State and Development (Nairobi: East African Educational Publishers). Indian Technical and Economic Cooperation Division (2007), ‘A Note on Indian Technical and Economic Cooperation (ITEC)’, http://itec.nic.in/about.htm, last accessed 16 March 2007. Jenkins, Rhys and Chris Edwards (2005), The Effect of China and India’s Growth and Trade Liberalization on Poverty in Africa, Final Report (London: DfID). Kaplinsky, Raphael and Mike Morris (2006), ‘The Asian Drivers and SSA: MFA Quota Removal and the Portents for African Industrialization’, Paper presented to a workshop on Asian and other Drivers of Change, St. Petersburg, 18–19 January 2006. Kaplinsky, Raphael, Dorothy McCormick and Mike Morris (2007), ‘The Impact of China on Sub Saharan Africa’, IDS Working Paper No. 291, Brighton: Institute of Development Studies. Kinyanjui, Mary N., Dorothy McCormick and Peter Ligulu (2004), ‘Clothing and Footwear in Kenya: Policy and Research Concerns’, in D. McCormick and C. Rogerson (eds.), Clothing and Footwear in African Industrialization (Pretoria: Africa Institute of South Africa). McCormick, Dorothy (2006), ‘China, India and African Manufacturing: Framework for Understanding the Impact of Aid and Migration’, Paper presented at workshop on Impact of China and India on Sub-Saharan Africa, organised by the African Economic Research Consortium, 9–10 October 2006, Addis Ababa, Ethiopia. McCormick, Dorothy, Peter Kimuyu and Mary N. Kinyanjui (2007), ‘Textiles and Clothing: Global Players and Local Struggles’, in D. McCormick, P. O. Alila and M. Omosa (eds.), Business in Kenya: Institutions and Interactions (Nairobi: University of Nairobi Press). McCormick, Dorothy, Paul Kamau and Peter Ligulu (2006), ‘Post-Multifibre Agreement Analysis of the Textile and Garment Sectors in Kenya’, IDS Bulletin, 37, 80–88. Morris, Mike (2006), ‘China’s Dominance of Global Clothing and Textiles: Is Preferential Trade Access an Answer for Sub-Saharan Africa?’, IDS Bulletin, 37, 89–97. OECD (2007), OECD Official Development Assistance Statistics, http://www.oecd.org/document/3 3/0,2340,en_2649_34447_36661793_1_1_1_1,00.html, last accessed on 9 March 2007. Razmi, Arslan (2006), ‘Pursuing Manufacturing-Based Export-Led Growth: Are Developing Countries Increasingly Crowding Each Other Out?’, Department of Economics Working Paper 2006-05 (Amherst: University of Massachusetts). Stevens, Christopher and Jane Kennan (2006), ‘How to Identify the Trade Impact of China on Small Countries’, IDS Bulletin, 37, 33–42. Tull, Denis M. (2006), ‘China’s Engagement in Africa: Scope, Significance and Consequences’, Journal of Modern African Studies, 44, 459–79. UNCTAD (2005), Investment Policy of Kenya (Geneva: UNCTAD). USAID (2005) ‘Impact of the End of MFA Quotas and COMESA’s Textile and Apparel Exports under AGOA: Can the Sub-Saharan Africa Textile and Apparel Industry Survive and Grow in the Post-MFA World?’, Report prepared for USAID East and Central Africa Global Competitiveness Trade Hub. Vick, Karl (2000), ‘A New View of Kenya’s Asians’, Washington Post, 15 March 2000, http://www. goacom.org/news/news2000/mar/msg00094.html, last accessed on 20 August 2006. World Bank (2007), World Development Indicators (Washington, DC: World Bank). Xinhua News Agency (2005), ‘First Confucius Institute for Africa Launched in Nairobi, December 20, 2005’, http://www.china.org.cn/english/international/152505.htm, last accessed 9 September 2006. Zafar, Ali (2007), ‘The Growing Relationship between China and Sub-Saharan Africa: Macroeconomic Trade Investment and Aid Links’, The World Bank Observer (Washington, DC: World Bank).

6 The Developmental Impact of Asian Drivers on Ethiopia with Emphasis on Small-scale Footwear Producers Tegegne Gebre-Egziabher

1. INTRODUCTION

O

NE clear consequence of recent changes in Chinese and Indian production and trade flows is in the industrial policy and sectoral choice of developing countries1 (Kaplinsky et al., 2006). The industrial sector in developing countries and particularly in Africa is extremely susceptible to Chinese and Indian exports. These exports can affect the industrial sector on two fronts: they create competition in internal markets for domestically-oriented manufacturers and competition in external markets for export-oriented industries (Kaplinsky et al., 2006). Producers in domestically-oriented industries can be easily displaced as they cannot withstand the competition from cheap imports from Asia. On the other hand, export-oriented industries face competition in the world market or third-country market as Chinese and Indian exports enter such markets. The potential for industrialisation in developing countries can also be affected by Chinese and Indian competition which has the capacity to crowd-out the efforts of developing countries. However, competition does not always displace competitors, but as classical economics tell us competition can enhance the productivity of those firms exposed to a competitive environment. It, therefore, becomes interesting to identify which of these effects dominate in order to maximise the opportunities and minimise the threats. This chapter was commissioned by the OECD. Part of the material for the chapter was completed as a research programme carried out by the African Clothing and Footwear Research Network (ACFRN). 1 Other policy areas that are of relevance are commodity production, poverty and income distribution, good governance, global and regional links.

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This chapter primarily aims at examining the impacts of Chinese imports on the Ethiopian footwear sector with the view toward understanding the impacts and identifying ways forward. It also provides a general perspective on the impacts of China and India on Ethiopia. Both secondary and primary data were collected for the study. Secondary data pertaining to trade relations, investment and aid (assistance) were collected from various Ministries and Offices. Primary data were collected to provide firm-level evidence on the impacts of Chinese imports on local producers. The data were collected using case study and survey methods. Sixty-six micro enterprises (20 per cent of micro enterprises in the study area) and 30 small and medium enterprises (40 per cent of firms in this category) chosen randomly were interviewed from a list of 330 micro enterprises and 75 small and medium enterprises2 prepared by a census of the study area.3 The study areas, kebeles4 5, 12 and 17, were chosen since they represent the highest concentration of smallscale footwear production enterprises in Addis Ababa. In addition an in-depth interview was conducted with six information-rich case studies which were purposefully chosen from entrepreneurs who were willing to volunteer information. The chapter is structured as follows. Section 2 provides an overview of China’s and India’s impact on Ethiopia along three main vectors: trade, investment and aid. Section 3 examines the impact of Chinese imports on the Ethiopian smallscale footwear sector. In the concluding section, opportunities and challenges are highlighted.

2. THE IMPACT OF CHINA AND INDIA: TRADE, FDI AND AID

a. China’s and India’s Trade Relations with Ethiopia The economic links between China and India on the one hand and Ethiopia on the other can be seen in terms-of-trade relations. Figure 1 shows the growth of imports, exports and trade balance between Ethiopia and China. It is clearly evident from the figure that imports from China are expanding more rapidly than export to China. Ethiopia’s export to China was minimal in the 1990s and started to pick up only in the first half of 2000. There is, however, a huge gap between imports and exports resulting in a trade balance that favours China.

2

This chapter uses an operational definition of micro, small and medium enterprises. Micro enterprises are those with up to 15 employees while small and medium enterprises are those with more than 15 employees. This definition closely follows that used by Knorringa and Pegler (2004) for Ethiopian shoe industries. 3 A total of 94 questionnaires were used since two questionnaires were found to have insufficient information. 4 A kebele is the smallest administrative unit found within a city. Addis Ababa is divided into 128 kebeles.

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TEGEGNE GEBRE-EGZIABHER FIGURE 1 Balance of Trade between Ethiopia and China, 1991–2004 350,000 300,000 000 US$

250,000 200,000

Import Export Trade balance

150,000 100,000

2003

2001

1999

1997

1995

1993

0

1991

50,000

Year Source: Ministry of Trade and Industry, unpublished data.

FIGURE 2 Balance of Trade between Ethiopia and India, 1992–2004

000 US$

200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

Export Import Trade balance

Year Source: Ministry of Trade and Industry, unpublished data.

Similarly, Figure 2 shows that imports from India have grown far greater than exports to India with the balance of trade favouring India. Imports from India have shown a constant increase with the highest jump being since 2002 onwards. The highest volume of export to India was in the year 2001 when it reached US$7 million. Exports since then have declined, though the level is still higher than during the period prior to 2001. (i) Exports from Ethiopia to China and India Many authors have noted that the rapid growth of the Chinese and Indian economies and the rapid growth of demand for commodity imports have offered market opportunities to exporters around the world (Jenkins and Edwards, 2006; Kaplinsky et al., 2006). Many African countries have benefited from export growth

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FIGURE 3 Share of Imports and Exports from and to China and India (% of total Ethiopian imports and exports) 14 12

Per cent

10 8 6 4 2 0

1997

1998 1999 2000 2001 2002 2003 Imports from China Exports to China Imports from India Exports to India

2004

Source: Ministry of Trade and Industry, unpublished data.

to China and India (Jenkins and Edwards, 2006). The share of Ethiopia’s exports to China has remained low during the period 1997–2004. Exports to China were under 2 per cent for the same period (Figure 3). This compares very poorly with other African countries which export to China such as Sudan (41 per cent of total exports in 2003 went to China) and Angola (23 per cent). It is, however, important to note that the share of exports to China between 1997 and 2004 has shown a steady increase, though limited in magnitude (Figure 3). The most recent data available on Ethiopian exports, however, show that there has been a surge of exports particularly to China. China has become the number one trade partner for Ethiopia in the year 2005/06. Table 1 shows that out of different destination countries for Ethiopian exports (111 countries were listed as destinations for export in 2005/06), China has the highest share (13.34 per cent). China’s share was only 0.22 per cent in the year 2000. The share of other countries, such as Germany which was the leading export destination in the earlier period, declined due to the rise of China as an important destination. In fact, Ethiopia’s export bundle is highly concentrated in terms of market and product; for example, more than half of Ethiopia’s export is directed to four countries: the European Union, Japan, Djibouti and Saudi Arabia. Now China has superseded these countries. This helps Ethiopia to diversify its export market, which is important for Ethiopia in terms of prices and financial possibilities. One of the reasons for China’s dominance is that Ethiopia, since January 2005, has received preferential treatment to export a number of products (about

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187 products) free of quota and duty to China. China has instituted a programme of tariff exemption for 25 sub-Saharan African (SSA) economies covering 190 products in order to reduce the Chinese tariff on SSA imports which was higher than other Asian economies (Kaplinsky et al., 2006). The major types of products exported to China are agricultural products which are unprocessed or semi-processed. These include skins, leather and leather products, oil seeds and pulses, incense, sesame and coffee (Figure 4). Tantalum has also been exported since 2002. The bulk of leather, skin and hides are semi-processed. Although Ethiopia was given preferential treatment to export 187 products free of quota and duty, the country only managed to export three of the stated products: sesame, leather and leather products, and incense to China under the preferential trade policy granted in the year 2005/06. Ethiopia has huge potential in other products which are allowed to be exported to China under preferential terms. These include coffee, natural gum, beeswax, edible oil, horticultural and textile products, precious stones and other organic products. Exports from Ethiopia to India declined in 2002 and 2003 from the peak of US$17 million in 2001 (Ministry of Industry, unpublished data). The major items exported are skins, leather, leguminous vegetables and cotton, though the latter has shown a decline in 2004 (Figure 5). The share of exports to India reached a peak of 4 per cent in the period up to 2001 but has remained mostly under 3 per cent for the period 1997–2004 (Figure 3). As opposed to China, India’s share in the total exports in 2005/06 was only 0.75 per cent, ranking only 25th in the list of destinations. This is a decline from its share of 1.7 per cent in the year 2000 (Table 1). The volume of export during this period, however, has shown a limited decline. The reason for a declining share despite little change in the volume of export could be due to the rise in the total volume of Ethiopian exports making India’s share decrease significantly since there is no overall change in the volume FIGURE 4 Ethiopia’s Export to China by Major Commodities (% of total exports to China) In 2000 1% 3% 1% 9%

43%

15%

In 2004 1% 7%

5%

53% 62% Coffee Natural gum Skins and leather and leather products Others

Source: Ministry of Trade and Industry.

Coffee Natural gum Skins and leather and leather products Oil seeds and pulses Pile fabrics Tantalum Others

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FIGURE 5 Ethiopia’s Export to India by Major Commodities (% of total exports to India) 12%

In 2000 1%

In 2004 27% 45%

87%

0% 4% 4% 1%

Skin and leather Cotton Natural gum

7%

12%

Skin and leather Leguminous vegetables Oil seeds Scraps Ginger Coffee Chat Others

Source: Ministry of Trade and Industry.

TABLE 1 Value and Share of Ethiopian Exports by Country of Destination, 2000 and 2005/06 Country

China Germany Japan Switzerland Djibouti Italy Saudi Arabia USA Somalia Netherlands India Total sum

2000

2005/06

Value (US$ millions)

% Share

Value (US$ millions)

% Share

1.0 91.2 54.6 27.4 48.1 30.4 37.3 17.1 29.2 9.8 8.0 465.8

0.2 19.6 11.7 5.9 10.3 6.5 7.9 3.7 6.3 2.1 1.7 100.0

134.6 99.0 79.0 66.7 57.0 55.3 54.8 47.6 38.4 38.1 7.6 1,008.6

13.3 9.8 7.8 6.6 5.7 5.5 5.4 4.7 3.8 3.8 0.7 100.0

Source: Ministry of Trade and Industry.

of exports to India. India does not have any preferential trade agreement with Ethiopia, though the two countries have agreements to promote and facilitate trade, as well as commercial and economic cooperation between them on a longterm and stable basis. (ii) Imports from China and India Figure 3 shows that there is a steady increase in the share of imports from China and India. Imports from China have shown a significant increase. The volume of

118

TEGEGNE GEBRE-EGZIABHER FIGURE 6 Ethiopia’s Major Imported Commodities from China (% of total imports from China) In 2000 18%

1%

In 2004 1.1%

0.3% 16.5%

0% 4% 2% 1% 28%

1.1% 1.5%

5.8%

28.1%

12% 12%

14%

Food items Medicament and pharmaceuticals Textile and textile products Articles of iron, steal, copper, aluminium, metals Electrical and electronic equipments Others

8% Chemicals Paper and paper product Footwear Machinery Motor vehicle

22.9% 9.1% Food items Medicament and pharmaceuticals Textile and textile products Articles of iron, steal, copper, aluminium, metals

8.7%

4.8%

Chemicals Paper and paper product Footwear Machinery Motor vehicle

Electrical and electronic equipments Others

Source: Ministry of Trade and Industry, unpublished data.

imports from India has increased from US$90 million in 2001 to US$177.6 million in 2004 with a 78 percentage point change (Figure 2). The volume of Chinese imports rose from US$87.5 million in 2000 to US$291.4 million in 2004, showing a 233 per cent increase (Figure 1). The share of imports from China in Ethiopia’s total imports has grown from less than 5 per cent in the late 1990s to over 10 per cent by 2004 (Figure 3). This increment is not matched by imports from India which have remained around 5 per cent for most of the period and a little over 5 per cent in 2003 and 2004. The major commodities imported from both India and China are manufactured goods which are both labour-intensive and non-labour-intensive products (Figures 6 and 7). Among labour-intensive products, textiles and textile products and footwear form the major types of goods. The value of footwear and textiles imported from China (US$96 million in 2004) is much higher than those coming from India (US$6.9 million in 2004). Since these products are domestically produced, their importation has a significant effect on local producers. The specific effects of Chinese imports particularly on footwear producers are discussed in Section 3. On the other hand, it is acknowledged that cheap Chinese and Indian goods will reduce prices to consumers (Jenkins and Edwards, 2006). The net welfare effects of Chinese and Indian imports in Ethiopia, however, are not known. (iii) Competition in the third-country markets One way of looking at whether Ethiopia faces competition from China and India in the third-country markets is to look at the export structure. Most Ethiopian exports are unprocessed agricultural products while most Chinese exports are

IMPACT OF ASIAN DRIVERS ON ETHIOPIA

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FIGURE 7 Ethiopia’s Major Imported Commodities from India (% of total imports from India) In 2000 21%

1% 1% 3%

7%

16.5%

In 2004 0.9% 0.5% 2.4% 3.4% 4.7%

4.9%

39%

16% 7%

4% 1%

Measuring instruments Electrical and electronic equipments Products of metal Textile Rubber, chemicals and mineral

Motor Vehicles Machineries Articles of glasses Paper and paper products Others

8.9% 2.1% Measuring instruments Electrical and electronic equipments Products of metal Textile Rubber, chemicals and mineral

55.6% Motor Vehicles Machineries Articles of glasses Paper and paper products Others

Source: Ministry of Trade and Industry, unpublished data.

manufactured goods. This suggests that Ethiopia may not face a competitive threat in third-country markets from China or India. This is further reinforced by the export similarity index (ESI) between Ethiopia and China. Jenkins and Edwards (2006) computed the ESI for 2003 between Ethiopia and China to be 4.3 per cent while that between India and Ethiopia for the same year was 9.3 per cent in a scale range of 0–100 per cent (Jenkins and Edwards, 2006). But ESIs or export structure may not clearly depict the level of competition because of differences in the scale of export between countries. Jenkins and Edwards (2006) identified an alternative approach that captures whether African countries are facing competition in products for which China and India are likely to be significant competitors. In this method Jenkins and Edwards (2006) identified a Standard International Trade Classification (SITC) three-digit class in which the share of China or India in world exports increased by 1 per cent or more between 1999 and 2002. These products were considered as products in which other countries will face increased competition in the third-country markets. It was discovered that China experienced an export surge in 140 products while India did so in 31 products (Jenkins and Edwards, 2006). The proportion of Ethiopian exports facing competition from China and India is 17.8 per cent and 7.6 per cent, respectively. China thus seems to be presenting a higher threat to Ethiopian export than India. This, however, is not a worrying factor as the proportion is relatively low compared to other African countries such as Lesotho and Mozambique whose proportion of export facing competition from China is 89 per cent and 73.4 per cent, respectively (Jenkins and Edwards, 2006). If one closely examines Ethiopian exports, some labourintensive products such as textiles and footwear and leather products are given higher priority as exportable items. These sectors are identified as priority sectors to spearhead industrialisation and generate employment in the country. As both

120

TEGEGNE GEBRE-EGZIABHER

China and India, particularly China, are involved in the exportation of clothing and footwear products to the world markets, they pose a possible threat to Ethiopian drive in this area. This competition is even more difficult in the context of MFA dismantlement. In particular the rise of China in the clothing sector affects Ethiopia’s effort to export to the US through the African Growth Opportunity Act (AGOA). So far, Ethiopia has not benefited much from the AGOA opportunity as other African countries such as Kenya have. Ethiopia has been able to export only a total of US$4.9 million in the years 2001–05 to the US. The corresponding figure for Kenya up to June 2005 was US$177.2 million (McCormick et al., 2006). Ethiopia is encouraging its entrepreneurs to make use of the opportunity. Ethiopian entrepreneurs wishing to pursue an AGOA opportunity, however, will be under pressure to reduce costs because of the presence of China in the US market. b. Investment Chinese and Indian private entrepreneurship is evident in Ethiopia. Chinese investment in the years 1992–2005 is higher than Indian investment in the same period (Table 2). During the period Chinese investment accounted for 8 per cent and 5 per cent of the total number of projects and capital, respectively. Indian investment accounted for 7 per cent and 4 per cent of the total projects and capital, respectively. The average size of Chinese investment is 17.1 million birr while that of Indian investment is 15.7 million birr. Unlike other countries, Ethiopia does not receive investment from naturalised Chinese and Indians, i.e. there is very little investment from Chinese–Ethiopian or Indian–Ethiopian residents. The sectoral distribution of investment by Chinese and Indian entrepreneurship is almost similar. Manufacturing, agriculture, real estate, renting and business and construction are the most important, in that order. Within agriculture, floriculture occupies the highest share. This is due to the recent boom of the flower industry in Ethiopia. Floriculture in Ethiopia has grown very quickly and it has been one of the recent attractions to foreign investors. Under construction investment, Chinese have been predominant in road construction while Indians seem to be present in water drilling projects. The Chinese road construction investment has been concentrated in Addis Ababa, the capital city, and across regions linking cities. Within Addis Ababa, the Chinese Road and Bridge Construction Company has been very active and is engaged in several projects (see Table 3). As shown in Table 3, some of the projects are grant5 projects, though they are undertaken by Chinese companies. Others are tendered and are financed by the Ethiopian government.

5

Grants are assistance and such projects come under aid (see below).

TABLE 2 Chinese and Indian FDI, 1992–2005 China

Wholly foreign Joint with domestic Total % of total country

India

No. of Projects

Capital (million birr)

Permanent Employment

Temporary Employment

No. of Projects

Capital (million birr)

Permanent Employment

Temporary Employment

97 10 107 8.2

1,480 351 1,831 4.8

5,230 515 5,745 4.0

5,128 368 5,496 4.7

78 12 90 6.9

1,225.1 158.2 1,413.2 3.7

6,361 769 7,130 5.0

5,693 449 6,142 5.3

Source: Ethiopia Investment Office (2006).

122

TEGEGNE GEBRE-EGZIABHER TABLE 3 Chinese Road Project Investment in the City of Addis Ababa

No.

Road Segment

Cost of Construction Birr

1 2

9 10

Alert Hospital–Keranio Mekanisa Square–Anbessa Garage Adwa Square–CMC–Ayat Lafto Libo–Mekanissa settlement area Winget Square–Gojam Road Gotera interchange Megenaga–British Embassy Yekatit 12 Square–Afincho ber–Semen Hotel Ethio-China Friendship Road Ring road phase 1

11

Ring road phase 2

3 4 5 6 7 8

Remark

US$*

32,346,000 38,070,000

3,805,412 455,294

135,509,000 79,262,000

15,942,235 9,324,941

380,838,000 108,900,000 197,104,000 50,279,000

44,804,470 12,811,765 23,188,705 5,915,176

33,426,202 601,000,000

3,932,494 70,705,882

Grant Partially grant Grant The cost of 601 million birr covers both phase 1 and phase 2 of the project

Note: * The exchange rate used in this chapter is US$1 = 8.5 birr. Source: Addis Ababa Road Authority, unpublished.

c. Aid The formal link between China and Ethiopia in economic and technical cooperation started in 1971. The cooperation includes provision of soft loans, grants and technical assistance. The technical assistance involves training of personnel, dispatching of medical doctors and supply of medical equipment and medicines. The aid vector between the two countries thus constitutes financial and technical assistance. The financial assistance is intended to aid implement projects and constitutes both grants and loans. Since 1971 the Chinese government has extended a total of US$78.6 million as an interest-free loan to the government of Ethiopia (MoFED, unpublished, undated). Out of this money, US$46.7 million was allocated for the implementation of different projects. Since 1995 the total committed grant amounts to US$22.7 million, of which 53.09 per cent is allocated, while the total loan is US$20 million, of which 73.3 per cent is allocated. The Chinese government is not a major financial donor to Ethiopia compared to other countries such as the US or European Union. For example, Ethiopia received a total of US$4,495.53 million in official development assistance (ODA) from Development Assistance Group (DAG) countries from 2000–05. The presence of the Chinese government in financial assistance, however, is strongly felt, in particular in the capital city Addis Ababa, through its support for different projects. For instance,

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123

the Chinese government has allocated US$9.45 million for the construction of a model TVET in Addis Ababa. An interchange road project is also to be supported with US$14.7 million in Addis Ababa (see above).6 These are supposed to be flagship projects in the city. The second form of aid provided by China is technical cooperation which involves both support to the medical sector and short-term training. The Chinese government has provided medical experts for some hospitals for the last 20 years. The medical teams mainly work in Jimma and Debre Berhan hospitals and currently Chinese medical teams can be found in Adama Hospital, Black Lion Hospital and the Addis Ababa University Dental Health Training Centre. In addition, shortterm training is offered by the Chinese government. Though Ethio-India diplomatic relations started in 1949, the involvement of India in different components of aid in Ethiopia is limited. The two countries signed technical, economic and scientific agreements in 1969 and trade agreements in 1982 and 1999. The trade agreement is used as a basis to import and export items from and to India. Under its technical and economic cooperation programme launched in 1964 and known as ITEC (Indian Technical and Economic Cooperation programme), Ethiopia has benefited from a human resource development programme. Under this programme in 2003/04, 20 people were trained and a further 30 were trained in 2004/05 (MoFED, unpublished, undated). Other aspects of ITEC assisted projects in Ethiopia include a feasibility study for the Ejersa and Sewir irrigation project, the supply of equipment for Awash common facility centre and a pilot weaving centre in Addis Ababa. In addition, the Indian government intends to provide a concessional loan for development of highly indebted poor (HIPC) countries. Under this arrangement, the Ethiopian government has requested that the Indian government finance a power transmission and distribution project with an estimated cost of US$65 million. Both the Chinese and Indian aid are tied aid. By and large, equipment, goods and personnel are brought from the two countries.

3. IMPACTS OF CHINESE IMPORTS AND COPING STRATEGIES OF SMALL-SCALE FOOTWEAR PRODUCERS

The foregoing has provided a general perspective on the overall impacts of China and India on Ethiopia. China seems to have a larger impact than India, particularly in the sphere of trade relations. One of the consequences of trade relations is its impact on local producers. The following closely examines such

6

There is a slight difference concerning the actual figure allocated to the interchange road project in Addis Ababa. The discrepancy is due to the different data sources.

124

TEGEGNE GEBRE-EGZIABHER

impacts with the view to understanding the extent of the impact and how local producers cope with such influences. This is done by a closer look at small-scale footwear producers. a. Ethiopian Footwear Sector The Master Plan for the Development of the Ethiopian Leather and Leather Products Industry (LLPI), produced jointly by the government of Ethiopia and UNIDO, classified the footwear industry in Ethiopia into two groups, namely the large mechanised footwear industries and the micro, small and medium enterprises (UNIDO and Ministry of Trade and Industry, 2005). The mechanised footwear industries, numbering about a dozen, are those found in the formal sector and constitute large and medium industries. Most of the industries are privately owned while there are a few state-owned industries. The other group of industries constitute medium, small and informal producers. According to the Master Plan (UNIDO and Ministry of Trade and Industry, 2005), the medium-scale producers have about 30–40 workers and number about 3–40 units, the small-scale producers have about 15–20 workers and number about 75–100 units. The informal producers are home-based units and they are estimated to number about 400–500 units. Knorringa and Pegler (2004) also estimated these industries to number about 400. These factories are dominated mainly by a single ethnic group – the Guraghes who are poor and seasonally move between farm work or petty trading in their native areas and footwear production in Addis Ababa (Knorringa and Pegler, 2004). They produce low-quality cheap footwear using manual methods. The targets are rural traders and farmers. The small-scale producers are semi-mechanised and produce for shops in the city. They have their own brand and some even attempt to enter the export market but lack the capability to do so. The mediumscale producers have better machines and workshops and better known product brands and mostly sell their products in their own shops (UNIDO and Ministry of Trade and Industry, 2005). Both informal and small-scale industries cater for high levels of employment, satisfy local demand and operate in a naturally (spontaneously) established cluster. International trade in the footwear sector shows that the country is a major importer (Table 4). Export is in its infancy or non-existent in the footwear sector. Poor quality of domestic leather and the high cost of imported inputs are cited as possible reasons for not being competitive in the international market (Berhanu and Kibre, 2002). To this is added the stigmatisation of the country. As the country is prone to natural disaster and famine, it does not have an image of producing high-quality shoes (Knorringa and Pegler, 2004). Increased pressure from imported shoes is the major challenge the sector is currently facing. The overwhelming proportion of leather shoes is imported mainly from China and these shoes have flooded the domestic market. Despite the fact

IMPACT OF ASIAN DRIVERS ON ETHIOPIA

125

TABLE 4 External Trade in Leather Products (US$ million) Country

1997 1998 1999

Footwear

Leather Articles

Import

Export

Import

Export

4.6 9.1 9.7

0.1 0.1 0.1

0.7 0.9 1.7

0.04 0.08 0.00

Source: Berhanu and Moges (2002, p. 13).

that the tariff applied to imported shoes (35 per cent) is the highest possible level given the present tariff structure, Chinese imports still compete in the domestic market. They have relegated informal firms to supplying the most basic traditional types of footwear and have forced them to compete desperately with the cheap imports (Knorringa and Pegler, 2004). The small-scale factories which produce for the more expensive domestic market segment are also affected as the quality of imports improves (Knorringa and Pegler, 2004). On the other hand, firms faced with such disequilibrium have continued to survive and operate in the domestic market. This implies that firms develop coping strategies that enable them to survive in the market or even grow. The following section examines the competitiveness of Chinese and local shoes in the domestic market, the local impacts of Chinese shoes and coping strategies followed by local producers. b. Competitiveness of Chinese and Local Shoes in Domestic Markets (i) Local firms’ perceptions on the competitiveness of Chinese and local shoes Firms’ perceptions on the competitiveness of Chinese and local shoes in domestic markets were examined in the study. Price is a major advantage Chinese shoes have over local shoes (Table 5). Chinese shoes are available in the market at a much lower price than domestic shoes. For instance, the average price for men’s shoes from China is 60–80 birr (US$7–9.4) while the average retail price for domestic shoes is 100–110 birr (US$12–13). In principle, low prices can force those who cannot offer the same prices out of the market. The other major significant competitive advantage of Chinese shoes is the introduction of new products in the domestic market which have better and superior designs. This was confirmed by nearly one-third of the respondents. The case studies also reiterated that Chinese shoes are better designed and are more fashionable than domestic shoes. These advantages of price and superior design attract customers who like to have a better looking shoe for a reduced price. In addition, quality is mentioned by 15 per cent of the respondents as another important advantage of Chinese shoes. This refers to different aspects, including the finishing quality of shoes.

126

TEGEGNE GEBRE-EGZIABHER TABLE 5 Producers’ Perception about the Competitive Advantage of Chinese Imports*

Price (lower) Introduction of new products and better design Quality, including better finishing Reliability in delivery and supply Total

Micro Enterprises

Small and Medium Enterprises

Total

Number

Number

Number

Percentage

Percentage

Percentage

39 26

46.9 31.3

19 14

52.7 38.8

58 40

49.1 33.8

16

19.3

2

5.5

18

15.2

2

2.4

1

2.7

3

2.5

83

100

36

100

118

100

Note: *Multiple answers possible. Source: Author ’s own survey.

FIGURE 8 Assessment of Own Competitiveness by Producers (Rating scale 1–5) All Enterprises Product quality 5 4 Flexibility

3

Price

2 1 0

Innovative designs

Time from order to delivery

Punctual delivery All Enterprises

On the other hand, local firms’ perception of their own competitiveness puts the different competitiveness variables at a low level (Figure 8). Relatively speaking, local firms agree that they do not have competitive advantage in price and product quality. Similarly, innovative design is also rated very low, indicating the poor design quality of local shoes. Punctual delivery and time from order to delivery have received a better rating in comparison to other factors.

IMPACT OF ASIAN DRIVERS ON ETHIOPIA

127

The competitiveness of Chinese imports in the local shoe industry can be seen vis-à-vis the domestic market requirement. The factors that were rated very high by producers in the domestic market are quality, delivery time and design. Price is also rated high. The three factors (quality, design and price) are easily fulfilled by Chinese imports but not by local shoes. The only advantage local firms envisaged for themselves is punctual delivery, which is instrumental only to meet the seasonality of demand in the shoe market. But this advantage can easily be eroded if importers plan imports to match seasonal demand. Under this condition, it is only natural for the Chinese shoes to take over the domestic market and inflict heavy impacts on local firms. (ii) Impacts of Chinese imports Chinese imports have affected all enterprises to a different degree and scale. Micro enterprises in particular are hard-hit by the imports. Seventy-eight per cent of the micro enterprises stated that the impacts are very severe. The major impact of Chinese imports has been downsizing the activity of Ethiopian enterprises. This is reported by 32 per cent of the total enterprises with the highest number of such impacts being felt by micro enterprises (Figure 9). Downsizing of activity refers to cutting back of production, reducing the labour force, reducing working hours etc. In terms of workforce or employment, Chinese imports have resulted in shrinking the labour force working in different firms. For instance, the mean number of employees per establishment has declined from 7 to 5 for micro enterprises and from 41 to 17 for small and medium enterprises. Similarly, the medium and small FIGURE 9 Firms’ Response to the Impact of Chinese Shoes 45 40 35

Percentage

30 Micro enterprise Small and medium enterprise Total

25 20 15 10 5 0

Went into Closed down Downsize bankruptcy firms and activity returned licence for a while

Resorted to shoe repair from production

Started to work without licence

Brought marketrelated problems

No impact

128

TEGEGNE GEBRE-EGZIABHER

enterprises used to have a maximum number of 99 employees compared to the current maximum employment of 22. Such reduction of the labour force results in massive lay-offs, affecting not only the firms but also the workers and their families who become the victims of the process. The other impact of Chinese shoe imports reported by firms is bankruptcy or loss of assets and money. This is reported by about 28 per cent of the respondents. The case studies reiterated that some firms were forced to sell their assets and machinery. These firms are now operating again. In the extreme case, bankruptcy caused firms to permanently exit the market. Though it is difficult to contact those who have quit the market, case studies have revealed that many firms have left the market completely. In other cases firms exited and re-entered the market. More specifically a little over 10 per cent of the surveyed firms reported that they returned their licence. Others stayed in the business but downgraded their activity to shoe mending and shoe repair (4 per cent) or converted to informal operators (6 per cent). c. Coping Strategies of Local Footwear Producers Firms have followed a number of strategies to withstand the impacts of Chinese imports and stay in the market. Following the literature (Nadvi, 1995) these could be grouped into ‘high road’ and ‘low road’. The former in general refers to the ability to withstand competition through improving productivity via a technically innovative and quality-conscious strategy and the latter refers to maintaining or increasing market share by lowering prices, lowering profit margins, using cheap labour and employing a technically stagnant strategy. (i) High road of competition These strategies include improving design, improving quality, investing in machinery and product specialisation. About 60 per cent of the survey respondents indicated that they have been able to improve the design of their shoes following Chinese imports (Table 6). Design improvement is significantly confirmed by micro enterprises (59 per cent) and small and medium enterprises (63 per cent) as a critical strategy. This strategy emanates from the need to counter the design advantage Chinese shoes have over local shoes. Improving designs in response to import competition has two aspects. First, better designs are prepared by giving attention to different details that matter in designing. For instance, a respondent in the case study mentioned that he now uses a compass to draw parallel lines while previously he drew them freehand. This shows how competition has forced producers to pay attention to different issues relevant for the design of shoes. In addition, better designs are prepared by imitating some imported shoes and copying from catalogues. Producers, however, face difficulty in directly imitating imported shoes since they cannot acquire the necessary last, sole etc. that matches the design

IMPACT OF ASIAN DRIVERS ON ETHIOPIA

129

TABLE 6 Enterprise Strategy to Cope with Chinese Shoe Imports*

Design superior Improved quality of products Increased average speed of response time Lowered price and profit margin Increased reliability in delivery and supply Introduction of new shoes Shift to lower products Total

Micro Enterprises

Small and Medium Enterprises

Total

Number

Number

Number

Percentage

Percentage

Percentage

55 18

58.5 19.1

29 12

63.0 26.1

84 30

60.0 21.4

10

10.6

1

2.2

11

7.8

8

8.5

0

0

8

5.7

1

1.1

4

8.6

5

3.6

1

1.1

0

0

1

0.7

1

1.1

0

0

1

0.7

46

100

140

94

100

100

Note: * Multiple answers possible. Source: Author ’s own survey.

requirement of the imported shoe. Secondly, firms have learned that they have to continuously change the design of their shoes in order to match the needs and demands of the market. Although improving design is mentioned as one important strategy to compete in the market, shoe producers have not attained a high level of design capacity. The survey result showed that 100 per cent of the firms use a manual method of design. Respondents also mentioned that they have a serious capacity problem in this area. They reiterated that they need training on design (28.1 per cent), access to design machinery (22.7 per cent) and workforce training (22.7 per cent) in order to improve their design capability. Quality improvement in finishing, use of accessories etc. is pointed out as the other coping strategy by 21 per cent of the enterprises. In particular, producers have realised the importance of finishing quality as being key to being competitive in the domestic market. Some respondents from the case study mentioned they have learned finishing quality from the Chinese shoes. Quality improvement, however, is given emphasis by small and medium enterprises compared to the micro enterprises. For instance, 84.4 per cent of the micro enterprises rated quality improvement in their firm as low (a score of 2 or less) on a scale of 1–5, as com-

130

TEGEGNE GEBRE-EGZIABHER TABLE 7 Producers’ Ratings of Quality Improvements in Own Firm (%) (Rating scale 1–5)

Micro enterprises Small and medium enterprises Total

1

2

3

4

5

Mean

N

56.3 20.0 44.7

28.1 33.3 29.8

10.9 13.3 11.7

3.1 26.7 10.6

1.6 6.7 3.2

1.65 2.67 1.97

64 30 94

Source: Author ’s own survey.

pared to about 46.7 per cent or nearly half of the small and medium enterprises who rated quality improvement in their firm with a score of 3 and above (Table 7). One of the ways to improve quality is innovation in the usage of materials and accessories. Nearly 60 per cent of the small and medium enterprises mentioned that they have introduced some kind of innovation, while the overwhelming majority of micro enterprises (86 per cent) have not introduced such innovation in the usage of material and accessories. Other less frequently mentioned coping strategies, shown in Table 6, are increasing the speed of response time and reliability of delivery and supply. These are mentioned by nearly 8 per cent and 4 per cent of the producers. These strategies address the nature of shoe production in which orders tend increasingly to arrive at the last moment (Rabellotti, 1997). In addition to those strategies shown in Table 6, producers have undertaken other activities in response to the domestic market requirement. Investment in machinery is a case in point. Slightly over half (53.3 per cent) of the small and medium enterprises have bought new machineries since the Chinese imports. Among micro enterprises, however, it is only 3 per cent that reported the same. All those who have bought new machinery expressed that their investment is a significant investment and not a mere replacement. Domestic market requirement is considered as an important source of motivation for undertaking such investment by the small and medium enterprises. Chinese imports have forced local producers to concentrate on the production of shoes for which they seem to have a comparative advantage. About 92 per cent of the micro enterprise and 100 per cent of the small and medium enterprises reported that they mainly produce men’s shoes (Table 8). Women’s and children’s shoes are less important among local producers. The main reason is the difficulty of competing in the domestic market, especially in women’s shoes. Imported women’s shoes are highly fashionable and require a high design and finishing quality. In addition, women’s shoes require some inputs such as shank board and steel piece which are not usually used by local producers. This makes locally-made women’s shoes, particularly high-heeled shoes, less competitive in the domestic market. There is, therefore, a tendency to concentrate more on men’s shoes which

IMPACT OF ASIAN DRIVERS ON ETHIOPIA

131

TABLE 8 Type of Shoes Mainly Produced by Local Firms

Men’s shoe Women’s shoe Children’s shoe N

Micro Enterprise

Small and Medium Enterprise

Total

Percentage

Percentage

Percentage

92.2 6.3 1.6 94

100 0 0 30

94.6 4.2 1.1 94

Source: Author ’s own survey.

are mostly chosen for their durability rather than their design. In general, all the case studies agree that Chinese shoes lack durability and some of the shoes are made of synthetic materials. Local producers use leather, which is believed to have a longer life and be less likely than synthetics to bring bad odour. This has begun to be appreciated by the customers as well. (ii) Low road of competition Though it is not significantly borne out by the survey, there is an indication that some firms, particularly the micro enterprises, have resorted to some negative coping strategies. For instance, 8.5 per cent of the micro enterprises have lowered their price and profit margin in order to stay in the market (Table 6). This is strengthened by illustrations of the case studies. Two out of the three cases from the micro enterprises mentioned that they have reduced their price and profit margin after Chinese imports. In addition, they have also resorted to reduced use of inputs and raw materials in order to produce shoes that can compete in the market. This decision is taken at the expense of the quality of the shoes. The other coping strategy followed by firms is to join the informal sector. All the interviewed cases from the micro enterprises revealed that prior to the influx of Chinese imports they were operating formally as registered and licensed businesses. They also had more employees and capital. One respondent revealed that his previous capital was 200,000 birr (US$23,529); another respondent indicated that he used to have 28 workers and produce 12 dozen pairs of shoes per day; and the third mentioned that he used to have a large stock of finished shoes in the store. They were all forced to discontinue production for some time following the importation of the Chinese shoes. They have all re-entered the business as informal sector businesses, meaning that they do not have a licence and do not pay tax. In fact, they mentioned that they will not have the capacity to compete in the market if they pay government tax. The case of Firm 3 illustrates the situation (Box 1). The strategies outlined above are varied and they have been instrumental in helping firms stay in the market. In general, it appears that micro enterprises are

132

TEGEGNE GEBRE-EGZIABHER BOX 1: FIRM 3 RESPONSE ON COPING STRATEGY

Firm 3 is a micro enterprise with eight employees. The impact of the Chinese imports has been very detrimental to the owner. He mentioned that prior to the Chinese imports, he used to stock shoes in huge quantities. But since the Chinese imports, the owner could not sell his stock and was forced to sell most of his shoes at a much reduced price in places where cheap shoes are sold. He was forced to return his licence during this period. During the period 2000–04, a time when Chinese imports were established in the country, he was operating at a much reduced level. Now the owner works informally because of lack of capacity to compete in the market if he pays government tax. He mentioned that the way to survive the Chinese shoe imports is to reduce the profit margin by selling at a very low price and reduce the quality. The owner admitted that Chinese shoes are superior in design and finish.

following the low road of competition while the small and medium firms attempt to follow the high road of competition. Those strategies labelled as high road represent a window of opportunity amid the negative impacts of Chinese shoes. Producers even perceive that they now have a tentative hold on the domestic market. For example, 82 per cent of the producers believe that their shoes are now competitive with Chinese shoes. This figure is higher for small and medium enterprises (93 per cent). There are two reasons for this. First, local production as indicated above has entered into a learning stage, particularly in terms of design and improving the quality of shoes. Second, customers have also gradually realised that the competitive advantages of Chinese shoes which were highly based on price and design have started to erode as the advantages cannot outweigh their main competitive disadvantage, namely the poor durability of the product. Durability is mainly related to the materials used in producing the shoes. Case studies revealed that local shoes use better quality material and hence maintain durability. Though this is an indication of recovery, there is still no fundamental change in the domestic market as it continues to be flooded with imports. Local shoemakers continue to struggle to stay in the market. The micro enterprises in particular are staying in the market marginally given the disastrous consequences they have been subjected to. The internal capability of firms shows that local firms have major deficiencies due to their backward technology, lack of skill, poor support services, lack of working premises etc. These reduce their capacity to withstand the import. Local shoe production thus needs to be invigorated if it is to vie with imports.

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d. Policy Measures Aimed at the Shoe Sector The shoe sector needs to be invigorated to withstand the competition and even excel. Invigoration requires that both the producers and the government which are the main stakeholders in shoe production work together. The producers should collectively aim to improve their productivity and competitiveness, particularly in the spirit of the high road of competition. This is required mainly because firms in isolation will find it difficult to grow and prosper in the midst of fierce import competition. In this regard the local association, the Leather International Association which embraces most of the small-scale producers, retailers and wholesalers, needs to be buttressed and strengthened in order to promote collective efficiency to withstand competition. The government has recently taken the leather and associated industries as a priority sector. The government’s interest is expressed in establishing a Leather and Leather Products Training Institute (LLPTI), a research and training institute on leather and leather products, to enhance the productivity of the sector and increase its competitiveness. The UNIDO supports the government’s effort through its various programmes which allow it to work closely with LLPTI or the government bureau such as the Federal Small and Medium Enterprise Agency (FEMSEDA). UNIDO formulated a master plan and a business plan for the LLPTI. The plan proposed a top-down (pull) approach which requires that the footwear sector should ‘pull’ the tanning sector to produce more, better quality finished leather which in turn results in more demand for the tanners for better quality hides and skins (UNIDO and Ministry of Trade, 2005). In addition, a package of interventions have to be designed to strengthen the shoe producers and minimise the negative effects of Chinese shoe imports. These interventions should focus on those aspects which improve the quality and competitiveness. Training, introduction of better technology, quality control, networking and benchmarking will strengthen shoe producers from the supply side. Besides these, the government should help minimise the negative effects of imports by putting in place mechanisms such as quality control of Chinese imports. Quality control of imports may safeguard local producers from competing with substandard products which may find their way to the domestic market. On the demand side, the small-scale producers are confined to local markets and they never tap the export market. Efforts to enter the regional and international market will help local producers access the more lucrative markets and can also be taken as a coping strategy of domestic competition. 4. CONCLUSIONS AND POLICY RECOMMENDATIONS

The foregoing discussion has shown that the rapid expansion of the Chinese and Indian economy has found expression in Ethiopia. This is observed in the three vectors of trade, investment and aid.

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The trade relation is the one which has a far-reaching implication. The preferential treatment Ethiopia has benefited from since 2005 has led Ethiopia to increase its exports to China significantly. China has become the number one export destination for Ethiopia in recent years. This is an opportunity that Ethiopian investors and entrepreneurs should exploit. Ethiopia has a huge potential in producing and exporting products allowed to enter China free of tariff and quota. Ethiopia should look into the future to understand how the Chinese economy is evolving in order to cater to its needs by focusing on those areas for which the country has a niche market. The livestock and the meat sector could be a potential area to supply more leather and meat to the Chinese and Indian economies since the demand for these products will increase with the expansion of their economies. Overall, however, the trade relations between Ethiopia and the Asian Drivers are asymmetric in that the Asian Drivers are favoured as Ethiopia suffers from a negative balance of trade. A significant implication of trade relations for Ethiopia is the Chinese export of labour-intensive products. In particular the importation of textiles and footwear goods from China has generated both immediate and long-term effects. The immediate effect is the displacement of local producers. In this regard this study has shown that small-scale shoe producers have downsized their activity, lost assets and property and have resorted to informal operation. This will have negative consequences on the domestic growth and expansion of the sectors. Firms have followed both the high and low roads of competition in reaction to the Chinese imports. The high-road strategies include improving designs, quality and response time. Investment in machinery is also noted as part of such a strategy. These strategies, however, are more common among small and medium enterprises than in micro enterprises. The latter seem to have resorted to low-road competitive measures such as lowering profit margins, reducing inputs and changing into informal operators. In this context, the continuation of the flooding of Chinese shoes into Ethiopia and most micro enterprises’ engagement in the low-road strategies are worrisome. At policy level, the long-term effects of the footwear and textile imports will crowd out the local effort to use these sectors as the basis of industrialisation. It was earlier mentioned that the government has identified the two sectors as priority sectors and intends to support them in order to influence their expansion and growth. The main purpose of supporting these sectors is not only to satisfy the local demand but also to export. These objectives, however, will be constrained both in the domestic and export market. In the export sector, Chinese and Indian exports of the same item to the world market will present stiff competition and may even crowd out Ethiopia’s effort. Perhaps one way Ethiopia can avoid competition from China and India may be by shifting to high quality, speciality footwear or helping small shoemakers to move into the production of other types of high-quality leather goods.

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In terms of investment, both Chinese and Indian entrepreneurship have demonstrated significant presence. Manufacturing, floriculture and construction seem to be the preferred areas of investment. These foreign investments have a farreaching implication in employment creation and income generation. In particular, investment in the floriculture for which Ethiopia seems to have a niche market due to its comparative advantages will help in strengthening the country’s ability to earn foreign exchange. The major destination for Ethiopian floriculture is the European market with a share of 90 per cent of the export (Tesema, 2007). Within the European countries, the Netherlands and Germany are the main importing countries. The rest of the exports go to the Middle East, Asia and North America (Tesema, 2007). It therefore seems that both Chinese and Indian entrepreneurs in floriculture target the European market. Both Chinese and Indian investors are engaged in infrastructural development. This will help the country recover and upgrade its infrastructural stock. In terms of aid, though not as important as European countries or the USA, Chinese aid is starting to be felt, particularly in some flagship projects. In this regard the road projects and the envisaged TVET school in the capital city to be constructed by Chinese grants are worth mentioning. In addition, technical support, particularly in the health sector, is a significant assistance though at a lesser scale and coverage. The role of India in this respect is less pronounced.

REFERENCES Asian Drivers Team (2006), ‘The Impact of Asian Drivers on the Developing World’, IDS Bulletin, 37, 1, 3–11. Berhanu, Nega and Kibre Moges (2002), ‘Declining Productivity and Competitiveness in the Ethiopian Leather Sector ’, unpublished report (Addis Ababa: World Bank). Ethiopian Investment Office (2006), Statistical Bulletin (Addis Ababa: EIO). Available at: english. people.com.cn/200601/16/eng20060116-235719.html, last accessed 8 August 2006. Jenkins, Rhys and Chris Edwards (2006), ‘The Asian Drivers and Sub-Saharan Africa’, IDS Bulletin, 37, 1, 23–32. Kaplinsky, Raphael, Dorothy McCormick and Mike Morris (2006), ‘The Impact of China on SubSaharan Africa’, Agenda-setting paper prepared for DfID China office. Available at http://www. uneca.org/eca_programmes/acgd/overview_report.pdf. Knorringa, Peter and Lee Pegler (2004), Operationalizing Social Capital for Industrial Development in Marginalised Countries: Field Studies on the Footwear Sub-sector in Ethiopia and Vietnam (The Hague: Institute of Social Studies). McCormick, Dorothy, Paul Kamau and Peter Ligulu (2006), ‘Post-multifibre Arrangement Analysis of the Textile and Garment Sectors in Kenya’, IDS Bulletin, 37, 1, 80–88. Nadvi, Khalid (1995), ‘Industrial Clusters and Networks: Case Studies of SME Growth and Innovation’, UNIDO small enterprises medium programme, paper commissioned by the small and medium industries branch. Available at http://www.unido.org/doc/4297. Rabellotti, Roberta (1997), ‘Footwear Industrial Clusters in Italy and Mexico’, in M. P Van Dijk and Roberta Rabellotti (eds.), Enterprise Clusters and Networks in Developing Countries (London: Frank Cass).

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Tesema, Hirbaye (2007), ‘Development of Floriculture in Ethiopia: Challenges and Opportunities of the Industry in the Global Floriculture Chain’, unpublished MA thesis (Addis Ababa: RLDS, Addis Ababa University). UNIDO and Ministry of Trade and Industry (2005), A Strategic Action Plan for the Development of the Ethiopian Leather and Leather Products Industry, Volume I – Master Plan, unpublished manuscript (Addis Ababa: Ministry of Trade and Industry).

7 The Asian Drivers and SSA: Is There a Future for Export-oriented African Industrialisation? Raphael Kaplinsky and Mike Morris

1. INTRODUCTION

I

NDUSTRIALISATION paths for emerging economies have traditionally stressed the importance of the development of their export-oriented manufacturing sectors as the critical step along an industrialisation path leading to higher incomes and increased employment. However, the fundamental question that the recent decade of deepening globalisation poses for this approach is the following: what is the prognosis for export-oriented industrialisation given the rise of the Asian Drivers (China and India) and their increasing dominance of global trade of labour-intensive manufactures? In assessing the impact of the Asian Drivers (China and India) on sub-Saharan Africa (or indeed any other region or economy) it is important to distinguish between two dimensions of effects. The first of these is the competitive–complementary dimension. Is there a synergistic fit between the trading economies with win–win elements predominating, or is their relationship one of competition, a win–lose outcome? The second and more complex dimension is that between direct and indirect effects. Direct effects are easy to assess, arising from the bilateral relationship between the two economies, for example direct trade links between the Asian Drivers and other economies. Indirect impacts are more complex to assess, arising in third-country economies, for example the impact which the Asian Drivers have on prices and market shares in third-country markets. We are grateful to Peter Minor and Jane O’Dell (Nathan Associate Inc.) for undertaking the survey of US buyers, to Masuma Farooki for trade-data collection, to Jeff Readman and Leanne Sedowski for some of the interviews with SSA clothing manufacturers, and to DfID for funding the field research. Unfortunately, we hold sole responsibility for any errors and omissions.

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In this chapter we attempt to assess the indirect impact on sub-Saharan Africa (SSA)’s outward-oriented industry of China’s growing global manufactured exports in the context of a preferential trade access arrangement which favours such an industrialisation path. This is done through an analysis of SSA’s clothing and textile exports under the African Growth and Opportunities Act (AGOA) which provides preferential access to SSA exporters into the US market. Since, excluding South Africa, more than half of all SSA’s manufactured exports are made up of clothing alone (Kaplinsky and Morris, 2008), what happens in this sector may be a portent for SSA’s export-oriented industrialisation in the future. South Africa is excluded from this analysis for three reasons. First, its export base is significantly more diversified than that of all other SSA economies, and the rise of China poses a different set of challenges to South Africa. Second, its welldeveloped clothing and textile sector has predominantly been domesticallyfocused, and whilst this industry has been significantly affected by competition from China (Morris, 2007), this competition poses different challenges from those confronting exporters to the US and the EU. And, third, because of its relatively high per capita income, South African clothing firms exporting to the US have not been able to take advantage of fabric imports from China (see below). We will largely take as read the phasing out of the Multifibre Agreement/ Agreement on Textiles and Clothing which had previously governed much of global trade in this sector. In brief, the final quotas governing exports from key Asian exporters to the US and the EU were removed on 31 December 2004. Whilst SSA AGOA exporters still benefited from a tariff preference exceeding 13 per cent in the range of clothing products, China and other previously quota-constrained exporters were no longer held back by quantitative controls.

2. SSA CLOTHING EXPORTS AND THE AGOA

This structure of the global clothing and textiles sector reflects three major factors. The first is the concentration of global buying power in the industrialised countries (Gereffi and Memedovic, 2003; Kaplinsky, 2005). The significance of this buyer concentration is their requirement for large volumes (and, of course, low prices). This has made it difficult for small-scale suppliers to meet the requirements of large global buyers, and this has advantaged countries such as China with large volume plants, and transnational companies (often based in Hong Kong and Taiwan) who have a competitive advantage in organising large-scale production runs. The second major explanation for the structure of global production has been costs and efficiency. Although the clothing industry has become increasingly characterised by the requirement for shorter lead-times, greater inter- and intraseasonal variety and tighter logistics (USITC, 2004; Kaplinsky, 2005), cost has been

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king in this industry. The intensity of competition in these areas has been reflected in cost pressures, and since the mid-1990s there has been a secular downtrend in the global price of clothing (USITC, 2004; Manchester Trade Team, 2005). The third and the most important determinant of global production structure has been the protective regime, since this has determined the pool of countries who can reliably serve these large-scale global buyers with low-cost and qualityassured products. In recent years the AGOA has been the most effective preferential trade access regime favouring SSA clothing and textile exporters, particularly for Kenya, Lesotho and Swaziland (Table 1 provides the data for key SSA Eastern and Southern African clothing exporters; it excludes Mauritius, most of whose exports go to the EU). The AGOA was signed into USA law on 18 May 2000, aiming to assist SSA by using trade as a means of generating revenue, investment and employment. The largest manufacturing sector beneficiary of the AGOA has been the clothing and textiles sector, since the key relevant element of the AGOA is that it extends the Generalised System of Preferences (GSP) offered to low-income economies to clothing and textiles. The AGOA incorporated different rules of origin to the GSP. It built on procedures which had been established early in the 1990s in relation to the Caribbean Basin Initiative allowing for the use of US-origin inputs or regional inputs in the calculation of minimum levels of value added (35 per cent). Nevertheless, despite these concessions, few SSA economies were able to meet these rules of origin in the clothing and textiles sector. Thus, in a further key amendment, AGOA-qualifying countries which were also classified under the UN’s ‘least developed category’ (that is, per capita incomes of less than US$1,500 in 1998) were also subject to a further amendment to GSP rules of origin. That is,

TABLE 1 Share of US in Exports of Key SSA Clothing Exporters* Country

Year

Exports US$ ’000

US Share (%)

AGOA as Share of Exports to US (%)

Kenya

2000 2005 2000 2005 2000 2005 2000 2005

78,000 306,000 154,000 406,000 633,000 771,000 56,000 171,000

89.6 95.3 94.9 96.5 18.9 37.0 88.4 99.4

n.a. 98.5 n.a. 99.4 n.a. 98.5 n.a. 99.0

Lesotho Madagascar Swaziland

Note: * Mauritius is a major SSA exporter but is excluded from this table as most of its exports go to the EU. Source: COMTRADE database, accessed via World Integrated Trade Solution (WITS) on 15 December 2005. Country and sectoral data calculated on the basis of US imports.

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until September 2005 (subsequently amended to September 2012) they could source their material and accessory inputs from non-AGOA and non-US-based suppliers (up to a restricted share of US clothing imports), including from China and other Asian economies. In other words, they were freed from the minimum value-added requirement. In 2004, the five largest exporters of clothing and textiles to the US under the AGOA scheme were Lesotho, Madagascar, Kenya, Mauritius and Swaziland. The critical issue is the relationship between total exports of clothing and textiles and those which were under the AGOA. In 2004, excluding Mauritius and South Africa, more than 95 per cent of SSA clothing and textiles exports to the US was via AGOA’s preferential trade access. The share of AGOA exports in all exports grew rapidly between 2001 and 2004 (particularly for Swaziland and Kenya), and this reflects two general tendencies. First, new investments (including plant expansion) were made, directly targeting AGOA exports to the US. And, second, in some cases pre-existing plants exporting to the US were brought under the AGOA umbrella. The impact that this clothing-and textiles-based industrialisation process has had on creating wage employment and reducing poverty in these poor SSA countries has been huge (see below).

3. SSA AGOA CLOTHING EXPORTS POST-QUOTA REMOVAL

In assessing the outcome of the first year of quota removal, we focus on aggregate AGOA exports, as well as the major exporters (with the exception of Mauritius), namely Lesotho, Swaziland, Kenya and Madagascar. We concentrate on the clothing sector since, with the exception of South Africa, there are negligible direct exports of textiles to the US. In each case we compare export volumes, unit prices and market shares with China. (See Kaplinsky and Morris, 2006, for a more detailed analysis and for a comparison with India and other East Asian economies.) As can be seen from Table 2 and Figure 1, the major trends were that: • The value of African clothing exports to the US dropped by 17 per cent in the first year after quota removal. Lesotho and Madagascar experienced a 14 per cent fall and Swaziland’s exports declined by 10 per cent. The major outlier was Kenya, where exports declined by only 3 per cent. By contrast, the value of China’s exports to the US of the same products grew very rapidly, by 58 per cent by comparison with all AGOA exports and to a larger extent by comparison with the 10 major traded products of individual countries.1 1 In each case in Table 2, we compare Chinese export values and unit values in the 20 largest 10digit product groupings for AGOA and each SSA country’s exports to the US.

TABLE 2 Change in Value of Exports and Unit Prices in Clothing Exports to the US, 2004–05 (%) (Weighted average of top 10 products for individual countries*) Value (% change)

AGOA Lesotho Madagascar Swaziland Kenya

Unit Prices (% change)

SSA

China

SSA

China

−17 −14 −14 −10 −3

58 111 72 93 78

−0.9 −3.2 −9.5 −2.7 −1.9

−45.9 −46.2 −44.0 −51.9 −44.8

Note: * Unit prices calculated for top 10 products in 2004 for each AGOA country’s exports. Source: Calculated from http://dataweb.usitc.gov data, accessed on 19 March 2007.

FIGURE 1 AGOA and China Import Share in Products in which AGOA Countries Specialised AGOA country share of the US market in 10-digit product categories in which country exports were concentrated in 2005 5 2001

Per cent

4

2004

2005

3 2 1 0

AGOA products

Kenya products

Lesotho products

Madagascar products

SA products

Swazi products

China’s share of the US market in 10-digit product categories in which AGOA country exports were concentrated in 2005 30 2004

2005

25 Per cent

20 15 10 5 0

AGOA products

Kenya products

Lesotho products

Madagascar products

SA products

Source: Calculated from http://dataweb.usitc.gov data, accessed on 10 January 2006.

Swazi products

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• Unit prices on average remained reasonably stable in key product groupings for individual countries, with Madagascar experiencing the sharpest decline (10 per cent). By comparison, in the same product groupings, the unit value of Chinese exports almost halved. (However, it is not clear to what extent this was due to a reduction in the unit prices of individual products, or China’s entry into producing lower-end products within each of these 10-digit product classifications.) • In general, AGOA economies performed less badly in their major exported items than they did in aggregate, suggesting a process of specialisation. However, alarmingly, in general China’s export growth in these sectors and the rate of price decline was faster than for its overall exports, suggesting potentially heightened competition for SSA products in the future. • The share of SSA exporters in the US clothing and textiles imports grew between 2001 and 2004, reflecting the combination of quota-access and preferential AGOA trading arrangements. However, the removal of MFA quotas set back this advance, and African exporters experienced a significant fall in their share of the US market after quota removal. By contrast, the share of China in each of these major product markets grew significantly (Figure 1). A major consequence of this decline in exports from the AGOA region was the impact on employment and overall economic activity. At its peak, in 2002, Lesotho’s clothing exports to the US accounted for virtually all manufactured exports, and were equivalent to 50 per cent of GDP. In Kenya in 2003, clothing enterprises accounted for the equivalent of nearly 20 per cent of all formal sector manufacturing employment. Table 3 shows the impact of quota removal on employment in 2005. In Swaziland, most severely affected, overall employment fell by 43 per cent; in Lesotho it fell by 26 per cent, although it revived somewhat (but not to previous levels) in 2006. In Kenya (where clothing exports had fallen by only 3 per cent in 2005), employment declined by nearly 10 per cent.

TABLE 3 Employment Decline in the Clothing Sector, 2004–05

Kenya Lesotho Swaziland

2004 (numbers employed)

2005 (numbers employed)

% Decline

34,614 50,217 28,000

31,745 40,000 16,000

9.3 25.9 56.2

Source: Kenya and Swaziland: industry and government interviews; Lesotho: Morris and Sedowski (2006).

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4. WHAT DO US BUYERS THINK OF SSA AS A SOURCE OF CLOTHING IMPORTS?

The broad conclusion from this trade analysis is that although there has been considerable pricing pressure and employment loss, and although some sectors (knitwear) and some economies (Swaziland) were hit harder than others, SSA AGOA exports were surprisingly resilient. This outcome, at least in the first year after quota removal, runs against some of the bolder predictions of the post-quota future of SSA’s clothing and textile sector (see, for example, USITC, 2004). In searching for an explanation for this we polled the major US buyers. The purchasing process is triggered by the final retailers in the US who, often using in-house design offices, define the product lines and price points which they require for the coming season. In a very limited number of cases, retailers (such as Wal-Mart) and brand-sellers (such as The Gap) make direct contact with manufacturers. But in most cases they pass over their requirements to US-based primary sourcing agents. These primary sourcing agents, in turn, either contact secondary sourcing agents in producing countries, or more commonly and especially when there are very large orders, make contact with Asian-based manufacturing companies (the ‘triangular manufacturers’). It is these manufacturing houses who ultimately decide where different products are to be sourced, and most often provide clothing manufacturers not just with the designs, but also the fabrics which they use. However, in most cases the US principals and sourcing agents are aware of the source of these garments and influence the decision made by their Asian intermediary buyers and manufacturing houses. Our interviews were exclusively with the US-based retail and sourcing agents, shaded grey in Figure 2. Our reasons for this decision were based on the premise that SSA clothing exports were overwhelmingly destined for the US final market (Table 1), and we assumed that it was here that the key sourcing decisions were to be made. The views and perspectives of 20 US buyers were obtained through a telephone survey undertaken in the summer of 2005. These companies are large, multi-store operations with substantive global sourcing activities in clothing and other consumer goods. The participants came from four key market segments: branded speciality retail (nine responses), manufacturers (branded and private label, eight responses), department stores (two responses), and mass merchants (one response). The share of their total sourcing portfolio which comes from SSA ranges from 1 to 5 per cent with the exception of one small company (turnover of US$30 million in 2004) which obtained 30 per cent of its product from SSA. Amongst the issues we explored with buyers (see Kaplinsky and Morris, 2006, for a discussion of wider issues) was whether quota removal was likely to lead them to retreat from SSA, and whether this differed between the short term (the coming one-to-two years) and the medium term (the coming three-to-five years). A key response (Table 4) was that 16 of the 19 respondents said that they were

144

RAPHAEL KAPLINSKY AND MIKE MORRIS FIGURE 2 Triangular Manufacturing and SSA Clothing Exports to the USa US-based principals – brands, agents, retail chains

US-based primary sourcing agents

Asia-based primary and secondary sourcing agents

Asia-based manufacturing head offices

Asia-based material and trim suppliers

African garment manufacturers

Note: a Dotted lines represent weak linkages; interviews conducted with buyers are in shaded boxes.

largely sourcing from SSA in order to compete on price. Their inability to access products from quota-constrained economies such as China had not been the major reason why they were importing from SSA.2 Second, and as a consequence of SSA’s current price competitiveness, around half of the buyers thought that there would be no change over the coming two years, and four of them said that, if anything, they were likely to increase purchases from SSA. However, there is clearly an expectation that SSA will suffer from diminishing competitiveness, since when asked about intentions over the medium term, almost half of the buyers (nine of the 19) thought that they were likely to decrease imports from SSA over the three-to-five-year time horizon. If quotas were not a major reason why buyers currently source from SSA, then how important are AGOA preferences to SSA’s competitiveness? The response 2 However, to some extent SSA’s price competitiveness had its origins in the quota system. Given an absolute limit in the number of items which could be exported, Chinese producers generally tended to concentrate on high-price, high-margin products, leaving SSA concentrated at the bottom end of the price range.

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TABLE 4 How Important have MFA Quotas Been in your Decision to Source from SSA? (Number of buyers)

‘How are you likely to change SSA sourcing as a result of quota elimination?’ ‘What are your plans to source from SSA in the next 1–2 years?’ ‘What are your plans to source from SSA in the next 3–5 years?’

Decrease

Unchanged

Increase

Total

3

16

0

19

4

11

4

19

9

8

2

19

FIGURE 3 Buyer Perceptions of the Relative Importance of AGOA Preferences, China Safeguards and Corporate Social Responsibility in the Decision to Source from SSA (1 = not important; 5 = very important) 5.0

4.0

3.0

2.0

1.0

0.0 How important are AGOA tariff preferences in sourcing from SSA?

Are third-country fabric provisions important in your SSA sourcing?

How important is the How important was expiration of China social responsibility in safeguards to future your decision to SSA sourcing? source from SSA?

(Figure 3) was that this was clearly critical, with more than half of the buyers (10 out of 19) reporting that it was ‘very important’. However, even more important was the view that it was the derogation on the rules of origin allowing AGOA economies to source fabrics from Asia which made it possible for these economies to compete (15 of the 19 buyers characterised this as being ‘very important’). Again, reflecting the fact that quotas have not been the basis for sourcing from SSA in recent years, few of the buyers thought that existing or likely future ‘China

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US buyer plans to source SSA in coming 3–5 years

South Africa

US buyer plans to source SSA in coming 1–2 years

FIGURE 4 Producer Perceptions of Future Sourcing from SSA

South Africa

Swaziland Lesotho US buyers

Swaziland Lesotho US buyers 0%

20% Decrease

40%

60%

Unchanged

80%

100%

Increase

safeguards’ would make much difference.3 A majority of buyers also thought that consumer pressures on corporate social responsibility (CSR) were a significant factor in sourcing from SSA, reflecting the growing commercial need of buyers to show awareness of the poverty impact of their sourcing decisions. To close the triangle, we also interviewed enterprises in the five SSA countries. One of the more surprising outcomes of these plant-level visits was the unrealistic pessimism of the firms, at least insofar as this is reflected in responses from enterprises in Kenya, Lesotho and Swaziland .4 As Figure 4 shows, the US buyers have much more positive intentions of staying in the region than the firms perceive. Fully 80 per cent of them expect either to have unchanged purchasing requirements or increased requirements from SSA over the short term (one–two years), and almost half believe that this would be the case even over the medium term (three to five years). By contrast, producers in all countries (and especially Lesotho) think it much more likely that sourcing requirements will deteriorate. Finally, we asked the US buyers to rank the performance of firms in SSA when compared to Chinese and Indian counterparts (Figure 5). Chinese firm capabilities

3

The Chinese accession agreement to the WTO allows for safeguard tariffs and quotas to be applied solely against Chinese textiles and clothing, even when imports exert only a slight adverse impact on the domestic industry. In June 2005, the EU and China reached an agreement that limited 10 categories of Chinese textiles exports to the EU to between 8 and 12.5 per cent growth above a specified base period for the next three years. In December 2005, the US and Chinese trade representatives agreed to a three-year agreement reducing US imports of Chinese textile and apparel products in all or parts of 34 sensitive categories. 4 We also polled South African clothing firms but their responses are not reflected here given our focus on primarily export-oriented clothing economies.

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FIGURE 5 The Performance of SSA, China and India Clothing Firms on Operational Factors (1 = very poor performance; 5 = excellent performance) Manufacturing costs 5 4 Product range

Quality

3 2 1 0

Technology level

Labour relations

Delivery leadtime/flexibility China

Product development capability India

SSA

were clearly seen to be more developed, in every respect, followed by Indian suppliers and, some way behind, by SSA suppliers. The performance gap was smallest for labour relations, and greatest for delivery time and flexibility, product development capabilities, technology levels and quality. With the exception of delivery time, these are all areas where SSA firms can improve and this is an issue which we address in the policy conclusions below.

5. CAN AN EXPORT-ORIENTED SSA CLOTHING AND TEXTILE INDUSTRY SURVIVE IN THE POST-QUOTA ERA?

Contrary to the expectations of many, the removal of quotas has not led to a collapse of AGOA clothing and textile exports. We should, however, put one large caveat on this conclusion. One key informant asserted that the reason why export values seem to have declined less than employment has been due to illegal transhipments from China, with clothing either directly brought into AGOA countries and then re-exported, or the paperwork suggesting that this was the case. (This is akin to transfer-pricing, which has long bedevilled international trade statistics and undermined government tax revenues.) It is notable that the 10 per cent fall in Swazi exports to the US is much lower than the loss in total employment (43 per cent in the same period). We are unable to judge whether these assertions are accurate, and the analysis below is agnostic on the issue.

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It is widely believed that by limiting China’s export surge, the introduction of China safeguards in the US (and in the EU) midway through 2005 would lead to a further strengthening of SSA clothing and textile exports. However, the impact of the imposition of China safeguards is generally misinterpreted. Although designed to ‘protect domestic industry’ from Chinese competition, it is not only China whose exports were kept out of major importing markets by quotas. Other low-cost and high-quality Asian producers are similarly able to compete effectively in the major markets, and they, rather than SSA or domestic industries in the US and the EU, are likely to be the primary medium-term beneficiaries of China safeguards. Firm interviews reported some resurgence of orders to SSA in the immediate aftermath of China safeguards. In the immediate context of safeguards being imposed, existing relationships between US buyers and SSA producers clearly have had a role to play when alternative sourcing was necessary. The key, however, lies in the medium term, when buyers have more time to make and set in place new sourcing decisions. Although, historically, quotas were important in the establishment of the exportoriented clothing and textiles sector in SSA, the key to understanding the relatively robust performance of SSA AGOA exporters lies in the realm of costs. This, as we have seen from earlier analysis, is the single most important driver for the buyers. Within this, the degree of competitive advantage held by AGOA exporters arises from their duty preferences. And, here, US nominal tariffs significantly underestimate the degree of preference which AGOA producers are actually accorded since the tariffs are imposed on the gross value of exports, whereas most of the textile inputs are imported (duty free). The real value of these AGOA preferences is akin to the effective rate of protection for domestically-oriented industrial production. It follows from this discussion on the impact of tariffs that without the derogation from the AGOA rules of origin which allow least-developed qualifying SSA economies to import their fabrics from outside of the region (or the US), little of the clothing and textile industries in the region would survive. As can be seen from Figure 6, almost all fabric in AGOA clothing exports has been imported (although the new denim mill opened in Lesotho in 2004 will reduce this somewhat in the future).5 South Africa’s experience represents the dark side of the AGOA clothing producers’ future when and if the fabric derogation is repealed. The inability of its clothing sector to incorporate imported fabrics was the major reason why it was especially adversely affected by the ending of MFA clothing quotas. It is this spectre which awaits all SSA clothing exporting economies when 5 Most of the firms operating in the region source their material inputs from East Asia in general, and predominantly from China. This is an ironic side-effect of the derogation on the rules of entry, in that given the importance of fabrics in production costs (especially in the case of synthetics), the primary beneficiaries of the AGOA scheme are the Asian fabric suppliers!

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FIGURE 6 Share of Non-AGOA and Non-US Cloth in AGOA Exports to US, 2004–05 100% 90% 80% 70% 60% AGOA Kenya

50% 40%

Madagascar Swaziland Lesotho

30% 20% 10% 0%

2001

2002

2003

2004

2005

2006

Source: Calculated from US Department of Commerce, Office of Textile and Apparel (OTEXA), data accessed in March 2007.

the special fabric derogation accorded them within the AGOA preferential trade access arrangements comes to an end. If these clothing producers have not by then become competitively self-sustaining by upgrading their production processes and moved up the value chain into more complex garments their export path may well run into a cul-de-sac. Although of primary significance, the combination of tariff protection and the derogation on the rules of origin are not the only factor influencing the competitive costs of SSA producers. Although SSA producers have wage costs which are comparable to Asia (Table 5), wages are only one component of unit labour costs. The other components are the degree of automation involved, the skills possessed by the labour force and the effectiveness of management. A detailed investigation of productivity in Lesotho observed low levels of skill and efficiency (Salm et al., 2002). Middle management was particularly weak, and was largely made up of Chinese workers with shopfloor experience, but little management knowhow and largely unable to communicate with the Sesothospeaking labour force. They concluded that ‘operator productivity within the industry was generally low. This is principally due to deficient recruitment policies, inadequately trained operators, poor supervisory management, communication difficulties and cross-cultural misunderstanding …’ (Salm et al., 2002, p. 51). ‘The Industrial Engineering function … is not carried out in a focused manner … [with the possibilities of]’ significant improvements in productivity (passim). Poor labour relations are part of this.

150

RAPHAEL KAPLINSKY AND MIKE MORRIS TABLE 5 Labour Costs: Hourly Compensation: Selected Countries, 2002 (US$/hour)

Bangladesh Sri Lanka China India Kenya Egypt Mauritius South Africa Mexico Taiwan Madagascar

Textiles Industry Hourly Labour Costs (US$/hour)

Clothing Industry Hourly Labour Costs (US$/hour)

0.25 0.40 0.40–0.69 0.57 0.62 1.01 1.33 2.17 2.30 7.15 n.a.

0.39 0.48 0.68–0.88 0.38 0.38 0.77 1.25 1.38 2.45 n.a. 0.33

Source: Economist Intelligence Unit (2004).

A detailed survey of worker attitudes found that 51.3 per cent of workers felt ‘very negative’ towards their employers, and a further 14.3 per cent felt ‘quite negative’. Only 1 per cent felt ‘very positive’. Fifty-four per cent felt that their lives had not improved at all since joining their factories, and a further 37 per cent that it had improved ‘only a little’. ‘There was remarkable consensus across the different focus groups: regardless of age, employment status or gender the participants expressed fundamentally the same views. … The overwhelming majority see Asian investors (their factory managers) in an extremely negative light’ (Salm et al., 2002, Annex 3, 21). The Manchester Trade Team (2005) compared costs along a range of factors for the Common Market for East and Southern Africa (COMESA) and China and India for an equivalent product to show the barriers faced by SSA clothing exporters. They found that: • Export finance costs in Kenya (13 per cent p.a.) and Madagascar (18 per cent p.a.) were much higher than in China (5.5 per cent) and India (10.5 per cent). • Building costs were much higher in Kenya (US$3/sq. ft) and Madagascar (US$4/sq. ft) than in China (US$1.50/sq. ft) and in India (US$2.50/sq. ft). • Transport costs to the US East Coast were lower for Kenya and Madagascar than for China (US$0.29 versus US$0.33 per jean) but were lowest for India (US$0.23 per jean). • The cost of machinery and of power were rather similar, but labour productivity with equivalent machines was significantly higher in China (25 pieces/ day) than in India (21 pieces/day), Kenya (18 pieces/day) and Madagascar (16 pieces/day).

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TABLE 6 Electricity Supplies in Kenya and China

Frequency of power outages (number of times last year) % of production lost due to power outages Have own generator (%) No. of days to obtain an electricity connection

Kenya

China

33.1 9.3 70.0 65.6

n.a. 1.8 17.0 18.2

Source: World Bank (2003).

TABLE 7 Determinants of Lead-time: Kenya, Lesotho and Swaziland Delivery Type

Kenya

Lesotho

Swaziland

Delivery of fabric from Asia (Taiwan or China) From port to factory Production lead-time Factory gate to port Port to USA port (NY)

30 days

30 days

30 days

7 days (Nairobi) 30 days 3 days 40 days Mombasa to NY 110 days

3 days 25–30 days 3 days 28 days Durban to NY 90–100 days

3–10 days 25–30 days 2 days 28 days Durban to NY 90–100 days

Total delivery time Source: Company interviews.

Clothing manufacturers depend heavily on access to reliable infrastructure. Here SSA producers are disadvantaged compared to their Asian counterparts. In some countries water supplies, critical to successful production, are intermittent. One of the clothing firms in Lesotho had to close 13 out of 23 lines in 2004 due to water cost, availability and quality, and another Lesotho firm also observed poor water supplies as a handicap to production, along with power outages; Swazi firms also reported water shortages and power outages (source: interviews). In Kenya, production is often confined to EPZs precisely because of the failure of infrastructure supplies in the wider economy, and electricity costs are more than three times those in South Africa (Ikiara and Ndirangu, 2003). The comparison with China is stark, with Kenyan firms facing frequent outages, losing significant production due to power shortages, despite having to invest in generators, and new businesses have to wait very long periods for connection to the grid (Table 6). The weakness of the transport system associated with bureaucratic hold-ups also leads to considerable delays and makes it almost impossible for SSA producers to produce items for higher-margin rapid-response markets. Unlike Asian competitors, SSA producers have to wait around 30 days to obtain their imported inputs and a further 28–40 days to deliver products to final markets (Table 7).

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However effective improvements in process efficiency might be, perhaps halving throughput time to around 15 days, it will not be possible to make up for these structural weaknesses in the economy. Despite these handicaps, the evidence seems to suggest that SSA clothing and textile exporters who are able to draw on trade preferences are still largely able to compete with the best competition in the world. They also do so with the evidence of significant productivity improvement, in that during 2005 export values and volumes held up much better than employment in Kenya, Lesotho and Swaziland. Moreover, as various industry analysts have pointed out, there is considerable scope for further improvements in efficiency (Salm et al., 2002; Manchester Trade Team, 2005). But to achieve this requires tailored and effective government support and, more importantly, comprehensive firm-level restructuring in the industry. Enhanced capacities of innovation management – the ability to scan the environment, to develop appropriate strategies, and then to implement these strategies – are key to a successful response. If SSA firms are to have a long-term competitive future at some point they will have to place themselves on an upgrading trajectory, building their production capabilities through introducing innovative production processes, introducing more complicated activities, and moving from basic to more complex products.

6. FROM CLOTHING AND TEXTILES TO INDUSTRY: WHAT IMPACT WILL THE ASIAN DRIVERS HAVE ON SSA INDUSTRIALISATION?

What is the wider significance of these findings for manufacturing-based industrialisation paths? First, where buyers have multiple sources of supply, SSA is unable to compete effectively in global markets. In a world of a level playing field, it will have little global presence as an exporter. In the case of clothing, SSA has been unable to fully hold onto its already tenuous position with effective rates of subsidy provided by a preferential trade regime of between 28 and 84 per cent, and has seen an aggregate decline in clothing exports of 17 per cent, despite a sharp rise in US imports of clothing in 2005. Our complementary study of SSA’s furniture industry, where protective subsidies are less than 13 per cent, shows that without these subsidies, SSA producers are being squeezed out by Chinese, Indonesian and Vietnamese competition (Kaplinsky and Morris, 2006). Total SSA furniture exports are around 1 per cent of global trade, having fallen from 1.5 per cent in 2000. So, our first conclusion is that in respect of a manufacturing-based industrialisation path, SSA requires a non-level playing field in global trade, significantly tilted in its favour, and primarily raised against its major competitors who are now based in Asia, rather than in the EU or North America. Second, the clothing and furniture industries are widely recognised as being the stepping stone for industrial development. Our findings suggest that these first

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steps are being blocked by competition from the Asian Drivers in general, and China in particular. In this chapter we have focused on export-oriented manufacturing, but similar damaging impacts of China’s manufactured exports are evidenced in the domestically-oriented industrial sectors (Kaplinsky, 2008). This being the case, the implication of our study is not so much about the present trajectory of SSA industrial development, but about its future trajectory. Unless it is believed that the Asian Driver economies will soon run into capacity constraints (perhaps a shortage of unskilled labour) and be forced to raise their costs, or that their overall success will surface in significant upward realignments of their currencies, then it is difficult to see a future for SSA industrialisation in a global economy. It may be that changing terms of trade will mean that industrial development will be a relatively less attractive development option in the short to medium run (Kaplinsky, 2006), but this is a separate issue. Commodity-based sectors (particularly mineral-based commodities) have few linkages and provide little scope for positive external economies. Third, the welfare effect of importing cheaper clothing on the poor and working class of SSA cannot be discounted. The South African case demonstrates the significant consumer surplus arising from the reduction in the unit prices of children’s and infants’ clothing (Morris, 2007). Although, in the process this has had a deleterious impact on producers in the clothing and textile sector, by lowering the cost of wage goods, it has arguably led to nominal-wage suppression in other sectors. Finally, in this chapter we have considered in depth a single industry in a single continent. But our conclusions are not only relevant for other industries in SSA, but also for other regions in the world. There are compelling reasons to believe that the prospects facing large parts of Latin American and Caribbean are not dissimilar to those confronting SSA (Kaplinsky, 2005; Jenkins and Dusserl Peters, 2008). This being the case, we may yet again find ourselves in a familiar territory which questions the attractiveness of deepening globalisation for many economies.

REFERENCES Economist Intelligence Unit (2004), ‘Africa Consumer Goods: Clothing Industry is Shrinking’, The Economist, London. Gereffi, G. and O. Memedovic (2003), The Global Apparel Value Chain: What Prospects for Upgrading by Developing Countries?, Sectoral Studies Series (Vienna: UNIDO). Ikiara, M. M. and L. K. Ndirangu (2003b), ‘Prospects of Kenya’s Clothing Exports under AGOA after 2004’, Discussion Paper No. 24 (Nairobi: Kenya Institute for Public Policy Research and Analysis). Jenkins, R. O. and E. Dusserl Peters (2008), ‘The Impact of China on Latin America’, World Development Special Issue on Asian Drivers and their Impact on Developing Countries, 36, 2, 235–53.

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Kaplinsky, R. (2005), Globalization, Poverty and Inequality: Between a Rock and a Hard Place (Cambridge: Polity Press). Kaplinsky, R. (2006), ‘Revisiting the Terms of Trade Revisited: Will China Make a Difference?’, World Development, 34, 6, 981–95. Kaplinsky, R. (2008), ‘What does the Rise of China do for Industrialisation in SSA?’, Special Issue on the Impact of China on SSA, Review of African Political Economy, 35, 115, 7–22. Kaplinsky, R. and M. Morris (2006), ‘Dangling by a Thread: Can SSA Survive the Chinese Scissors?’, Report prepared for DfID (Brighton: Institute of Development Studies). Kaplinsky, R. and M. Morris (2008), ‘Do the Asian Drivers Undermine Export-oriented Industrialisation in SSA?’, World Development Special Issue on Asian Drivers and their Impact on Developing Countries, 36, 2, 254–73. Manchester Trade Team (2005), ‘Impact of the End of MFA Quotas and COMESA’s Textile and Apparel Exports under AGOA: Can the Sub-Saharan Africa Textile and Apparel Industry Survive and Grow in the Post-MFA World?’, Report prepared for USAID East and Central Africa Global Competitiveness Trade Hub. Morris, M. (2007), ‘The Rapid Increase of Chinese Imports: How do we Assess the Industrial, Labour and Socio-economic Implications?’, paper delivered at the 20th Annual Labour Law Conference, Sandton Convention Centre, 4 July 2007. Morris, M. and L. Sedowski (2006), ‘Report on Government Responses to New Post-MFA Realities in Lesotho’, PRISM Working Paper No. 2, Policy Research in International Services and Manufacturing, SALDRU, University of Cape Town. Available on www.saldru.uct.ac.za/prism/ lesotho_clothingrept.pdf. Salm, A., W. J. Grant, T. J. Green, J. R. Haycock and J. Raimondo (2002), ‘Lesotho Garment Industry Subsector Study for Government of Lesotho’, mimeo. USITC (2004), ‘Textiles and Apparel: Assessment of the Competitiveness of Certain Foreign Suppliers to the US Market’, Investigation No. 332-448, USITC Publication 3671 (Washington, DC: United States International Trade Commission). World Bank (2003), ‘Kenya: A Policy Agenda to Restore Growth’, Report No. 25840-KE (Washington, DC: The World Bank). Available on www.worldbank.org/ke/cg2003/CEM_CG.pdf.

Index Abdou Diouf, President (Senegal) 74 Adama Hospital (Ethiopia) 123 Addis Ababa 113, 120, 122–3, 124 Africa Asian Drivers and (case studies) 40–4 Chinisation of (Angola) 45–63 see also individual countries African Growth and Opportunities Act 99 Ethiopian footwear 120 preferences 93, 144–5, 148–9 Senegalese clothing 71, 78, 81–2, 85 SSA clothing 43, 138–49 US-AGOA 93, 94, 139–41 US buyers 143–7 Agreement on Textiles and Clothing 138 agricultural equipment 66 agricultural protection (Europe) 1–36 changes (impact) 30–1 Common Agricultural Policy 2–3, 4, 18 crisis (nineteenth century) 8–13 growth (explanations) 26–30 liberalisation 6–7 measurement 3–5 NRA 3–7, 9, 11–12, 14–17, 32, 34–6 policy evolution 5–18 political economy of 1–2, 3, 18–25 self-sufficiency 18, 29, 30, 32–3 structural changes in economy 21–2 agricultural sector Ethiopia 116 Kenya 87 Senegal 68, 82, 84 aid see development aid; foreign aid; official development assistance (ODA) Alcatel Shanghai Bell 57 Anderson, K. 2, 3, 32 Angola 41, 42, 45–63, 115 economy of 45, 46–9 exports 48, 49, 51–2, 61, 62 financial relationships 56–62 imports 52–5, 63 oil sector 47, 48, 49–52, 55–6, 59–62 political economy 45, 59–61

relationship with China/India 55–9 trade patterns 50–5 Angola Railway Rehabilitation Project 58 Angola Telecom 57 ‘Angolagate’ affair 56 ‘Animal Disease Act’ 12 animal skin sector (Senegal) 67, 69 aquaculture (in Senegal) 44, 81 arap Moi, Daniel (Kenyan President) 105 Argentina 8 Asian Drivers Africa and (case studies) 40–4 Angola and 41, 42, 45–63 Ethiopia and 41, 42–3, 112–35 Kenya and 41, 42–3, 86–110 Senegal and 41, 42, 64–85 SSA and 43, 137–53 see also China; India assimilados (in Angola) 46 Bahrain 100 balance of payments (Angola) 48 balance of trade Ethiopia 113–14, 134 Kenya 89, 90 Bandung Asia-Africa conference 73 Bangladesh 94, 100, 150 bankruptcies (Ethiopia) 128 Beijing 42, 46, 59, 75 Belgium agricultural protection 2, 4–5, 7, 9–17, 19–24, 26, 32, 34–7 food expenditure 21–2 Benguela Railroad 57, 58 Berhanu, N. 124, 125 bilateral cooperation/trade Kenya 105, 107 Senegal 66, 72–6 SSA 137 Black Lion Hospital (Ethiopia) 123 black market 13, 17, 47 Black Sea region 5, 7 Botswana 91, 92

155

156

INDEX

Boulevard du Centenaire (Dakar) 77 BP 55 Brazil Angola and 53–4, 59–60, 61 Senegal and 72, 73, 84 Bretton Woods institutions 45, 59 Business in Africa 100, 101 butter 15–16, 32, 33, 36 Cabinda Gulf 49, 50, 56 Cameroon 91, 92 Canada 8 CAP 2–3, 4, 18 capacity utilisation (in Kenya) 95, 102 ‘cardboard structures’ (in Angola) 60 Caribbean Basin Initiative 139 case studies economic globalisation 40–4 see also Angola; Ethiopia; Kenya; Senegal; sub-Saharan Africa (SSA) cashew nuts (Senegal) 67, 68–9, 78, 81, 82, 85 Centre for Business Information in Kenya (CBIK) 96–7 Chamber of Commerce (Luanda) 56 ‘cheque book diplomacy’ 74 China Angola and 41, 42, 45–63, 115 diaspora 42, 64, 65, 105–7, 108–9 economic globalisation 40–4 Ethiopia and 41, 42–3, 112–35 Kenya and 41, 42–3, 86–110 safeguards 145–6, 148 Senegal and 41, 42, 44, 64–85 Taipei 42, 64, 74–5, 94, 104 China-Africa Forum 104 China International Fund 56 China National Fisheries Association 69 Chinese Embassy (in Kenya) 104, 105 Chinese Eximbank 56, 57, 60 Chinese Road and Bridge Construction Company 120, 122 clothing sector Ethiopia 120 Kenya 41, 42–3, 86–110 Senegal 41, 42, 78, 81–2 SSA 43, 44, 138–42, 147–52 see also footwear sector; textile sector CMEC 57

‘cold war’ 29–30 commodity prices 41 Common Agricultural Policy 2–3, 4, 18 Common Market for East and Southern Africa (COMESA) 150 Commonwealth of Nations 105 communication and information technologies (Senegal) 82–3 comparative advantage 44, 130, 135 agriculture 18–19, 20–1, 27 competition Ethiopia 112, 118–20, 125–32 Kenya 91–2 SSA 138, 148 COMTRADE 139 conditionality Angola 59–60, 62 Kenya 103–4 Confucius Chinese and Language Centre 103 construction sector 57 Ethiopia 120, 135 Senegal 66, 79, 82–3 see also road construction consumer expenditure 21, 22, 30 consumer surplus 153 cooperation levels (Senegal) 74–6 see also bilateral cooperation/trade coping strategies (Ethiopia) 125, 128–32 Copycat 100 Corn Laws (1848) 2, 5, 6 corporate social responsibility 41, 145, 146 corruption Angola 49, 60, 62 Kenya 102 costs clothing sector (SSA) 138–9 farm (Netherlands) 14 labour see labour costs of production (Senegal) 71, 78–80 transport 8, 13, 78, 79, 150 Côte d’Ivoire conflict 73 cotton exports (Senegal) 68 credit line (Angola) 56–8, 60 Crimean War 7 Crommelynck, A. 17 ‘crowding-out’ effect 97–8, 112 cultural exchange programmes 103

INDEX dairy products 15–16, 32, 33, 36 Dakar 42, 65, 69, 70, 77 Dakar Dem Dikk (DDD) 70 Debre Berhan Hospital (Ethiopia) 123 debt Angola 48–9, 56–8, 60 Ethiopia 123 Senegal 80, 81 democracy 30–1, 103 Deng Xiaoping 104 Department of Commerce (US) 149 Department of Interior Affairs (Senegal) 76 design improvement (footwear) 128–9 development aid in Ethiopia 122 in Kenya 101–4, 108 Development Assistance Group countries 122 ‘development niche’ 79–80 diamond sector (Angola) 47, 48, 51 diaspora Chinese 42, 64, 65, 105–7, 108–9 Indian 105–7, 108–9 role 42 digital link/network (Senegal) 44, 83 diplomacy (in Senegal) 73–5 direct payments 29 Distacom 41 Djibouti 115, 117 Doha Round 1 downsizing (in Ethiopia) 127, 134 DPEE (Senegal) 67–8, 72 duka-wallas 106 Dutch Flower Auction 87 duty free 71, 94, 109, 116, 148 Economic Community of West African States (ECOWAS) 83 economic development, agriculture and 19, 26–7 economic globalisation 40–4 Economic Partnership Agreements 83 Economist Intelligence Unit 57, 59, 60, 150 economy, structural changes in 21–2 education programmes (Kenya) 102–4, 108 Edwards, C. 91, 92, 118–19 EEC 4 Egypt 150 Ejersa and Sewir irrigation project 123

157

electricity prices/supply 78, 151 employment share (agriculture) 19–20, 26 Energy Information Administration 49 England Corn Laws 2, 5, 6 -France trade agreement (1860) 6 ‘high farming’ period 7 landlords 10, 23 voting rights reforms 23, 24 Equivalent Number index 51, 52, 53–5 Ethiopia 91, 92 competition 118–20 exports 112, 113–19, 124–5, 134, 135 footwear sector (impact of Asian Drivers) 41, 42–3, 112–35 foreign aid 122–3, 135 foreign direct investment 120–2, 135 imports 113–15, 117–18, 123–33, 134, 135 policy measures/recommendations 133–5 trade relations 113–20, 134 Ethiopia Investment Office 121 Europe agricultural protection 1–36 see also European Union European Union Angola and 51, 52, 54 Common Agricultural Policy 2–3, 4, 18 EEC 4 Ethiopia and 115, 117, 122, 135 Senegal and 73, 83, 85 SSA and 138, 148 see also individual countries Eurostat 22 Everything But Arms initiative 85 exchange rate, real 41 Eximbank 56, 57, 58, 60 export processing zones (EPZs) 94–6, 98, 99–100, 109, 151 Export Processing Zones Authority 94, 98, 100 export similarity index (ESI) 91–2, 119 exports Angola 48, 49, 51–2, 61, 62 Ethiopia 112, 113–19, 124–5, 134, 135 Kenya 87–91, 107, 109, 110, 139–42, 146, 149–52 Lesotho 43, 91–2, 119, 139–42, 146, 148–9, 151–2 Senegal 64, 65, 66, 67–9, 72, 76

158

INDEX

exports (cont’d) SSA 41, 43, 137–53 Swaziland 43, 139–43, 146, 147, 149, 151–2 farm incomes Finland 17–18 relative 19–21, 29, 30 farm prices/costs (Netherlands) 14 farm workers 10 farmers, political organisation of 23, 25, 27–8, 29, 31 Federal Small and Medium Enterprise Agency (FEMSEDA) 133 fertiliser market (Senegal) 68, 80–1 feudal systems 28 financial assistance to Ethiopia 122–3 see also development aid; foreign aid; foreign direct investment (FDI) financial flows (Kenya) 97–100 financial relationships (Angola) 56–62 Finland agricultural protection 2, 4, 7, 9, 12, 15–20, 22, 24, 30, 33–7 farm income 17 First World War, agriculture and 13 fishing industry (Senegal) 42, 44, 68–9, 71, 75, 76, 81–2, 85 Fletcher, T.W. 11 ‘floating people’ (in Senegal) 76 floriculture (in Ethiopia) 120, 135 Food and Agriculture Organization (FAO) 73 food distribution/scarcity 13–14, 17, 18, 29–30 expenditure 21–2, 26, 29, 30 industry (Senegal) 81, 82 footwear sector 44 Ethiopia 112–35 foreign aid Ethiopia 122–3, 135 Kenya 101–4, 108 see also official development assistance (ODA) foreign direct investment (FDI) 41, 43 Ethiopia 120–2, 135 Kenya 87, 94, 97–100, 108, 109–10 Senegal 42, 65, 68–71, 73, 74, 76, 83–5

France 61 agricultural protection 2, 4–12, 14–16, 17, 19–20, 22–4, 26–8, 33–7 Development Agency 40 Senegal and 65, 69, 73, 74 free trade (in agriculture) 1, 2, 6–7, 11, 26, 27, 30 freezing technology 11, 12 freight transport (Senegal) 78, 79 furniture industry 152–3 G21 countries 73 Gap 143 Gardner, B.L. 2 Generalised System of Preferences (GSP) programme 93, 139 Germany agricultural protection 2, 4–12, 14–15, 17, 19–20, 22, 24, 26–7, 29–30, 33–7 Ethiopia and 115, 117, 135 Senegal and 72, 74, 84 Ghana 91, 92, 95 globalisation 137–8, 153 economic 40–4 governance (Kenya) 101, 103 Grain Laws 6 grain market 2, 5, 6–16, 26–8, 30–5 grants (from China) to Ethiopia 122 to Kenya 103, 108 ‘greenfield’ investment 69 gross domestic product (GDP) Angola 48 growth (developing countries) 40 Kenya 101 share of agriculture 20 gross national income (Angola) 48 Gujarati 106 gum arabic (in Senegal) 67, 69 Guraghes (in Ethiopia) 124 Haier 56 Hayami, Y. 2 Henan Chine 77, 79 Herfindahl index 51, 52, 53–5 ‘high farming’ (in England) 7 highly indebted poor countries 123 Hoffmann, W.G. 6, 11 Hong Kong 41, 138 Hu Jintao, President (China) 105

INDEX Huawei 57 human resource development programme (Ethiopia) 123 human resource flow (Kenya) 104–7 human rights (Kenya) 101, 102, 103 ICS (Senegalese Chemical Industry) 44, 65, 68, 69–70, 80–1, 83 IFFCO 68, 70 immigrants in Kenya 105–7 in Senegal 82 see also diaspora Immigration Act (1968) 106 implantation strategy (TATA) 70 import tariffs 116 agriculture 1, 5–6, 9–12, 15–16, 26–9, 31 SSA 148, 149 imports agricultural protection 1–36 Angola 52–5, 63 Ethiopia 113–15, 117–18, 123–33, 134, 135 Kenya 87–91 Senegal 66–7 US (from SSA) 143–7 income farm 17–21, 29, 30 gap 17–18, 21, 30 gross national (Angola) 48 parity 18 relative (agriculture) 19–21 India Angola and 42, 46, 53–61 diaspora 105–7, 108–9 economic globalisation 40–4 Ethiopia and 113–22 Kenya and 87–97, 105 Senegal and 41, 42, 64–85 India Eximbank 58 Indian Embassy (in Senegal) 76 Indian Technical and Economic Cooperation (ITEC) 102, 123 industrial policy (Ethiopia) 112 Industrial Revolution 19 industrialisation export-oriented (SSA) 43, 137–53 strategies 44, 112 informal sector 77, 78, 82, 131 information technology (Senegal) 82–3

159

infrastructure development Ethiopia 135 Kenya 102–3, 110 Senegal 79, 80 SSA 151 innovation management 152 institutional approaches 43 international financial institutions (IFIs) 48, 60–1 International Monetary Fund (IMF) 47–8, 49, 51, 52, 54, 60, 61, 62–3 investment in agriculture (Europe) 12–13 in machinery 130 in Senegal 69–71, 83–4 see also foreign direct investment (FDI) Italy, Ethiopia and 117 Japan Ethiopia and 115, 117 Senegal and 72, 84 Jean Lefebvre Sénégal 105 Jenkins, R. 91, 92, 118–19 Jiang Zemin, President (China) 105 Jiangsu Construction Group 57 Jimma Hospital (Ethiopia) 123 kebeles (in Addis Ababa) 113 Kenya Chinese/Indian diasporas 105–10 development aid 101–4, 108 developmental impact of Asian Drivers (textiles/clothing) 41, 42–3, 86–110 exports 87–91, 107, 109, 110, 139–42, 146, 149–52 foreign direct investment 97–100, 108, 109–10 human resource flows 104–7 imports 87–91 political economy 104–7 trade flows 87–97, 107 Kenya-Uganda railway 106 Kenya Airways 100 Kenya Investment Authority 98–9 Kenya Tourist Board 100 Kibaki, Mwai (Kenyan President) 105 Knorringa, P. 124–5 Korea 55 Krueger, A.O. 2 kwanza (Angolan currency) 47

160

INDEX

labour costs Kenya 95, 98, 110 SSA 149–50 labour force Ethiopia 127–8 Kenya 100, 110 SSA 149 landlords 9, 10, 23, 27, 28 lead-times 95, 110, 138, 151 leather industry Ethiopia 124, 133 Senegal 67, 69 Lesotho (exports) 43, 91–2, 119, 139–42, 146, 148–9, 151–2 ‘lesser developed countries’ (rules of origin waived) 93 liberalisation agriculture 1, 2, 6–7, 11, 26, 27, 30 see also free trade Lindert, P. 2 livestock sector 6, 10–12, 13, 14, 15, 27–8, 33–4, 36, 134 loans (from china) to Ethiopia 122 to Kenya 103, 108 local products, value of (Senegal) 83 Luanda 42, 48, 56, 57, 60 Mabati Rolling Mills 100 McCormick, D. 86, 94, 102 Macky Sall, Prime Minister (Senegal) 76 Madagascar 41, 73, 139–42, 149, 150 Maghreb 83 Manchester Trade Team 139, 150, 152 manufacturing sector Ethiopia 42, 135 France 27 Germany 27 Kenya 42, 98 SSA 143, 144, 152–3 Mao Zedong 45–6 marine products (Senegal) 81 market returns (agriculture) 18, 19–21 share 66–7, 95–6, 107 Mauritius 83, 139, 140, 150 meat see livestock sector medical sector Ethiopia 123 Kenya 103

Mexico 150 micro and small enterprises (Kenya) 93 migration Angola 58–9 Ethiopia 124 Kenya 105–7 Senegal 76–7, 82 milk 15–16, 32, 33, 36 milling ratios 16, 29 Ministry of Commerce (Senegal) 76–7 Ministry of Finance (Kenya) 102, 103, 109 Ministry of Finance and Economic Development (Ethiopia) 122, 123 Ministry of Petroleum (Angola) 56 Ministry of Trade and Industry (Ethiopia) 114, 115, 116–19, 124, 133 Moges, K. 124, 125 Morris, M. 142 most favoured nation principle 27 Mozambique 92, 119 MPLA 47 Multi-Fibre Agreement (MFA) 43, 78, 85, 94–5, 98, 120, 138, 142, 145, 148 Mumbai 105 N.I.S. 22 Nairobi 105 Namibia 91, 92 Napoleonic Wars 6 natural resources 40, 41 Kenya 87 Senegal 64, 65, 75 see also raw materials Netherlands agricultural protection 2, 4–5, 7, 9, 12, 14–17, 19–20, 22–4, 26, 34–7, 117 Ethiopia and 117, 135 farm prices/costs 14 New Delhi 65 New Partnership for Africa’s Development (NEPAD) 42, 73, 84 Nigeria 91, 92 nominal rate of assistance (NRA) 3–7, 9, 11–12, 14–16, 17 calculation 32, 34, 35–6 Non-Aligned Movement 46, 73, 84, 105 non-diversified exports 67–9 non-tariff barriers 12, 29 Norway 2 NSTS 81

INDEX OECD 80, 101 countries 61, 87–8 Development Centre 40 Office of Textile and Apparel (OTEXA) 149 official development assistance (ODA) Ethiopia 122 Kenya 101 Senegal 42, 72, 74, 84 Oginga Odinga, Jaramogi (Kenyan VicePresident) 105 oil sector Angola 47, 48, 49–50, 51, 52, 55–6, 59–60, 61, 62 Kenya 89 Olson, M. 23 ‘One China Policy’ 103, 104 ONGC 60 OPEC 45 Pakistan 94 Paris Club 48, 49, 60 parliamentary representation (UK) 9, 10, 13, 31 partnership India-Senegal 73, 74, 80–1 political 72–4, 84 Senegal’s economic gain from 75–6 Pegler, L. 124–5 People of Indian Origin (in Kenya) 106–7 Petrobras 59 Petroleum Law (Angola) 49 phosphate sector/trade (Senegal) 42, 44, 64–5, 67–8, 75, 76, 80–1, 85 political economy agricultural protection 1–3, 18–35 Angola 45, 59–61 Kenya 104–7 political organisations/institutions, agriculture and 22–5, 27–8, 29, 31 political partnerships 72–4, 84 Portugal, Angola and 46, 52, 54, 58, 61 Portuguese Revolution 46 post-quota removal (clothing exports) 140–2, 147–52 post-war agriculture 17–18 poverty 28 Angola 57, 58, 62 Ethiopia 123 Senegal 76, 81 SSA 140, 146

161

Poverty Reduction Strategic Paper 81 pre-war agriculture 13 preferential trade agreements 43, 94–5, 117, 138–40, 149 prices agriculture 3, 5, 7–11, 13–14, 16–18, 21, 26 29–30 clothing (SSA) 141–2, 153 commodity 41 electricity (Senegal) 78 farm (Netherlands) 14 oil (Angola) 51, 52 shoes (Ethiopia) 125–7, 129, 131, 132 transport 8, 13, 78, 79, 150 primary sourcing agents 143, 144 product specialisation (shoes) 128, 130–1 production costs (Senegal) 71, 78, 79–80 Production Sharing Agreement model 50 productivity 7, 43, 149 profit margin (shoes) 129, 131, 132 Prussia 6, 11, 27, 29 Punjab 106 Qatar 100 quality control (shoe imports) 133 quality improvement (footwear) 129–30 quotas 94, 138, 144–5 removal 140–3, 147–52 rapid-response markets 151 raw materials 41, 72–3, 75, 83–4, 94, 95, 107, 131 see also natural resources relative income (agriculture) 19–21 retail sector 82, 106 rice imports (Senegal) 66, 67 RITES Limited 58 road construction (Ethiopia) 120, 122, 123, 135 Romania 27 Roque Santeiro Market 57 Royal Commission on Labour 10 rules of origin 93, 99, 139, 145, 148–9 Russia 7, 8, 27, 30,61, 73 Saudi Arabia, Ethiopia and 115, 117 Savimbi, Jonas 46 scholarships 102, 103, 104, 108 scrap metal (Senegal) 68, 69, 78–9 Sécil Marítima 60

162

INDEX

Second World War, agriculture and 17–18 secondary sourcing agents 143, 144 Sedowski, L. 142 self-sufficiency rates 18, 29, 30, 32–3 Senegal economy 76–84 exports 64, 65, 66–9, 72, 76 fishing industry 42, 44, 68–9, 71, 75, 76, 81–2, 85 foreign direct investment 42, 65, 68–71, 73, 74, 76, 83–5 impact of Asian Drivers 41, 42, 44, 64–85 imports 66–7 Sénégal Armement 69, 70, 71 Sénégal Pêche 69, 70, 71 Shell 60 Silk Road (World Bank) 41 Sinopec 55, 56, 59 skill transfer (Senegal) 70, 78, 79–80 small-scale footwear producers (Ethiopia) 112–35 Smith, Adam 7 Somalia, Ethiopia and 117 Somalian invasion (Kenya) 102 SONANGOL 47, 49–50, 55–6, 59, 60 SONANGOL-Sinopec consortium 56, 59 South-South partnership 73, 80–1 South Africa Angola and 51, 52, 53, 54 Kenya and 91, 92 Senegal and 73 SSA and 139, 140, 146, 150 Soviet Union, Angola and 59 Spain, Senegal and 74 Sri Lanka 94, 100, 150 Staff Monitored Programme (SMP) 47 Standard International Trade Classification (SITC) 119 Stratégie de la Croissance Accélérée (SCA) 71, 81, 82 Stresa Conference (1958) 18 structural changes (in economy) 21–2 sub-Saharan Africa (SSA) 116 economic globalisation and 40–4 exports 41, 43, 137–53 see also individual countries subcontracting 109 subsidies 152 agriculture 1, 3, 12, 13, 16, 84 Sudan 40–1, 45, 61, 91, 92, 115

sugar trade/industry 32–4, 36 Swaziland (exports) 43, 139–43, 146, 147, 149, 151–2 Swinnen, J.F.M. 8, 18, 20, 22, 24, 33 Sweden 4, 9, 14, 19 Swiss Development Cooperation 40 Switzerland 2, 40, 117 Taipei 42, 64, 74–5, 94, 104 Taiwan 138, 150, 151 Tanzania 87, 91, 92, 96, 101 tariffs see import tariffs TATA 70, 79–80, 83 taxation 31, 77, 82 tea imports (Senegal) 66 technical assistance 102, 104, 105, 122 technical training 102, 104, 108, 110, 122, 123 technology transfer Kenya 100, 109 Senegal 42, 70, 74, 79–80, 83 Telecom Malagasy (Telma) 41 Telecommunication Consultants India Limited (TCIL) 58 telecommunications 41, 58 teleservice (in Senegal) 44, 82–3 tenure rights (of tenants) 31 terms of trade 40 Ethiopia 113 Kenya 90, 91 SSA 153 textile sector Ethiopia 118 Kenya 41, 42–3, 86–110 Senegal 66, 71, 78, 81–2 see also clothing sector Thappar group 70, 71, 81 Tia Jin Normal University 103 titanium mining (Kenya) 89 Total 56 Toutain, J-C. 11 Tracy, M. 2, 8, 11 trade agreements 43, 94–5, 117, 138–40, 149 China as supplier 65–9 Ethiopia 113–14, 134 flows (Kenya) 87–97, 106–7 India as outlet 65–9 patterns (Angola) 50–5 Senegal 65–71, 76–8

INDEX see also balance of trade; bilateral cooperation/trade; free trade (in agriculture); terms of trade Trade Licensing Act (1967) 106 training 100, 102 Angola 57 Ethiopia 122, 123, 129 Kenya 100, 102, 108, 110 Senegal 70, 74 see also technical transfer transfer pricing 147 transport costs/prices 8, 13, 78, 79, 150 Senegal 64, 66–7, 78–80 SSA 150, 151–2 ‘triangular manufacturers’ 143, 144 TVET 123, 135 Uganda 87, 91, 92, 95, 96, 101 UNACOIS 77, 78 UNITA 46, 48 United Kingdom agricultural protection 2, 4–11, 13–17, 19–20, 22–4, 26–9, 31, 34–7 Kenya and 100, 106 United Nations 139 Commission 73 FAO 73 Security Council 72–3, 75, 84 United Nations Conference on Trade and Development (UNCTAD) 69, 98 United Nations Industrial Development Organization (UNIDO) 81, 124, 133 United States agricultural protection 8, 27

163

Angola and 52, 53, 61 clothing imports (from SSA) 43, 138, 139–41, 142, 143–7, 148–9, 152 Ethiopia and 117, 122 freight transport costs 78, 79 Kenya and 93, 94, 95–6, 100, 107 Senegal and 73, 74, 78, 79, 85 Université du Futur Africain 74–5 University of Nairobi 103 US-AGOA 93, 94, 139–41 USAID 94 USITC 138–9, 143 value-chain analysis 43, 109 Van Molle, L. 13 voting rights reforms 23, 24–5, 28, 31 Wade, Abdoulaye (President of Senegal) 73, 74 wages 10, 21, 29, 149 Wal-Mart 143 Wall Street crash (1929) 14 water supply/shortages (in SSA) 151 welfare effect 92, 118, 153 World Bank 41, 47, 51, 61, 70, 101–2, 151 World Integrated Trade Solution 139 World Trade Organization (WTO) 1, 73 Dispute Settlement Body 84 Yang Zilin

60

Zambia 92 Zeng Peiyag 60 Zollverein (import tariffs) ZTE 57

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