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Feature Article of Tuesday, 17 April 2012

Columnist: Rahman, Majeed Abdul

Political Economy of China’s Foreign Direct Investment in Ghana.

Introduction:

Background of the study:

Ghana opened its economy to the world economic order since 1983, as a result, of the massive economic mismanagement, political instability, balance of payments deficit, and poor terms of trade as well as bad weather conditions that characterized the nation’s economy prior to 1983. The head of state, J J Rawlings was compelled to abandon his revolutionary socialist rhetoric, but turn to the Breton Wood institutions of the World Bank and the IMF in order to move the country’s economy from fiscal and monetary problems that performed inefficiently in the last two decades of 1983.

Ghana’s economy prior to 1983 could be described as an ailing economy with declining output and triple inflation. While the aims of the structural adjustment programs of the two Breton wood institutions were clear, such as to correct market distortions and to ensure that price mechanisms worked efficiently, it also sought to liberalize the country’s economy by removing the import licensing system and boosting price incentives for agricultural productions. This is consistent with the vice president speech in 1993 when he met with 35 American businessmen representing 23 firms at the Osu Castle and reiterated Ghana’s commitment towards privatization. This commitment saw coca cola opening a $10 million manufacturing plant in Accra as well as several others in many areas of the country as Coca-Cola’s diversification policy was taking root. The Ashanti gold fields for example, sold its government 55% share to shareholders and listed its shares in the London stock market in order to generate foreign exchange earnings.

Foreign Direct Investment, (FDI) in Ghana’s economic development process did not become a reality until after the 1990s when Rawlings began his privatization policy of development that moved away from the statist paradigm to a more pragmatic capitalist system that is consistent with the world bank and the IMF recommendations. (ATPC P.3) The delay of the integration of Ghana’s economy into the world economic system was largely because of (1) fear political sovereignty to foreign companies. (2) which is also consistent with the statist development was largely due to protection of indigenous industries, and local manufacturing companies that may unlikely survive foreign competition by foreign firms, and (3) & finally, the problem of environmental degradation and pollution.

The changes to Ghana’s economic development paradigm were based on the argument that in order to improve quality of service, and overall improvement in the economy, the role of the private sector was necessary in bringing about cost effective ways of doing business, and efficiency, thereby minimizing large excessive government subventions.

In view of the policy of trade liberalization and open market, this paper explores the nature and impact of Chinese Foreign Direct Investment in Ghana’s economic development.

The 21st century, has witnessed a number of significant events in China’s Sino -African relations, especially one that moves to deepen relations between China and Africa. Today, as the world’s economy is witnessing a new industrial restructuring, and owing to china’s economic expansion, it has become imperative for China to shift its development phase to finding avenues towards improving strategic opportunities that accommodates its growing expansion. This growing economic opportunity has led china to embark on a scramble spree to acquire investment opportunities, as well as working towards promoting bilateral and mutual partnerships with African states. By the turn of 2010, nearly more than 500 Chinese companies had already registered with the registrar’s department general to undertake different investment projects in mining, mineral extractions, construction and oil and gas explorations.

Although united States continue to remain the largest trading partner in the world, china export import earnings with Ghana continue to rise between 2000 and 2010. For example, total import export in 2003 accounted about 17.5% and by 2011, it accounted for about 51.6%.

According to the Ghana investment promotion center, China, continuous to remain on top of foreign direct investment in Ghana, with a cumulative total of 23 new projects registered in just the first quarter of 2011. Although the Netherlands has indicated high foreign direct investment in Ghana, with $129.7 million in value the combined foreign direct investment in Ghana country between China and the Netherlands in the first half of 2011 stood at $600.3 million while initial total capital transfers were $97.03 million. The estimated value of projects announced by the Ghana investment promotion center stood at 828.44 million cedis at approximately $565.62 million representing about 92% as part of the foreign direct invest component of China-Ghana investment and trade . Analyses of China’s import to Ghana from the year 2000 to 2006 are in order. According to Ghana ministry of trade and industry, Ghana’s external trade from 2000 to 2006 has seen continues increase in exponential growth in both China import and export trade with Ghana.

Conversely, Ghana’s foreign direct investment to China has been very small if not negligible compared to other regions in sub-Saharan Africa. This asymmetric relationship continues to widen as Ghana’s economic relations with China deepens with strong unequal economic and trade relations since 2000.

Tsikata et all, argue that the main export of Ghana to China is mainly in the form of crude materials such as iron ore, aluminum, alloys, waste materials, manganese timber, cocoa beans, cotton linters, scrap and frozen fish. Tsitkata et all again argue that the rate at which the percentage share grows in increments and decrements by year after year is an indication of a double dip scenario that characterizes the percentage share of growth.

The relationship between China and Ghana reached its zenith when China Development Bank, the largest bank in China opened China Africa Desk at Ecobank Ghana ltd in Accra to service China’s infrastructure projects in Ghana, Liberia, sierra Leon and other sub-Saharan African nations, while at the same time easing the necessary bureaucracy for servicing of loans through China’s infrastructure development overseas. The Bank’s executive director argued that Africa has indeed become a strategic market for China as a result of China Ghana relationship; a loan amount of $600 million between the two countries has been appropriated for rural electrification, and another $13 billion, for infrastructure, transport and housing development, the largest loan facility that China ever committed in any African state.

One poised to question why the exodus of Chinese foreign investment at the turn of the 21sth century? The answer is two-fold; first and foremost, the increasing expansion of Chinese economy in the last two decades has meant that if China’s economy need to sustain its growth in the future, then it is likely that china will be confronting certain challenges that are inimical to its manufacturing and industrial growth. A situation similar to the British industrial revolution of 19th century, in which Britain needed raw materials in order to feed its industrial machines. The second is also consistent with Tsikata et all argument that the perception of some areas in Africa by western countries as less attractive and occasional risky has led the Chinese to rather step up their demand for, and to take advantage of local resources necessary for producing light industrial products and at the same time, market for Chinese finished goods. On the basis of the above table, it’s possible to ascribe that the Chinese expansion in trade relations year after year is further facilitated by the Forum for China Africa Cooperation (FOCAC), a Sino-African relations established by Hu jian Tao. Third, is the geopolitical shift from western nations. As African states, and for that matter much of the developing world today were colonized, and have just been given independence from the shackles of colonial rule in the last four decades, and role of Breton woods institutions of the World Bank and IMF for many years and with the conditions attached to their loan packages, china have become not the alternative for loan packages, but also a partner in economic development. In the next section, I review Chinese mutual and bilateral cooperation in the spirit of equality and partnership for development.

The forum for China Africa cooperation (FOCAC) is the benchmark of Africa China relations organized every year in Beijing by the Chinese government and ministerial leaders of African governments. FOCAC was established in 2000 with the initiative of the Chinese government in the spirit of organizing African countries with the common aim of confronting the challenges of economic globalization and at the same time working to promote development. The Chinese presence in Africa is attempt by china to pursue its own interest in fulfilling the desired economic resources required to sustain its development in the future. Consequently, the presence of Chinese companies in Africa have been welcomed by many sub-Saharan African countries as an alternative to the status quo, and have given the Chinese the opportunity to execute mutual interest and economic cooperation. The point here is whether African leaders have the responsibilities and skills to negotiate with the Chinese on matters bordering economic and mutual interest. As seen from the tables above, it prudent to see the amount of trade that African nations imported from china in the last decade. Not only has this increased year after year, but also the aggregate import has swamped domestic products.

Another reason that has also led to this welcome new partnership is the fact that the Chinese has averse not to meddle in national politics and promise to only engage African leaders on matters pertaining to economic cooperation and mutual interest. As oppose to the Exim banks of the World Bank and IMF, key factor that prevailed African countries is the fact that national leaders can run their day to day business without any domestic political interference. Also, the Chinese presence in Ghana and for that matter Africa is the fact that the FOCAC initiative has taken root to increase technical cooperation, and human resource development on the continent. The Chinese government through this initiative has increased scholarships to African students to study in china in many areas such as engineering, computing, manufacturing, telecommunication among others. This has in fact also increased the human development index in many African countries including Ghana, especially in the post 2000 period. On foreign aid to Ghana, Tsitkata et all, argued that aid to Ghana in the last four decades has been in three forms: grants, loans and technical assistance. On Chinese concessional loans to Ghana dates back to as far as 1960 when the first Chinese loan of $12 million was awarded for infrastructural development. Thereafter, many concessional loans have been initiated for instance in 1995 an $18 million was awarded to promote partnerships between Ghana and Chinese companies operating in Ghana. These among others include the three major companies Sian Goldfields, Calf International Cocoa and Ghana Shading Netting Company.

Impact of Chinese Foreign Direct Investment in Ghana

China’s foreign direct invest in Ghana is mainly in the areas of oil explorations and extraction, apparel, food process, retail ventures and transport and communication.

The impact of Chinese investment in Ghana in itself is a double edge saw although there is positive economic and social development that accounts for this relationship, the analyses here show that the prima facie relationship is on unlevel playing field that has a potential of subjugating Ghana’s economy in the long run. Chinese foreign direct investment in the Ghana since 2000, continue to improve relative to the years before, partly because of the Ghanaian open market, and the diversification of its economy in the last three decades, that has taken its peak at the turn of the millennium. Tsikakata et all, points out that the impact of imported manufactured goods is the challenges facing the market economy in Ghana especially with the survival of local manufactured industries. As more and more import continues to flood the Ghanaian market of Chinese finished goods, it threatens local manufacturers to extinction thereby lowering incentive for indigenous production. A notable example is the local textile and manufacturing industry, the Akosombo Textile Company limited which suffered Chinese textile importation in the last decade. The table below shows the exponential increase in Chinese manufactured import from 2000 to 2006. Not only is the declining textile production, but also the agricultural sector has suffered with declining food production. For example, the production of staple food such as the production of rice and barely, tomatoes and fruits has worsened due to these importations.

Also, Chinese foreign direct investment in Ghana is of cheap and poor quality of products. The influx of these cheap Chinese goods in the African markets has been lauded by many who consider the products as inferior, but a substitute for other manufacturers of good quality in the market. Tsikarta et all, argue that the quality of these products such as the electronic and other consumable products are of poor quality compared to other manufacturing companies from the western countries. It is against this background that any evaluation of Chinese manufacturing in the economy cannot overlook the health and safety implications of these products.is essential in the manufacturing process. Arguably, Chinese manufacturing compromise on health and safety standards in the manufacturing process. For instance, in 2005 china imported a host of dolls and toys into the US with high dose of lead when tested by the FDA which discovered that majority of the products were infested with lead, a dangerous substance for consumption. If China can often get away with standards such as this in African countries, and for that matter Ghana, then one wonders the health implication of Chinese products into the economy.

RENT SEEKING AND FDI

According to Mbaku, the concept of rent is a situation where individuals in a country assume office of the state and works to redistribute economic resources that ensure rent seeking or rewarding people, or group of people who come together to influence political power by ensuring that the redistributive process ensures their rent. This process of expending resources, according to Mbaku entails rent seeking. The most common rent seeking behaviors include among others bribery, lobbying, campaign contribution in primarily democratic regimes, and some forms of political violence. (p.197).

The implication of the impact of foreign direct investment is the fact that foreign direct investment in Africa often support perks and rent seeking behaviors by either both the host country or the international partner or both. Rent, according to Tollison is defined as “a return in excess of a resource owner’s opportunity cost.” Wood argues that the problem of rent is particularly profound in the case of the ethnic heterogeneity of the Ivory Coast case, where the appropriation of land in many forest growing areas has degenerated into conflicts between foreign investors growing cocoa and the indigenous people. This problem is significant in Ghana as well where majority of foreign investors including the Chinese in the oil and mineral explorations have appropriated lands for themselves either legally in some cases or conniving illegally with the local authorities unauthorized to give out land concessions for foreign businesses. Wood therefore, posits that a both political and social implication result in competition for land and natural resource for cash crop production becomes rampant in the society.

Rent, according to Weede, lowers production in a society where rent is present, and subsequently works to distorts market prices since people act rationally to promote or seek their self-interest, influence policies that work to favor their self-interest. Therefore, price rigging and market distortions become sources for achieving wealth in the society due to rent seeking. As investors influence activities that favor their own interest, they cartelize the market situation and subsequently, influence government policies regarding protection, tariff, quotas, regulation and deregulation and import and export licensing. (p.295) in the regression analysis, Weede concluded that the problem of rent seeking significantly correlates with economic resources, especially the diversion of resources and efforts from production areas to political conflict of interest that interferes with the efficient allocation of resources. (P.297) this is also consistent with Mbaku assertion on bureaucratic corruption when he argues that in the civil and public sectors management decisions on economic policies are often influenced by interest groups who seek to bribe civil servants on allocation of economic resources.

In fact, Weede points to two main causes of rent such as the movement or shift in the demand and supply that compels others to influence the market prices of commodities for their own interest. In this particular case and with reference to Chinese operations in foreign direct invest in Ghana is the fact that gold and diamonds are going high in the world market, and the demand for gold has increased in the last decades hence, the Chinese investment companies such as the Shadong Netting Company in the mining industry has secured itself concessions necessary for sustaining itself in the mining business. The other cause of rent seeking behavior by Weede is government interference with market forces. This second cause lies within the confines of this paper, as china is engages in infrastructure projects, such as road and high way constructions, the acquisition processes are designe to manipulate the policies and structures by interested parties that works to favor their interest. A typical case is the government contract with STX, a South Korean company contracted to build over 30,000 homes under the government affordable home project.

In the awards of contracts for example, competitive bidding are given to the foreign firms who are willing to give yield to some percentage of the construction work in order to be awarded the contract. This particular behavior lowers incentive that boosts local initiative for infrastructural work. According to the Registrar Generals department, there are over 700 companies duly registered for business in Ghana, but due to tax evasion Anas Aremeya Anas argues that most Chinese companies misrepresent their intention of doing a particular business after securing to themselves corporate license and certificate of commencement of business by doing something else that is outside their mandate of operation especially in the case of the Ghanaian illegal gold mining popularly known as the galamsey operations. The discovery of oil and gas in Ghana has further exacerbated the interest of foreign direct businesses in Ghana, notably Kosmos and Tullow oil industries among others. As companies act similar to human beings especially in the promotion of individual utility, the case of rent has often surfaced in the stakeholders conference organized by the Ghana national petroleum company in order to writ the oil and gas of rent seeking as seen in Nigerian delta state and the Angolan crisis. Despite the inherent inconsistencies that arise as a result of foreign direct investment in Ghana, especially with the negative perception of foreign direct investment in the economic development process, the United Nation Economic Commission for Africa’s report argues that the development of FDI in economic development promotes employment generation that ensures economic growth. For instance, with the souring of unemployment population in the 1990s couple with inflation and price distortions in the economy, it is argued that economic growth correlates positively with employment that foreign investors will generate to boost economic growth .(p.5) Another positive development argued and consistent with wood’s assertion of FDI is that FDI boost domestic savings of the country. Until recently, the domestic saving regarding Ghana’s GDP in the 1970s and 1980s was abysmal partly due to the lack of savings and accumulation of capital in the economy. This process of capital accumulation can be easily generated through foreign investors who are willing to do business in Ghana. Not only will savings be generated, but also the manpower resources needed to propel economic growth through transfer of technologies is likely to create interventions that are likely to promote economic growth in the country. As many FDI pushes for business they also bring with them technologies and skills that enhances local skills production and thereby bringing more efficiency in the production process. The 1970s and 1980s economies suffered an exogenous growth of technology in their capital generation and accumulation process that culminated in negative growth in sub-Saharan Africa which spilled over from the 1960s through to the 1980s thereby recording dismal economic performance. (p.5)

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