Monday, April 25, 2011

Where are Dani Rodrik's shamans and councils of elders to regulate China's activities in Africa?

Dani Rodrik recently posted a nice parable that seeks to capture a simplified version of the development process facing developing countries. He describes the development tale of a poor little fishing village beside a lake, and cut-off from the mainland by a dense forest tract, whose residents lived off the fish they caught and the clothing they sewed and who are slowly faced with the challenges of globalization.

The tale traces the challenges the villagers faced when the fishing stock in their lake plummeted (they responded with co-operatives that imposed fishing quotas), started trading dried fish in return for sewed clothes with the villages on the other side of the forest (fishermen got rich, while those who sewed clothes were flooded with cheaper and better quality garments - resolved by forcing fishermen to make higher contributions to the village feast), and when transportation facilities opened the floodgates for fishermen from outside (which depleted fishing stocks and was remedied with toll collection on outside fishermen).

One could easily replace the fishing village with any African country or Suriname and the foreigners from beyond the forest with Chinese migrants to represent the problems generated by massive Chinese economic and political activity in many emerging countries of Africa and Latin America. In fact, we could also substitute the shaman with local advisors and opinion makers and the council of elders with the political establishment in Africa. In this context, the recent events and trends relating to China's economic activities in Africa and Latin America provides an excellent and immediate test to managing globalization effectively following second-best approaches.

China has emerged as Africa’s biggest trading partner (crossing $120 bn in 2010) and has replaced Europeans as the most important external economic and political influence in these countries. In the past two years China has given more loans to poor countries, mainly in Africa, than the World Bank. China has invested more than $40 bn in the 2005-10 period in sub-Saharan Africa. The physical Chinese presence itself in many African countries is substantial and migrants now run everything from small factories to health care clinics and trading companies.

As the NYT reported, "for many budding Chinese entrepreneurs, Africa’s emerging economies are inviting precisely because they seem small and accessible. Competition is often weak or nonexistent, and for African customers, the low price of many Chinese goods and services make them more affordable than their Western counterparts."

Politically, Beijing sees a great opportunity to exercise some form of control, even pick up stakes, in strategic mineral and oil assets, and that too on the cheap, in these resource rich African countries. The big-ticket infrastructure contracts that are in any case inevitable for economic development, apart from being critical for the exploitation of these natural resources, form a major economic attraction for Chinese companies. These state-owned firms have developed massive economies of scale in heavy infrastructure equipment manufacturing and expertise in execution of huge road, railroad, irrigation, electricity, and urban infrastructure projects.

Though, such investments and labor migration has its beneficial effects on the host country economy, there remain serious concern, especially given the scale of China's interventions and historical experiences, domestically or from elsewhere, of previous such activity,

"Africans view the influx of Chinese with a mix of anticipation and dread. Business leaders in Chad, a central African nation with deepening oil ties to China, are bracing for what they suspect will be an army of Chinese workers and investors... When they arrive, will they bring their own workers, stay in their own houses, send all their money home?

In Zambia, where anti-Chinese sentiment has been building for several years, merchants at the central market in Lusaka, the capital, said that if Chinese people wanted to come to Africa, they should come as investors, building factories, not as petty traders who compete for already scarce customers for bottom-dollar items like flip-flops and T-shirts...

Africans in many countries complain that Chinese workers occupy jobs that locals are either qualified for or could be easily trained to do... The problem with the Chinese companies is that they reserve all the good jobs for their own people. Africans are only hired in menial roles. Another frequent criticism is that the Chinese are clannish, sticking among themselves day and night."

Though Chinese development assistance and cheap labor helps build roads, low-cost housing, set up renewables based power plants, promotes shrimp farming, and so on, there are several concerns, especially with the influx of significant Chinese labor (estimated to be over 10% of the country's population) in countries like Suriname,

"In parts of Suriname, concerns over whether some Chinese laborers illegally stay past the end of their visas has led to debate over whether Chinese companies should be allowed to bring their own workers to the country, possibly depriving some Surinamese of jobs... many of the new arrivals are visibly involved in commerce, standing in contrast to Brazilians, Suriname’s other fast-growing immigrant group, who work largely at remote gold mines in the interior."

The Economist has an article that highlights how Chinese business practices are creating tensions in many African countries,

"Chinese expatriates in Africa come from a rough-and-tumble, anything-goes business culture that cares little about rules and regulations. Local sensitivities are routinely ignored at home, and so abroad. Sinopec, an oil firm, has explored in a Gabonese national park. Another state oil company has created lakes of spilled crude in Sudan...

At Chinese-run mines in Zambia’s copper belt they must work for two years before they get safety helmets. Ventilation below ground is poor and deadly accidents occur almost daily. To avoid censure, Chinese managers bribe union bosses and take them on 'study tours' to massage parlours in China. Obstructionist shop stewards are sacked and workers who assemble in groups are violently dispersed. When cases end up in court, witnesses are intimidated."

However, unlike Dani Rodrik's fictional fishing village, which had a benevolent and wise shaman and a far-sighted and disciplined council of elders, not many African countries or Suriname enjoy the guidance of such institutions to help chart the vicissitudes of the development process. Can African governments, with a notorious reputation of being willing participants in the loot of their own countries, and its civil society summon the necessary foresight, commitment, and spirit of co-operation to guide their nations through the uncertainties like that posed by the increased role of China in their economies and societies?

Happily, Prof Rodrik also tries to provide some answers to these countries to face upto these challenges,

"The parable suggests that internal debate and deliberation can produce a reasonable compromise. The compromise does not entail the blocking of trade or high barriers, as some groups want. But it does entail accepting some transaction costs on external trade and a departure from complete free trade."

And underlining the departure from first-best solutions and embrace of second-best ones, he writes,

"It would be little comfort to the villagers to be told that they should resort to lump sum taxation, non-linear income taxes, or allocating property rights over the fish stock – when the practical implementability of such potentially more efficient solutions remains unclear...

When openness to trade raises overall national income, a properly structured political process should not have an anti-trade bias to begin with. And allowing greater "policy space" to individual nations will in fact make it easier to uphold the social bargains that enable openness to trade. A (small) deviation from the ideal of complete free trade (hyperglobalization) is a small price to pay for this."

Even assuming a second-best approach, the challenge still remains of formulating inclusive and reasonable policies that accommodate the interests of all sides, and then mobilizing the political support and commitment to implement them. In the absence of policies that can manange a "reasonable compromise", the fishing stocks will decline, fishermen will refuse to pay up their share for the monthly feast, and xenophobic sentiment against outsiders "stealing our jobs" will grow and explode. Does Africa have wise shamans and enlightened political elders who can prevent such damaging outcomes?

Post script

MR points to Chinese interest - massive investments and labor migration - into Caribbean too. Diplomatic concerns, arising from the need to out manouvre Taiwan, and economic interests may be the primary motivators here.

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