China could be a game changer in Zim

04 Dec, 2015 - 00:12 0 Views
China could be a game changer in Zim President Mugabe talks to his Chinese counterpart President Xi Jinping during a media briefing at Harare International Airport before the latter’s departure for South Africa recently

The Herald

President Mugabe talks to his Chinese counterpart President Xi Jinping during a media briefing at Harare International Airport before the latter’s departure for South Africa recently

President Mugabe talks to his Chinese counterpart President Xi Jinping during a media briefing at Harare International Airport before the latter’s departure for South Africa recently

Persistence Gwanyanya
Generating sustained economic growth remains one of the most pressing challenges to development in Africa today. As such considerate amount of time has been invested towards understanding Africa-specific determinants of sustained economic growth.

An OECD report of 2009 linked economic development to Foreign Direct Investment (FDI). There is strong evidence that FDI leads to rapid growth and development in Africa.

This causal relationship is particularly important to a country like Zimbabwe, which is struggling to sustain the growth momentum generated after dollarisationin 2009. FDI may stimulate the economy from the structural and cyclical impediments to sustained growth.

Economists and policy makers seem to agree with the notion that FDI could be a game changer in Zimbabwe. Consistent with this presumption the Minister of Finance and Economic Development, in his 2016 Budget statement, underscored the need to create an investor friendly environment which attracts foreign capital. FDI will open up an economy to the latest technology, knowledge and learning, which are crucial competitive assets.

Importantly, rebuilding of the country’s infrastructure base would require significant flows of FDI. That’s why the visit by the Chinese President has generated considerable excitement in Zimbabwe.

All hopes are pinned on the conclusion of mega deals that were signed between Zimbabwe and China last year and other potential investments that are likely to be sealed by the two countries during and after President Xi Jinping’s visit to Africa.

The China-Africa Co-operation Forum comes on the backdrop of structural shift in China’s business model from investment and export-led growth model to consumption driven growth model.

China has to rebalance its economy as the consumption binge in the West, particularly America that used to absorb the bulk of its exports disappear owing to fiscal consolidation and austerity measures being implemented by the latter to spur their economies from the Global recession.

As such, China is suffering from overcapacity mainly in the real estate and manufacturing sectors. There was an estimated 65 million unoccupied houses in China 2014. Overcapacity is also reflected massive build up of inventories in China.

With high investment rates of more than 50 percent of GDP and low domestic expenditure of less than 40 percent, there is need for China to explore new markets and avoid a hard landing scenario.

On the other hand, the commodity dependent Africa is struggling to sustain growth due to softening global commodities prices. As such the China-Africa Corporation Forum is seen as a platform that will proffer a win-win solution to the challenges that confront the two parties today.

There is scope for China to explore markets in Africa given its growth potential.

Africa is one of the fastest growing continents in the World. It is estimated that sub-Saharan African will grow by 4,33 percent in 2016, making is the second fastest growing region after the emerging markets which is expected to grow at 4,5 percent. China investment in Africa is one that could sustain this growth.

Africa underwent a protracted period of under investment which presents opportunity for investment in mainly infrastructure public utilities.

In the case of Zimbabwe for example, there is need for between $14 billion and $20 billion to close the infrastructure gap in the country.

Given the tiny budget of $4 billion with only $237 million set aside for capital expenditure in 2016, closing the infrastructure gap remains a mammoth task. Even with the proposed saving on the civil service wages bill of $170 million per annum from fiscal measures to streamline the public service sector, it will be difficult to generate enough financial resources meet the country’s infrastructure requirements.

Frost relationships between the Zimbabwe and the West have meant limited flow of capital from the latter. FDI in Zimbabwe has underperformed with only $591 million received in 2014 and $614 million projected in 2016 compared to South Africa, Zambia and Botswana annual averages of $6 billion, $2 billion and $1,8 billion respectively.

There is, therefore, need to look for new sources of FDI. China’s preference for Africa augers well with current shift in capital flows in favour of the South to South flows.

There is real opportunity for Zimbabwe to benefit from China’s renewed interest in Africa. With $3,8 trillion reserves there is scope for China to diversify its investment into Africa. Part of these reserves can be invested to build up market base for its manufactured products in Africa.

This is exactly what China has been doing with America when it was accumulating US reserves which were then lent to America to support consumption of Chinese goods.

With this in mind the mega deals signed between China and Zimbabwe in the energy, transport, infrastructure development and agriculture sectors in 2014 present good opportunity for Africa to benefit from the glut in China financial reserves. We hear the good news that more deals a being signed between the two countries.

Of particular interest to me is the nature of deals being in the energy, transport, infrastructure development and agriculture sectors. As espoused by the Zim-Asset document, the country’s industry strategy will be underpinned by value addition.

Successful implementation of value addition depends on the country’s electricity situation.

It is estimated that Zimbabwe is currently producing less than 900MW of electricity against peak demand of 2 200MW.

Being a commodity depended economy with more than 50 percent of exports coming from the mining sector, revamping electricity infrastructure is seen as a top priority in Zimbabwe.

The current softening of global commodity process makes investment in electricity more urgent. The investments being made by China in the electricity sub-sector which include Kariba South and Hwange expansion project with capacity to add 900MW to the national electricity grid.

This together with investments in the green energy mainly solar will see a significant improvement in the electricity situation in the next three years, which augers well with value addition.

The mega deals will also extend to the transport sector mainly rail and road infrastructure.

Sustained economic recovery in Zimbabwe will depend of efficient transport system.

Being a commodity dependent economy transport is a major cost in the production cycle. Zimbabwe’s rail system is in a dire state and needs to be revamped as a matter of urgency. The same applies for our aviation system.

These investment require huge sums of money which we currently cannot afford from the budgetary resources.

As such China’s interest in the transport sector is seen as a major boost to the economy.

Agriculture used to be the mainstay of Zimbabwe’s economy contributing between 15 percent and 19 percent of GDP but is now under serious threat from adverse weather patterns and limited investment.

In light of the increasing drought recurrence, there is need to rehabilitate major dams and irrigation schemes in Zimbabwe.

Farm mechanisation will also be important driver of productivity in the agriculture sector.

Agriculture sector has immense potential due to the comparative advantage it enjoys relative to other nations.

Investment in the agriculture sector will produce huge saving on imports as the country becomes food self-sufficient.

Revival of the agriculture sector has significant downstream benefits. Agriculture has the potential to contribute 60 percent to the manufacturing sector and consume 40 percent to industrial output.

Agriculture also provide major livelihood for 70 percent of our population.

However, the emphasis today should not just be primary agriculture but agro processing which emphases value chains.

Being an industrial hub of the world, China has capacity to benefit Zimbabwe in terms of manufacturing expertise and technological transfer.

The manufacturing sector which used to be one of the major drivers to the Zimbabwe economy lay in ruins.

However, there is scope for this sector to regain its pre-eminence. Being a is a super power in textiles, shoes, sporting goods and electronics there is scope for joint ventures between China and Zimbabwe in these sectors.

China can set up manufacturing industries in Zimbabwe to benefit from both proximity raw materials and the market.

The fact that an item carries a “Made in China” label does not mean that it really was made in China. It can be manufactured here in Zimbabwe, with the Chinese companies and sold cheaply than if it was manufactured in China. The major challenge is the cost of doing business in Zimbabwe.

Maybe it will be corrected with the relevant investments by China.

Since 2008, China’s consumption growth has exceeded net world consumption growth for all metals, with consumption of copper, lead, and nickel increasing by more than 50 percent.

China’s share in global base metal consumption has doubled to about 40 percent during the past 10 years. More than half of all Chinese exports of manufactured goods are made by foreign Multinational Enterprises (MNEs)thus there is scope for Zimbabwe to benefit processing industries given that we are a commodity dependent economy.

Tourism sector is also set to benefit from the renewed interest in Zimbabwe by China.

Tourism is one of the rapidly growing sectors in Zimbabwe with potential to contribute 15 percent of GDP from the current 10 percent.

There is, therefore, need to create a conducive environment for tourism in Zimbabwe so that we can benefit from Chinese tourists.

It is important to note that FDI is most effective where solid foundations for economic development are already in place. This means strong property rights, free and open markets, minimal state red tape and effective rule of law should be the focus of our Government.

  • Persistence Gwanyanya is an Economist and Banker. He is also a member of the Zimbabwe Economic Society. He writes in his personal capacity and this article does not represent the views of his employer.

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