Chinese, US aid not mutually exclusive

The growing importance of Kenya, and indeed sub-Saharan Africa, to the global economy magnifies the significance and implications of the divergent policy approaches of the United States and China toward the region.

China views development and foreign aid as practical policy instruments to promote political friendship and economic cooperation, while the US attaches clearly stated goals, stringent conditions, and strict criteria to its development programs.

The US president's scheduled visit to Kenya in July to attend the Global Entrepreneurship Summit highlights the growing interest in private sector and economic empowerment. This visit, in my view, may spur more competition among foreign countries expressing their interests in Kenya, especially the US versus China scrimmage. From this viewpoint, Kenya could benefit from this scramble for Africa, though watchfully. Pushing the necessary technical cadre to make cautious long-term decisions is vital at this point.

Equally, the impact of Chinese investment and aid to Kenya has been mixed. The low import prices of Chinese consumer and producer goods have reduced monopolistic tendencies among Kenyan enterprises, and yet employees and firms are negatively affected by the influx of cheap products. These effects in turn trickle down to the national economy with both gains and losses.

To improve its trading position, China is lending billions of dollars to Africa in tied loans that guarantee Chinese companies contractor rights and ensure Chinese goods are used in development projects. The loans tend to be granted when their repayment can be guaranteed by payments from China for African exports. So China is buying African exports, but trying to ensure the African export revenues are spent on Chinese goods and companies, while aiming, over the longer term, to boost African GDP and the African market of 1 billion consumers. What Africa gets in return is cheaper, longer-maturity loans, investment in infrastructure, and the ability to afford Chinese-made items to meet consumer demand.

Research by Paulo Drummond and Estelle Xue Liu establishes that "China's rapid investment-driven economic growth has affected (sub-Saharan Africa) economies via trade, investment, aid, and loans. China-SSA trade, in particular, has increased significantly in the last decade and across the region. Although larger exports to China have helped drive economic growth in the region, they have also led to greater exposure to China. Increasing trade links with China have allowed SSA countries to diversify their export destinations, away from advanced economies; but by the same token, these links have led these countries to become more susceptible to spillovers from China".

The authors find that China's domestic investment growth has a positive and significant impact on sub-Saharan African countries' exports. A 1 percentage point increase in China's domestic investment growth is associated with an average 0.6 percentage point increase in sub-Saharan African countries' export growth.

There is some cooperation, however, already occurring in other parts of Africa. The US and China have been active in helping rebuild Liberia's infrastructure and institutions. The US has primarily focused on rebuilding Liberia's armed forces, through training and recruitment, and has developed the management capability of the Ministry of Defense's civilian employees. The Chinese have been rebuilding much of the support infrastructure for those armed forces, including offices for government officials. They deployed some 570 military engineers to help rebuild basic infrastructure. The two nations have been able to cooperate for Liberia's benefit.

In an interview with The Economist in August, US President Barack Obama held the view that every country (of course, China included) that sees investment opportunities and is willing to be a partner to African countries should be welcomed. The president, however, cautioned that African governments should negotiate a good deal with whomever they enter into partnerships with. Obama recognizes the crucial capacity that China holds, for example, to build infrastructure in Africa. He argued that the fact that China has a lot of capital and may be less constrained than the US is fiscally is helping roads and bridges and ports get built.

In my view, the question of governance and accountability is an absolute necessity when it comes to dispensing with the resources the country accesses, whether from China or the US. The two countries will definitely engage in building infrastructure and provide much-needed jobs that will increase tax revenue for Kenya among other benefits. However, as with any investment, it matters more what you do with the money than from where you get it.

It is imperative that the money is optimally spent through avenues that will spur growth and equitable distribution of the national resources. It is clear to me that such an outcome can be attained by leveraging a sound mix of the quality versus quantity approach of the US and China in Kenya.

A study by two academics in Kenya and South Africa makes this clearer. They find that infrastructure quality significantly explains economic growth, while infrastructure stocks have no explanatory power. They reached this conclusion from their 2000-2011 study of the link between economic growth and infrastructure in 40 countries in sub-Saharan Africa.

The author is a lecturer at Strathmore University's School of Finance and Applied Economics.

(China Daily Africa Weekly 06/26/2015 page9)