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Sun. November 10, 2024
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Around the World, Across the Political Spectrum

Africa at a Crossroads: Will China’s Investment Lead to Economic Development?

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China hosted the 2024 Summit of the Forum on China-Africa Cooperation (FOCAC) in Beijing last month. The summit theme, ‘Joining Hands to Advance Modernization and Build a High-Level China-Africa Community with a Shared Future’, reflects China’s efforts to deepen its strategic partnership with Africa.

Africa holds incredible potential to become a global economic power. Indeed, its population is comparable to that of China and India. Yet, unlike China and India, Africa has struggled to leverage its scale to achieve rapid growth – remaining fragmented into fifty-five nations. The fragmentation has hindered the continent’s development. However, China’s recent promises suggest Africa may be on the cusp of transformation. During the summit, it pledged Africa $50 billion over three years, committed zero-tariff treatment for 100 percent of its tariff lines, and Xi promised to help “creation of one million jobs for Africa”. This signals a turning point for Africa.

Africa’s growth potential is enormous. Its young and growing population provides a demographic advantage, increasing the return on development investments. As a historical benchmark, China grew around 7-10 percent per year per capita between 1980 and 2020, after economic reforms following the Cultural Revolution. This growth rate meant China’s economy doubled roughly every ten years, increasing thirtyfold in four decades. The transformation lifted China from a low-income to a high-income country, achieving the country’s goal of eradicating extreme poverty by 2020. UN Secretary General, António Guterres, noted that, “China’s remarkable record of development […] provides a wealth of experience and expertise.”  Africa has similar untapped potential, with the highest growth prospects globally, its headroom for growth. To achieve this, Africa requires a clear financial and development strategy.

Short-term loans cannot sustain long-term growth in Africa. Too often, development loans come with short repayment plans, making it difficult for countries to service their debts. This is especially problematic for infrastructure projects, which may take years or decades to yield returns. Thus, it becomes impractical to invest in critical long-term infrastructure projects. Africa’s development requires affordable financing – loans with low interest rates and a long grace period, ideally twenty-five years or more. Although interest repayment is necessary, the principal should be deferred until the country has experienced significant development. This provides Africa with the breathing room it needs for economic growth. By the time the loan needs to be repaid, African countries will be wealthier and able to pay the debt.

Interestingly, taking debt is often ill-advised for African nations, and Secretary-General Antonio Gutteres described it as “unsustainable and a recipe for social unrest". However, it is not inherently risky. Africa’s average debt-to-GDP ratio in 2023 was under 69 percent, lower than many other developed nations such as the US with a debt-to-GDP ratio of 124 percent and Japan with 263 percent. The difference is in the interest rates: The US and Japan enjoy low interest rates of 2-4 percent, while African countries pay over 10 percent if they go to market. This makes borrowing money unsustainable for Africa, pushing countries inevitably into debt traps. The problem is exacerbated by credit rating agencies that often downgrade developing countries – which is antithetical given that developing countries have the greatest potential for growth. In short, debt for African countries should be long term and affordable, enabling them to experience sustained economic growth without falling into a debt crisis.

Of course, strategic investment is equally important. For African countries to benefit, funds must be directed towards meaningful projects that promote long-term development. This includes cross-border infrastructure such as roads, railways, ports and fiber-optic cables – all of which help unify Africa, enabling it to leverage its scale and resources, while integrating into the global market. A unified Africa will be more competitive internationally, attract foreign investment and have a greater bargaining power. Investment in education is also critical – current completion rates are around 69 percent for primary school, 50 percent for middle school and 33 percent in upper-secondary education. Improving these outcomes will have cascading and reinforcing effects including greater productivity, innovation, reduced poverty, better health and social stability.

The specific details from the 2024 FOCAC Summit remain unclear as loan terms are usually negotiated bilaterally behind closed doors. China also prefers structuring project-based loans to mitigate risk. Nevertheless, China has committed to continuing its heavy investment in African infrastructure. Since FOCAC was established in 2000, China has built approximately 100,000 kilometers of highways, 10,000 kilometers of railways, 200 schools, 130 hospitals and 100 ports across Africa. This growing partnership comes amid heightened tensions between the US and China, and the shift toward a multipolar world order. China surpassed the US as Africa’s largest trading partner in 2009, and it appears this engagement is only deepening. President Xi announced that China is elevating its relationship with African countries to the “strategic level”.

China’s investment offers a critical opportunity for Africa, but it also raises questions: Will these funds finance long-term transformative projects, or will they lead to a debt trap? African leaders must secure favorable loan terms – lower interest rates with long repayment periods. Additionally, steps must be taken to ensure funds are channeled into projects with enduring economic benefits. If managed effectively, Africa could replicate China’s economic rise and emerge as a major player in the global economy.

Michael Roach is a researcher and management consultant. He completed his B. International Relations and B. Commerce at the Australian National University (ANU), and his Master of Laws at the University of New South Wales (UNSW). His work has been published by the Lowy Institute, International Affairs Forum and other leading think tanks. His research is focused on global economic and geopolitical trends.

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