Limitations to Developmental Impact

While governments tend to talk of China’s role as that of a benevolent development partner, our research revealed substantial evidence that the relationship’s developmental impact is often far more limited than the official rhetoric claims.

Claude Kabemba's picture

Director of the Southern Africa Resource Watch (SARW)

October 9th, 2012

While governments tend to talk of China’s role as that of a benevolent development partner, our research revealed substantial evidence that the relationship’s developmental impact is often far more limited than the official rhetoric claims.

In Angola, Chinese financing has offered better conditions than commercial loans, along with lower interest rates and longer re-payment periods. This new co-operation has been immensely beneficial to the Angolan government as it struggles to rebuild the country after decades of civil war and social unrest. Complex conditionalities imposed by western donors complicated Angola’s recovery trajectory, but China has provided a new and less restrictive model for commercial interaction. China’s willingness to assist with construction and infrastructure has given Angola an opportunity to rebuild its economy and begin a new phase of economic development. China also offers Angolans low-cost technology transfers, ideal for local conditions and more appropriate than western options. Chinese scholarships for Angolans to study in China offer opportunities for skills development and help to consolidate commercial interaction. It is wrong to assume that only the Chinese are benefiting in Angola. Government has taken two major steps towards adding extra value to its oil production with the development of a liquefied national gas plant in Zaire Province and an oil refinery in Benguela Province. The process of liquefying gas enables it to be transported by ship to Europe or the US, where the gas is used in homes and industry. The cost of the gas plant is $4 billion, paid for by the investors (British Petroleum, Chevron-Exxon, Sonangol and Total). The plant is expected to absorb much of the natural gas that is currently burnt as an unwanted by-product in the petroleum industry.

Nevertheless, the developmental impacts seem dubious. Chinese companies are not creating jobs and there is limited skills or technology transfer to Angola from China. These negatives are meant to be outweighed by the Chinese role in building infrastructure, but this is itself a mixed blessing. Quality is a problem, with serious maintenance issues emerging on a number of projects (as in the case of the General Hospital of Luanda, which was built by a Chinese company five years ago, but is already requiring major repairs and maintenance). Quality control on Chinese construction projects has become a focus of attention. The poor quality of Chinese construction has given rise to a popular saying which suggests that ‘Chinese construction takes no time.’ The infrastructure built by Chinese companies is generally of poor quality, and hasn’t been monitored by the government or civil society. Óur research suggests that the development partnership is not equal – the majority of projects implemented by Chinese companies are not paid for in Angola. No money from the credit line entered Angola; all transactions were made in China, with only services provided on behalf of the credit line.

In the Democratic Republic of Congo, an agreement which will trigger new mining development is expected to have some negative effects on development. It is estimated that some 10 000 local workers will be employed in the first phase of this project. The Congolese employed by the Chinese firms will be paid less than in other foreign enterprises, there will be limited protection of workers’ rights, very little (if any) transfer of skills, there will be no provisions on how to maintain the Chinese-built infrastructure in the future, and no taxes will be paid by China on mineral reserves such as copper and cobalt (cutting a considerable amount of public revenue). On the environmental front, the project might impact on biodiversity. It will affect the Kundelungu National Park and Retenue Lake, and it is very likely to have an irreversible impact on air quality, water quality, natural habitats, and biodiversity.

The DRC is unusual in that some Chinese investment (discussed also in Chapter X), is initiated not by official agreements between governments or corporations, but by the activities of individual Chinese mining operators who rely on dealings with Congolese artisanal miners. This relationship brings some benefits to local people but cannot credibly be seen as a contribution to development. The Congolese economy is largely informal, and Chinese mining operators make use of informal practices. They buy raw materials for cash, directly from the artisanal miners. The impact on the socio-economic life of the communities is visible; money is exchanged between small earners, and their buying power increases. During the financial crisis (2008) the presence of the Chinese was perceived as a breath of fresh air to compensate for the stuffiness of the western bureaucracies which were not providing financial support to the government. The direct effects of Chinese investment were felt in the daily life of small earners. This helps to improve social tensions. There is a lot of money circulating in the streets, which brings some relief. They increase the buying power of the population. But Chinese investment has not yet led to sustainable development.

Chinese business at this stage did not have an impact on the country’s macro-economic indicators. Chinese mineral traders were in need of a large number of artisanal miners to ensure that they met their monthly quotas. Children abandoned schools and women left the market to look for minerals. People were sent into the bush to buy and transport the minerals to the Chinese buyers. The Chinese sent their marketing agents into the artisanal open-pit quarries to buy ore. The marketing agents were acting as independent traders, set up on mining sites. However, the marketing agents often did not have trading permits. It was often a clandestine form of trading, and it created conflicts. These marketing agents were very powerful financially because they had direct connections with Chinese traders.

It is difficult to know how much money the Chinese have used to purchase and process artisanal mining products, and the money that they gain from these operations escapes all financial control. Chinese money bypasses the banking system, and strengthens the informal sector. The injection of Chinese capital in the informal economy was a solution in itself – with great impact on the life of the artisanal miners and the Congolese. But the loss of fiscal earnings for the state due to this behaviour cannot be determined. The consequences of the world financial crisis also taught the DRC a lesson – the Chinese money simply disappeared. The Chinese companies present in Katanga have not yet drawn up an integrated economic and social development programme. They have also not yet carried out any social actions to the benefit local communities (as have South African and western companies).

In Mozambique, Chinese involvement has hindered the prospects of developing an export industry of processed wood products. In 2006, a damning report entitled Forest Governance in Zambézia, Mozambique: Chinese Takeaway! was published in Mozambique. It highlighted the growing problem of illegal logging and mismanagement on the part of local government officials, who instead of implementing the laws designed to protect the forests were directly benefitting from the industry. While Chinese entrepreneurs are not the only business people involved, China has a huge appetite for wood. In 1998, it issued a ban on logging of its own national forests. Since then domestic timber production halved from 80 million m3/year to 40 million m3/year, and in 2002 the deficit was estimated to be 60 million m3/year.To meet this demand, China has become the world’s largest importer of timber. China has a preference for importing logs as opposed to semi-processed wood, and according to data from International Tropical Timber Organisation (ITTO), since 2005 roughly 80 percent of China’s recorded timber imports have been logs and not sawn or ply wood. African countries are not an exception to this rule, and most of the timber traded between China and Africa involves logs (85 percent of the total exported to China in 2006). Mozambique is amongst the six top African exporters of wood to China, accounting for around 5 percent of the trade in 2006. It could be argued therefore, that the timber trade denuded Mozambique of a natural resource without adding any developmental value which might have accrued if wood products were manufactured locally.

In Zambia, CCCM is located in Chief Sinazongwe’s area, in a resettlement scheme for families displaced during the construction of the famous artificial lake, the Kariba Dam. Fishing from Lake Kariba, animal rearing, and small-scale farming are the major economic activities in the district, while the two coal mines are the main source of revenue. The district depends on coal, which the country has been producing since 1967, the bulk of it coming from the two mines. The effect of the mining industry on the socio-economic life of the people cannot be underestimated. Whatever material developmental aspirations the people of Sinazongwe have, they will always be linked (directly or indirectly) to the mining wealth of the district. Given conditions in the area, we would expect a flood of mining investment to have a strongly developmental effect. But, in terms of contribution to the improvement of people’s livelihood, most respondents in the area observe that the mine has not contributed significantly, though they acknowledge that the institution is a major source of employment. The overall view from most of the respondents in the area was that they are subject to a raw deal, because the profits of this company were not benefiting the local community. As noted in Chapter X, Chinese investment has not prompted significant skills transfer to local economic actors.

There is some tax benefit to the local authority. According to information gathered by the local government, CCCM contributes between 5 and 10 percent towards its total budget. This is mainly through payments of road tax and a personal levy. But it does not pay ground rent or property tax (which would have been a more significant revenue to the local government authority) because it is located on customary land, which is governed by customary laws. It was difficult to ascertain whether the company pays royalties to the local chief. It was also difficult to ascertain how the mine was acquired.

Local business could be said to have benefited from the operations of CCCM only through the strengthening of currency circulation in the area. The procurement system is not formal and no service apart from direct labour is procured from the surrounding businesses. Almost all machinery at the mine is procured from China, and Chinese vegetables are grown next to the shafts for the expatriates.

In South Africa, the effect on jobs has, as suggested earlier, been most pronounced. China has been able to maximise market share in South Africa, competing effectively against local businesses, by leveraging its undervalued currency, efficient production processes, and low labour costs. The general trend of Chinese investment in South Africa to date is not promising in terms of skills transfers or job creation (given the very significant dollar reserves held in China). There is clearly potential for an expansion of Chinese investment, so these trends are likely to continue.

The experience of job losses in textiles, resulting from significant increases in Chinese imports, followed significant retrenchments in the footwear industry and is expected to be replicated in many other manufacturing sectors within South Africa. The increase in Chinese low-cost manufactured products in South Africa continues, with new threats emerging in the auto and auto-parts industry. Faced with the ultra-competitive Chinese manufacturing sector, South African industries will find it harder and harder to compete. Other countries have responded to China by increasing productivity, moving up the value chain, or moving into services. However, given South Africa’s level of development, constructing an effective competitive response to China will not be easy. By the middle of 2009, China had become South Africa’s biggest trade partner, but the content of South Africa’s exports remained focussed on raw materials.

In response to demands from trade unions and some businesses, the South African government has negotiated a trade agreement with China. But observers pointed out that negotiating with China on textiles (and footwear) was largely irrelevant, as devising a strategy to protect an industry after it was already undermined by international competition made no sense. Instead, they argued, the Department of Trade and Industry (DTI) should be devising survival strategies for other South African industries, such as automobiles, which are yet to enter into full competition with Chinese exports. The SA Textile and Clothing Workers Union (SACTWU) proposed measures to reverse retrenchment trends, such as combating illegal imports, local sourcing by retailers, improved quality, design innovation, improved technology, increased productivity, better training, and expanding new investments.

One of the hardest hit textile production centres in South Africa has been the Qwa Qwa region. Chinese clothing and textile imports into South Africa have resulted in massive job losses in Qwa Qwa, and there is little prospect for retrenched workers to find new employment. Interviews with retrenched workers concluded that many of them were sole breadwinners, with family size averaging six persons. Ebrahim Patel, then General-Secretary of SACTWU (now minister of Economic Development), suggested that the loss of jobs in the clothing and textile sector affected almost half a million people- the widespread loss of employment has been devastating for the community. Interviews with former textile workers revealed that in many cases more than one member of a family was retrenched, undermining the traditional household support structure. Prospects of re-employment at the same factory are very low, while new skills would be required for employment in related sectors.

Joint ventures between local and Chinese companies do not generate any significant compensating job creation or business opportunities. Executives of the partly Chinese-owned Aquarius, which mines platinum group metals, have confirmed that Zijin, the Chinese investor, did not bring any new technology to South Africa as part of the deal, nor were any new jobs created. A deal between Standard Bank and Chinese investor ICBC, while it brought billions of US dollars into the local bank, has not generated job growth. Chinese officials suggest that ICBC-Standard Bank intends to open new opportunities for small borrowers in Africa and South Africa, but no evidence of this intention is yet available from the bank itself.

The present Chinese business model for engaging South Africa’s ferrochrome industry presents significant negative features. Chinese investors are seeking supply at the lowest possible cost, and all beneficiation is carried out by manufacturers in China. This approach obviously mirrors a typical neo-colonial relationship in which South African resources are extracted for processing elsewhere, and South African consumers are required to import manufactured products. Without value added in South Africa, jobs remain limited and no skills or technology transfers occur. Sustainable development strategies are the focus of much debate and planning, but Chinese investments are part of the existing corporate mining strategies which essentially focus on maximum material extraction at minimum cost. Besides capital transfers to South African mines, China’s engagement remains limited. South African ferrochrome producer Xstrata Alloys has criticised the growing export of unbeneficiated chromite ore to China, which, the company claims, is driving a decline in ferrochrome exports. Xstrata’s claims are supported by the data, with South Africa’s share of the global ferrochrome markets reportedly dropping from 50 percent in 2004 to 42 percent in 2006. China places no tariff on chromite ore imports, but does tax the import of ferrochrome. This is classic tariff escalation in a bid to protect Chinese value added. Beneficiation in South Africa would attract taxation in China and may not be advantageous in the longer term.

South Africa has no preferential market access to China (such as that provided for by AGOA, the law which gives preferential access to the United States) making exports difficult. South Africa retains the status of a supplier of primary products (with no value added) to the bourgeoning Chinese economy. The China-South Africa trade profile shows that in 1993 South African manufactured exports to China constituted 50 percent of the total. But by 2003, this figure had fallen to just 8 percent, with 92 percent of exports consisting of resources and intermediate products. South Africa has not yet identified either challenges or opportunities in response to China’s economic engagement, and so it has not developed an appropriate strategy. It has not yet found instruments to break the ‘products-for-resources’ model of commercial interaction, and is not active and strategic in its engagement with China.

In Zimbabwe, teams have been sent from China to design dust and smoke control systems for the open furnaces at ZIMASCO, a subsidiary of Sino-Steel Zimbabwe which produces high-carbon ferrochrome and has 30 chrome mines. However it was not possible to establish a working relationship between these teams and local staff because of the language barrier.

Perhaps more importantly, Africa’s mining industry in general is characterised by very low value addition, and Zimbabwe (in spite of her relatively advanced industrial infrastructure and fairly good human resource base) is no exception. The tragedy is that a few kilometers from ZIMASCO is an iron and steel producing plant (the Zimbabwe Iron and Steel Corporation, ZISCO) which also exports iron products. But ZIMASCO’s chrome does not feed beneficiation at ZISCO. Rather, it smelts chrome to produce high-carbon ferrochrome, a major ingredient in the production of stainless steel. It exports this and the stainless steel is used to make many industrial products, which Zimbabwe subsequently imports. According to the response obtained from ZIMASCO, this ferrochrome is exported to all global stainless steel producing countries in Europe, North America and the Far East (including China). It is clear that this technology-intensive process largely remains the preserve of developed countries, thus maintaining the technological divide between the north and the south.

An exploitative character to the Chinese investment was also observed. When the Chinese first came into Zimbabwe donating tractors and grinding mills to war veterans around 1997, they were involved in chrome buying, but the prices offered were deemed so ridiculous that the ZMF had to intervene and stop introducing small-scale miners to Chinese buyers. While on the face of it they wanted joint ventures, in reality they were not interested in mining but in buying chrome at sub-economic prices. The price offered to small-scale miners was lower than the price offered by the Chinese to South Africa, so it was more profitable to export to South Africa.

What is very clear is that Chinese small-scale investors are averse to indigenisation. Data available to our research team amply show that they had the least indigenous shareholding in the approved investment projects. While the Chinese conglomerates had entered into 50-50 joint ventures (and rarely below 40 percent indigenous) with either the state companies or individual indigenous investors, small-scale investors averaged 11 percent indigenous content (on paper).

About the author(s)

Claude Kabemba is the Director of the Southern Africa Resource Watch (SARW). In 2006, the Open Society Initiative for Southern Africa (OSISA) asked him to spearhead the formation of SARW. He holds a PhD in International Relations (Political economy) at the University of the Witwatersrand (Thesis: Democratisation and the Political Economy of a Dysfunctional State: The Case of the Democratic Republic of Congo). Before joining SARW, he worked at the Human Sciences Research Council and the Electoral institute of Southern Africa as a Chief Research Manager and Research Manager respectively. He has also worked at the Development Bank of Southern Africa and the Centre for Policy Studies as Policy Analyst. Dr. Kabemba’s main areas of research interest include: Political economy of Sub Saharan Africa with focus on Southern and Central Africa looking specifically on issues of democratization and governance, natural resources governance, election politics, citizen participation, conflicts, media, political parties, civil society and social policies. He has consulted for international organizations such Oxfam, UNHCR, The Norwegian People’s Aid, Electoral Commissions and the African Union. He has undertaken various evaluations related to the work of Electoral Commissions and civil society groups interventions in the electoral process in many African countries. He is regularly approached by both local and international media for comments on political and social issues on the continent. His publication record spans from books (as editor), book chapters, journal articles, monographs, research reports, and newspaper articles.

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