Following China's example, Africa's development can benefit from special economic zones

Hannah Edinger

To promote African regional priority projects, an approach to FOCAC by African member states that is less decentralized and fragmented, and more coordinated and regionally focused is required.

Fifteen years after China's wave of strategic inroads into Africa commenced, culminating in the First Ministerial Conference of the Forum on China-Africa Cooperation (FOCAC), the Second FOCAC Summit will be held in Johannesburg, South Africa, on December 4-5. More than 50 heads of state, including Chinese President Xi Jinping and dozens of African leaders, will gather at South Africa's commercial center to chart the path of Sino-African relationship to 2018.

To date there have been five ministerial conferences and a Beijing Summit in 2006.

Judging by media statements made in the run-up to the event, emphasis is likely to be placed on Chinese commitments and deals that will underpin greater industrial activities, as well as more focus on agricultural value chains. This comes as the relationship between the world's second largest economy and what is still the poorest continent has been described as one of "imbalances." Not only have African countries been on the receiving end of Beijing's foreign commercial policy over the past decade and a half, but they have also become overly dependent on sometimes single commodity exports.

Value-added activities

High commodity prices in the mid-2000s in particular made the value proposition of China as a key commodity investor and export market an attractive one to resource producers. However, with oil at $50 per barrel and other commodity prices also subdued, countries with less diversified export baskets are feeling the pain. This is reflected in growth forecasts for the region. According to the World Bank, GDP growth of Sub-Saharan Africa as a region is expected to come in at 3.7 percent for 2015. While growth drivers reportedly have been diversifying to services and consumer-facing sectors, this growth estimate is testament to the importance of the hydrocarbon and metals sectors.

With this commodity bias in mind, the impact of China on Africa - particularly whether it is a boon or not - has been debated in many writings and platforms. While featuring less in popular media, Chinese investments have however been geared toward greater industrial and value-added activities more recently, with Ethiopia and South Africa being cases in point.

Particularly, as input costs in China rise (wages, administered costs, etc.), more manufacturing-related opportunities could become evident for competitive African economies. China could become less of a manufacturing competitor - often stated as a key deterrent to Africa's own industrial diversification - and instead become a source of value-added investments as labor-intensive manufacturing industries seek new destinations. In light of China's evolving production structures, which means its structure of engagement is likely to change with its commercial partners in Africa, FOCAC should provide the platform for African nations to engage China toward their own structural transformation and economic diversification requirements.

However, China's transformation from being the manufacturing powerhouse of the world to becoming both a leading source of outbound investment and a leading consumer market firstly requires African economies to better understand the investment and trade complementarities that spore from this structural mega shift. FOCAC-supported special economic zones (SEZs) could be part of the process toward promoting a structural change in the Sino-African trade and investment profile. But it requires African economies to be agile in understanding how to establish functioning SEZs and how to compete for attracting off-shore firms.

Wider focus needed

More broadly speaking, there are a number of barriers at play. Some of these are considered basic building blocks of competitive economies as per the World Economic Forum. These include a lack of infrastructure (power and transport), institutions, as well as human capital development (health and primary education).

FOCAC already focuses on addressing a number of these challenges. The Johannesburg Declaration and Action Plan should however strengthen and further focus on the engagement along a number of dimensions. For example, although financing and developing infrastructure projects is part of the FOCAC process, greater emphasis must be placed on the right strategic and cross-border projects that will unlock regional opportunities and supply chains. This will require more sophisticated development assistance support from Beijing, the right partnerships with development finance institutions, greater transparency, as well as political will from African policymakers toward regional undertakings.

Also, to promote African regional priority projects, an approach to FOCAC by African member states that is less decentralized and fragmented, and more coordinated and regionally focused is required. By pooling and coordinating resources and efforts among African states, this approach could translate into a more proactive and less fragmented regional position and so attract manufacturing investment at the regional level, boosting regional trade and value chains.

Linked to this, FOCAC should continue to strengthen and explore deeper collaboration in terms of technical skills transfers and expertise, particularly in the area of policymaking. This is in order to create a more conducive and enabling trade and industrial policy environment for African economies to become more competitive for attracting investment into higher value-added sectors. This too will require building more credible institutions.

As Chinese investments diversify in terms of players (more private investment) and sectors (more light industries, consumer-facing industries, services), the FOCAC process will need to broaden its focus on, inter alia, environmental sustainability and corporate social responsibility issues. Domestic African concerns in particular will need to become more prominent in Chinese firms' engagements and local integration of Chinese firms will become more pressing. This will require improving governance of Chinese firms by showing a more genuine concern for their African counterparts' development.

The FOCAC platform, going forward, should thus encourage a deeper level of engagement between the Chinese private sector, the African private sector, local communities and civil society, and not just engagement at the state-to-state level. In this regard, all eyes will be on South Africa in the coming days to set the tone for harnessing FOCAC toward endorsing the industrialization agenda of the continent.

(The writer is associate director at Frontier Advisory Deloitte)