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South to South Relationships begin to Strengthen

April 14, 2010


If you need evidence that the world is changing, you might want to look at the fact that so-called BRIC countries (Brazil, Russia, India, and China) are starting to fill economic gaps that used to be filled by more developed countries [“Crumbs from the BRICs-man’s table,” The Economist, 18 March 2010]. As the article states, “Emerging powers have helped poorer nations weather the global recession.” That’s big news. The article continues:

“In Cold-War days America and the Soviet Union vied for influence among the poor world’s minnows. Now the BRICs—Brazil, Russia, India and China—are getting into the game, and changing it. This month, Sri Lanka got $290m from China for a new international airport and $67m from India to upgrade its railways. As poor countries emerge from recession and the rich world flounders, big middle-income countries see a once-in-a-generation chance to win friends and influence people.”

BRIC countries, of course, are not acting strictly out of altruism. The “poor world’s minnows” being helped by these countries have things that the BRICs want, such as, natural resources, better relations, or new markets. There are always underlining reasons for the help being provided. The article continues:

“The process is sometimes direct (through aid, trade, remittances, investment) and sometimes indirect (through commodity prices or competition in third markets, for instance). But it is always hard to pin down. None of the new donors (all of which, except Russia, still get aid themselves) publishes comprehensive, or even comprehensible, figures. But a new study by the Overseas Development Institute (ODI), a British think-tank, says the emerging countries (such as the BRICs) increasingly affect the growth prospects of poorer ones. In other words, after decades of talk about the importance of ‘south-south’ ties, those links have finally started to mean something.”

It will come as no surprise to anyone that China leads the pack when it comes to economic outreach. The article continues:

“China is now the largest donor to Cambodia and Sri Lanka. It has a huge list of pledges to Africa. In November the prime minister, Wen Jiabao, promised $10 billion of cheap loans over three years. China has also offered debt forgiveness, new hospitals, professional training for 15,000 Africans and a doubling of aid between 2006 and 2009 (though the accounting is so opaque that this is hard to measure). When Sudan ran into trouble repaying its $34 billion foreign debt, it turned to China, India and regional development funds in the Gulf. India lags behind China, but has helped bail out Tanzania’s financial institutions by offering special farm credit. Dirk Willem te Velde of the ODI reckons that these flows will soon become even more important. History supports that idea: Western aid tends to wane two to three years after any recession.”

The kind of help that countries need and desire most is foreign direct investment. It doesn’t take a reader of tea leaves to know that the BRIC countries are currently on the right end of global money flows. That’s why developing countries are increasingly turning in their direction for help. The article continues:

“Trade and foreign direct investment (FDI) from the West are already falling and the middle- income countries are taking up the slack. While total FDI in Africa fell by about a third between 2008 and 2009, the flow from China soared by 80% (admittedly from a low base). Brazil says it has invested $10 billion on the continent since 2003. Since 2009, the BRICs’ deals in Africa have become a flood (see table). Similarly for trade: poor-country exports to rich countries have fallen much faster (down by 17% in 2008-09) than those to emerging markets (down by only 7%). In three-quarters of the poor countries that the ODI looked at, middle-income countries have increased their share of trade.”

While countries are generally grateful to receive help, increasingly they are finding that much of that aid comes with strings attached (just different kinds of strings than those imposed by the West). For more on that subject, read my posts entitled Africa and America and Rogue Aid. The Economist also notes that BRIC assistance can create challenges.

“Aid agencies dub China and others ‘rogue donors’ because they give to—and prop up—beastly regimes. Chinese aid is also usually ‘tied’ to hospitals, roads, and equipment built or sold by Chinese companies. And much ‘aid’ is in fact loans at near-commercial rates. African governments have had their debts to the West mostly forgiven—and are piling up new loans elsewhere. Such aid may also be a trap. The BRICs import raw materials like copper and cotton from poor countries; rich countries tend to buy manufactured goods such as garments. So more trade with the BRICs and less with the rich world is a step down the value chain—the opposite of what China did as it grew richer. Eswar Prasad of Cornell University says the voracious appetite for raw materials of China and India may help poor countries diversify their export markets but not their industry, leaving them more dependent on volatile commodities than before. They also suffer, he notes, from China’s policy of depressing its exchange rate. That undermines their competitiveness and forces them to try to push their own currencies down.”

The Economist concludes that “this does not mean the BRICs have been, on balance, bad for the economic minnows. Without them, the global slump would have hit the world’s poorest countries even harder.” The magazine notes that “Deborah Brautigam, author of a new book on China’s role in Africa, says the BRICs’ emergence as aid donors is as important for poor countries as was the fall of the Berlin Wall for eastern Europe.” I’m not sure the two events equate. Eastern Europe didn’t move down the value-chain when the Berlin Wall fell. Nevertheless, any source of new FDI must be looked upon as a good thing. But without good governance, the article concludes, all the investment in the world isn’t going to help. I’ll return to that subject later. First, let’s examine some of the investments that Brazil and China are making in Africa. Brazil is primarily focusing its efforts in countries that were former Portuguese colonies. It believes that its linguistic ties will make it easier for them to conduct business in those nations [“Brazil accelerates investment in Africa,” by Richard Lapper, Financial Times, 9 February 2010]. Lapper reports:

“Brazil’s mining company, Vale, is preparing to start operations in Mozambique as South America’s largest economy steps up its involvement in the scramble for Africa’s resources. The remote town of Tete in central Mozambique sits on top of some of the world’s largest reserves of coal. With migrant workers and contractors flooding in to take advantage of the opportunities created by this multi-billion dollar Brazilian investment, Tete has become a boomtown, its infrastructure creaking under the constant flow of business visitors. … Vale’s involvement provides the most striking evidence of Brazil’s growing interest in Africa. … Brazil’s arrival in Africa is part of the same pattern that has seen the continent’s traditional partners in the west compete against a range of emerging market players for resources and influence. Luiz Inácio Lula da Silva, the Brazilian president who took office in 2003, visited Africa six times in his first first five years in power.”

Like most countries looking to invest in the developing world, Brazil is looking for a source of natural resources as well as new markets for its products. Lapper explains:

“Propelled by Brazil’s own demand for raw materials, trade has grown rapidly, with imports from Africa rising from $3bn in 2000 to $18.5bn in 2008. Nigeria and Algeria – as well as Angola – are key sources of imported oil. Brazil’s competitive food producers have found markets in countries such as Egypt, helping to boost São Paulo’s exports to Africa eightfold, from $1bn in 2000 to $8bn in 2008.”

Vale’s investment and the boom it has created demonstrate why developing countries need FDI. The company, of course, wants Mozambique’s coal. To extract that resource, however, the company plans on building a power station and constructing rail and port infrastructure so that extracted coal can be exported to Brazil and other markets. Lapper reports that Vale’s “initial investment will amount to $1.3bn (€948m, £831m)” and that the final “total could eventually amount to several times that.” According to Lapper, Vale is not the only Brazilian company investing in Mozambique and elsewhere in Africa.

“[In late 2009], CSN, a Brazilian steel-maker, bought 16.3 per cent of Riversdale, an Australian mining company, in which India’s Tata Steel also has a substantial stake. This company is also planning a multi-billion dollar investment in the Tete area. Odebrecht, [a Brazilian construction company], has become the largest private sector employer in Angola, with activities including food and ethanol production, offices, factories and supermarkets. Its executives enjoy direct access to José Eduardo dos Santos, president of Angola. Petrobras, Brazil’s state-controlled oil company, is also active in Angola, deploying its expertise in deep water drilling.”

As noted earlier, “cultural and linguistic connections have helped make Brazil’s development model especially attractive in Angola and Mozambique.” Lapper explains how deep those connections are:

“Historic links with Lusophone Africa go back centuries. Some 1.4m of the 3m black African slaves sent to Brazil between 1700 and 1850 came from Angola, and in the 1820s settlers in Angola and Mozambique and other Portuguese colonies applied to join the newly independent Brazil. Brazil’s more recent success in reducing poverty – through social welfare payments that are conditional on school attendance or visits to clinics – has attracted interest in both countries.”

Lapper reports that Brazil is just getting started in its process of strengthening African ties. He concludes:

“Although Brazilian companies have invested a relatively modest $10bn or so since 2003, that total will probably rise sharply. The government is driving hard to persuade Brazilian companies to expand in Africa, especially since Mr Lula da Silva took office in 2003. Brazil’s network of embassies on the continent has been expanded and dozens of business leaders have accompanied Mr Lula da Silva on his trips. … Analysts at Standard Bank in Johannesburg argue there is a neat fit between Brazil’s resources and food industry expertise and the opportunities offered by Angola. And they argue that climate change could increase the value of Brazil’s African investments. Because warmer weather could reduce the amount of cultivable land at home, food and ethanol producers could become more interested in expanding into Africa, especially countries such as Angola where land is plentiful.”

Brazilian investment appears to have mostly beneficial consequences for African countries. In another Financial Times article, William Wallis asserts that money from China may not be quite so beneficial [“Chinese investment has put Africans in the driving seat Africa,” 27 January 2010]. Wallis agrees that Chinese money is propping up regimes that have governed poorly yet will probably remain in power. He writes:

“Two decades after the Cold War’s protagonists began cutting loose client dictators, peaceful transfers of power via the ballot box remain the exception. Potentially a greater game changer is instead coming from outside: China. Before the global downturn washed up on African shores, trade and investment from China and other Asian countries were contributing to an unprecedented spurt of economic growth. Trade between China and Africa rose to $107bn in 2008, up tenfold from a decade before. In the same period, Chinese funding of infrastructure and development in Africa grew to rival lending by multilateral agencies such as the World Bank and International Monetary Fund. In some African countries there are now more Chinese immigrants than there were Europeans during colonial times.”

Large influxes of Chinese workers that often accompany Chinese investments often raise complaints from African governments. They are looking for FDI to create jobs and are disappointed when those jobs are filled by Chinese workers rather than local citizens. Even though Chinese investment has slowed since the beginning of the current recession, China remains committed to obtaining African resources. Wallis continues:

“With commodity prices now recovering and confidence returning, China is in a more solid position than Africa’s traditional partners to pick up the pace. China’s burgeoning interest in Africa has acted as a multiplier. Asian demand for African commodities improves trade terms. This in turn encourages other investors to look at Africa with different eyes, correcting what bankers describe as the ‘undervaluation of African assets’.”

Wallis notes that along with Chinese investors, “investors from Brazil, India, Russia, and other emerging markets have all been gearing up their relations with Africa.” He also reports that inter-African business is also on the rise. But it is China that is really altering Africa’s future. He continues:

“What remains uncertain is the impact that Africa’s changing relations with the outside world will have on the shape of its economic and political realities. China bashers see in Beijing’s mercantilist expansion the same exploitative patterns that typified Africa’s past relations with Europe. They worry too that Beijing’s willingness to lend with no political strings attached is undermining Western proselytising about democracy and letting corrupt leaders off the hook just as governance was beginning to improve. But hyperactive Chinese involvement in construction projects is helping to address infrastructure shortcomings holding up African growth. Competition for African resources meanwhile has given African states greatly increased bargaining power with foreign partners. If the net result is higher growth, this is likely to further the expansion of the middle classes in Africa, the section of society most likely to demand greater accountability from leaders.”

I have written before that economic change almost always precedes political change and African nations are not likely to alter that pattern. While western leaders believe that good governance and democracy are the surest paths to African progress, China’s premier Wen Jiabao insists that Africans should be left alone to choose their own future. I suspect that Wen likes working with authoritarian regimes. Wallis concludes, “This great game, however, is very much Africa’s to lose.” Corrupt and incompetent leaders continue to squander their country’s natural resources along with their future. As a result, many African countries have suffered from the so-called “resource curse.” Two British professors believe that it is not too late for African nations to recover from the mistakes of the past and take advantage of rising commodity prices [“Good decisions help avoid ‘resource curse’, by Paul Collier and Tony Venables, Financial Times, 29 March 2010]. They write:

“Most of the locations that remain promising for exploration are in the world’s poorest countries. Until recently, they were neglected because the political context was judged to be too risky. Recent discoveries of copper in Afghanistan, iron in Guinea, and oil in Sierra Leone, demonstrate that companies are now willing to face these risks. A reasonable presumption is that over the next decade big discoveries will occur in many of the poorest countries. The revenues from extraction will dwarf all other international sources of finance to these countries: foreign investment, remittances, and aid. They have the potential to be transformative, enabling these societies to replace hopeless poverty with sustained prosperity. However, as the historical record demonstrates, such a transformation is by no means inevitable. Transformation is a weakest link problem: it depends upon a long chain of decisions all being taken correctly.”

Collier and Venables insist that the resource that leaders need to decide to protect first is human capital. They explain:

“The first decision concerns the treatment of the people who live near where extraction takes place. Unless they are generously compensated for any environmental costs and can see that the revenues will benefit ordinary citizens, they are liable to disrupt it.”

One need only look to Nigeria to see the kind of intractable violence and instability that can result when poor decisions about how to invest in people are made. Collier and Venables continue:

“Assuming that this delicate issue is handled correctly, the next difficult decision relates to the design of taxation of the corporate revenue stream from extraction. This needs to balance society’s right to revenue from its resources with investors’ incentives to explore and extract. Governments in the poorest countries often do not have the information or skills to design appropriate tax systems. They may fail to capture enough revenue or leave companies facing insecurity about future fiscal demands.”

Extractable commodities are not renewable resources. This means that once they are gone they are gone forever. If countries don’t obtain fair compensation for their resources, the opportunity to invest in the future may also be gone forever. Collier and Venables continue walking down their decision chain:

“Assuming this highly technical matter is handled correctly, the next decision concerns how government revenues should be allocated between consumption and savings. Typically, there will be intense political pressure for consumption to be sharply increased, but since the revenues are generated by depleting natural assets, a substantial proportion of them should be saved. If these pressures are faced down, the next decision concerns how those savings are deployed: what assets should be acquired? The global model is Norway, but its model is largely inappropriate for a low-income country. Norway has more invested capital per worker than any other economy, so it makes good sense for the Norwegians to save in the form of financial assets. These are, effectively, claims on capital invested elsewhere in the world where the returns are likely to be higher than on extra investment in Norway. However, resource discoveries are likely to be concentrated in countries that have very little invested capital. Savings should be in the form of domestic investment in both human and physical capital.”

For more about the Norway model, read my post entitled Norway: Proof (or not) that Oil Need Not be a Curse for Developing Nations. Collier and Venables continue:

“Assuming the Norwegian route is resisted, the final set of decisions concerns how domestic investment should be implemented. One reason there has been so little capital invested in these economies is that investment processes are weak, marred by corruption, excessive bureaucracy, and lack of capacity to appraise and implement projects. Probably the most difficult task in the whole decision chain is to tackle these deficiencies.”

Inevitably, development returns the subject of good governance. Colliers and Venables write about a decision chain, because they know that a chain is only as strong as its weakest link. That means that a 100 good decisions can be made but a single bad decision can derail progress. They conclude:

“Not only is this chain of decisions a weakest link problem, but the chain has to hold repeatedly for about a generation. This is the minimum realistic time-frame for economic transformation out of poverty. Historically, in many societies either the chain has never held, or it has held too briefly for transformation. The challenge is to prevent this history of missed opportunities from being repeated. Evidently, there are powerful forces of self-interest and ignorance that trap societies in avoidable poverty. But this time could be different: new IT makes it far easier to build a critical mass of informed opinion, society by society, that can press for the opportunity presented by a resource discovery to be harnessed rather than dissipated. Even in the poorest societies, many people now have access to the internet. To date, however, there has been no focused, easily accessible information on the decision chain pertinent to the transformation of a resource-rich poor economy.”

Good governance requires transparency and accountability. As the professors assert, both of those factors can be improved if a society is connected. There is a reason that bad governments try to keep their citizens from being informed. They are on the wrong side of history, however. The more that African and other developing states become connected to each other and the rest of the world the faster they will begin to progress. I believe the blessings of connectivity can overcome the resource curse — and that connectivity includes increased south to south connections.

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