Connecting Two Continents

China and India’s newfound interest in trade and investment with Africa — home to 300 million of the globe’s poorest people and the world’s most formidable development challenge — presents a significant opportunity for growth and integration of the Sub-Saharan continent into the global economy.

These two emerging economic “giants” of Asia are at the center of the explosion of African-Asian trade and investment — a striking hallmark of the new trend in South-South commercial relations.

Both nations have centuries-long histories of international commerce, dating back to at least the days of the Silk Road, where merchants plied goods traversing continents, reaching the most challenging and relatively untouched markets of the day.

In contemporary times, Chinese trade and investment with Africa actually dates back several decades, with most of the early investments made in infrastructure sectors, such as railways, at the start of Africa’s post-colonial era.

India, too, has a long history of trade and investment with modern-day Africa, particularly in East Africa, where there are significant expatriate Indian communities. Today’s scale and pace of China and India’s trade and investment flows with Africa, however, are wholly unprecedented.

The acceleration of South-South trade and investment is one of the most significant features of recent developments in the global economy. For decades, world trade has been dominated by commerce both among developed countries — the North — and between the North and the developing countries of the South.

Since 2000 there has been a massive increase in trade and investment flows between Africa and Asia. Today, Asia receives about 27% of Africa’s exports, in contrast to only about 14% in 2000. This volume of trade is now almost on par with Africa’s exports to the United States and the EU — Africa’s traditional trading partners.

In fact, the EU’s share of African exports has halved from 2000 to 2005. Asia’s exports to Africa also are growing very rapidly — about 18% per year — which is higher than to any other region.

At the same time, although the volume of foreign direct investment (FDI) between Africa and Asia is more modest than that of trade — and Sub-Saharan Africa accounts for only 1.8% of global FDI inflows — African-Asian FDI is growing at a tremendous rate. This is especially true of Asian FDI in Africa.

China and India each have rapidly modernizing industries and burgeoning middle classes with rising incomes and purchasing power.

The result is growing demand not only for natural resource-extractive commodities, agricultural goods such as cotton and other traditional African exports, but also more diversified, nontraditional exports such as processed commodities, light manufactured products, household consumer goods, food and tourism.

By virtue of its labor-intensive capacity, Africa has the potential to export these nontraditional goods and services competitively to the average Chinese and Indian consumer and firm.

With regard to investment, much of the accumulated stock of Chinese and Indian FDI in Africa is concentrated in extractive sectors, such as oil and mining. While this has been grabbing most of the media headlines, greater diversification of these countries’ FDI flows to Africa has in fact been occurring more recently.

Significant Chinese and Indian investments on the African continent have been made in apparel, food processing, retail ventures, fisheries and seafood farming, commercial real estate and transport construction, tourism, power plants and telecommunications, among other sectors.

Moreover, some of these investments are propelling African trade into cutting-edge multinational corporate networks, which are increasingly altering the “international division of labor.” China and India are pursuing commercial strategies with Africa that are about far more than resources.

Despite the immense growth in trade and investment between the two regions, there are significant asymmetries.

While Asia accounts for one-quarter of Africa’s global exports, this trade represents only about 1.6% of the exports shipped to Asia from all sources worldwide, By the same token, FDI in Asia by African firms is extremely small, both in absolute and relative terms.

At the same time, the rise of internationally competitive Chinese and Indian businesses has displaced domestic sales as well as exports by African producers, such as textile and apparel firms — whether through investments by Chinese and Indian entrepreneurs on the Sub-Saharan continent or through exports from their home markets.

This competition spurs African firms to become more efficient, but it also creates unemployment and other social costs during the transition. Not surprisingly, some African governments are responding with policies that protect domestic businesses.

As the global marketplace continues to be increasingly integrated, with rapidly changing notions of comparative advantage, much is at stake for the economic welfare of hundreds of millions of people in Sub-Saharan Africa.

With this newest phase in the evolution of world trade and investment flows taking root — the increasing emergence of South-South international commerce, with China and India poised to take the lead — Africans cannot afford to be left behind, especially if growth enhancing opportunities for trade and investment with the North continue to be as limited as they have been.

Nor can the rest of the world, including Africa’s international development partners, afford to allow Africans to be unable to genuinely participate in — and most important, benefit from — the new patterns of international commerce.

Editor’s Note: Copyright 2007 The World Bank. Reprinted with the permission of the publisher.