Some Thoughts on President Mills’ Visit to China

Mon, 4 Oct 2010 Source: Idun-Arkhurst, Kobina

In mid-September 2010, over 140 world leaders gathered at the UN in New York to review progress made by developing countries on the Millennium Development Goals (MDGs). Conspicuously missing at the UN special development summit was Ghanaian President John Atta Mills. Embattled at home by even members of his own party for being too slow to respond to growing domestic challenges- including unemployment and energy and water shortages- the Ghanaian leader headed off to Beijing and Shanghai, China’s political and commercial capitals, in hope of inking aid and investment deals that may help him silence his critics and up his somewhat battered mojo. The Ghanaian leader was not disappointed.

On the second day of his visit to China, President Mills emerged from a meeting with Chinese leader Hu Jintao at the Great Hall of Beijing a very contented visitor. The China Development Bank is to provide $3bn for investments in Ghana’s fledgling oil and gas sector, while the China Exim Bank will provide $150m for an e-government project and $260m to expand water supply systems in Ghana. Further, China Exim Bank, the world’s largest export credit agency, signed a memorandum of understanding (MoU) with the Ghanaian delegation to provide up to $10.4bn for future projects in infrastructure construction and rehabilitation, which will include roads and railways. China’s State Council, China’s highest decision-making body, is also putting up 100m Yuan in grants to provide equipment and drugs to aid the fight against malaria.

Off to Shanghai, China’s commercial capital. Ironically, what President Mills got was not big commercial, but social, investments: two new regional hospitals in Ghana. Still, these are good business for the Chinese construction behemoth, the Shanghai Construction Company, which is going to build the projects. At an UNCTAD conference in Accra in 2008, the China-Africa Business Council, a quasi-state organisation to promote Chinese businesses in Africa, mounted a stand with a big banner reading: “Combining Generosity with Profits”. One doesn’t get that much honesty. The Chinese have told us point blank they’re here for business, although they also think their commercial interests should help us too.

Whether the latter is true or not is a big question that has spawned a huge research industry, which, unfortunately, is dominated by Western, rather than African, voices. Even for the few African voices that can be heard on the subject, many regurgitate Western (geopolitical) concerns, either because they’re funded by Western organisations or are under the spell of some negative Western propaganda. Others are stuck in an old aid mentality or fear of Africa’s past painful experiences. So, for example, some Ghanaians have dinged President Mills for ignoring the city shining on the hill and heading for Beijing to sign a pact with the “Yellow Peril”. Some have looked on China’s entreaties with cynicism, warning Africans that China has colonial, rather than philanthropic, intentions.

But although starting from analytical agnosticism is useful, to be stuck in self-inflicted fear could prevent us from seeing the bigger picture. And thank God China is not, and does not pretend to be, a philanthropist. We have had too many of these saviours around for far too long. What we need now are entrepreneurs, not saviours. There is an emerging trend in enterprise called social business. Pioneered by Mohammad Yunus, founder of the celebrated Grameen Bank, social business uses business to solve social problems, such as micro-enterprise for poverty reduction. Rather than giving handouts, this is a more dignifying way of combating poverty. This is how Yunus puts it: “[W]e have created a society that does not allow opportunities for those people to take care of themselves because we have denied them those opportunities”.

Incidentally, China, where President Mills chose to go, has the singular distinction of recording the largest dent in poverty in recorded history and it did so not by accepting humanitarian aid but by creating opportunities for its people to work hard to improve their own circumstances and in the process uplift their nation in the comity of nations.

While in Beijing President Mills met African diplomats stationed in the Chinese capital and urged them to use their stay in China to study the secrets of China’s economic success story and bring those ideas back home to help in Africa’s transformation. I’m not a diplomat but having spent some time in China, I’d like to accept President Mills’ challenge and share my views on what useful lessons we can draw from China’s growth and on the logics and implications of its consequent expansion into Ghana (and Africa as a whole). I’ll do this in a series of articles on this forum. Since President Mills skipped the UN summit on the MDGs, it is, perhaps, appropriate to start this conversation by asking whether the agreements President Mills signed in China can have a positive impact on the MDGs in Ghana. But I’m certain that there are some who, awaiting milk and honey to flow from the city shining on the hill, don’t even believe that we have anything to learn from China, not least because China is still a poor country. So, let me offer some preliminary thoughts on China’s development story, if only to show that there is some lesson to be learnt from (not so) Communist China.

There is still a lot of poverty to beat in China. True. Any regime that is able to yank over 300m of its people out of extreme poverty within one generation deserves the bragging rights, nevertheless. But with 1.3bn mouths to feed, there will still be many awaiting their share of the benefits of China’s growth. That doesn’t mean China hasn’t achieved a great feat. To illustrate, with $1.337 trillion in GDP, China overtook Japan ($1.288 trillion) as the world’s second biggest economy in the second quarter of 2010. China’s current GDP is 90 times bigger than it was in 1978, when Deng Xiaoping launched China’s market reforms, following Chairman Mao’s fin de siècle death in 1976. But at $3,687(World Bank estimate for 2009), China’s income per capita (nominal) is below that of Angola ($3,734), which is one of the largest recipients of Chinese aid in Africa.

China’s growth has also concentrated in a few areas of its territory, especially in the industrial hubs in the coastal south and some parts of the north (e.g. the capital, Beijing). About 11 Chinese cities, including Shenzhen, Shanghai and Beijing (all three of which President Mills visited) have GDP per capita exceeding $10,000 (nearly $20,000 when calculated in purchasing power parity terms). What this means is that there are wide regional inequalities in China. In fact, China has moved from one of the most equal societies under Chairman Mao to one of the most unequal under his successors. But under Chairman Mao, high equity meant mass poverty. This led to Deng Xiaoping’s famous statement: “Poverty is not socialism. To be rich is glorious”. Deng also argued that it is Ok for some people to get rich first. What Mao’s populist policies (including revolution against the proto capitalists) did was to redistribute poverty. Jeremy Bentham (1748-1832), a British legal philosopher, argued that the duty of government is to make the poor rich, not the rich poor.

The good news for the Chinese people, and for the world economy, is that Chinese leaders are bracing up with confidence to address the challenge of inequality. China’s dual economy characteristic, developed (southern China) and underdeveloped (western China), is, ironically, a great source of future growth. Unlike its East Asian neighbours, whose high growth performance spanned three decades (by any measure an impressive growth record), China can grow for a decade or two more, as it expands westward to the poorer parts of its country. That process is already underway.

Although initially slowed by opposition in the wealthy south (there is opposition in China, you know!), the “Go-West” (west of China) strategy was re-invigorated in the wake of the recent financial crisis and resulting global economic downturn, which hit the exports of the wealthy industrial hubs in the south and brought home the need to expand investment and consumption internally. Much of China’s over $600bn stimulus package, credited for bringing the world out of the recent global economic downturn, was designed for this expansion. Many of the new rail lines being built in China are leading to the west. But the westward expansion of investment goes beyond simply generating growth. It has implications for nation building. China’s hottest spots are also in the western part of the country, including in Xinjiang and Tibet. Expanding opportunities to these parts may help keep the peace and promote national integration. So, there is hope for the remaining poor in China because Chinese leaders, instead of whining about the enormity of the challenge, are busy finding answers to the problems that confront their society.

African Excuses and China’s Example

Here in Africa, Nigerian leaders claim that their small neighbour Ghana is doing relatively better because its leaders do not have to contend with the complexities of managing a large, ethnically diverse population. Nigerians also claim, and perhaps rightly so, that if Ghana had discovered oil as early as did Nigeria (1950s), it too would have suffered the “oil curse”, the most pernicious type of the resource curse problem.

Well, China is almost ten times the size of Nigeria’s population and it too has many ethnic groups and faces the challenge of Islamic fundamentalism. While Africa’s multi-ethnic identity has often been used to explain its lacklustre economic performance, the evidence on the ground is that the most homogenous society in Africa, Somalia, is also Africa’s most failed state. Small states are also wont to suggest China has grown because of its large size. True, China’s demographic weight endows it with enormous economic and geopolitical assets: a large internal market that sucks in large amounts of market-seeking foreign direct investment (FDI) from the advanced industrialised countries, in consequence of which developed states are constrained to deal aggressively with China. But here is the counterfactual: small city states like Singapore have grown in spite of their size and they achieved their turnaround between two to three decades.

Let’s throw in the resource curse variable. This for me is, perhaps, the most interesting aspect of China’s growth and consequent expansion into Africa. What many do not realise is that China has only recently moved from a resource abundant to resource scarce country, as a result of rapid industrialisation and urbanisation, especially since the 1990s. In fact, China found oil just about the same time as Nigeria (1950s), but while oil appears to have been a curse in Nigeria, it has been a boon to China’s industrial take-off. From the early 1970s, just about the same time Nigeria was experiencing its oil boom, China began leveraging its oil wealth to attract aid and investment, especially from Japan. In return for oil, Japan invested heavily in infrastructure and industrial plants in southern China.

What has become known as China’s “Angola Mode” in Africa, the exchange of infrastructure investment for natural resources, was first honed in China itself, and the Chinese have brought it to Africa because they know it works for development: it locks resource rents in investment and prevents diversion and default, which is also important for avoiding a debt crisis, an issue that excites Western donors and the international financial institutions. Not too long ago, someone from a leading global development think tank flew all the way from Washington to Accra to offer the worst policy advice I’ve ever heard: sharing the oil cash. Why? Because it is done in Alaska and it will help “curb state power”. But we can forgive him. He lives in a post-industrial society and offers solutions that are best suited to post-industrial societies. The IMF also proposed that the best way to avoid the resource curse in countries like Ghana, Sierra Leone and Uganda, which have recently found oil, is to deposit the oil revenues in a special fund with the IMF. What’s the rationale in the latter advice: to avoid macro-economic imbalance, reflecting the IMF’s single-minded, almost blind, focus on stabilisation policies irrespective of context.

In a subsequent article, I’ll show that both pieces of advice were used to disastrous effects in the Middle East in the 1970s and 1980s. I’ll also show that although it has shortcomings China’s resource development model in Africa offers a better chance than most solutions currently on offer to break the resource curse.

Thus, from reducing poverty to breaking the resource curse problem to industrialising in the age of neo-liberal globalisation, China, probably better than any other country today, offers us important lessons on development. Even the global development institutions agree. After being confounded by the failure of all the tricks in the Washington Consensus rulebook, global development agencies have also turned to China for lessons to help other countries. For example, in collaboration with the Chinese government, they are sponsoring an International Poverty Reduction Centre in Beijing as a platform for disseminating the lessons of China’s approach to poverty reduction. The World Bank has moved from criticism of China’s development model in Africa to open admiration to request for collaboration with China, especially on China’s planned industrial projects in Africa. Of course, given China’s liquidity power and the growing traction of its development model, the move by the World Bank is very rational: if you can’t beat them, join them.

China’s Liquidity and Development Power

While so much noise has been made about Chinese aid in Africa, the United States is technically-speaking the largest recipient of Chinese loans, which buy bonds to finance America’s large and soaring deficit. Of course, the Americans have said they don’t want Chinese FDI in their industry that much. The reason: they don’t want to share sensitive technology with the Chinese. Who says Western mercantilism is dead! One thing that should have become a key issue in the debate on the offloading of Kosmos’ interest in the Jubilee oilfield is which strategic investor will be more willing to transfer technology and help us build local capacity in oil exploration and development. Of course, there are other issues, including willingness to invest in the country’s development and technical capacity in offshore oil development.

There is no doubt that the Western supermajors have superior capacity in offshore oil drilling. But it is also not in doubt that over the decades their foreign investment strategies have not been pro-local development. From Ghana, look down the armpit of the Gulf of Guinea for evidence: it smells really bad. The strategy of the Western oil companies can be summed up thus: burrow the oil, flare the gas, pay taxes and bribes to local officials, and export the crude, without investing in local development. One riposte to this criticism is that once the oil companies have paid their taxes, it is the responsibility of local government officials to use the revenues to promote development. True. Another argument is that we don’t even need to build local capacity. We can simply sit back and earn enough by taxing the oil companies. Maybe.

But wouldn’t we prefer a model in which the oil companies partner local governments to promote development? After all, there is something called corporate social responsibility. And wouldn’t we prefer a model in which the presence of foreign oil companies equips us with the technical capacity to undertake future oil exploration and development? After all, those global supermajors started from somewhere and learnt their way up. And what is wrong if tomorrow GNPC rubs shoulders with the ExxonMobils and CNOOCs of the global energy industry? We too deserve, and must build, global industry giants, using our natural endowments as a starting point. After more than a century of developing with cocoa, should we not have had a national giant (public or private) rubbing shoulders with Cadbury (British) and Cargill (American)? Are these thoughts mere sentiments of no practical use in modern economics?

Well, no. They can be backed by sound theoretical, practical and geopolitical reasoning. This I shall do in another instalment of this conversation. But for now, I’ll suggest one country that has recently done what we should have done: China. Many of the Chinese companies expanding into Africa (and the Chinese banks that finance them) have emerged from the process of utilising China’s resources for development. These include the state-owned CNOOC, which is likely to enter Ghana’s oil and gas industry, and the privately-owned Bosai Minerals Group, which bought out Rio Tinto Alcan early this year and saved Ghana Bauxite Company from being grounded as Valco was recently. Do the Chinese bring a resource development model that can help promote local development and build local capacity? Well, for now, yes. Almost everywhere the Chinese have gone into African resource sectors, they have formed joint ventures with state-owned resource companies, built infrastructure to support local development, and, more importantly, started to build an integrated resource industry, consisting of upstream, midstream, and downstream activities. The evidence can be found across Africa, but I won’t go far for it. Instead, I’ll point to the composition of the deals President Mills recently signed in China.

The $3bn loan from the China Development Bank will be invested in exploration and development of oil and gas (upstream); in the processing, storage and transportation of oil and gas products (midstream); in the refining of oil, distribution of associated gas (for which a gas pipeline is to be constructed), and the construction of a petrochemical plant (downstream). In another example, Bosai Minerals, backed by the deep vaults of the China Development Bank, seeks to go beyond its acquisition of the Awaso bauxite mine to build a one million-tonne capacity alumina refinery at an estimated cost of $1bn. It also plans to revive Valco to create an internal market for its output. If this deal goes through, Ghana’s dream of building an integrated aluminium industry will have been realised.

Is China doing this because it is simply a benign actor? I don’t think so. As a by-product of its development, it has built large companies in resource development and construction, which have to go out and seek new opportunities in order to remain profitable. Is this good for our development? I think it is, especially if our leaders keep their eye on the ball: the national interest. I also think that Chinese aid and investments are also compatible with some of the eight MDGs, including reducing poverty (Goal 1), increasing access to health (Goals 4 & 5), and improving access to water and sanitation services (Goal 7). I shall explain China’s impact on the MDGs in Ghana in the next instalment (call it part two) of the conversation, using evidence from the deals President Mills recently signed in Beijing, which should be obvious if you go back to paragraphs 2 and 3, and from other Chinese aid and investment projects in the country, including what is so far its flagship aid project, the 400MW Bui Dam project, for which the Chinese are providing $560m in investment loans.

So far, almost everything I’ve said on China’s role in Ghana sounds positive, but there are major concerns, especially in the implications for local industry and jobs. I hope to take up these concerns after I have been able to discuss in detail what it is that the Chinese are doing here. But I can’t end this instalment of the conversation without asking what we would have gained had President Mills made a shorter trip- in distance and, perhaps, ideology- to New York.

The MDGs Summit in New York

If President Mills had gone to New York, he would have met Obama and probably hoped that with Obama around there would be good news, at least for Africa. Don’t we all love Obama and expect so much from him! But as Obama took the stage, he probably looked one direction in the audience and saw his African brothers, looked the other way and saw his Asian cousins, and then whispered to himself: “What can I do? I can’t even get the right wing here to support legislation to create jobs and increase access to healthcare for Americans”. So, although he raised his head and came off in his usual soaring eloquence, there wasn’t much to take away from the speech aside an encouragement for his brothers and cousins to go back home and find other ways of meeting the MDGs. Not a bad advice. Besides, in a summit where all sorts of characters like Qaddafi get the chance to speak for hours on end, it is refreshing still to listen to Obama. But disappointed some developing world leaders asked to be spared the lecturing on human rights, if developed countries would not put their money where their mouths should be: meeting the MDGs. Perhaps, it is time we realised that although summit diplomacy may help build consensus, it is hardly useful for delivering results on the ground. As it turned out, the UN summit was just another talk shop.

Still, if President Mills had attended the UN summit, he would have been the toast of the gathering. Along with China, Brazil and Vietnam, Ghana received special mention at the summit (and in a report prepared earlier for the summit) for making the most progress on beating poverty and improving access to healthcare. But at home President Mills’ opponents, probably including within the NDC (the poverty headcount index has been falling since the 1990s), would have claimed the credit. So, rather than join the whining party or going to claim credit that would be contested at home, President Mills headed for China to write his own legacy. If the Chinese deals don’t fall through, that legacy will be a good one. For one thing, President Mills might go down in history as the leader that developed Ghana’s oil and gas industry, after Rawlings had put in place the initial institutional framework for Kufuor to find the oil.

Kobina Idun-Arkhurst

(Note: For a relatively more comprehensive analysis of China’s new deals for Ghana, please see Business and Financial Times, Friday, Oct. 1, 2010, pp. 16, 18 & 19). Available (scroll down) at: http://www.thebftonline.com/bft_subcat_linkdetails.cfm?prodcatID=6&tblNewsCatID=3&tblNewsID=5737)

Columnist: Idun-Arkhurst, Kobina