Capital Flows

Beer bottles roll on a conveyor belt at the East African Breweries Ruaraka factory in Kenya's capital Nairobi, February 17, 2010. (Thomas Mukoya/Courtesy Reuters) The day before last, I attended an on-the-record discussion with two African heads of state here at the CFR. One talking point was a pitch for foreign investment in their countries. This brings us back to the debate over “Africa’s untapped potential,” and the costs and benefits of doing business on the continent. Responding to a previous posting on this topic, a blog reader commented tongue-in-cheek “Africa may not be a ready market for Western businesses because the West produces mainly higher added value products. But from where I type in Enugu, Nigeria, it is a goldmine for Chinese and Indian manufacturers,” whose products are much cheaper. A recent Financial Times article suggests that Africa is, indeed, ready for products produced by Western companies—and that they should be thinking hard about ways to make their businesses on the continent work. The author quotes Nestlé’s head of emerging markets that there are three hundred million to four hundred million people in Africa who can already afford his companies products, and within a few years that could increase to six hundred million. The many challenges of doing business in Africa—underdeveloped infrastructure and supply networks, political and financial constraints, not enough skilled workers—do not lend themselves to conventional business models. However, motivated companies have begun to find innovative solutions. Food and drink companies that already have significant operations in Africa--Heineken, Nestle, Unilever, SABMiller, and Diageo (Guinness)—for example, are overcoming sourcing problems by purchasing from local farmers and, in exchange, providing training and a guaranteed price for the finished product. In some cases, the company will also provide seeds, fertilizers and even microfinance. SABMiller is trying to create new products with locally available crops. For example, the company is using locally produced cassava in beer that will sell for seventy percent less than other types. Nestle has responded to supply network and transport issues by setting up smaller and cheaper “finishing” factories close to customers, which gives Nestle the flexibility to increase production when demand rises. Who knows? Perhaps we will see cassava beer on the shelves in the United States before too long—or even Nigerian-brewed Guinness, which I’ve heard has acquired something of a cult following in the UK. H/T to Asch Harwood

Textile vendors look after their Chinese-made goods inside their stalls in Kano, northern Nigeria, March 15, 2011. (STR New/Courtesy Reuters) Given that Nigeria has the second largest economy in Africa and that its population of almost 160 million includes one out of every four or five sub-Saharan Africans, the Chinese presence is relatively anemic. A press report of an exchange between Rong Yansong, the economic and commercial counselor of the Chinese embassy in Abuja, and Samuel Ortom, the Nigerian minister for trade and investment, provides a window into some of the issues. Yansong claimed that Chinese enterprises in Nigeria employ over forty thousand Nigerians. In a country as big as Nigeria, and where Chinese involvement is heavily in construction, this does not seem to be a large number. A long-standing Nigerian complaint is Chinese reluctance to use Nigerian labor, including the unskilled labor often required at construction sites in developing countries. Yansong appears to be responding to that complaint. He also said that the value of trade and investment between China and Nigeria is now 8.2 billion dollars and could reach ten billion dollars by the end for the year. For comparison’s sake, the value of U.S.-Nigeria trade in 2010 was about 34.6 billion dollars and U.S. direct investment (PDF) in Nigeria in 2009 was about five billion, mostly in the oil sector. Nigerians have long complained that the reality of Chinese investment in Nigeria does not match its rhetoric though. The Nigerians also regularly complain that the Chinese destroyed the Nigerian textile industry by flooding the domestic market with shoddy textiles, which often enter the country illegally with the connivance of Nigerian customs officials. In response, where it is possible, the Nigerian authorities have tried to tighten enforcement of various inspection regimes for imports. In their conversation, the press reports that Yansong asked Minister Ortom to secure final Nigerian approval of a draft agreement on industrial inspection. In response, Ortom apparently assured Yansong that his ministry’s mandate is to ensure that Nigeria’s trade and investment environment is conducive for foreign investors. But the press does not report him as responding directly to Yansong’s request. The Chinese are trying to develop their economic ties with Nigeria. But they must overcome the popular Nigerian perception that they are racist – hence their unwillingness to use African labor– and that they are predatory – hence the view that they destroyed the indigenous Nigerian textile industry. Chatham House has published a fascinating report on then-president Olusegun Obasanjo’s efforts to trade oil blocks for Chinese infrastructure construction – with a big off-the-top to finance his political ambitions. It all went to bits when Umaru Yar’Adua became president and annulled most (not all) of the contracts.

Brazil's President Luiz Inacio Lula Da Silva (L) and South Africa's President Jacob Zuma join hands during a news conference at the Union Buildings in Pretoria July 9, 2010. (Thomas Mukoya/Courtesy Reuters) American alarm, sometimes justified, sometimes not, over China’s engagement in Africa occasionally crowds out what other emerging countries are doing on the continent. I recently called on the Brazilian ambassador in Washington and some of his staff to talk about current African developments. What I heard about Brazil’s involvement with Africa is gratifying to friends of that continent and deserves to be better appreciated by an American audience. Many Brazilians are of African origin. The Nigerian Ooni of Ife, paramount traditional ruler of the Yorubas, likes to say that Brazil has the second largest number of his people in the world, and he regularly visits northeast Brazil. When I served in Lagos in the late 1980’s, embassy staff sometimes traveled to the United States via Rio on Varig, then the Brazilian national carrier. But Brazil’s engagement with non-Lusophone countries was limited. Former president Luiz Inacio Lula da Silva changed that. Since 2003, Brazil has almost doubled its embassies in Africa, and it now has full-fledged diplomatic representation at the ambassadorial level in thirty-three out of fifty-four African nations, with two consulates-general, in Lagos and Cape Town. While former President Lula was in office, he visited twenty-one countries over the course of twelve trips to Africa. Brazil has also has established technical cooperation projects. Commerce has followed Brazil’s new political and diplomatic activism. Trade between Brazil and African countries has multiplied fivefold since 2003, and now amounts to twenty-five billion dollars in value, according to the Brazilian embassy. Africa has become Brazil’s fourth largest trading partner, after China, Argentina, and the United States, and ahead of Japan and Germany. A CFR Task Force recent report, Global Brazil and U.S.-Brazil Relations, recommends inter alia that U.S. policy makers recognize Brazil’s international standing and work with it to develop complementary policies. With Brazil’s expanded presence, new activism, and important commercial ties, Africa would be an appropriate theater for Washington-Brasilia bi-national consultation, coordination, and cooperation, in the spirit of the CFR Task Force recommendations. Read the report here.

Street vendors hawk their goods in front of a Makro branch of the South African retailer Massmart in Cape Town, September 30, 2010. (Mike Hutchings/Courtesy Reuters) I recently wrote about the untapped potential of foreign investment in South Africa. A reader of this blog, Jim Sanders, responded with an insightful comment, which I thought would be worth sharing. Jim writes: "I’m a little dubious about the view, which one hears so often, that establishing a foothold in South Africa facilitates expansion into the continent by firms with little or no African experience. (And I have to wonder about the way in which “Africa’s enormous untapped economic potential” is accepted as an article of faith, without examination.) This is what Walmart wants to do with its Massmart acquisition—use South Africa as “a springboard to reach low- and middle-income consumers.” A Financial Times article last month took a critical look at this issue. One problem is that , while there are “pockets” of consumers with reasonable spending power in Africa, a Nedbank Capital analyst reportedly said that there is really very little purchasing power in the outlying areas. Another obstacle, especially for retail, is the difficulty in moving goods quickly and cheaply to multiple destinations, owing to poor transport links and murky property markets. Logistics and bureaucracy emerge as key challenges. The FT notes that mining companies have succeeded because they built their own infrastructure. But Walmart, which the writer judges, “as an inexperienced outsider in Africa, could find itself out of its depth.” At least part of the reason for the enthusiastic and uncritical chop-licking over Africa’s business potential may have to do with Thomas Friedman’s view of a globalized future. If so, I would recommend that you have a look at Michael Shermer’s article, “Globaloney, Why the world is not flat…yet,” in the August issue of the Scientific American. Shermer cites University of Navarra professor Pankaj Ghemawat who has figured out that only 10-25 percent of economic activity is international, and most of that is regional, not global. He provides the following percentages (of the total in each category): international mail: 1 percent; international telephone calling minutes: less than 2 percent; international internet traffic: 17-18 percent; foreign-owned patents: 15 percent; stock market equity owned by foreign investors: 20 percent. Ninety percent of the world’s people will never leave their birth country. “Some flattened globe.” Globalization theories fail to account for distance (geographic and cultural) factors. For example, “a 1 percent increase in the geographical distance between two locations leads to about a 1 percent decrease in trade between them.” Likewise, “two countries with a common language trade 42 percent more on average than a similar pair of countries that lack such a link.” “Countries sharing membership in a trade bloc…trade 47 percent more than otherwise similar countries that lack such shared membership.” These factors have a bearing on a “nuanced understanding” of the ‘real’ [have you noticed how popular this word is these days?] prospects of the African business climate, but I suspect the lust for profits overrides them."

South Africa's President Jacob Zuma delivers a speech at a Trade and Investment session of the G20 CEO summit in Seoul November 11, 2010. (Hoang Dinh Nam/Couresty Reuters) Yesterday, I had a discussion with a few students about the various lenses through which different American communities view sub-Saharan Africa. I chose to talk about the business community, civil society, and the federal government. One view that seems to be quite common among the American business community is Africa’s enormous untapped economic potential. However, clearly, that hasn’t translated into the investment necessary to tap that potential. I speculated that this timidity was related to a number of issues, including the widespread poverty of African consumers and our lack of nuanced understanding of the African business climate. Interestingly, South Africa, despite its highly developed (and Westernized) business climate, has also failed to attract significant foreign investment. In the most recent installment of the World Bank’s biannual “South Africa Economic Update,” released last week, the authors emphasize that now is the time for South Africa policymakers  to start focusing on the country’s medium term growth prospects, including working to attract more private investment, to reduce its sizable unemployment. The authors note that South Africa actually provides favorable and rising returns on investment but that “risk perceptions or structural barriers to investment” likely impede foreign firms. However, the report’s authors believe that South Africa’s economic problems can be overcome by promoting policies that generate  higher employment, productivity, savings, and investment to kickstart a "virtuous cycle of inclusive growth.” An added advantage for American business is that establishing a foothold in South Africa could make it easier for private firms with little or no Africa experience to begin expanding into the continent, helping to provide the much needed investment and employment that Africa needs. Read the report here. h/t to Asch Harwood.

“How China’s external current account surplus will evolve in the coming years is one of the key questions on the economic outlook for China and the global economy both,” said a World Bank official in Beijing recently. The IMF presented its own answer to that question in a July 2010 report on the Chinese economy, forecasting a gentle, steady rise in China’s current account surplus, relative to its GDP, as shown in the top figure above. The forecast comfortingly shows the surplus staying well below its 2007 peak. Yet since China’s economy is growing much faster than the world economy, the IMF understates the upward trajectory of China’s growing imbalances with the rest of the world. This we show in the bottom figure, which projects China’s surplus relative to world GDP using the IMF’s own assumptions. By this measure, China’s surplus will surpass its 2008 peak within two years. If China continues to recycle dollars abroad at this pace, the global economy will become considerably more vulnerable to shocks from capital flow reversals. Special Report: Global Imbalances and the Financial Crisis Working Paper: Doubts About Capital Controls Spence: Changing China’s Growth Path Meeting: Currency Wars, Capital Controls, and the Outlook for the International Monetary System