chapter 3
Going Global: Foreign Aid in the
Toolkit of a Rising China
On a piece of property owned by the Tanzanian Ministry of Defense, a small
factory sits behind a sliding black gate marked “Tanzansino United Pharmaceuticals
(T) Ltd.” A stadium built by the Chinese towers in the background,
glinting in the sunlight. China’s old and new foreign aid meet here,
in a ﬂat and sandy neighborhood just outside of Dar es Salaam.
I visited Tanzansino with a member of its board of directors, Zhou Yong.
Zhou is an old friend of Beijing University historian Li Baoping, a ﬂuent
Swahili speaker who is in turn good friends with Jamie Monson, chair of the
history department at Minnesota’s Carleton College, and an expert on the
Tan-Zam Railway. Jamie introduced me to Li Baoping, who gave me an
introduction to Zhou Yong. Guanxi (“connections”) like this helped to open
gates like Tanzansino’s in Tanzania.
The factory was built as a Chinese aid project close to the end of the Maoist
period.1
It aimed to produce tropical vaccines and medicines, one of a handful
of enterprises operated directly by the Tanzanian military. While Tanzania
has been at peace for all of the years of its independence, Julius Nyerere
maintained a relatively robust army. At one point, with the tacit support of all
his neighbors, he marched the army across the border with Uganda to oust
the brutal dictator Idi Amin after he had begun to threaten Tanzania.
Nyerere’s army was successful in ridding Uganda of Idi Amin, who went
into exile in Saudi Arabia. The factory, under Tanzanian management, was
less successful. The Chinese were asked to return. In 1997, the embassy
brokered a $3 million joint venture between New Technological Applications
Center of northern China’s Shanxi province and the Tanzanian
Ministry of Defense. The factory limped along more or less until 2006,
when Wang Lichen, the Chinese entrepreneur who started Holley Pharmaceuticals,
saw an opportunity. One of Holley’s specialties is artemisinin,
an effective anti-malarial medicine derived from a Chinese shrub Artemisia
annua, a variety of witch hazel. Holley was growing Artemisia annua in the
purple mountains near Chongqing. Could the shrub also grow in Africa?
Wang Lichen is bullish on Africa: he is also the vice-chairman of the
China–Africa Business Council. His company has distribution outlets in
Tanzania, Kenya, Cameroon, Uganda, and Nigeria. China has targeted
pharmaceuticals like his as a key technology export sector, one marked out
for state support. Indeed, one of the promises made at the lavish November
2006 Forum on China–Africa Cooperation (FOCAC) Summit in Beijing
was a grant of almost $38 million to supply artemisinin to the thirty malarial
treatment centers China promised to construct across Africa.
Holley hired Zhou Yong, who had originally come to Tanzania in 1999 to
run distribution and marketing for a Chinese pharmaceutical company, and
made him the managing director of their Tanzania branch. They bought
out the Shanxi company’s shares, and applied for a Chinese loan to expand
the joint venture. In 2006, Holley invested more than six million dollars in
an Artemisia annua plantation in Tanzania.
Why did Holley set up in Tanzania, I asked Zhou Yong, as we drove out
to see the factory under the blazing January sun. “The cost of importing
medicine from China is high,” Zhou Yong told me. “This creates an
opportunity for us to produce locally. And the Tanzanian government
gives a 15 percent preference for local products for its medical stores.”
I asked him what help he had gotten from the Chinese government.
“They helped a lot in making contacts.” He ticked off a few more points.
“The Chinese government will buy our product to make donations to local
hospitals and clinics. And the government has sent two medical teams, one
in Zanzibar and one on the mainland. It’s a good opportunity for us to
introduce Chinese medicine.”
The stadium towering above the factory shows another side of China’s
aid. In 2000, Tanzanian President Benjamin Mkapa, elected to succeed
72 the dragon’s gift
Julius Nyerere when Nyerere stepped down, promised Tanzanians that he
would build a state-of-the-art 60,000 seat stadium before leaving ofﬁce in
2005. “The President made a commitment that he would like to leave
Tanzanians a good stadium,” Tanzania’s Foreign Affairs Minister Jakaya
Kikwete, who signed the agreement, told the BBC news.
But Mkapa found that it was not so easy to arrange to build the stadium.
Tanzania was a Highly Indebted Poor Country (HIPC). Under the 1996
HIPC program, international donors were prepared to cancel some of
Tanzania’s mountain of debt to the World Bank and the IMF, but only if
the government maintained a strict program of austere spending. To the
Bretton Woods institutions, building a modern stadium in a poor country
with an annual per capita income of $330 seemed a bit like the Romans
building a new coliseum with the barbarians camped outside the city walls.
It may have been a project with genuine local ownership. But was this really
a good idea?
Mkapa pressed ahead. The Tanzanian government issued a tender for a
very ambitious project, with an Olympic-size swimming pool, an athletes’
village, and other amenities. In 2004, a French company, Vinci Construction
Grands Projets, won the tender with a bid of $154 million. Under pressure
from Washington, the Tanzanians reluctantly abandoned this more expensive
option. Its cost “would have sown panic in the Bretton Woods institutions,” a
journalist noted.2
They turned to the Chinese.
The stadium is “a special aid project,” an ofﬁcial at the Chinese embassy
acknowledged. Usually the Chinese government provides all the funding for
projects like stadiums, but in this their grant of $20 million covered only half
of the estimated cost; the Tanzanians would have to raise the rest. Beijing
Construction Engineering Group got the contract. Mkapa (and the ruling
party) got their stadium – a considerably simpler version. The International
Monetary Fund continued to object, pointing out that the stadium’s cost had
not been included in the Public Expenditure Review, Tanzania’s annual
report card to its major donors. But President Mpaka “is very happy,” a
Tanzanian ofﬁcial said at the time, “because all of this is his work, the credit
goes to him and I am conﬁdent that the stadium will be ready before the next
elections.”
The stadium, and the pharmaceutical factory sitting in its shadow,
represented the political side of China’s aid (the joint venture with the
going global: foreign aid in the toolkit 73
Ministry of Defense, the stadium a politically important “prestige project”).
But the factory is now in its third life: ﬁrst as a traditional aid project, second
as one of the joint ventures that rose in the consolidation experiments of
the 1980s, and now part of the wave of Chinese companies going global.
In Africa, there are many misconceptions about China’s “going global”
strategy. Some believe it is all about resources, others that it began as recently
as 2002. Below, we will see how deep are the roots of this strategy, as well as
how it works today.
Chinese leader Deng Xiaoping’s cautious Open Door policies included
“going out” as well as “bringing in.” Chinese ﬁrms made their ﬁrst tentative
steps overseas in 1979. Through the 1980s, as we saw in the previous chapter,
the government encouraged state-owned companies to bid on contracts, and
form joint-ventures abroad. By the early 1990s, provinces like Fujian and
Guangdong were actively promoting the overseas activities of their companies.
Policymakers created additional tools and instruments to promote
trade and investment overseas during the 1990s.3
As China entered the new millennium, its leaders’ economic concerns
continued to center on the United States, Europe, and Japan. Gaining access
to the advanced technologies of these countries was a key reason why China
applied to join the World Trade Organization. Those negotiations took
nearly ﬁfteen years, snagging frequently on details of China’s pledge to
liberalize its markets. During all that time, Beijing steadily prepared for
WTO entry with its hallmark gradual reforms. Finally, in December 2001,
China was admitted to the WTO. That year, China’s tenth ﬁve-year plan
marked the escalation of China’s own globalization, “with Chinese
characteristics.” It formalized the directive for Chinese companies to “go
global”: zou chuqu.
Zou chuqu means, literally, “walk out.” Walking out involved trade –
ﬁnding new markets – as one step. But there was more. Chinese companies at
the high end would be asked to establish brand names with global recognition
(Lenovo in computers, Huawei in telecoms, Haier in home appliances).
They would be encouraged to invest overseas, establish factories, buy property.
Small and medium-sized companies would also be encouraged to go
out, particularly those at the lower end, where moving offshore would aid
China’s domestic restructuring. Characteristically, the Chinese embrace of
74 the dragon’s gift
globalization, and the role aid would play in that embrace, would not look
much like globalization viewed from the West.
Battle in Seattle
The establishment of the World Trade Organization (WTO) in 1995
marked a milestone in the march toward a global market. The WTO
absorbed the GATT, the gradually negotiated set of rules established in
1947 to organize trade among the world’s industrialized, capitalist economies.
This new organization was also tasked with the incorporation of
items on the “new” trade agenda – services, investment, and intellectual
property rights – into the global trade regime. Yet almost as soon as the
WTO began operations, the world’s giddy rush toward globalization stumbled
badly. Financial markets imploded across the developing world, a
warning that would fail to avert the even more severe banking crisis that
roiled the global economy in 2008.
The ﬁrst post-WTO crisis began in Asia. Encouraged, and sometimes
pressured, to remove restrictions on the free movement of capital (“open
their capital accounts”) before their regulatory systems were robust enough
to regulate these ﬂows, a number of Asian countries were ripe for disaster.
It happened ﬁrst in Thailand, where real estate troubles triggered capital
ﬂight, and ultimately a collapse of the Thai currency. Spooked, nearly $150
billion in foreign capital ﬂed the Asia region in the course of a few months in
the second half of 1997.
The economic crisis spread like a virus, with exchange rates tumbling
across Asia. Former World Bank vice-president and Nobel laureate Joseph
Stiglitz later charged that Washington – and the Bretton Woods institutions
more generally – had badly bungled their response to the crisis,
insisting on austerity and tighter monetary policy when the situation
demanded exactly the opposite. The Chinese reacted with great sangfroid.
They had not opened their own capital accounts, and they refused to exploit
the crisis by devaluing their currency to grab market share from the more
troubled countries. Beijing contributed one billion dollars to a temporary
loan fund established by the IMF to assist Thailand. Nevertheless, there
followed similar meltdowns, as Russia was forced to default on its external
debt in 1998 and the Brazilian exchange rate collapsed that same year.
going global: foreign aid in the toolkit 75
Then, in the spring of 1999, as Asia was still smarting from the wounds of
its crisis, protests erupted into riots in Seattle, where the World Trade
Organization was holding its annual ministerial meeting. Anarchists wearing
black face masks smashed the windows of Starbucks and McDonalds.
More thoughtful critics called on WTO members to reject the market
fundamentalism that they said put the rights of corporations and private
investors above those of workers, consumers, ordinary people, and the
environment. These protests were a backlash against the power of a small
group of countries (especially the United States) that had played a large role
in shaping the global ﬁnancial architecture and foreign aid to reﬂect their
priorities and ideologies.
Rallies and marches began to take place outside meetings of the Genevabased
World Economic Forum, and each April at the meetings of the
world’s ﬁnance ministers at the Bretton Woods institutions in Washington
DC. The September 2001 terrorist attacks in Manhattan that toppled the
World Trade Center pushed the backlash against globalization off the front
page. Yet the Bush administration’s subsequent “war on terror” failed to
recognize that the fallen twin towers were also symbolic of the fragility of
the global ﬁnancial architecture, something that became painfully apparent
to the world with the ﬁnancial turmoil that began in 2008.
In Africa, structural adjustment policies with their focus on growth,
and demands for liberalization and privatization, continued to frame aid
during the 1990s, even as aid ofﬁcials and recipients alike grew increasingly
weary of the failure of adjustment to foster economic recovery. Critics
described the process as an elaborate charade: aid recipients pretending
they would reform, and donors pretending to believe them. (China’s promise
to give aid “without conditions” showed how little the Chinese thought of
all this.)
Even as structural adjustment continued to shape aid from the West, a
renewed focus on poverty, governance, and concern about the cumulative
debt and ﬁnancial crisis that had plagued the developing countries since the
1980s gradually gained momentum. A coalition of NGOs called Jubilee 2000
built support for an agreement to cancel debt owed by the Highly Indebted
Poor Countries (HIPCs). And in September 2000, almost 150 world leaders
at the UN’s Millennium Summit signed off on a symbolic commitment to
eight Millennium Development Goals (MDGs) at the United Nations.
76 the dragon’s gift
Pushed by Jeffrey Sachs, director of the Earth Institute at Columbia
University, the MDGs marked a resurgence of optimism about aid.
In many ways, the eight goals were a triumph for NGOs and other critics
of structural adjustment. The MDGs focused attention on social development:
ending poverty and hunger, combating malaria, achieving gender
equality and universal primary education. In Africa, donors increased their
funding for social sector programs to 60 percent of the total.4
But there was
a cost. Funding for agriculture, which in the late 1980s received more than a
quarter of total aid to Africa, fell to only 4 percent. Aid for manufacturing
and infrastructure dropped to historic lows. The traditional donors left a
vacuum, and who was there, ready to step in? The Chinese.
Deeper into Africa
China’s rise as a donor and development model happened as many in Africa
and elsewhere were growing weary with the old models of aid and global
engagement. Chinese President Jiang Zemin attended the UN Millennial
Summit in New York, but no doubt as he stood there with the other world
leaders, he was thinking about another meeting that would take place in
Beijing a month later: the launch of the new Forum on China–Africa
Cooperation (FOCAC), in October 2000. Forty-four African countries sent
their foreign ministers and those responsible for economic affairs to Beijing.
Much like the FOCAC Summit held in Beijing in 2006, the ﬁrst FOCAC
meeting contained pledges that China would establish an array of new
programs – debt relief, training programs, an investment fund – to move
its economic cooperation with Africa forward.
In 2000, China was starting to harvest the fruits of nearly two decades of
reform in its aid and economic relations with Africa. Buildings ﬁnanced by
China’s aid or built by Chinese contractors had reshaped the skylines of
dozens of African cities. In Ethiopia, Rwanda, and elsewhere, Chinese
contractors who had originally arrived to carry out Chinese aid projects
were now winning half or more of the construction contracts funded by
other donors. Dar es Salaam alone had eight resident Chinese engineering
companies, which had won more than 170 small and large contracts between
1990 and 1997.5
A total of 42,393 Chinese engineers and skilled laborers
were working in Africa in 2000.6
China’s Ministry of Commerce7
approved
going global: foreign aid in the toolkit 77
ﬁfty-seven Chinese investments in Africa that year, bringing the total
number to just under 500. Two-way trade between China and Africa
surpassed ten billion dollars. All this happened without much comment
from the West.
As should be clear by now, Beijing’s engagement with Africa involved a
well-thought-out and long-term strategy, not the hasty, desperate scramble
familiar from media headlines. This strategy addressed three central political
and economic challenges. First, rapid growth was already outpacing
China’s ample natural resource base. In 1993, China became a net importer
of oil. Logging had increased, and China was losing 500,000 hectares of
forest every year, putting pressure on the watersheds. Africa’s vast natural
resources were a growing attraction. Second was a political challenge.
Beijing needed to calm concerns that its rapid rise would preempt other
developing countries’ development prospects. It needed to establish China’s
reputation as a rising but “responsible” power.8
And, as always, front and
center among Chinese political concerns in Africa was Taiwan and its
continuing campaign for diplomatic recognition. China’s embrace of globalization
created the third challenge. China would need to expand into new
markets, manage the upgrading of its increasingly “mature” domestic
industries, and build up its ﬂedgling multinational corporations, those like
Holley Pharmaceutical.
Beijing proceeded in three steps. First, a major aid reform in 1995 created
new instruments to link aid, trade, and investment together. Second, after
2000, Chinese leaders took on a much higher proﬁle stance as promoters
of “common prosperity,” creating regional organizations to support a series
of programs that combined aid and economic cooperation. Third, parallel to
joining the World Trade Organization, Beijing reﬁned its portfolio of
tools to aid its domestic restructuring by pushing its mature “sunset”
industries offshore. A quiet decision to establish up to ﬁfty special economic
cooperation zones in other countries would become the most visible signal of
this step.
Value for Money
China’s 1995 aid reform, the Indian Ocean Newsletter commented, “marks
the determination of the Beijing authorities to put an end to the era of
78 the dragon’s gift
pouring funds down drains and subsidizing ﬂamboyant sports stadiums and
presidential palaces. Now, the People’s Republic of China wants value for its
money.”9
In the 1990s, Beijing implemented a series of reforms that would
shape China’s aid program well into the new millennium. The reforms were
sparked by lessons gleaned from the experiments of the 1980s, collected and
discussed at a 1991 national conference on foreign aid. But they were also a
product of public management reforms in China that went well beyond aid.
They emphasized competition, efﬁciency, and “market-oriented” principles
in the use of public money, including foreign aid.
Two organizational changes in the 1990s were especially key for the aid
program. First, the trading companies and economic cooperation corporations
owned by Chinese ministries were further separated from their
parent ministries and pushed to operate as independent companies, responsible
for their own proﬁts and losses. These companies had been given
limited independence to seek new business in the 1980s. But over the
1990s, their budgets would be progressively “hardened” and they could no
longer count on regular transfers of budget support. Eventually, in the early
2000s, some of the large, state-owned enterprises would be closed down or
merged, and almost all small and medium-sized ﬁrms would be privatized.
As we sat in his air-conditioned ofﬁce in an otherwise eerily deserted
building in Freetown, George Guo, managing director of the Magbass sugar
complex, told me how these reforms affected his company, China Complete
Plant Import and Export Corporation (Complant), previously owned by the
Ministry of Commerce. “In 1993, Complant became an independent
company,” Guo said, “so we had to ﬁnd commercial opportunities. We
found that sugar was a good business, especially if it was a former aid
project.” Complant started by leasing one of China’s former aid projects in
Togo. “When we had success in Togo, we went to Madagascar. We changed
from ‘management cooperation,’ where the local government is responsible,
but the Chinese are asked to give continual help, to doing it on a purely
commercial basis,” he said.
In 1994, a second organizational change created three “policy banks”
(China Development Bank, China Export Import Bank, and China Agricultural
Development Bank). While other state-owned banks were asked to
operate more on commercial principles, the three policy banks remained
tools of the government, allowing Beijing to allocate preferential or targeted
going global: foreign aid in the toolkit 79
ﬁnance through a hybrid of planning and market means. China Eximbank
and China Development Bank began to operate overseas.
The importance of policy banks like the Eximbank and China Development
Bank in China’s development model and its international economic
relations cannot be emphasized too strongly. China, as I noted earlier, is in
many ways a typical East Asian developmental state. It acts to accelerate
development through the deliberate use of state policies. The central characteristic
of a developmental state is its control over ﬁnance. This control
need not be exclusive – but it must be important at the margin in order to
inﬂuence the behavior of ﬁrms in directions determined by political leaders.
In this regard, Beijing is following directly in the footsteps of the earlier
Asian successes, Japan, Korea, and Taiwan, who all used development
ﬁnance to “pick winners” in the globalization race.
In China, aid would become part of that process. The Chinese had
learned a lot from being a recipient of aid, particularly aid from Japan.
During the early 1990s, those lessons fed into the active debates on aid
reform. In a rare glimpse into the thinking of China’s leaders, we have a
1993 statement from Wu Yi, China’s Minister of Foreign Economic Relations
and Trade. China was reforming its aid program, “using as our
reference the internationally practiced and effective ways of providing
aid.”10
The centerpiece of the reforms was the launch in 1995 of an entirely new
system of concessional aid loans, offered through China’s Eximbank. We
will look at this more closely in the next chapter. But let me emphasize here
that this 1995 reform marked the most dramatic formal change in China’s
aid program since its inception. In effect, China launched a new aid
program.
Also in 1995, a clear mandate came down to the Ministry of Commerce
from China’s State Council: combine aid to Africa, mutual cooperation, and
trade together.11
The strategy was called the “Great (or ‘Mega’) Economic
and Trade Strategy.” The point was simple. Aid would be used to foster
three kinds of initiatives, all growing out of the experiments of the 1980s and
early 1990s.
Joint-venture investments in manufacturing and agriculture were ﬁrst
on the list. For example, Mauritius received a concessional line of credit of
about six million dollars to support productive joint-venture projects.12
80 the dragon’s gift
Assembly factories were a second target. Set up by Chinese companies in
Africa, they would create demand for exports of Chinese machinery and
parts, as well as fabric and other inputs. As the government put it in 1995:
“Chinese trade corporations and manufacturing enterprises should be
encouraged to invest in African countries with better investment climate
to promote the export of our medium and small equipment, processing
machinery, relevant technology, and labor service.”13
Vehicle assembly
factories were set up with concessional loans in Coˆte d’Ivoire, Cameroon,
and elsewhere. Finally, the government emphasized exploration and investment
in mineral and forest resources. In 1996, long before the war
in Darfur erupted, Sudan became the ﬁrst country to receive Chinese aid
to ﬁnance oil exploration, in a joint venture with China National Oil
Corporation.14
The new aid program was deliberately shaped to assist Chinese ﬁrms to
enter an unfamiliar region with daunting challenges. As Europe, the US,
and especially Japan had long been doing, the Chinese now wanted to
channel their aid money more directly as support for “mutually beneﬁcial”
business. But for countries in Africa long accustomed to the ﬂexible, zerointerest
terms of China’s traditional aid, the announcement that China
would now be offering more aid, albeit at a considerably higher cost,
through its new Eximbank was at best a mixed blessing.
Entering Europe’s Backyard
As the vacuum in Africa grew larger, with European and other wealthy
countries de-investing and shifting aid funding out of infrastructure, industry,
and agriculture, Chinese leaders saw vast opportunities for a new
approach that would meet their own political and economic needs, as well
as Africa’s. Year after year, the Department of Foreign Aid reported that
they were “pushing and supporting” (1992) or that they had “actively
propelled” (1998) Chinese companies to do business overseas.15
There
were just two problems. More independent now, China’s companies did
not seem terribly interested in seeking business in Africa. They still saw
Africa as Europe’s backyard. Just as importantly, China’s traditional partners
in Africa were alarmed at the change in aid policy and unsure what it
would mean for them.
going global: foreign aid in the toolkit 81
The Chinese government had a lot of ideas for what Chinese companies
should do: they should actually come to Africa and do intensive studies of
local markets; the Ministry would help organize delegations. If exporting
machinery, they should set up repair and maintenance shops to guarantee
that customers’ needs would be taken care of. If exporting Chinese medicine,
companies should take care to translate directions in English and in French.
For their part, the Chinese government adopted a multifaceted approach
to promote their new strategy and market it to African leaders. The stateowned
Bank of China was directed to set up a branch ofﬁce in Zambia in
1997, and China Construction Bank opened an ofﬁce in Johannesburg in
October 2000 to make it easier for Chinese companies to enter unfamiliar
territory. Eximbank began offering preferential loans to construction ﬁrms
in 1998 to boost their ability to win contracts overseas in the Middle East,
South Asia, and Africa. This, explained a People’s Daily story, will help them
in a sector “which had long been monopolized by developed countries.”16
Eximbank followed this by opening overseas branches in Coˆte d’Ivoire and
South Africa.
The State Council also directed China’s state-owned companies to launch
a number of trade, investment, and development centers across Africa. Each
center was to be built and operated independently by an experienced
Chinese company with extensive business interests in that country. The
centers offered bonded warehouses for traders, referrals for legal assistance,
travel and banking advice, and help with the complicated matters of customs
clearance. In December 1995, Complant, newly independent from the
Ministry, opened the ﬁrst trade, investment, and development center in
Guinea, China’s ﬁrst aid recipient. At least ten other centers followed.17
This was a potent symbol of the shift in priorities. The centers were
constructed on a standard “build–operate–transfer” model. In Benin, for
example, the Chinese government contributed a grant of RMB 17 million
($2.5 million) out of its aid budget to build the ﬁve-ﬂoor center, while
Zhejiang Tianshi International Economic and Technical Cooperation Company
did the design and construction. In a pattern that would become
standard for the mix of aid and business, the Chinese company ﬁnanced a
share of the cost (about a quarter, in the Benin case) in return for the right to
run the center for ﬁfty years, after which it would be turned over to the host
country.18
82 the dragon’s gift
Additionally, the Ministry directed its municipal and provincial
branches to organize delegations of “outstanding enterprises” to travel to
Africa, exposing them to opportunities on the ground. A delegation from
Yunnan province visited Djibouti in December 1995, and discussed setting
up a tobacco farm, and a public–private partnership with the state-owned
electricity utility. One of the Yunnan companies on this delegation later
won a contract to manage Djibouti’s Sheraton Hotel. These delegations
increased after the millennium. In 2007, for example, Guangdong province
organized a business seminar in Dar es Salaam, attended by 900 Chinese
business people.
The new strategy was capped by a dramatic increase in visits by top
leaders to Africa, where they explained and marketed the new program
of aid and economic cooperation. Three Chinese vice-premiers fanned out
to visit a total of eighteen African countries in 1995. Chinese premier Li
Peng visited Morocco that year, and the following year President Jiang
Zemin traveled to six African countries, the ﬁrst time a Chinese president
had ever visited Africa. Premier Li Peng followed this with a 1997 trip to
six more African countries (Figure 3.1 maps the visits of top Chinese
leaders since 1995). Li Peng emphasized to his worried hosts that “China’s
basic policy of providing aid to Africa has not changed [but] . . . China’s
policy has moved from aid donation to economic cooperation for mutual
beneﬁt.”19
Zhu Rongji and the Tan-Zam Railway Redux
The challenge of explaining China’s aid reforms may have been toughest
with China’s close allies, Tanzania and Zambia. Vice-premier Zhu Rongji,
who had been purged several times in the Maoist era for his “rightist” views,
was in charge of breaking the news about the shift in aid policy and how it
might affect China’s ﬂagship project, the Tanzania–Zambia Railway. Zhu, a
trained engineer who would become China’s premier in 1998, was a complicated
man. Alleged to be a direct descendant of the emperor who founded
China’s Ming Dynasty, he was known as China’s “economic czar.” Zhu
pushed hard on issues such as China’s WTO membership, global engagement,
and domestic restructuring, but he was also intensely practical. Once,
at a state banquet in Australia, he failed to reappear from a visit to the
going global: foreign aid in the toolkit 83
lavatory. Security ofﬁcials found him studying the mechanism inside the
water-saving toilet, which he had disassembled. Given this, his attitude to
the iconic railway is perhaps not so surprising.
The Tan-Zam Railway was a problem, and Zhu Rongji confronted it
during his 1995 visit without a lot of sentiment. He knew the history: after
the iconic railway was handed over in 1976, a group of Chinese experts
remained behind to provide technical training, but the railway was operated
by local staff. Losses mounted, and service deteriorated. In 1983, under the
aid consolidation program, Tanzania and Zambia agreed to invite Chinese
managers back. Two hundred and ﬁfty Chinese were soon stationed across
the different bureaus of the railway, in most of the top management
positions. They raised the efﬁciency of the railway, paid their own expenses
out of the revenues, and began to report operating proﬁts. But China
continued to provide new zero-interest loans for spare parts and rehabilitation,
rescheduling payment when necessary.
Niger
Chad
Benin
Nigeria
Cameroon
Central Af. Republic
Sudan
Ethiopia
Eritrea
Somalia
Diibouti
Congo
DR Congo
Rwanda
Zambia
Zimbabwe
Morambiquw
Swaziland
Madagascar
CHINESE LEADERS
Visits to Africa, 1995–2009
Premier Li Peng
1995, 1997
President Jiang Zemin
1996, 1999, 2000, 2002
President Hu Jintao
2004, 2006, 2007, 2009
Premier Zhu Rongji
2002
Premier Wen Jiabao
2003, 2006
Malawi
Lesotho
South Africa
Namibia
Botswana
Angola
Tanzania
Kenya
Seychelies
Mauritius
Uganda
Gabon
Equatorial Guinea
Sao Tame and Principe
Cote D’lvoire
Togo
Ghane
Mali
Burkina FasoGuinea
Liberia
Sierra Leone
Guinea Bissau
Gambia
Cape Verde
Senegal
Western Sahara
Mauritiria
Morocco
Algeria Libya Egypt
Tunisia
Bufundi
Fig. 3.1. Map of Chinese leaders’ visits to Africa
84 the dragon’s gift
In 1995, under pressure from other donors (some of whom were also
ﬁnancing Tazara), the railway was allowed to run on more commercial
principles. This prompted concerns in Tanzania that socialist China would
cease supporting the railway. But Zhu Rongji complimented the government
on its “boldness” in making reforms.20
Commercializing the railway
should ensure better services, he said, and he promised a new aid loan.
Noting that the railway was currently employing about 2,500 more workers
than was necessary, Zhu commented briskly: “Laying off workers is not a
good thing, but we will have no alternative of making our railway run
efﬁciently other than doing what the reality dictates.”21
Zhu’s practical advice might have come from the local World Bank
representative. The efforts to consolidate aid projects in the 1980s convinced
the Chinese that aid for productive projects would only be sustainable if it
involved Chinese companies more directly. By 1995, the Chinese attitude
was not far from the famous Berg Report that blamed African governments
for the problems plaguing the World Bank’s projects in Africa.22
But the
solution was radically different. Structural adjustment programs were trying
to use conditionality to create an enabling environment for the private sector
in Africa. The Chinese also decided to use part of their aid to support private
sector initiatives, but they did it by fostering cooperation directly between
Chinese companies and those in the recipient countries. “Complant really
started to expand into investment around the time of Zhu Rongji’s visit to
Africa,” as the manager of China’s Magbass sugar complex, George Guo,
told me later. China’s effort to promote exports to Africa, Europe’s backyard,
had another effect: a proliferation of Chinese traders in African markets.
“Koni . . . Koni . . . Koni”
In early 2008, the rains were late in northern Namibia. Between 2004 and
2008, as Swiss anthropologist Gregor Dobler reported, the number of
Chinese shops in the border town of Oshikango quadrupled.23
Rumors
began to spread through villages near the Angolan border that the drought
was God’s punishment: Namibians had allowed the Chinese traders to open
their shops on Sundays. In Dar es Salaam, Chinese traders were increasingly
visible in the busy central market neighborhood of Kariakoo. Their small
crowded shops sold traditional medicine, hair pieces, embroidered fabrics,
going global: foreign aid in the toolkit 85
and other Chinese goods. Some Chinese traders were even competing with
the village women, squatting on the ground selling groundnuts and roast
corn outside the ﬁsh market and the bus terminal, enticing customers with
Swahili shouts of “Kranga . . . kranga . . . kranga! Koni . . . koni . . . koni!”24
In the 1990s, Chinese products and Chinese traders became a rapidly
growing part of the landscape in African cities and rural towns. Many
established larger, more formal shops to import Chinese vehicles, machinery,
electronics, and equipment. Chinese companies were encouraged to sell
and service small power tillers and other kinds of agricultural machinery
ﬁrst introduced through aid programs. In addition, with aid projects at one
time or another in every country in Africa but Swaziland, and teams of
Chinese laborers imported to work on these projects, some stayed behind.
Drawing on guanxi (connections) to set up an import business was a fairly
easy way to ﬁnance the ﬁrst stage of plans that generally went far beyond a
small market stall (or a patch of ground on which to sell groundnuts). This
accelerated after emigration rules were somewhat relaxed in China in 1985.
The pattern we see today of a Chinese presence in African markets is partly
due to the success of government programs to push Chinese export businesses
to expand into Africa, but there is no evidence that the Chinese
government sends workers to Africa under a plan to have them remain
behind as traders. These are individual decisions.
Packaging Soft Power
The process of preparing for WTO entry, the need for natural resources,
and the goal of building and diversifying trade, meant that Beijing continued
to be interested in Africa and other parts of the developing world for
economic reasons. But, as the quiet ongoing diplomatic war with Taipei laid
out in Chapter 1 made clear, China also needed to package itself as a
politically attractive partner. In addition, as a rising power engaging overseas
in foreign investment and resource extraction, Beijing wanted to make the
case that China was not simply a newer version of Japan and the Western
“imperialist powers.” Beijing needed to make its aid and other forms of
what Harvard professor Joseph Nye has called “soft power” much more
visible. It needed to convince other developing countries that China’s rise
would be peaceful, and not zero-sum.25
86 the dragon’s gift
Public framing of the growing ties with Africa as “win-win” took top
priority. In 2000, as we saw above, the Chinese unveiled the Forum on
China–Africa Cooperation. But the FOCAC model was soon echoed in the
China–Caribbean Economic and Trade Cooperation Forum, and a similar
forum linking China and Portuguese-speaking countries, both launched in
2003. The Forum on Cooperation between China and Arab States followed
in 2004, and the China–Paciﬁc Islands Economic Development Forum was
set up in 2006. All of the new forums framed aid within a broad set of
economic cooperation policies, and allowed for regular dialogue and highlevel
meetings. Each included promises of preferential funds for investment,
tariff-free entry to China for many categories of goods, cancellation of debts,
scholarships and training in China for ofﬁcials from the region, and so on.
China’s growing political engagement in Africa was clearly part of a
broader strategy of engagement with the developing world more generally.
In September 2005, Chinese President Hu Jintao reinforced this with a
speech at the United Nations Summit on ﬁnancing the Millennium Development
Goals. China would step up to the plate, he said. Hu Jintao pledged
to train 30,000 people and provide ten billion dollars in concessional ﬁnance
and export credits to developing countries, over the next three years.26
Dragon Heads
“Going global” was partly about supporting sophisticated, high value-added,
brand-name companies with their own intellectual property. It was also
about nurturing “dragon heads” (national champions) to become globally
competitive multinational ﬁrms. As part of the push, Eximbank and the
National Development and Reform Commission (NDRC, China’s state
planning authority) began to provide lower-cost loans to Chinese companies
to help them expand overseas.
The telecommunications ﬁrm Huawei received a $10 billion line of credit
from China Development Bank to support its “going global” activities.27
China National Oil Company landed a soft loan of $1.6 billion (repayable
over ten years) for its investments in Nigeria. Several large construction
ﬁrms like Beijing Construction Engineering Group (which built the US
embassy in Beijing) received attractive lines of credit from China Eximbank.
This helped them win bids to build dozens of overseas projects – casinos in
going global: foreign aid in the toolkit 87
Las Vegas and the Bahamas, as well as the gleaming new stadium just
outside of Dar es Salaam that we saw at the start of this chapter. China State
Construction Engineering Corporation gained a $3 billion, ﬁve-year preferential
line of credit in 2005, something that boosted its ability to win bids on
contracts from Ethiopia to Botswana.
To foster the overseas investment, engineering contracts, and search for
new markets that were all part of “going global,” Beijing promised diplomatic
support, export tax exemptions, help with risk assessments, easier
emigration approvals, and insurance. They set up programs to give enterprises
“with comparative advantages” interest rate rebates for loans taken
out from China’s domestic banks to ﬁnance working capital for overseas
engineering contracts valued at $5 million and above.28
Investment responded to the incentives. Figures 3.2 and 3.3 show the
growth over four short years in Chinese overseas investment in agriculturerelated
activities, mining, and manufacturing. They also show that this
growth is not particularly steady. One reason may be changes in the incentives,
put in place by the Chinese government to ﬁne-tune investment
decisions by ﬁrms. The State Council publishes regular catalogs listing
overseas activities that are eligible (or not) for this support, and countries
where investment would be encouraged (or not). For 2007, unsurprisingly,
Beijing provided support for projects involving petroleum and a host of
minerals, but also encouraged rubber and fuel oil plantations, cotton farms,
0
5
10
15
20
25
30
$billion
2004 2005 2006 2007
Manufacturing
Mining
Agriculture
Fig. 3.2. Chinese outward FDI stocks: Manufacturing, mining, and
agriculture
88 the dragon’s gift
and overseas factories for textiles, paper, farm machinery assembly, and
medicines (like Holley Pharmaceuticals). At the same time, Sudan, Iran, and
Nigeria were removed from the list of countries where Chinese companies
could receive incentives for investment in oil, while Niger, Ecuador, and
several new countries were added.29
This move was widely perceived as
political in nature, given China’s image problems in Sudan. However, others
believed it to be a practical response to an oversupply of Chinese companies
in some countries, and a desire to encourage diversiﬁcation.
About the same time that China’s state ramped up encouragement for its
winning ﬁrms to expand overseas, they also began encouraging the laborintensive,
less competitive “mature” industries (such as textiles and leather
goods) to relocate to other countries. China’s government acted to anticipate
restructuring, not hold it back. They understood that forward momentum
involves “creative destruction,” the label given by the renowned economic
historian Joseph Schumpeter to the forward march of innovation that
brought the automobile, but left the makers of buggy whips high and dry.
They also ﬁgured that markets for buggy whips lasted a bit longer in parts of
the world where buggies (ﬁguratively) were still being used.
Creative Destruction
For months in 2007 and 2008, the Washington Post that landed each day
outside our door brought story after story focused on industrial pressures
0
2
4
6
8
10
$billion
2004 2005 2006 2007
Manufacturing
Mining
Agriculture
Fig. 3.3. Chinese outward FDI ﬂows: Manufacturing, mining, and agriculture
Source: Chinese Ministry of Commerce.
going global: foreign aid in the toolkit 89
inside China, all with the same message: China’s outsourcing appeal diminishing.
Until prices fell in the global recession that began in late 2008, high
fuel costs had tripled the price of transport across the Paciﬁc. In the crowded
areas of the Pearl River delta near Hong Kong, reported The Economist in
January 2007,
ofﬁce rents are soaring, industrial land is in short supply and utility costs
are climbing. Most signiﬁcant of all are rocketing wages. In spite of the
mass migration of workers from China’s vast interior to the coast, pay for
factory workers has been rising at double digit rates for several years.
A labor law that came into effect in January 2008 increased wage costs by
another 10–15 percent. “Everyone should be aware,” a member of Hong
Kong’s legislature commented, “that China has changed.”
China’s very success at creating new ﬁrms had led to problems of
overcapacity. Fierce business competition drove margins razor-thin and
made it hard for new businesses to get their foot in the door. A 2005 survey
commissioned by the World Bank from Peking University economists Yang
Yao and Yin He reported that of Chinese companies with plans to invest in
Africa, more than 90 percent listed “markets” as the most important factor
in their decision.30
This helps explain why, like their US counterparts, most
Chinese investors targeted Egypt, South Africa, and Nigeria, Africa’s three
most populous countries. The ﬁnancial crisis that began in 2008 only
intensiﬁed the pressure to look outward for new markets and lower-cost
production sites.
Chinese leaders have also woken up to the environmental legacies of their
headlong sprint through the early stages of industrialization: the infamous
Beijing pollution and the poisoned rivers that snake through China’s heartland.
The ﬁve-year plan unveiled in 2006 emphasized a more environmentfriendly
growth path. This is also a factor in the growing interest Africa
holds for some Chinese companies. In 2007, South Africa’s deputy President
Phumzile Mlambo-Ngcuka raised eyebrows in her country when she commented,
“China needs to send some of its polluting industries elsewhere
because it is choking on them,” adding quickly that she believed South
Africa had the capacity to manage emissions.31
In 2005, as Figure 3.3 demonstrated, China’s outward investment in
manufacturing exceeded that for mining. As Chinese industrialists start to
put down roots in Africa, their path will in many cases have been smoothed
90 the dragon’s gift
by a Chinese state that is now encouraging the low end of Chinese industry
to move overseas.
Beijing has continually adjusted the mix of incentives and costs to push
forward restructuring. On the one hand, new incentives were put in place.
In July 2006, for example, the Ministries of Finance and Commerce established
a special fund Chinese textile companies could draw on to encourage
more of them to move offshore.32
On the other hand, costs were increased
for those who stayed. For example, China has a system where ﬁrms that
export can get rebates on the taxes they pay domestically. In 2007, this beneﬁt
and others were removed for companies in China exporting high emission
(chemicals, smelting) and labor-intensive products (plastics, textiles).33
While I was in China that summer, China Daily announced yet another
change for the worse in the tax rules for low-tech exporting ﬁrms. “Tens of
thousands of Hong Kong enterprises will have to give up their laborintensive
production, move out of familiar coastal bases,” the newspaper
concluded, “or upgrade their technology and product quality quickly.”34
Two of the tools announced at the November 2006 FOCAC Summit –
the China–Africa Development Fund, and support for the new overseas
economic zones – are part of the restructuring plan. In 2007, the vicegovernor
of China Development Bank, Gao Jian, told Caijing, an independent
Beijing magazine focused on ﬁnance and economics, that the China–Africa
Development Fund was intended to help push Chinese companies to
relocate their more mature factories offshore. “Chinese ﬁrms have faced
overcapacity and upgraded their production methods in recent years, while
Africa has a shortage of supply in consumer goods,” Gao explained. “This
should complement both economies,” he added.35
Before we look at those two tools, let us put China’s engagement in active
restructuring into comparative perspective. The West gives very little assistance
for manufacturing in Africa, the kind of medium-to-large factories that
would create thousands of jobs. Between 2002 and 2007, World Bank loans
for industry and trade combined came to less than 5 percent of all loans
made to sub-Saharan Africa. The traditional donor countries allocated
less than 1 percent of their aid to industry.36
The World Bank’s private equity arm, the International Finance
Corporation, makes equity investments in African companies. But in the
1990s only about 10 percent of IFC investments went into manufacturing,
going global: foreign aid in the toolkit 91
while half ﬁnanced projects in mining and oil. Although a broad swathe of
IFC equity goes into African banks or equity funds, which might lend to
manufacturers in their region, the IFC itself has averaged only around four
manufacturing projects a year in Africa since 2000.37
What about the private sector in Europe and the US? Just like the ofﬁcial
donor community, they have shied away from investing in African factories.
European manufacturers started to wind down their factories when Africa’s
prolonged economic crisis began to bite into their proﬁts. A third of British
companies with manufacturing investments pulled out in the ﬁrst decade of
Africa’s prolonged economic slump, including Leyland Trucks, Unilever
(soaps, foods), Raleigh bicycles, and Boots and Wellcome (pharmaceuticals).
By 1994, a mere sixty-ﬁve British companies still had equity investments
in African manufacturing.38
This pattern is only now slowly starting to
reverse. US companies have been equally reluctant to invest in Africa, aside
from the lucrative petroleum and mining sectors. Only 11 percent of US
investment in Africa went into manufacturing between 1995 and 2007, and
South Africa received nearly half of this.39
The United States government has tried in other ways to foster more
investment in Africa. In 2000, the US launched AGOA, the Africa Growth
and Opportunity Act. AGOA was intended to boost African exports to the
US, but also to help boost US investment in the region. Three years after
AGOA took effect, Stephen Hayes, president of the Corporate Council for
Africa, told Congress: “As a tool for Americans to invest in Africa, AGOA
has been an abysmal failure.”40
Susan Schwab, head of the ofﬁce of the US
Trade Representative, admitted to the annual AGOA Forum audience in
2008 that although investment by US companies was now higher, they were
still heavily concentrated in natural resources.
And, of course, there is no ofﬁcial support in places like the United States
for assisting industrial restructuring by helping “mature” industries relocate
across the border or overseas. The relocation of these sunset industries
follows a pattern known as the “international product life cycle,” the name
Harvard professor Raymond Vernon gave to a familiar trajectory. Over
time, Vernon explained, the production of a product such as textiles, or
radios, or computers will typically shift offshore to lower-cost locations. This
happens in distinct (if stylized) phases. First, a country imports the product
(unless it is something they invented). Second, they begin to produce it
92 the dragon’s gift
themselves for domestic use, using imported components: “knocked down”
kits assembled locally. Third, they increase the “backward linkages” by
producing some of the components locally. Fourth, they start to export
it themselves, and, ﬁnally, facing pressure to restructure due to higher
labor costs and/or pollution problems, they export the production process
itself.
The inexorable workings of the international product cycle are highly
political in wealthy countries. We call it “outsourcing” or “going offshore.”
During the 1992 American presidential election, candidate Ross Perot
famously called it the “giant sucking sound” of jobs being pulled to Mexico
by NAFTA, the proposed North American Free Trade Agreement. Communities
and labor unions lobby hard to stop the product cycle from
working its way through, to protect the mature industries (textiles, shoes,
steel, electronics, automobiles) that are under pressure, to stop jobs from
leaving for Mexico, and now China.
In 1994, the US Congress imposed a regulation (known as “PD 20”) that
prohibits the US Agency for International Development from funding any
activity (such as helping a developing country attract US investment) if it
was “reasonably likely” that it would lead to any jobs being lost in the US.41
This ensures that aid from the US will not be used to help poor countries
attract our sunset industries. China has no such restriction. They ﬁnd aid
and other tools, like the China–Africa Development Fund, useful precisely
for this purpose.
China–Africa Development Fund
In May 2007, the China Development Bank launched the ﬁrst phase of the
China–Africa Development Fund (CADF), an equity fund that is expected
over time to provide $5 billion in ﬁnance for ventures launched by Chinese
ﬁrms. Three months later, in Beijing, I met with Gao Jian, vice-governor of
the CDB and head of the fund, to ask him about his plans. We sat in a plush
reception room, the perimeter lined with overstuffed velvet armchairs, the
walls with delicately brushed Chinese paintings. An aide brought hot tea.
Gao Jian sat beside me in the center of the room facing the door, his arms
resting on either side of the chair. A small entourage of senior aides sat
diagonally across from us.
going global: foreign aid in the toolkit 93
Gao told me that the fund will encourage joint projects between stateowned
or private Chinese ﬁrms, and African (or other nationality) companies.
The fund will invest on commercial principles, he continued. “We’re
not seeking high proﬁts from this fund, but just asking that we don’t incur
losses.” He turned to look directly at me, and nodded slightly to emphasize
the next point. “We regard Africa as entering already a new era. They have
gotten rid of some of the problems: tribal problems, apartheid struggles.
They are concentrating on economic development.”
“This is not aid; it’s a market-based fund,” the fund’s CEO Chi Jianxin
commented later, explaining some of the thinking behind the fund. “The
African market is very new and many companies are not familiar with it so
they need to share the risk with other investors. Most Chinese companies
don’t have much experience in risk management.” He pointed out that the
China–Africa Development Fund would have a longer time horizon than
most equity funds. “We think we will stay in a project for ﬁve to eight years,
but if some need a bit longer we can do that.”42
The fund planned to invest between $5 and $50 million for each project,
in minority shareholdings. “We are interested in partnering with European
countries,” Gao Jian told me. “Many European countries have relationships
with their ex-colonies. They may have developed a plan to invest in infrastructure,
but they haven’t raised the money. We can use these plans. We
would like to join their efforts. We would like to have joint projects.”
China Development Bank moved quickly to get the fund up and running.
By the time the China–Africa Development Fund was launched in June
2007, the bank had already sent twenty teams to Africa to set up temporary
ofﬁces, build relationships (as Gao described it), and scout out investment
projects in agriculture, manufacturing, electricity, transportation, telecommunications,
urban infrastructure, and resource exploration. The ﬁrst few
projects funded included a glass factory in Egypt, a gas-ﬁred power plant in
Ghana (a joint venture with a Ghanaian ﬁrm), and a chromium processing
plant in Zimbabwe.
By my next visit more than a year later, the team running the fund had
moved into posh new quarters in China’s ﬁnancial district. The CADF’s
board had approved funding for twenty projects worth about $2 billion
by the end of 2008 and were evaluating more than one hundred other
proposals.43
At our meeting around a business-like rectangular table, Willie
94 the dragon’s gift
Chao, the new fund manager, told me that his board had decided to allow
the fund to invest in projects proposed by African entrepreneurs without
any Chinese participation.
Although Africa equity funds have been launched by private ﬁrms in
industrialized countries, the China–Africa Development Fund has no real
counterpart in the efforts by governments of industrialized countries to
foster economic development in Africa. During a trip to South Africa in
2008, French President Sarkozy announced that France would launch a 250
million euro ($368 million) investment fund for Africa. However, the
French will purchase shares in other funds and not offer equity directly to
companies. The US supports equity investment by American ﬁrms in Africa
through the Overseas Private Investment Corporation (OPIC). But OPIC
also provides no equity, only loans, political risk insurance, and other kinds
of guarantees.44
The British Commonwealth Development Corporation
probably comes closest. It offers equity investment, but its total assets
amount to $4 billion, and it has been around since the 1940s.
China’s fund was criticized at ﬁrst because participation was restricted to
Chinese companies and their African joint-venture partners. But the Chinese
listened, and decided to open the fund. At a dinner for a visiting
delegation from the China–Africa Development Fund, China’s ambassador
to Liberia, Zhou Yuxiao, told Liberians that the fund’s interest in Liberia
might be a “turning point” in the two countries’ economic relations. At the
moment, ties were based mainly on aid, but foreign investment could be a
shortcut to development. It’s like “borrowing a boat to go to sea” instead of
having to build it yourself. This worked well in China, he added.45
Tariff and Quota-Free Entry
At the Addis Ababa ministerial meeting of FOCAC in 2003, Chinese leader
Wen Jiabao promised to give zero tariff treatment to an unspeciﬁed
number of exports from Africa’s least developed countries. The list of
commodities and degree of local content stipulations (“rules of origin”)
were negotiated during 2004. The full list of 190 products was announced
in each country in early 2005. At the Beijing Summit in November 2006,
the Chinese pledged to increase the list to 440 commodities. This went into
effect in July of 2007.
going global: foreign aid in the toolkit 95
What impact is duty-free entry likely to have on Africa? The West has
two similar programs. Europe’s “Everything But Arms” (EBA) program
generally allows duty-free and quota-free entry into the European Union
for all goods from the least developed countries, except armaments. Entry
for politically contentious crops – bananas, rice, and sugar – was to be phased
in more gradually. The United States’ Africa Growth and Opportunity
Act allowed duty-free entry of most commodities, as long as countries
were certiﬁed as having met a number of economic, political, and rule-oforigin
conditions. Independent analyses of the Everything But Arms and
AGOA programs have reported a range of effects for participating countries,
from generally positive to somewhat disappointing.46
The disappointments
came mainly from the complex rules of origin that often limited
duty-free access to products made from inputs that also came from the region.
Under strict rules of origin, garments exported from Africa would
generally have to be made using African cloth, buttons, zippers, even the
lining for the pockets. Worse, for AGOA, the rules of origin were constantly
changing, as Congress continued to modify the legislation. There
were also problems on the supply side: it takes time to respond to new
incentives, and potential entrepreneurs were not sure how long the incentives
would remain in place.
China’s program was said to cover almost all the exports from the least
developed countries; however, a list of goods was not easy to obtain and
this made it difﬁcult to evaluate the potential development impact. China’s
Minister of Commerce Chen Deming commented that the program
removed import tariffs on “farm products, stone materials, minerals, leather
and hide, textiles, clothing, electric appliances and machinery and
equipment,” from thirty-one of Africa’s least developed countries. He said
that between 2006 and 2008 the program had transferred $680 million in
tariff exemptions to the thirty-one countries.47
This was quite a bit higher
than estimates made by Adam Minson at the South African Institute of
International Affairs, who obtained a list of products. Minson estimated that
the economic value of the preferences was modest, only about $10 million
per year, with the highest returns coming from things like sesame seeds,
cocoa beans, leather and skins, copper, and octopus.48
However, Minson’s
analysis relied on the value of export ﬁgures from previous years, and did
not account for possible increases stimulated by the program.
96 the dragon’s gift
As we saw above, Chinese companies have a set of separate incentives for
agricultural and natural resource investments. Together, these incentives
have stimulated new investment not only in copper (as in the Democratic
Republic of the Congo) but in crops. Chinese entrepreneurs have begun to
plant sesame seeds in Senegal to export duty free to China, for example.
Minson also pointed out that although China was continuing to protect its
cotton farmers by not allowing duty-free entry of raw cotton, cotton products
from the least developed countries were being allowed in duty-free. If this
were better publicized, Minson noted, it could “serve as an incentive to
African producers to process raw materials locally before exporting them.”49
Between 2006 and 2008, according to an analysis by Mark George, an
expert at the Beijing ofﬁce of the British Department for International
Development, the value of exports from Africa to China increased by an
average of 110 percent. Thirty-two countries in Africa showed an increase in
earnings from exports to China, while exports from the remaining twenty
had either decreased, or shown no change.50
We can expect that the global
ﬁnancial crisis will roll back many of these increases, at least temporarily,
reﬂecting the slump in Chinese import demand, and the related fall in prices
of many African commodities.
Overseas Zones: Going Global in Groups
“Why did we develop so fast?” Li Qiangmin, China’s ambassador to
Zambia, said to me when I met him in the Zambian capital of Lusaka
in 2008. “We had four special economic zones. This is a shortcut for development.”
In 2006, China’s Ministry of Commerce announced that overseas
economic zones would become a key platform in the “going global”
program. China would support its companies to establish ﬁfty overseas
economic zones in countries around the world.51
China’s new overseas zones are similar (but not identical) to China’s own
model. In one of Deng Xiaoping’s ﬁrst major experiments, China set up
Shenzhen and three other special economic zones in July 1979. These were
intended to attract foreign investment by countries eager to enter China’s
markets or to move their own mature industries overseas (Hainan Island
was added later as a ﬁfth zone). In 1984, fourteen coastal cities carved out
smaller areas as industrial and technological development zones, similar in
going global: foreign aid in the toolkit 97
concept but often targeting clusters of ﬁrms in different sectors. Over three
decades, Chinese cities set up more than a hundred industrial and technology
zones along the coast and eventually around the country.52
Export processing zones have at least as many critics as they do fans.
Unions dislike them because they often operate with fewer labor restrictions
and lower wages than the rest of the formal economy. They can be enclaves
without any development connection to the rest of the country. Yet in places
such as Ireland, China, Taiwan, Mauritius, and the Dominican Republic,
special export zones are widely deemed responsible for a large chunk of each
economy’s initial industrialization success.
China’s new overseas zones were not only about export processing,
however. They could be for a range of activities, including services. Their
one signal innovation was that they were to be built and operated by Chinese
enterprises as proﬁtable ventures. As the Chinese put it, the overseas zone
model was company-centered and business-based. Companies would propose
locations where they hoped to open a zone (or had already started one),
put their own capital on the line, and compete with other Chinese companies
for Beijing’s support.
Although proposals for these zones would be selected purely on competitive
market principles, the winning proposals would then be eligible for a
range of supportive policies in classic East Asian “developmental state”
fashion.53
Companies could receive help with feasibility studies, land rents,
and infrastructure. The Ministry of Commerce pledged to make up to $25
million in grants and up to $250 million in long-term loans available. Half of
the expenses for Chinese enterprises moving into the zones could be reimbursed,
and companies could get export tax rebates and easier access to
foreign exchange in China’s strict capital control system. In addition, the
cachet of being selected as one of the sponsored zones might make policy
banks such as the China Development Bank or China Eximbank look more
favorably on companies’ applications for ﬁnance or equity participation.
And Chinese embassies would provide diplomatic support in negotiations
with the host government over land, tax incentives, or work permits. The
Ministry of Commerce even put a special team together to help push the
Mauritius zone forward.
Why did Beijing select this unusual method of promoting Chinese
investment overseas? The obvious answer, yet again, is that it ﬁts with
98 the dragon’s gift
China’s own domestic experience – an experience they believed was a useful
model. As in China, these zones would allow other developing countries
to create a “protective bubble,” a place where they could experiment with
new approaches without having to change national-level policies. Moving
production overseas also allowed the Chinese to ease some of their “trade
frictions.” But for China the overseas zones also provided a partial solution
to two pressing domestic dilemmas.
First, more restructuring was clearly underway in China, and these zones
provided an orderly way to transfer mature industries abroad rather than
just letting them “creatively destruct.” The focus of the zones was supposed
to be on mature industries where China had excess production capacity
(textiles, light industries, machinery, appliances, construction materials,
pharmaceuticals, etc.). Each zone was supposed to include no more than
three major industries, and ideally would present a cluster of related
industries. In Pakistan, for example, the Haier-Ruba zone was specializing
in home appliances; the Ethiopia zone would concentrate on textiles, leather
goods, and building materials; and the Zambia zone at Chambishi on a
cluster of metal processing factories, while its extension near the city of
Lusaka would concentrate on electronics assembly.
Second, many of the industries that were unable to compete were small
and medium-sized. MOFCOM promised to support the efforts of the
winning companies to attract small and medium-sized companies into
their zones. For Chinese companies unused to foreign investment, the
zones provided a framework where much of the uncertainty and risk
were mitigated. Fu Ziying, from China’s Ministry of Commerce described
the strategy succinctly in a speech at China’s Financial Forum in 2007: “It is
a way to support the Chinese companies to ‘go global’ in groups.” This
strategy “reduces anxieties” about foreign investment, and it can provide
economies of scale, former Minister of Commerce Bo Xilai noted.54
As with all of China’s major initiatives, there had been earlier experiments.
Fujian Huaqiao Company built an industrial and trade zone in Cuba in 2000.
In 2004, China Middle East Investment and Trade Promotion Center and
Jebel Ali Free Trade Zone joined together to construct an enormous, $300
million trade center that could host 4,000 Chinese companies in the lively
Arabian Gulf port city of Dubai. That same year, Tianjin Port Free Trade
Zone Investment Company and the United States Paciﬁc Development
going global: foreign aid in the toolkit 99
Company began construction of a Chinese trade and industrial park in the
South Carolina city of Greenville. By 2008, a dozen Chinese companies had
set up production, logistics, and trade companies in the Greenville zone.
But the Chinese ﬁrm Haier, the world’s fourth-largest appliance manufacturer,
was a key pioneer. Haier built its ﬁrst industrial complex outside of
China in 1999: a 46-hectare industrial park in Camden, South Carolina, about
115 miles from Greenville where the Tianjin province project would later
be located. Two years later, Haier and a Pakistani company, Panapak Electronics,
constructed a joint industrial park near the Pakistani city of Lahore.
Haier’s experience in Pakistan, knowledge of the local market, and
familiarity with Pakistan’s policy regime put Haier in a good position to
win the ﬁrst of China’s ofﬁcially sponsored overseas cooperation zones. In
November 2006, Chinese President Hu Jintao dug a shovel into the Pakistani
soil to launch construction of the zone, a joint effort by Haier and
Ruba, a private Pakistani company.
Haier’s proposal was one of eight selected in the ﬁrst round of what the
Ministry described as a “fair, just, and transparent” bidding system. The
system worked as follows. First, the Ministry’s branch ofﬁces were asked to
promote the idea and the proposal guidelines among enterprises in their
region, and help them to apply. In the ﬁrst round held in 2006, more than
sixty companies submitted detailed expressions of interest. About half of
these were asked to submit formal proposals, documenting the market
potential, the support offered by the host country, and its investment
environment. The government’s primary emphasis was on the likely profitability
of the project, but the projects also needed to be given the green light
by the Ministry of Foreign Affairs.
Twelve companies were invited to Beijing as ﬁnalists to appear before a
panel of outside experts, and eight were ﬁnally selected. In the second round
in 2007, the government raised the bar a little higher. More than ﬁfty
companies applied, twenty were allowed to submit formal proposals,
and eleven companies had their proposals selected. At the end of 2007,
China’s Ministry of Commerce had signed off on seven ofﬁcial overseas
economic zones in Africa (these are pictured in Figure 9.1, on p. 250).55
“This is good for our own industrial upgrading,” a Chinese analyst asserted.
“We cannot always remain as ‘the world’s workshop’ and stick to low-end
manufacturing.”56
100 the dragon’s gift
The First Two African Winners
China’s ﬁrst two zones in sub-Saharan Africa were announced in Zambia
and Mauritius, and both were sponsored by companies with substantial
investments in each country. In Zambia, China Nonferrous Mining
Group (operator of the copper mine where Zambians and Chinese have
repeatedly clashed over labor and safety issues) began in 2003 to implement
plans to develop a metallurgy industrial cluster on the large concession of
land it held in Chambishi. The Zambian government was at the same time
working out a legal framework for multi-facility economic zones (MFEZ).
“So these two things came together,” explained a Zambian government
ofﬁcial. The Chinese company signed a letter of intent in December 2005.
China Nonferrous Mining Group aimed to develop a cluster of ﬁrms that
would pull some of the industrial chain back to Africa by producing bars,
wires, cables, and so on from raw copper, nickel, and other metals mined in
Zambia and the region nearby. This would be Zambia’s opportunity to
ﬁnally add local value to the raw materials it had been exporting since
British times. “The Chinese want to start manufacturing . . . in Zambia
instead of just importing raw materials,” Commerce and Trade Minister
Felix Mutati told Reuters in 2007.
In Lusaka, I sat with Roy Kapembwa of the Zambian Development
Authority in his new ofﬁce across from a government complex built by
the Chinese. Zambia’s MFEZ regulations, he told me, required a minimum
investment of $500,000 to be able to take advantage of government incentives,
but there was no prohibition on Zambian ﬁrms or other foreign
investors at Chambishi. He showed me the glossy, bilingual promotional
materials produced by the Chinese for the zone.57
The Chambishi zone
promoters hoped to “bring in Zambian strategic investors with good performance
and reputation.” By 2011, they aimed to have forty Chinese
companies and at least ten from other countries (hence the bilingual materials).
And they added a “green” pledge: the operators of the Chambishi zone
would apply to have its environmental management certiﬁed at the International
Standards Organization’s ISO 14000 global standard.
The proposal submitted by Shanxi province’s Tianli Group for an
economic zone in Mauritius was also one of eight selected in the ﬁrst
going global: foreign aid in the toolkit 101
round. In June 2008 I visited Mauritius again. Although the farmers who
had protested the terms of their removal from the land had by then agreed
on a compensation package from the government and been resettled peacefully,
some Mauritians continued to express worries.
“It is a voluntary colonization . . . a danger for our security,” Anil Gayan,
former Minister of Foreign Affairs and opposition member of parliament,
had written in a January 2008 op-ed in a local paper, L’Express. “This is
money from the People’s Republic of China. The Chinese state, Beijing in
fact, will decide the contours and the content of the project. What were their
intentions, their strategic designs, when the Beijing authorities chose
Mauritius?” he wondered, darkly.58
In fact, Beijing probably had little strategic interest in the Mauritius project,
which had been initiated as a business proposal by the Tianli Group. And
the content of the project was decided not in Beijing, but through negotiations
with the Mauritius government. Later, Tianli hired a Shanghai
ﬁrm, Wang Strategy Consultants, to create an overall design for the zone.
I met with an ofﬁcial from Tianli and two Mauritian ofﬁcials at the
government’s Board of Investment in Port Louis. Before we started to
discuss the project, the Mauritian ofﬁcials played a promotional DVD
prepared by the Shanghai ﬁrm. The ideas for the zone had changed
radically over the past two years. They were very different from the
Chambishi zone, and I was astounded at the new design.
Tianli had ﬁrst envisioned an industrial hub producing for export,
perhaps focused on textiles, along with a trade and distribution center for
east and southern Africa to take advantage of the free port in Mauritius. But
as the Tianli ofﬁcial, William Guo, told me, “We had a lot of meetings with
the government here to ﬁnd out what they wanted for the future of the
country. The plan changed away from industry.” The Chinese economic
counselor stressed this point in a meeting I had with her later: “We are not
doing the zone of twenty years ago. It is a must to do this in an environmentally
friendly way. The company has realized this point. They are not
going to be moving the polluting industries to Mauritius.”
The promotional DVD showed a modern, airy city with boulevards of
ﬁlao trees and garden apartments with views of the Indian Ocean. The zone
(to be built using feng-shui design principles) would now be positioned as an
“i-Park,” emphasizing “intelligence, innovation, incubation, interaction.”
102 the dragon’s gift
There would still be some light industry, but Tianli was aiming to build
something more like Dubai. They were now going out on a limb to attract
higher value-added investors, along the lines of the vision Mauritius had for
its service-oriented future.
Tianli hoped Chinese companies active in Africa would locate their
regional headquarters in the zone. There would be a logistics center, two
hotels, an international conference center, a state-of-the-art medical center,
wholesale and retail shopping centers, an informatics tower, and a bilingual
Chinese–English boarding school for the children of executives stationed in
other parts of Africa. New employment, direct and indirect, would almost
certainly expand beyond the several thousand in the original estimate, and
many of them would be Chinese.
Tianli had wanted Mauritians to be able to invest in the zone, but the
Mauritian government decided that the ﬁrst phase at least should be only
foreign investment. “We want these new jobs to be truly additional, from
new companies,” Finance Minister Rama Sithanen told me. “We want to
avoid diverting Mauritian investors into the zone who would be investing
anyways.” In April 2008, Gao Jian visited Mauritius with a delegation from
the China–Africa Development Fund. How did they like the plans, I asked.
William Guo smiled broadly. “They loved it.” The China–Africa Development
Fund had decided to invest.
Jean-Noel Wong, a Mauritian partner at Kemp Chatteris Deloitte, chosen
by Tianli to be its local consultants on the project, gave his overview of the
project: “Mauritius was selected because we can be a platform between
China and Africa. There is also the quality of the infrastructure, the good
communication and telecoms facilities, and economic, political and social
stability. If the project succeeds, as we think it will,” Jean-Noel Wong added,
“it will certainly have a snowball effect.”59
Crossing the Ocean by Feeling the Stones
Bo Xilai, the former Minister of Commerce, described the “going global”
policies as a new phase of Deng Xiaoping’s familiar experimental strategy:
“we are now crossing the ocean by feeling the stones.” China’s overseas
economic zones and the $5 billion China–Africa Development Fund are
attractive to many in Africa because they are a striking alternative to the aid
going global: foreign aid in the toolkit 103
business as usual. They represent China’s twenty-ﬁrst-century efforts to
build on its own domestic experience. And they embed some of the lessons
China learned in its aid and economic cooperation experiments of earlier
decades.
These programs have some parallels in the West, but not on the gigantic
scale envisioned by Beijing. They are particularly interesting in view
of former Mozambican President Chissano’s call for aid to be leveraged
together with resources from the private sector, to promote domestic entrepreneurs
in Africa. And they help explain the comment Roy Kapembwa of
the Zambian Development Agency made to me, leaning across the large
desk in his Lusaka ofﬁce: “We are trying as much as possible to focus on
China because they are ready. Where there are opportunities, they will take
them. We need to move the country up the value chain.”
Above all, these programs reﬂect the lessons of all the experiments since
Mao died, the spirit of China’s 1995 aid reforms, and the continued emphasis
on aid as a lubricant for mutually beneﬁcial cooperation. The $10 billion in
preferential ﬁnance promised at the UN Summit in 2005 would target turnkey
infrastructure projects but it would also be available, Hu said, for
promoting cooperation between Chinese enterprises and those in developing
countries. The Millennium Development Goals and China’s own plan to “go
global” came together in this pledge. It underlined the enormity of the
resources available in China’s coffers, and it was a wake-up call for the
traditional donors. China, they could now see, was a player in the global
system of aid and development ﬁnance. But, as we shall see in the next
chapter, the mysterious new player with the large pot of money was not
necessarily going to be playing by the traditional rules.
104 the dragon’s gift