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Africa: South-South Cooperation

AfricaFocus Bulletin
Jun 24, 2010 (100624)
(Reposted from sources cited below)

Editor's Note

A new study warns that trade and investment flows with the South are reinforcing a longstanding trend in which African countries export farm produce, minerals, ores, and crude oil, and import manufactured goods. It says this situation should be reversed while the South-South trend is still in its early stages. A repeat of the traditional pattern will not help African countries to reduce their traditional dependence on exports of commodities and low-value-added goods.

This AfricaFocus Bulletin contains a press release and excerpts from the study, released on June 18 by the United Nations Conference on Trade and Development (UNCTAD). The study documents increasing trade, investment, and aid flows to Africa not only from China but from other countries in Asia and Latin America. It stresses that the development opportunities presented could be lost unless there is more proactive planning by African countries and international organizations as well as Africa's new partners.

Another AfricaFocus Bulletin sent out today, available at http://www.africafocus.org/docs10/g8-1006.php, on "G8 Goals and Promises," contains several short articles evaluating the failure of G8 countries to meet pledges for stepped-up development aid for African and other developing countries.

For previous AfricaFocus Bulletins on economic issues, visit http://www.africafocus.org/econexp.php


Attention: For AfricaFocus Subscribers who are Authors

In the next month, there will be one or more AfricaFocus Bulletins focusing on recent books. If you are an author, particularly if you have published a book recently, please let me know so that you can be included in the AfricaFocus listings. Check . http://www.africafocus.org/books/subscribers.php, and let me know (at africafocus@igc.org) if your books are not yet included. For the most recent Bulletin with new books by subscribers, see http://www.africafocus.org/docs09/sub0912.php

++++++++++++++++++++++end editor's note+++++++++++++++++++++++

South-South cooperation offers new opportunities for transforming African economies, report says

Growing trade, finance, and investment with other developing countries is opportunity to diversify production, acquire technology, and develop regional markets, study notes

UNCTAD/PRESS/PR/2010/014

18/06/10

http://www.unctad.org / Direct URL: http://tinyurl.com/2axnq2l

Geneva, 18 June 2010 -- Africa should take steps to ensure that its growing economic interactions with large developing countries, including China, India, and Brazil, result in economic diversification rather than simply the sale of African commodities and raw materials -- the traditional pattern of the continent s relations with the industrialized North, an UNCTAD report recommends.

New, increasingly important economic partners in the "South" can help this African transformation along not only through growing trade and financial flows but by supporting regional infrastructure projects and transferring knowledge and technology, notes the Economic Development in Africa Report 2010.

The study warns that so far, trade and investment flows with the South are reinforcing a longstanding trend in which African countries export farm produce, minerals, ores, and crude oil, and import manufactured goods. It says this situation should be reversed while the South-South trend is still in its early stages. A repeat of the traditional pattern will not help African countries to reduce their traditional dependence on exports of commodities and low-value-added goods.

Emerging trends

Subtitled "South-South cooperation: Africa and the new forms of development partnership," the study shows there has been a significant increase in the number and nature of Africa-South cooperation arrangements since 2000. The Forum on China-Africa Cooperation (FOCAC) is the best-known and most elaborate. But there are also new institutions linking Africa with India, Brazil, the Republic of Korea, and Turkey, among others. And there are new intercontinental strategic partnerships (see figure 1).

Trade, investment and official financial flows are the key vectors of these new partnerships, with trade paramount.

  • Africa's total merchandise trade with non-African developing countries increased from US$ 34 billion in 1995 to $97 billion in 2004 and then jumped to $283 billion in 2008.
  • The number of "greenfield" foreign direct investment (FDI) projects by investors from non-African developing countries climbed from 52 in 2004 to 184 in 2008. (A "greenfield" investment is an investment in a manufacturing, office, or other physical company-related venture where no previous facilities exist.)
  • While data availability does not permit a comprehensive and reliable estimate of the scale of official flows to Africa from developing countries, it is estimated that official aid to the region from developing countries was US$ 2.8 billion in 2006. And it has risen substantially since, as China, which is estimated to contribute over 83% of that aid, committed to double its assistance to Africa by 2009.

In 2008, Africa's total trade with developing countries, including African countries, exceeded Africa's total trade with the EU, traditionally its major trading partner, for the first time ever (see figure 2).

With the continuing growth of large developing countries, together with weaker growth prospects in advanced economies, the economic relationships linking Africa to other developing regions can be expected to grow in relative importance.

The report finds that flows of official development assistance (ODA) from developing countries are increasingly channelled into the infrastructure and production sectors of African economies. This has increased the resources available to the region as well as diversifying Africa's financing options. In 2006, traditional donors allocated only 22% of their ODA flows to production sectors and infrastructure.

In terms of scale, China is becoming the most significant bilateral source of support to Africa in the infrastructure and production sectors. Available evidence suggests that Chinese infrastructure finance commitments in sub-Saharan Africa soared from $470 million in 2001 to $4.5 billion in 2007. An estimated 54% of China's support to Africa over the period 2002-2007 went to infrastructure and public works.

However, an important message of the report is that the new trends should not be seen as simply a China-Africa story. The increasing economic relationships between China and Africa are, rather, part of a broader trend towards intensifying Africa-South economic relationships, particularly with large and dynamic emerging economies.

While Africa's total merchandise trade with China increased from $25 billion in 2004 to $93 billion in 2008, Africa's total merchandise trade with India increased over the same period from $9 billion to $31 billion, and its trade with Brazil increased from $8 billion to $23 billion.

What should be done to seize the opportunity?

The EDAR 10 urges African nations to take "Africa-South" trends into account in their planning for long-term economic progress. It says these governments should be assertive when negotiating cooperation with other developing countries, so that domestic concerns are addressed. A pro-active approach by African governments and a sharing of experiences with developing-country partners will accelerate mutual policy learning, which should enhance the effectiveness of interactions for all.

The overall aim, the study says, should be to build Africa s "productive capacities" -- that is, the abilities of the continent's economies to produce a greater variety of goods, and more sophisticated goods.

Developing-country partners can support this process by broadening the scope of engagement beyond extractive sectors and by enhancing technology transfer and learning. The availability of concessional loans from developing-country partners has increased access to finance for several countries in the region and should be welcomed, says the new UNCTAD report. But it recommends that African countries ensure that new borrowing from such partners is used to finance projects that enhance domestic capacities to repay.

Cooperation with the South should also ensure that gains are better distributed across countries, the EDAR says. In 2008, the five largest African exporters to developing countries accounted for 68% of the region's total exports, and the top five African countries accounted for 57% of the region's imports from other developing countries.

African countries should also play a more active role in coordinating and managing support from developing and developed countries to reduce transaction costs and ensure better development outcomes, the EDAR says. It recommends that African countries should set or strengthen existing national aid management and coordination frameworks to enhance local ownership of aid processes and outcomes. The report suggests that the Development Cooperation Forum of the United Nations Economic and Social Council could be used to share national experiences in the effective use of aid.

The report recommends that African countries adopt a developmental approach in seeking foreign direct investment. The focus of African countries should not be on attracting Southern FDI per se, it says, but on creating linkages between FDI and domestic economies and on directing these investments to sectors where they can catalyse domestic investment, create jobs, spur regional economic integration, and boost productive capacity. The use of targeted incentives to encourage foreign investors to source inputs locally is one way to promote linkages between Southern FDI and African economies. The promotion of joint ventures between African and Southern firms also could boost the diffusion of knowledge to local entrepreneurs and contribute to the structural transformation of African economies.

The report notes that despite advances in Africa-South cooperation, traditional donors are, and will remain for a long time, the main providers of aid to the region and also its major trading partners. The report thus recommends that Africa-South cooperation should be seen as a complement to, and not a substitute for, relations with traditional partners in the North.


Making South-South Cooperation Work for Africa:
Main Findings and Policy Recommendations

Main findings

There have been significant changes in the structure of the world economy and in the role of large developing countries. Brazil, China and India are increasingly playing important roles in global trade, finance, investment and governance. These changes have opened up opportunities for further cooperation between Africa and other developing country regions, as evidenced by the plethora of new initiatives aimed at fostering political, economic and social relations with the region. This report has examined the nature as well as features of these partnerships and how African countries could manage them to address their development needs. The main findings of the report are as follows.

  1. There has been a significant increase in the importance of developing countries in Africa's merchandise trade. The region's total merchandise trade with non-African developing countries increased from $34 billion in 1995 to $283 billion in 2008. As a result of these developments, the share of non-African developing countries in Africa's extra-regional trade increased from 19.6 per cent in 1995 to 32.5 per cent in 2008, while their share of the region's total trade rose from 15.4 per cent to 28.7 per cent over the same period. A large part of this increase is due to trade with China, which accounts for about 11 per cent of the region's external trade and is the second largest trade partner after the United States.
  2. Africa's exports to developing countries are concentrated by country of origin and its imports are concentrated by country of destination. In 2008, the five largest African exporters to developing countries accounted for 68 per cent of the region's total exports. Furthermore, five African countries accounted for 57 per cent of the region's imports from other developing countries in 2008.
  3. Africa's exports to other developing country regions are increasingly dominated by primary products while imports are increasingly dominated by manufactures. Over the period 1995-2008, the share of primary commodities in Africa's exports to non-African developing countries increased from 55 to 75 per cent, while the share of low, medium and high technology manufactures fell from 18 to 10 per cent. With regard to imports, the share of low, medium and high technology manufactures in the region's imports from non-African developing countries increased from 47 to 56 per cent, while the share of primary products fell from 32 to 22 per cent over the same period. As a result of these developments, Africa's trade with developing countries is reinforcing commodity dependence and replicating the current pattern of trade with developed countries.
  4. There has been an increase in official flows to Africa from developing countries. Although data constraints do not permit a comprehensive and reliable estimate of the scale of official flows to Africa from developing countries, it is estimated that aid to the region from developing countries, based on the OECD-DAC definition, was about $2.8 billion in 2006. It should be noted however that since 2006 several developing countries have made financial commitments to the region and so it is likely that the figures for 2007 and 2008 are much higher. The support provided by developing countries has increased resources available to the region as well as diversified its financing options.
  5. Developing countries often use official flows to promote trade and investment activities in Africa. For example, China and India use their export-import banks as channels for providing finance and promoting commercial interests in trade and investment. One consequence of the link between official flows and the commercial activities of large Southern partners is that the development impact of their support to the region cannot be assessed adequately without taking into account its catalytic effect on trade and investment flows in recipient countries.
  6. Official flows from developing countries are increasingly channelled to the infrastructure and production sectors of African economies. In terms of scale, China is the most significant source of support to Africa in the infrastructure and production sectors. Available evidence suggests that Chinese infrastructure finance commitments in sub-Saharan Africa rose from $470 million in 2001 to $4.5 billion in 2007. Furthermore, it is estimated that 54 per cent of its support to Africa over the period 2002-2007 was in infrastructure and public works.
  7. Developing countries are increasingly important sources of FDI to Africa. The share of developing countries in total FDI inflows to Africa, based on data for reporting host countries, increased from an average of 17.7 per cent over the period 1995-1999 to 20.8 per cent for the period 2000-2008. In addition, their share of inward FDI stock in the region rose from 6.9 per cent in 1999 to 7.4 per cent in 2008.
  8. FDI to Africa from developing countries is mostly in natural resources, but there are significant investments in infrastructure, finance, agriculture and light manufacturing. FDI to Africa from developing countries are concentrated in the natural resource sector. However, developing country investors are also active in areas such as transport, telecommunications, finance and light manufacturing (clothing and textiles). For example, data on cross-border M&As in African countries concluded by developing country transnational corporations over the period 1991-2008 suggest that about 32 per cent of their investments went into finance, 25 per cent into mining, quarrying and petroleum, and 21 per cent into transport and communications.
  9. There has been an increase in Africa-South international investment agreements. The number of BITs between African countries and developing countries leapt from 133 in 1998 to 335 by the end of 2008. Furthermore, African countries had concluded a total of 467 DTTs as of end 2008, out of which 113 were with developing countries from other regions.

Policy recommendations

The bourgeoning relationships between Africa and Southern partners have increased resources available for development in the region, enhanced its bargaining power in multilateral negotiations and diversified export markets, thereby reducing vulnerability to country-specific external shocks. But there are also potential risks for Africa from the new partnerships. For example, there are concerns that it could reduce environmental quality and weaken governance. Consequently, the net benefit of these partnerships will depend on the extent to which African countries are able to take advantage of the opportunities and minimize potential risks. Against this background, the report makes the following policy recommendations for consideration by African countries, development partners, regional and multilateral institutions.

1. Recommendations for African countries

(a) Mainstream South-South cooperation into national development strategies. Africa's cooperation with developing countries opens new options and these can be opportunities that need to be seized. Cooperation with other developing countries has the potential to enhance Africa's capacity to deal with the challenges of poverty, poor infrastructure, development of productive capacity and emerging threats associated with climate change as well as the food, energy, financial and economic crises. These potential benefits of cooperation are however not automatic. They accrue to countries that have taken adequate and proactive steps to exploit them. In this regard, African countries should adopt a well-defined strategy for South-South cooperation to ensure that it furthers rather than hinders the achievement of national and regional development goals. This means that South-South cooperation should be mainstreamed into national development strategies as well as efforts to promote regional cooperation within Africa.

(b) Take a proactive approach to the partnership process. The main challenge facing African countries is how to harness and use these partnerships more effectively to further their long-term development goals. Addressing this challenge requires that African countries be more proactive in the partnership process and use the leverage they have with developing country partners to persuade them to strike a balance between their strategic interests and Africa's development needs. The scale and scope of interaction between African countries and developing country partners has expanded rapidly in the last 10 years. A proactive approach by African governments and sharing of experiences with developing country partners will accelerate mutual policy learning, which should enhance the effectiveness of interactions for both parties. In addition, effective coordination at the regional level is needed to reconcile national interests and ensure that they do not jeopardize the achievement of the broad development objectives of the region. In this context, the AUC and the regional economic communities have important roles to play in coordinating the region's relations with Southern partners to avoid a race to the bottom. Furthermore, the AUC should be more assertive in negotiations with Southern partners to focus attention on regional priorities and ensure a wider spread of the benefits of these partnerships;

(c) Ensure that cooperation with developing countries complements existing partnerships with developed countries. Developed countries have been and will continue to be important development partners for Africa. Consequently, it is important that the regions' engagement with developing countries complements rather than substitutes for relations with traditional partners. In this context, it is interesting to note that one consequence of Africa's growing partnership with developing countries is that areas neglected by traditional partners are now being addressed. These include protecting the interests of African countries in the international economic, financial and trading systems, and infrastructure development.

(d) Involve more local stakeholders in partnerships with the South. To ensure effective national ownership of the process and outcomes of the evolving partnerships between Africa and developing countries, African governments should make efforts to get parliaments, the private sector and civil society more involved in the process. For example, when negotiating partnership agreements with developing country partners, they should ensure that parliament and other relevant stakeholders are represented. This will increase transparency and accountability and increase the likelihood that resources will be used in pursuit of national development goals and priorities. It will also reduce public scepticism and give more credibility to the partnerships.

(e) Strengthen efforts to develop productive capacities. For African countries to achieve the average 7 per cent growth rate needed to meet the MDGs, they have to produce goods with high income elasticities of demand and that present greater opportunities for export market expansion. This requires public and private investment, structural transformation and the development of productive capacities. The current pattern of trade with developing countries is reinforcing commodity dependence and replicating the existing pattern of trade with traditional partners. African countries should reverse this export pattern and transform the structure of their economies. This requires improving the business environment, addressing the problem of poor infrastructure, enhancing access to credit and transfer of skills and technology by, for example, providing targeted incentives to encourage foreign firms to train local employees. It also requires encouraging developing country partners to redirect part of their official flows to the development of productive capacities in the region.

(f) Enhance capacity to negotiate and benefit from the multilateral trading system. African countries have formed alliances with other developing countries to pursue common interests in multilateral trade negotiations. Overall, these partnerships have served the region well. However, to derive more gains from these partnerships African countries need to enhance their capacity to negotiate as well as take advantage of opportunities created in the multilateral trading system. They should also be more strategic in the formation of alliances to ensure that they protect their national interests.

(g) Play a more active role in coordination of support from partners. It would be desirable if African countries play a more active role in the coordination of support from developing and developed countries to reduce transaction costs and increase the development impact. In this regard, there is a need to develop or strengthen existing national aid management and coordination frameworks to enhance local ownership of aid processes and outcomes. Aid management policies within African countries can offer an effective mechanism to strengthen aid effectiveness and ensure complementarities between official flows from developing and developed country partners. The Development Cooperation Forum also provides a framework within which national experiences could be shared.

(h) Avoid accumulation of unsustainable debt. The availability of concessional loans from developing country partners has increased access to finance for several countries in the region and should be welcomed. However, African countries should ensure that new borrowing from developing country partners is used to finance projects that enhance domestic capacity to repay. There is also the need to pay more attention to the structure as well as management of external debt to avoid a debt crisis.

(i) Adopt a developmental approach in seeking foreign direct investment. FDI is not an end in itself. It is useful to the extent that it enables African countries to achieve their development objectives. African countries should recognize that ultimately the most effective way to attract FDI is to have a dynamic and growing domestic private sector. If they wish to attract market-seeking or efficiency-seeking FDI, instead of resource-seeking FDI, they have to create a growing and efficient domestic market coupled with a policy environment attractive to both domestic and foreign investors. In this regard, the focus of African countries should not be on attracting Southern FDI per se, rather it should be on creating linkages between FDI and the domestic economy and also directing it to sectors where it can catalyse domestic investment, create employment, spur regional integration and boost productive capacity. The use of targeted incentives to encourage foreign investors to source inputs locally is one way to promote linkages between Southern FDI and the domestic economy. The promotion of joint ventures between African and Southern firms could also facilitate the diffusion of knowledge to local entrepreneurs and contribute to structural transformation.

2. Recommendations for developing country partners

(a) Broaden the scope of engagement to include sectors other than the extractive industries. One of the stylized facts about developing countries' engagement in Africa is that their trade and, to a lesser extent, investment activities are heavily concentrated in the natural resource sector. While this is understandable given their growing need for resources, it replicates the pattern of economic relations between Africa and its traditional development partners, characterized by the export of primary commodities by Africa and the import of manufactures from traditional development partners. It would be desirable for official flows of developing country partners to seek to counteract rather than reinforce this pattern. In this regard, developing country partners should use their resource flows to enhance technology transfer and technological learning between African countries and other developing countries.

(b) Strengthen support for regional integration in Africa. Although several developing country partners have established frameworks for cooperation with Africa, their actual engagement is at the country level, with little or no link to regional development priorities. It would be desirable for developing country partners to provide more support for regional projects as an important step towards developing regional markets and laying the foundation for a sustainable and mutually beneficial relationship with the region. One regional project that calls for more support by developing country partners is the development of regional infrastructure, needed to reduce transaction costs, improve export competitiveness, boost South- South trade and enhance growth and development in the region.

(c) Enlarge country coverage. There is the tendency for trade, investment and official flows between Africa and developing country partners to concentrate in resource-rich, politically strategic and large countries in the region. This is making it difficult for small countries to derive significant benefits from the partnerships. It would be desirable for developing country partners to explore ways and means to involve more countries, particularly the LDCs, in their partnerships with the region. For example, developing country partners should consider directing more official flows to LDCs in the region. They could also increase trade with LDCs by offering 100 per cent duty-free and quota-free market access for exports of LDCs. This should be supported by the provision of export credit designed to reduce their cost of borrowing. These actions will facilitate South-South trade and ensure that the gains are more evenly distributed across countries.

(d) Provide more information on development activities in the region. Developing country partners do not provide information on their development assistance in the region, thereby making it difficult to know the exact scale and nature of these activities and their potential impact in the region. This has led to misunderstandings and tension between African governments and other local stakeholders such as parliaments and civil society. Developing country partners should increase transparency in their development cooperation with Africa as an important step towards improving accountability and establishing a sustainable relationship with the region. This would complement actions taken by African countries to improve transparency and accountability by integrating local stakeholders into the partnership process.

(e) Ensure that projects have positive impact on the environment. Developing country partners should pay more attention to the environmental consequences of their activities in Africa. In particular, it would be desirable if they conduct proper environmental impact assessments for proposed activities in the region before they are approved. They should also enact measures to encourage their domestic firms to make environmentally responsible investments in the region.

(f) Address the transactions costs associated with the multiplicity of partnership initiatives. In recent years, there has been an increase in the number of initiatives supporting and promoting cooperation between Africa and developing countries. Each of the large developing country partners has its own process and framework for cooperation with Africa. This multiplicity of initiatives places an undue burden on the already weak human and financial capacity of African countries. It would be desirable for developing country partners to coordinate and consolidate these initiatives to reduce participation costs for Africa for better development results. For example, developing country partners in Asia could agree to use the New Asia-Africa Strategic Partnership as their joint forum for engagement with the region. Similarly, partners in South America could use the Africa-South America initiative for their joint engagement in the region.

3. Recommendations for developed country partners

(a) Provide more support for Africa-South cooperation. Traditional development partners increasingly provide support for Africa-South cooperation by financing triangular cooperation activities. There is a fear that the financial and economic crisis may have a negative impact on funding for these projects from traditional partners. It would be desirable for Africa's traditional partners to resist any pressures that may arise to reduce financing for triangular cooperation projects in response to the global economic slowdown. It would also be desirable if they consider increasing resources available for Aid for Trade and earmarking part of it for strengthening South- South trade.

(b) Strengthen dialogue with Southern partners. The growing role of developing country partners in Africa has increased the number of projects and countries involved in development assistance in the region. It has also increased aid fragmentation and made coordination more difficult. Traditional partners should strengthen dialogue with developing country partners to enhance coordination and sharing of experiences and best practices.

4. Recommendations for regional and multilateral institutions

(a) Coordinate the development of statistics and collection of information on Africa-South cooperation. Lack of reliable information on the development finance activities of developing country partners has made it difficult to get a comprehensive picture of the trends, scale and features of their support to the region. African regional organizations, in collaboration with the United Nations, should develop a database on Africa-South cooperation. This will increase transparency as well as allow an identification of best practices;

(b) Provide more research support. Despite the increasing engagement of developing country partners in Africa, there are relatively very few studies on the development effectiveness of their activities. There is the need for rigorous and systematic country and regional studies of the impact and sustainability of developing countries' activities in the region. This will give African policymakers the information needed to make decisions on cooperation with developing country partners. In this regard, African regional organizations as well as the United Nations and other multilateral institutions should scale up their research activities in this area.

(c) Establish financing facilities for Africa-South cooperation. Regional and multilateral finance institutions should make more resources available for support of South-South cooperation projects. Inadequate resources due to poor access as well as the high cost of borrowing in international financial markets continue to inhibit the growth of Africa-South cooperation. It would be desirable if regional and multilateral finance institutions establish and enhance existing facilities for finance of South-South cooperation. In this regard, the recent establishment of a South-South financing facility by the World Bank to encourage sharing of development knowledge is welcome.


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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