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Chinese Investors in Ethiopia: the Perfect Match?

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Chinese Investors in Ethiopia: the Perfect Match? Notes de l’Ifri Chinese Investors in Ethiopia: The Perfect Match? Françoise NICOLAS March 2017 Center for Asian Studies Ifri is a research center and a forum for debate on major international political and economic issues. Headed by Thierry de Montbrial since its founding in 1979, Ifri is a non-governmental, non-profit organization. As an independent think tank, Ifri sets its own research agenda, publishing its findings regularly for a global audience. Taking an interdisciplinary approach, Ifri brings together political and economic decision-makers, researchers and internationally renowned experts to animate its debate and research activities. With offices in Paris and Brussels, Ifri stands out as one of the rare French think tanks to have positioned itself at the very heart of European and broader international debate. OCP Policy Center is a Moroccan policy-oriented think tank whose mission is to contribute to knowledge sharing and to enrich reflection on key economic and international relations issues, considered as essential to the economic and social development of Morocco, and more broadly to the African continent. For this purpose, the think tank relies on independent research, a network of partners and leading research associates, in the spirit of an open exchange and debate platform. By offering a "Southern perspective" from a middle-income African country, on major international debates and strategic challenges that the developing and emerging countries are facing, OCP Policy Center aims to make a meaningful contribution to four thematic areas: agriculture, environment and food security; economic and social development; commodity economics and finance; and “Global Morocco”, a program dedicated to understanding key strategic regional and global evolutions shaping the future of Morocco. The opinions expressed in this text are the responsibility of the author alone. This study has been carried out within the partnership between the French Institute of International Relations (Ifri) and OCP Policy Center. ISBN: 978-2-36567-688-5 © All rights reserved, Ifri, 2017 Cover Picture: Chinese locomotive driver Liu Ji (R) trains his Ethiopian counterparts at a railway station in suburban Addis Ababa, Ethiopia, Oct. 1, 2016. © www.news.cn How to quote this document: Françoise Nicolas, “Chinese Investors in Ethiopia: The Perfect Match?”, Notes de l’Ifri, Ifri, March 2017. Ifri 27 rue de la Procession 75740 Paris Cedex 15 – FRANCE Tel.: +33 (0)1 40 61 60 00 – Fax: +33 (0)1 40 61 60 60 Email: [email protected] Website: Ifri.org Author Françoise Nicolas is Director of Ifri’s Center for Asian Studies. She has been with Ifri since 1990. She also teaches at Langues' O, Sciences Po (Paris) and Sciences Po (Lyon) and is an occasional consultant to the Directorate for Financial, Fiscal and Enterprise Affairs (DAF) of the OECD. In the past she has been an assistant Professor in international economics at the University of Paris-Est (Marne-la-Vallée, 1993 - 2016) and has taught at the Graduate Institute of International Studies (GIIS, Geneva – 1987-1990), at the École nationale des Ponts et Chaussées (1991- 1995), as well as at the HEC School of Management (2000-2002). Françoise Nicolas holds a PhD in international economics (1991) and a MA in political science (1985) from the Graduate Institute of International Studies (Geneva, Switzerland). She has also studied at the University of Sussex (1980-1981) and has spent some time as a visiting fellow at the Institute of Southeast Asian Studies (ISEAS) in Singapore (1999) and at the Korea Institute for International Economic Policy (KIEP) in Seoul (2004). Executive Summary Since the fall of the Derg regime in 1991, cordial relations have developed between China and Ethiopia, forming a positive political backdrop in front of which the two countries’ interests have increasingly converged. On the one hand, Ethiopia seeks to replicate the experience of East Asian countries such as Taiwan, Malaysia, or China and to attract foreign direct investment (FDI) in order to accelerate the development of its manufacturing capacities (in particular through an ambitious industrial Park – IP - development program and the acceptance of foreign-owned Special Economic Zones - SEZs). On the other hand, China looks to export its development model (including SEZs), to delocalize its most labor- intensive activities, and to promote connectivity between Asia and the African continent. In this context, the Chinese government identified SEZ projects in 19 countries – including one in Ethiopia (the so-called Eastern Industry Zone - EIZ), located in Dukem some 30 kilometers southeast of Addis Ababa. Today, China is by far the leading foreign direct investor in the country. In addition to the Chinese-owned EIZ in Dukem, Chinese investors are also present in privately-run SEZs that are not part of the MOFCOM strategy, as well as in government-led IPs and outside SEZs or IPs. Lastly Chinese firms are also extremely active in all kinds of infrastructure development thanks to Chinese funds. Chinese investment in Ethiopia does not match the standard view of Chinese FDI in Africa, wherein investors are seen as looking for natural resources and plundering the country. Far to the contrary, as Chinese investments in Ethiopia are concentrated in infrastructure and in the manufacturing sector, they were expected to play a transformative role and give rise to a “win-win” outcome. For the time being, however, the assessment is mixed at best. Although China has certainly played a useful role in Ethiopia by setting up industrial zones, financing infrastructure, and encouraging Chinese firms to move some manufacturing production to Africa, thus contributing to the industrialization process, its transformative power remains limited. Backward linkages (through the purchase of materials and services from the local economy) as well as forward linkages (which refer to a situation where foreign companies sell goods or services to domestic firms) are not Chinese Investors in Ethiopia Françoise Nicolas easy to come by. In particular, local inputs are not always up to the standards expected by Chinese producers. Also, skills transfers that may simply occur through labor mobility so far remain limited, as the workers are concentrated in low-skilled jobs. For all these reasons, Chinese investment has not proven to be as transformative for Ethiopia as inbound investment was for China in the late 1980s. In particular the hope of turning Ethiopia into an international shoe and light manufacturing hub remains elusive so far. Overall, Ethiopia’s export pattern remains dominated by agricultural products (coffee/tea, vegetables and live trees and cut flowers), while garments and footwear account for less than one percent of the country’s total exports. Rather than manufacturing investments, Chinese investments in infrastructure may have proven to be more instrumental in transforming the country. The construction of new dams, for instance, has been instrumental in guaranteeing a stable supply of power and helping Ethiopia to realize its plan of becoming a major electricity exporter. The explanation of this disappointing result in garments, footwear and other light manufacturing sectors lies with policies. The two-pronged approach to SEZs followed so far by the Ethiopian authorities, with government-led IPs coexisting with private foreign-led SEZs, is certainly a good approach since there are more FDI firms wanting to invest or expand in industrial zones in Ethiopia than the government can offer. However, it is important to make sure that the zones' activities are aligned with the country's needs in terms of industrial development. This is less likely to be the case if the state is not actively involved, as in the case of foreign-owned private SEZs. However, various developments suggest that the situation may be changing soon. First, Ethiopia’s strategy has recently shifted in favor of government-led IPs, the logic of which is much closer to that of SEZs promoted in East Asia. Moreover, newly developed projects, such as the Huajian International Light Industry City, are also promising, as the sectoral orientation of the project is in line with the country’s industrial objectives. As these developments are still recent, the jury is still out on the reality of backward linkages and the ability of Ethiopian firms to take advantage of the presence of Chinese firms and technology, and hence on the potentially substantial benefits. The prospects look rather good, provided other accompanying measures are put in place so as to improve the overall business environment, and, probably more importantly, to enhance the local labor force’s “absorptive capacity”. 4 Table of Contents INTRODUCTION .................................................................................... 6 BACKGROUND ELEMENTS TO THE CHINA-ETHIOPIA ROMANCE ........ 8 The historical context: a long-standing partnership .............................. 8 Ethiopia’s industrialization strategy: East Asia as a model ................... 9 China’s strategy: from “Going out” to “One Belt, One Road” ............. 13 CHINESE INVESTMENTS IN ETHIOPIA .............................................. 17 An overview ............................................................................................ 17 Chinese-led special Economic Zones ..................................................... 19 Chinese investment in infrastructure ................................................... 24 ASSESSING THE IMPACTS OF
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