Africa

Chinese Investment in Africa: A Blessing or A Curse?


The 21st Century has seen an explosion in the growth of Chinese foreign investment. The Middle Kingdom is spending billions of dollars internationally in an effort to gain geopolitical favor and clout among the international community. China’s foreign spending came to preeminence with the announcement of the Belt and Road Initiative (BRI), a massive program of foreign infrastructure investment. BRI spans both the land and maritime spectrum of global trade. The projects extend Chinese trade routes through Asia to Europe and especially Africa, the apparent focus of current Chinese foreign investment. However, African nations should be wary of taking Chinese loans, as they often come with significant strings attached that could spell ruin for developing African nations.

Image courtesy of the Government of South Africa (c) 2018

China’s philosophy of foreign investment is intrinsically different from western institutions. The Chinese government values project feasibility, return on investment, and growth prospects without consideration of other social factors. The borrowing nation’s track record on human rights, corruption, and civil liberties do not enter the equation. Most western nations require the recipients to demonstrate certain rights and freedoms that are ubiquitous among civil societies. This means that there must be a track record of developing human rights, freedoms, legitimate governance, and social programs before a developing nation can receive the aid pledged by western nations. The goals of these standards are to limit aid and investments from going to line the pockets of corrupt government officials and businesspeople. China’s disregard of these standards perpetuates the environment of corrupt authoritarian regimes in Africa.

Image courtesy of Lommes (c) 2017

Many of the countries China invests in are desperately in need of new infrastructure projects. China funded the construction of a railway in Kenya from the capital city Nairobi to the port city of Mombasa to bypass the crumbling road network. The Chinese also funded the Addis Ababa – Djibouti Railway, which connects the capital of Ethiopia to the nearest port in neighboring Djibouti. China has also extended loans to Zambia, Tanzania, Algeria, Democratic Republic of Congo, and Angola, which are primarily low-to-middle income nations that desperately need foreign investment. In the eyes of the Chinese government, China’s increased investment comes at the perfect moment, as the United States reduces foreign aid and investment in Africa. Whereas Western institutions are more likely to be forgiving on loan repayment, Chinese institutions have not demonstrated that same forgiveness. However, these developing nations have limited options when it comes to foreign investment, and the terms of Chinese loans and aid are typically easier to maintain than loans from Western institutions. Therefore, developing nations are more likely to take Chinese loans, which provide a significant amount of risk in the realm of political influence and the reduction of sovereignty.

With smaller, less-developed nations, such as Djibouti, ending up in significant debt, China gains immense political, economic, and security influence in their regions. In what politicians refer to as “debt-trap diplomacy”, China offers enormous, low-interest infrastructure loans. When the host nation is unable to pay the interest down, Chinese companies end up seizing the newly created pieces of infrastructure. Sri Lanka recently handed over control of its newly-created port to the Chinese. Djibouti – which is home to the most significant U.S. military base in Africa, Camp Lemonnier – is potentially falling to the debt trap. Thanks to Chinese loans, Djibouti’s debt-to-GDP ratio reached 85% in 2016. The purchased influence is demonstrated concretely in the new naval base that the Chinese People’s Liberation Army Navy (PLAN) constructed in Djibouti. The naval base poses an enormous threat to the U.S. base at Camp Lemonnier. This new Chinese influence in Djibouti could spell trouble for the prospects for the U.S. presence in this strategic location.

While taking multi-billion dollar loans from China may be a decision with significant amounts of risk, there is evidence to support the position that Chinese projects are good for the borrowers. Countries that take on Chinese loans are demonstrating sustainable economic growth. Researchers have found that a country experiences a 0.7% bump in economic growth for every Chinese-funded project. In less-developed countries, infrastructure is a major inhibitor of business growth and development. Road and railway networks in disrepair prevent goods from traveling long distances without significant delays, reducing the market possibilities for growing businesses. Therefore, as China invests in transportation networks, local businesses are able to grow.

Developing countries must weigh the benefits and costs of making such decisions. If the project is run transparently and legitimately and demonstrates significant prospects for growth, the deal could be extremely beneficial for the host nation. However, these countries must also consider other serious factors, including loan repayment schedules, profit expectations, debt-to-GDP ratios, corruption, prior alliances, and significant forecasting of geopolitical developments. Additionally, when these countries take on loans from China, the Chinese government gains a significant amount of influence within the nation and region. This influence can be seen in the Chinese open naval bases and seizing national infrastructure. Therefore, unless governments of developing nations take a hard look at the loan terms China offers, they should steer clear.

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