GA ISIG Study Tour 2013 () 13. The Chinese in Ethiopia

Summary Curriculum Links-A level Paths to development There are two main areas of Chinese involvement in Africa – aid and Cultural diffusion trade. There have been dramatic changes over the past 20 years and this Successful regeneration involvement is having a significant impact on global patterns of both aid Social political tensions and trade. Changing places Emerging powers/Newly-Emerging According to the excellent AidData statistics, had an estimated Economies – China 2622 aid projects in Africa in 2016, up from 1673 in 2014. The leading Changing relationships with super recipient of China’s aid was Tanzania with 260 projects, followed by powers Ghana with 242. Ethiopia had 135 projects. Not only has the quantity of Development aid and record of success projects increased but there has also been a change in the funding opportunities. New multilateral funding agencies such as the Asian Key Words Infrastructure Investment Bank (AIIB) and the New Development Bank Imports have been expanded to include African countries. These institutions are Exports now challenging the multitude of existing multilateral agencies such as Balance of trade the World Bank, The African Development Bank and the United Nations Foreign Direct Investment (FDI) Development Programme (UNDP). Natural resources Globalisation AidData research is also leading to a re-examination of the criticisms of China’s role in Africa. Work by Parks (2016) is demonstrating that many of the long-held beliefs are incorrect. They have resulted from a fear of Questions to consider competition rather than a close examination of the available data on the part of the Global North. Myths such as ‘China's aid to Africa is all about 1. Log onto the AidData web site at natural resources’ and ‘China favours authoritarian and corrupt African http://china.aiddata.org/ and open the regimes’, can no longer be supported. new Geospatial dashboard. Click on Ethiopia and examine selected projects. Since the turn of the 21st century, Chinese state-owned and private enterprises have poured into African countries, seeking natural 2. Interrogate Figure 3 and provide a resources, new markets, and other business opportunities. China’s trade brief explanation of the main changes with the continent has skyrocketed; in 2009, China surpassed the United that have taken place in China’s trading States to become Africa’s largest trading partner, and by 2014 flows relationship with sub Saharan Africa exceeded U.S. trade with the continent by more than $120 billion. since 1990.

In 2014, export destinations such as Brazil, China, and India, accounted 3. The -Djibouti railway for over 50 percent of sub-Saharan African exports, with China opened to traffic in late 2016. Examine accounting for about half of that. Fuel, metal and mineral products the economic, political and social represent 70 percent of sub-Saharan African exports to China whilst the implications of this new transport link. majority of sub-Saharan Africa’s imports from China are made of 4. Draw up a table that lists the main manufactured goods, followed by machinery. arguments for and against the Chinese Total exports are now running at around $450 billion compared to less involvement in Ethiopia. than $60 billion in 1990. Imports in 2014 were around $375 billion compared with $50 billion in 1990. The African balance of trade deficit has increased from around $10 billion to over $75 billion.

1 GA ISIG Study Tour 2013 (Ethiopia)

Figure 1. Constructing a new road in Tigray with Chinese finance and supervision [August 2013] ©Dr Kevin Cook Background information provided by Study Tour participants Judith Mansell and Kevin Cook

Introduction

The global development aid landscape is changing with recipients becoming donors and they account for an increasing proportion of international development finance. Leading the way is China and its unique way of delivering its assistance is challenging the old ideas of aid donors as being from the Global North. China now has a flourishing bilateral aid programme and it has also helped to create alternative sources of multilateral funding such as the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank; institutions that are challenging the multitude of existing multilateral agencies such as the World Bank, The African Development Bank and the United Nations Development Programme (UNDP)

In order to understand why China is behaving as it is, we need to understand the different economic motives for both multi-national companies and countries to invest overseas. One approach is to consider investment as being of two types. Those countries, such as India, have seen Africa as a source of markets for their products. Such trade has been encouraged by the neo-liberal policies set in place over the past 30 years. With the reduction in tariffs and the growth of globalisation, countries able to expand their overseas markets have generally flourished. On the other hand China held up as a perfect example of a country investing overseas mainly for resource reasons. It is not looking for major markets at the moment. “Resource-seeking” includes making use of cheap labour as well as gaining access to resources such as minerals and agricultural products. As a result, China’s foreign aid has been labelled as “rogue aid”, that is aid that is unrelated to recipient need and is determined by the donor’s natural resource needs and a wish to forge international alliances. It must be noted, however, that not all commentators accept this view. Thus while political considerations may well shape its aid allocations, China does not pay substantially more attention to politics compared to Western donors. What is more, China's aid allocation seems to be widely independent of recipients' natural resource endowments and overall, denoting Chinese aid as “rogue aid” seems unjustified. Why, then, is China investing so heavily in other countries and especially in Africa and Ethiopia?

2 GA ISIG Study Tour 2013 (Ethiopia)

The Chinese in Africa

There is no doubt, despite the difficulties of obtaining up to date accurate information, that China is investing considerable sums of money in Africa’s development. Over the period 2003-2013 China committed $75bn (£48bn) to aid and development projects in Africa. This is less, however, than the $90bn US invested over the same period.

Data collected by researchers at AidData in the US challenge the dominant ‘resource-seeking’ view to explain China’s actions. AidData’s database is based on a wide set of sources and includes few mining projects and, while transport and energy projects account for the largest investments, hundreds of millions of dollars have been invested in health, education and cultural projects. Figure 2. Screen dump from AidData Tracking Chinese Development Finance Figure 2 is a screen dump taken from AidData’s interactive map of China’s December 2016 projects in Africa’s as of December 30th 2016. It provides information on 2622 projects, up from 1673 in 2014. The leading recipient of China’s aid is Tanzania with 260 projects, followed by Ghana with 242. Ethiopia has 135 projects.

In 2015, an Aid Data researcher Brad Parks argued that a range of commonly stated criticisms about China’s aid to Africa were incorrect. Five of these were:

 China now provides more aid to Africa than the US. Using the OECD definition of aid, China provided approximately $31.5 billion of aid to Africa between 2000 and 2013 whilst the US gave $92.7 billion.  Chinese development finance is all about the “hardware of development” (e.g., roads, ports, railways, refineries and electrical grids). AidData suggest that whilst China has focused its efforts in these sectors, it has also invested in Africa’s agricultural, educational, and health sectors. The only major difference to western aid efforts lies in the lack of investment by China in environmental projects.

 China's aid to Africa is all about natural resources. It is the less concessional and more commercially oriented forms of state financing known as ‘other-official flow’s or OOF and not strictly aid, that China tends to lend to countries rich in natural resources with higher levels of corruption.  China gains friends who vote for them at the United Nations. This is one of the few myths that is true. But a similar relationship exists between recipients of US aid and positive voting patterns at the UN Security Council.  China favours authoritarian and corrupt African regimes. This myth is not upheld by the AidData analysis. Instead it appears that China makes its aid allocation decisions on humanitarian and socioeconomic need; in common with the US.

China’s trade with Africa

Since the turn of the 21st century, Chinese state-owned and private enterprises have poured into African countries, seeking natural resources, new markets, and other business opportunities. China’s trade with the continent has skyrocketed; in 2009, China surpassed the United States to become Africa’s largest trading partner, and by 2014 flows exceeded U.S. trade with the continent by more than $120 billion. These trends coincided with an explosion in optimism about Africa’s economic growth prospects. However, with the recent slowdown in the Chinese economy (+6.9% in 2015 compared to +7.3% in 2014) the 2000-2014 expansion of trade has been interrupted. In 2015 Chinese exports to Africa fell by 38%.

This recent dramatic and rapid explosion of China’s interest in Africa as a trading partner represents a major move away from the 1990s when 90% of Africa’s trade was with the Global North. In 2014, export destinations such as

3 GA ISIG Study Tour 2013 (Ethiopia)

Brazil, China, and India, accounted for over 50 percent of sub-Saharan African exports, with China accounting for about half of that. Fuel, metal and mineral products represent 70 percent of sub-Saharan African exports to China whilst the majority of sub-Saharan Africa’s imports from China are made of manufactured goods, followed by machinery.

Access to new markets for its raw materials has spurred Africa’s exports, which have quintupled in real value over the past twenty years. But maybe even more importantly, sub-Saharan Africa’s trade engagement with China and other new trading partners has reduced the volatility in its exports. This helped cushion the impact of the global economic crisis in 2008 and 2009, when advanced economies experienced a deep economic deceleration. On the import side, access to cheap Chinese consumer goods, from clothing to mopeds, has boosted African living standards and contributed to low and stable inflation. In 2015, China began to move back to a growth model focused more on domestic consumption and the short-term impacts on Africa’s commodity exporters has been severe. Both the volume and the prices of its exports have fallen as a result and growth in sub-Saharan Africa has weakened markedly compared to previous years, although there are large differences among countries.

Figure 3 provides a considerable amount of information on China’s trade with sub-Saharan Africa over the period 1990-2014. Total exports are now running at around $450 billion compared to less than $60 billion in 1990. Imports in 2014 were around $375 billion compared with $50 billion in 1990. The African balance of trade deficit has increased from around $10 billion to over $75 billion.

The second notable feature is the increase in the range of trading partners over the period. In 1990, DAC countries (currently 30 members mainly from the Global North) accounted for 90% of trade. This had fallen to around less than 40% by 2014. China’s trading involvement had increased from virtually nothing to just under 25%.

The effects of the 2008 global recession can be seen in the statistics. Trade fell by 25% overall with exports suffering most (-31%) and imports Figure 3. Sub-Saharan Africa. Total Exports and Imports by Partner. declined by -18%. It took sub-Saharan Source: IMF. Direction of Trade Statistics Africa three years to recover.

4 GA ISIG Study Tour 2013 (Ethiopia)

Chinese Foreign Direct Investment (FDI) in Ethiopia

Introduction

China’s relationship with Ethiopia can be traced back to its financing of the Wereta-Weldiya road in 1972, but ironically the Marxist led1974 revolution held back relations between the two countries for the next 17 years. It was Ethiopia’s close relations with the Soviet Union during this period that meant links remained undeveloped. In 1995, former Ethiopian Prime Minister Meles Zenawi made a trip to China where the two sides signed an economic cooperation agreement. Relations were further strengthened when Ethiopia hosted the second Forum on China- Africa Cooperation in 2003. Between 1998 and 2004 China provided 15% of the costs of the Addis Adaba ring road and Ethiopia provided the rest. Since then, China has built dams, roads, factories in Ethiopia, has reduced the country’s debt and has provided funding to construct the African Union headquarters in Addis Ababa at a cost of $300 million.

In addition to these development initiatives, Chinese companies have invested heavily in Ethiopia through what is known as Foreign Direct Investment (FDI). FDI is an investment made by a company or individual in one country (in this case China) in another country (Ethiopia) in order to establish a business or to obtain a controlling interest in a foreign company. Multinational companies bring superior productive assets such as technological know-how, managerial and entrepreneurial skills, and marketing techniques. There are also beneficial spill-overs of technology transfers that affect the productivity of the domestic companies. On the negative side, there have been cases of excessive competition between foreign and local companies as illustrated by the legal battle between Sole Rebel and Oliberté Limited, a Canadian footwear company with a branch in Ethiopia. (For more details see Topic 10 on social enterprises in Ethiopia.) Also there are perceptions on the low quality of Chinese products and Chinese companies have been criticised for not transferring knowledge to Ethiopians.

China’s Foreign Direct Investment (FDI) in Ethiopia has grown rapidly over the past 15 or so years. According to Seyoum et al. (2015), there were 107 Chinese FDI projects in Ethiopia in 2002. These had increased to 944 by 2010 and now stand at 2622 projects. Ethiopian government data suggest that private Chinese investments (FDI) over the period 1992-2015 amounted to $773 million; larger than any other country’s investments during this period. Such investments have been supported, not through foreign aid but with financing backed by the China-Africa Development Fund. This has led to developments such as a leather factory, a cement plant and a glass factory. Chinese telecoms firm ZTE has teamed up with Chinese banks to provide $1.5 billion to roll out mobile phone and 3G networks. An export buyer’s credit is paying for more than half of the $612 million cost of a toll road between Addis Ababa and Djibouti whose port provides land-locked Ethiopia with sea access. Similar financing is paying for the freight and passenger railway linking the two locations. One aspect of Ethiopia’s recent history that cannot be linked to China is the issue of ‘land grabs’. There is very little evidence that China has invested in such land. Most of the schemes are linked instead to the Ethiopian government itself.

Examples of Chinese investments in Ethiopia

Telecommunications developments

The only way to access the is through the government-owned provided Ethio-Telecom which controls the telecoms industry. In neighbouring Kenya internet penetration rate is 70%, whist in Ethiopia it is under 4%. The government monopoly has created one of the most disconnected countries in the world. In 2016, there were only 10 countries with lower penetration rates and most were involved in civil wars (e.g. Somalia) or are sealed off from the outside world like North Korea. This is all the more astounding as Ethiopia is one of the fastest developing countries in the world. Ethiopians who can access the net face government surveillance, slow connectivity and continual outages of power.

This is despite Ethiopia signing an $800 million deal with China’s major telecom companies and ZTE in 2013 to expand its mobile network, thereby doubling the number of mobile phone subscribers to over 50 million (around

5 GA ISIG Study Tour 2013 (Ethiopia)

50% of the population of 102 million) and increasing 3G internet access. The deal was part of a project worth $1.6 billion. The result has been an expansion of mobile phone subscribers to around 43million (2015) but internet use remains low at 4.5 million (4.5% of the population). Most Ethiopians who access the Internet do so through their phones, and previously the government had singled out social media activity as a major influence in agitating the unrest that has affected the country since early 2016. Internet access was much reduced following the declaration of a state of emergency in October 2016. The Ethiopian government is well aware of the power of social media in fueling protest and mobile phones have been used by Oromo farmers objecting to land grabs.

New transport developments

In October 2016 Ethiopia’s Prime Minister Hailemariam Desalegn and President of Djibouti Ismail Omar Guelleh officially inaugurated the 756 km Chinese-built railway linking their countries. The line runs parallel to the abandoned railway built by the French and opened on 17 June 1917. Costing some $3bn, it starts at sea level in Djibouti. It then makes its way through Ethiopia's dramatic, challenging terrain until it reaches Addis Ababa, about 2,500m above sea level. The Chinese provided the funding for the railway after the European Union and the World Bank were reluctant to do so. It is the first standard gauge electrified railroad on the continent built with Chinese standards and technology. The new line is designed to China’s specifications for operation at up to 120 km/h, providing a freight transit time of between around 12 hours, compared to two or three days by lorry. Construction of the Ethiopian section of the route cost Figure 4. The new Addis Ababa-Djibouti around US$3·4bn, financed 70% by China Exim Bank and 30% by the 756km railway line. Source: Economist Ethiopian government. October 15th 2016

The first freight services ran to a temporary unloading facility in Merebe Mermersa, 112 km south of Addis Ababa, arriving on 21st November 2015, when the partially-completed line was opened to allow the delivery of 3000 tonnes of much needed humanitarian grain. The railway will completely transform how humanitarian aid is delivered and will save many thousands of lives during the current drought. Food can be delivered to drought-affected people in hours instead of weeks. Full freight services began in late November 2016 and passenger services will start in 2017. There are many other advantages of the new 800km line. The route runs close to the Somaliland border, a country that declared its independence in 1991 but remains unrecognised internationally. There has been talk of linking Ethiopia with Somaliland’s underused and underdeveloped Berbera port. Such a project would become possible if China were to provide the funding. For political reasons, it is unlikely the World Bank or the European Union would do so.

Another possible advantage lies in the area of health and nutrition. Somalia has the longest coastline in Africa and has rich fish stocks. Somalis are not keen on fish but Ethiopians have two fish days each week. Currently Ethiopians have access to only river and lake species such as the Nile Perch and Tilapia. There are also potential peace benefits in this fragile political area.

The Addis-Djibouti line is the first step in a wider national and regional rail network. In June 2012 the Ethiopian Rail Company signed a $1.7 billion contract with a Turkish firm to construct a line from Awash on the Addis-Djibouti line to run north to Weldiya/Hara Gebeya. This is due to be completed by April 2018. China Communications Construction Company is building the next 220kms north from Hara Gebeya to Mek’ele under a $1.5billion contract. A line is also planned to run from Hara Gebeya eastwards to the port of Tadjurah in Djibiouti, providing a second route to the sea. Finally, for the time being at least and to the delight of local residents, Africa’s first light rail system opened in Addis Ababa on September 20th 2016. The 34 km two-line network will serve 39 stations and meet the needs of the city’s 5 million inhabitants. The lines have been constructed by the China Railway Engineering Corporation at an estimated cost of $475 million. The Chinese Export-Import Bank provided 85% of the finance.

6 GA ISIG Study Tour 2013 (Ethiopia)

Expansion within the leather industry

Ethiopia’s economy, in common with most African countries, is based mostly on agriculture (38.8% of GDP) and services (46.6% of GDP) and urban unemployment is high at 16.8% in 2015-16. It is, however, one of Africa’s fastest economic growth countries with GDP growth averaging +10.5% since 2005. Growth fell for the first time in 2015-16to 8.0% (Figure 5) as a result of the severe El Nino induced drought and may remain low in 2016-17. Understandably, the agriculture sector was particularly badly affected. The 2010- 2015 and 2015-2020 Ethiopian Growth & Transformation Plans (GTP) both emphasize the importance of agriculture as a major source of growth. However, the latest plan aims to transform Figure 5. Ethiopia’s economic growth by Ethiopia into a manufacturing hub and to attain lower-middle sector 2011/12-2015/16 income status by 2025. The manufacturing sector is planned to Source: World Bank 2016 grow at a rate of +20% over the next decade.

Leather is one of the eight priority sectors in the GTPs and the export of leather products such as shoes, gloves and bags will make use of traditional agriculturally-based skills in these areas. A key feature of this expansion is the development of cluster zones for the leather industry centred on industrial parks. Currently (2016) there are two such parks at and Bole Lemi 1and there are plans for eight more at , , , , Kilinta, Areti, and Bole Lemi 2. In addition there are industrial parks at the Eastern Industrial Zone at Dukem and at Ayka Addis.

To encourage investors to these industrial locations, the Ethiopian government offers a range of incentives such as exemption from income tax for up to 15 years, exemption from import duties on manufacturing good and the provision of essential infrastructure such as power and road links. The land is leased to the company for up to 80 years. One such company that has been attracted to Ethiopia is the privately owned Chinese shoe company, Huajian. They leased a factory site at the Eastern Industrial Zone in 2012 and now employ 4000 workers who produce 7500 pairs of shoes each day. Huajian makes shoes for Tommy Hilfiger, Guess, Naturalizer, Clarkes and other western brands. Huajin has committed jointly with the China-Africa Development Fund to invest $2bn over the next decade to create a light manufacturing special economic Figure 6. Existing and Future Industrial zone in Ethiopia, creating employment for around 100,000 Ethiopians. The Parks in Ethiopia. Source IRDP 2016 company, which employs 25,000 workers in China, expects to be able to provide around 30,000 jobs in Addis Ababa by 2022. There are currently six other Chinese companies in the Eastern Industrial Zone at Dukem including a car assembly plant and a plastics factory.

Ethiopia not only offers lower production cost, but cheaper materials, particularly leather for shoes. It also has favourable export agreements with the EU and USA and offers considerable incentives for investors. However the country has drawbacks. It is bordered by Somalia and lacks good roads, so how do the shoes get from the factory to the port? The new railway linking Addis Ababa with the port in Djibouti will provide a new and much safer route for exports. It also faces a period of uncertainty until the current state of emergency is withdrawn and unrest is reduced.

7 GA ISIG Study Tour 2013 (Ethiopia)

References

Aid Data. (2016) Open Data for International Development. Tracking Chinese Development Finance. http://china.aiddata.org/

Bräutigam, (2011) Ethiopia’s Partnership with China. Guardian. https://www.theguardian.com/global- development/poverty-matters/2011/dec/30/china-ethiopia-business-opportunities

CNN. (2012) Huajian Group - Chinese shoe maker moved to Ethiopia. http://www.youtube.com/watch?v=rzD5yaiCSIA

Dreher, A. and Fuchs, A. (2015) Rogue aid? An empirical analysis of China’s aid allocation. Canadian Journal of Economics / Revue canadienne d’´economique, Vol. 48, No. 3 http://onlinelibrary.wiley.com/doi/10.1111/caje.12166/full

Industrial Park Development Corporation (IRDP) (2015) Industrial Parks Planned to be built 2015-2019 http://www.ipdc.gov.et/index.php/en/industrial-parks

Jobson, E. (2-13) Chinese Firm Steps up Investment in Ethiopia with ‘Shoe City’. http://www.guardian.co.uk/global- development/2013/apr/30/chinese-investment-ethiopia-shoe-city

Nord, R. (2015) China and Africa. Will the Honeymoon Continue? World Economic Forum https://www.weforum.org/agenda/2015/12/china-and-africa-will-the-honeymoon-continue

Parks, B. (2013). 10 Essential Facts about Chinese Aid in Africa. The National Interest. http://nationalinterest.org/feature/10-essential-facts-about-chinese-aid-africa-14456

Railway Gazette (2015) Ethiopia – Djibouti railway carries first freight. http://www.railwaygazette.com/news/news/africa/single-view/view/ethiopia-djibouti-railway-carries-first- freight.html

World Bank. (2016) 5th Ethiopia Economic Update. Why so idle? Wages and Employment in a Crowded Labor Market. http://documents.worldbank.org/curated/en/463121480932724605/5th-Ethiopia-economic-update-why- so-idle-wages-and-employment-in-a-crowded-labor-market-draft-for-public-launch

8