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Saturday, 20 December 2008

Chinese Investment in Zambia (Unreported World)

Related blogs :
Chinese Investment in Zambia (A Special BBC Report) (video presentation)
China's Impact in Zambia (An American Perspective)
China's new slave empire...


  1. This is such a sad story. something needs to be done before all our minerals are exploited by the chinese.

  2. the zambians will sit back and watch the chinese take over their country, because the work ethic of these groups are different. zambian priorities are screwed up.

  3. I was impressed by this article on the relationship between the PRC and the Chinese diaspora in Zambia and other Ffrican countries, from in June of '08. Written by an American (I think), it nonetheless makes a good case against the general "Look East" strategy, in that the ultimate destination for most of the raw materials exported eastward are still manufactured goods sold to western consumers. The East is looking to Africa because they haven't the resources to supply the western markets themselves, but they are in effect "middlemen", and while there may be limited argument for their necessity over the short term, the long term goal should be to cut them out of the process entirely and take their share of the profits.

    The argument that it is cheaper to manufacture goods in China falls flat on its face if China cannot import the necessary raw materials. The willingness of their population to accept low compensation and environmental degradation ceases to be a dominant competitive factor. Zambia together with her immediate neighbors has all of the natural resources required by the bulk of manufacturing activity undertaken in China. The Chinese manufacturing boom was largely funded externally, therefore I argue that to encourage "Look East" investment as an alternative to decreased western investment is to miss the boat, the western investment that went to China so quickly can leave just as fast. If they have to move into the Southern Hemisphere and make new partnerships in order to access the materials needed to stay in business, then they will, multinational corps are reliable that way. A regional bloc that takes a strong stand on domestic value addition as a prerequisite for exportation of products derived from finite resources could result in quite rapid transformation of the industrial base.

    Zambians pay more for development, because even scarce items like cement get exported to fuel China's ability to add value to other African raw material exports. I admit they have been decent, if distant, neighbors for a long time, but I cannot say that the bridges and railway that facilitate the movement of Zambian raw exports and manufactured or industrial imports were a truly selfless gift (not with a straight face at any rate). The MFEZs are attracting few investors who are not backed by PRC "economic migration" loans, others still apparently find it cheaper to utilize Chinese infrastructure and labour than to develop competing infrastructure in Southern Africa. The raw materials are the same either way, as long as current export policies that surrender the prospect of value addition continue.

  4. Actually, the other continents also produce in increasing amounts a lot of the commodities which China uses.

    China is good in manufacturing because it has competitive advantage (good infrastructure, skilled low cost workforce, good management, good government, etc). Theoretically Zambia can do the same, but it has to achieve competitive advantage first.

  5. Kafue,

    I quite agree, the Chinese have done brilliantly at positioning themselves to serve the needs of their population. Of course they are under tremendous pressure to do so, and quickly, since many Asian analysts are wont to say, "China needs 7% growth just to prevent riots". I do not begrudge them their success, and as I say, an argument can be made for their necessity to Zambia over the short term. I merely hope to remind those who will craft the details of the national short term response to temper their approach with an eye towards the future.

    I am not advocating against Chinese investment in favour of American or European investment, just pointing out that most of what we send to China winds up on shelves in the West anyhow. It is not the copper going into Chinese rural electrification that concerns me, it is the cell phones and consumer electronics that could be made in Southern Africa instead if only the infrastructure existed. It is therefore possible that in providing them with favourable terms to obtain raw materials, African states are in fact delaying the development of their own manufacturing base. If that development is delayed long enough, there may be no competitive advantage in untapped mineral wealth left to leverage.

  6. Yakima,

    Most of the value added to products whether in manufacturing or agriculture comes after the raw materials are produced. That is why the wheat component in the cost of a loaf of bread is a very small percentage of the total cost:

    So even though the price of commodities has been rising, it is the post production process that is still much more valuable in economic terms. It is far more difficult to achieve competitive advantage than to produce raw materials. Competitive advantage is needed to attract investment. From your other comment in the nationalising mines topic, lack of competitive advantage is the reason why investors are hesitant to invest in Africa:

    " I recall several years ago sitting at a breakfast meeting trying to help a low level broker with one of the major american banks convince his superiors to increase the percentage of their "emerging markets mutual fund" deployed in Africa from 0.75% to 1.25%. They were highly resistant, and while they did increase it eventually, most of that went into offshore oil exploitation on the Atlantic side."

    "China needs 7% growth just to prevent riots"

    That is because they are used to high growth in their economy. I am sure they can get used to lower growth if they have to.

  7. Kafue,

    I am not certain what it is you are trying to tell me. I suspect that this is a product of two different fractal measurements of the same thing. Similar to measuring a curved or irregular object with two sticks of different lengths, both results are accurate within their model, neither is absolute truth. By a wide definition I would say that you are correct about the ability of Chinese people to, "get used to lower growth if they have to." However, a narrower measurement indicates a high probability that part of the process of getting used to it would involve replacing some or all of their leadership.

    I think that we may be encountering similar fractal metric difficulties on the subject of competitive advantage, in that I agree with each of your statements in isolation, but from my perspective they reinforce my original point. That just makes me want to examine your thinking all the more, in case I am chasing my tail on false assumptions. I will try to elaborate on my perspective of the problem. That will hopefully make it easier for you to explain yours.

    I can accept a statement like, "Competitive advantage is needed to attract investment." If I use a somewhat smaller scale to measure the fractal however, I become less satisfied with that answer, and would refine it somewhat to: "Perceived competitive advantage is needed to attract investment." That's because information is not perfectly distributed, and competitive advantage exists between investors and brokers as well as among manufacturers. It was the longstanding perception amongst fund managers, even those in charge of "emerging markets," that Africa lacked exploitable competitive advantage which my friend had enlisted me to help address. (We were arguing in the late 1990's that the global share of competitive advantage within the entire African continent was greater than 0.75% of the emerging market sector alone. It still wasn't easy.) This wasn't a plea for charity kind of meeting, it was entirely about making money.

    I don't want to quibble about semantics in this sentence, "Most of the value added to products whether in manufacturing or agriculture comes after the raw materials are produced." If I were not trying to understand you I would probably just point out that this is the definition of value addition, therefore not most but all added value comes after input production, and leave it at that. However I do want to understand, and I suspect that your intent was to emphasize the relatively small price component of raw material inputs in the eventual end-user retail price. Value-addition is almost always the result of human labour (There are exceptions where the nature of a product allows for improvement during idle storage such as wine, or during shipment such as akavit (sp?) which apparently requires the roll of a ship to achieve full value.), and even farming and mining are value additive processes when viewed in this way.

    There is nothing wrong with being a producer at the front end of a supply chain, in fact it is arguably the most vital link, as breaks later in the chain can often be fixed by creating new linkages (e.g. carriage manufacturers turned to bicycles/auto bodies, kept supply chain for spoked wheels, harness suppliers out of luck). I don't have a problem agreeing that the cost of wheat cannot be greater than the cost of bread. I do however have some difficulty with the assertion that the baker should therefore make a greater profit than the farmer who supplies him/her. This is even more true for a commodity like copper, which is also an element, forged in the heart of a star, and about as basic as you can get. There is only so much value to be derived from digging it out of the ground and removing other substances. Therefore I also agree with this statement, "even though the price of commodities has been rising, it is the post production process that is still much more [profitable with]in [the] terms [of most supply chain arrangements]." But not all supply chains: e.g. Diamond merchants tend to take a higher percentage of the available profits than retail jewelers, oil companies have higher profit margins than petrol stations, etc.

    In the next sentence I think we run into fractal metric problems again, "It is far more difficult to achieve competitive advantage [in manufacturing] than to produce [renewable] raw materials." In this circumstance it is useful to measure raw materials at a small enough scale as to distinguish the comparative advantages in play within different commodity sectors. China doesn't grow a whole lot of wheat, though they are planting 47% more maize this year, and of course massive amounts of rice. It doesn't much matter by a wide metric why one and not the other, because all three are broken down by human digestion into glucose. China makes no effort to develop their own domestic copper mining industry because they can't, they have no deposits. They had to shut down their entire forestry industry because it was killing them on erosion and air quality, literally. They have no significant petroleum reserves. When it comes to the first link in their supply chains, China is woefully short on competitive advantage.

    Most of the attractive infrastructure in the country was built in the last decade or so. It was hardly the cold war era communist engineering that drew multinationals to invest in droves. Rather I assert that it was part of a shared G8/PRC ideology that viewed a middle class consumer base as more desirable to develop in China than anywhere else. It has been an almost constant mantra in political and financial circles in the G8 for ten or fifteen years that, "once China develops a thriving middle class, we will be able to sell our products to them. The trade imbalance is just a natural part of capitalism." That is the G8's problem, it doesn't have to be Zambia's. Selling stuff to American consumers is pretty easy, in my restaurant business pretty much all we do is add perceived value to items that are widely available at lower prices in "raw" form. A growing number know and/or care where the products that they buy come from, but the vast majority still don't.

    When the petrol and diesel prices spiked last year, fuel importing countries like the US and Zambia took a big hit to domestic spending on other items, as well as to balance of trade. China by contrast, also a fuel importing country, experienced improved balance of trade and continued high domestic growth in consumer spending. Now I could pull out the large metric and say, "That's because the US is developed, Zambia is underdeveloped, and China is developing," but that isn't terribly helpful, we already know that, and it is somewhat circular reasoning (i.e. things are the way that they are because they are the way that they are). Since these three countries each contain portions of certain shared supply chains, perhaps a smaller metric can lend some perspective on how, more precisely, things are what they are.

    Applying the dishwasher/chef/server chain that I used as an example elsewhere, it is common for the profits off a plate of food to be unevenly distributed amongst the three. Generally the chef makes the most, the server next most, and the dishwasher the least. This has to do primarily with how hard it is to replace that person with someone equally competent (e.g. good chefs are harder to find than good dishwashers). However, if sales fall off sharply, say 40%, and the server and dishwasher both make less while the chef continues to make the same amount or more, then I'd say there's something wrong with the distribution of benefits.

    In consumer electronics, like cell phones, the chain is more complex just as a meal is more than the plate it is served on, however the metals/manufacture/retail chain is not an unreasonable breakdown of the functions being performed in each country respectively. The standard colonial circumstance we are all familiar with and seek not to repeat is typically one where metals would be extracted from the colony and removed to the colonizer for manufacture and retail. In that arrangement it was fairly clear to most colonies that their best course of action would be to establish their own domestic manufacturing base in order to reap greater profits from overseas retailers in the colonizer and beyond, as well as increase the competitiveness of their own retail sector. Now that the manufacturing is located in some third country, yet still using metals extracted and exported without much value added, how does that change the desired course of action?

    Without the raw material of the southern hemisphere nations, there is no first link in the electronics manufacturing base of either China or the UK. The export statistics would have us believe that most of Zambian raw copper exports go to Switzerland, but that is fairly obviously a "flag of convenience," given the relative absurdity of lifting millions of tonnes of barely processed ore to the top of the Alps. I suppose that it is no more absurd than shipping dirty laundry from San Francisco to Honolulu and back by sailboat, which was economically viable due to labour shortages for a short while during the California Gold Rush. I just can't see the competitive advantage to be gained from doing so with raw copper.

    Clearly Zambia cannot do much unilaterally, no single southern hemisphere country can, but they tried to tell OPEC nations that the demand side of the market set the price for oil too. Within the SADC are all the industrial raw materials that global manufacturing requires (okay might need aluminium from Guinea, but that's the point, they've got it, we don't, if we can't get it from them we can't add value to it), and plenty of workers. The finite nature of certain industrial pre-requisites has to be worked into 20th century economic experience in order to remain effective during the coming decades. There is no way to synthesize copper, but it is relatively easy to recycle it, therefore it is foolish to give it away at anything less than a clear long term profit. In this case I am advising the dishwasher to ask for a better deal from the chef, via a union if need be, and then spend whatever extra they make on chef classes for some of their kids.

    I am asserting that if a regional bloc of southern hemisphere nations (or a bloc based on specific commodity production in common), the larger the better of course, were to establish a firm timetable for the gradual restriction of raw material exports to the northern hemisphere (e.g. 100% of present amounts in 2011, 95% in 2012, 90% in 2013, and so on. I am not convinced that increasing export tariffs would achieve the same result.), then not only would the average prices for internationally traded commodities such as copper go up, but multinational corporations would be more willing to partner with the South to invest in infrastructure and human development in order to better exploit the competitive advantage in raw material sourcing and maintain their global sales volumes. In this sense I join you in supporting the general concept and goals of MFEZs, just not the terms under which they are currently being implemented.

  8. Yakima,

    What is happening in China is that there is a big migration of people from rural to urban areas in search of jobs with higher incomes. Hence the government wants the economy to have a high growth rate to provide these new jobs. If they have to, they can restrict migration to prevent social unrest from those migrants unable to find jobs in the cities due to the financial crisis.

    There are a lot of countries that produce copper, even in the Northern hemisphere and new deposits have been discovered in Afghanistan and Mongolia, China also produces a lot of copper:

    China also produces a lot of oil, just not enough for its growing population:

    Cell phones contain very little copper, about 16 grams worth in each phone, costing probably 7 cents now:

    What I am saying is that you are attaching too much importance to the value of raw materials, and the ability to demand high prices for them especially when so many countries produce them and additional production can be brought online. The focus should instead be achieving competitive advantage such as rule of law, infrastructure development and on policies to attract investment.

    Countries in the Northern hemisphere also produce much commodities and metals other than those mentioned above.

    Regarding competitive advantage, it is difficult for all countries to compete with China because it has most of the factors needed - rule of law, good infrastructure, low cost skilled experienced workforce, mass economies of scale, etc - all necessary in one location.

    For other countries to compete with China, they need to replicate the above.

    As I have said before, creating a successful economy is like assembling a prefabricated house - there are modules needed for the house such as roof, walls, foundation that need to be present and connected to each other. Similarly the modules for competitive advantage such as rule of law, good infrastructure, skilled workforce, etc, that need to be present and combined to achieve a successful economy. The MFEZs are a good start in this respect.

  9. Kafue,

    Excellent. I think that I see your perspective much more clearly now. I think that you are correct to point out the vast importance of other aspects of competitive advantage, most especially rule of law and government accountability in the Zambian case (and frankly most "Southern" nations). I admit to taken as read the need for competitive (if not superior) performance by Southern civil servants and workforces in order to achieve any real attractiveness to investors. My worry is that Africa (and to a lesser extent the undeveloped nations as a whole) will suffer unduly from the sort of unmerited discrimination which has been the historical pattern. My frustration with the fund managers was not that they overweighted Asia at a time when that was the majority "smart bet", but that they placed Africa's potential so very very low that it couldn't really be called an underweight, it looked like a "sell".

    Standard Chartered Bank is currently running television advertisements touting their experience serving clients in, "Asia, the Middle East, and Africa". The voice track is played over computer enhanced animations of molten metal running through underground tubes to eventually burst upwards and instantly form into a giant bridge connecting the teeming skyscrapers of Hong Kong to the mainland, then back down to emerge once more in Dubai where towering structures along a bustling shoreline take shape in an instant, and plunging once more into the earth to emerge as a cell phone tower sitting isolated in the middle of a savanna with giraffes grazing in the background. Nowhere pictured are construction workers or oil, the apparent motive force for everything is molten metal flowing freely. At least this is the image that the bank apparently thinks will draw investment from the US (no idea if this was even that targeted, aired via Bloomberg Intl.).

    While this may be an accurate depiction of the kinds of investment which Standard Chartered Bank has actually participated in, within the various regions depicted, it is not the image of investment in "emerging markets" which is going to create a manufacturing and commercial infrastructure in Zambia with institutional capital rather than someplace else. Part of Africa's problem in general is being relegated to venture capital market almost exclusively, instead of the lower expectations of core institutional investors. (Though multinational franchise operations are making headway in retail and service sectors.) To avoid misunderstanding stemming solely from use of fractal metrics, I would like to clarify some of my previous statements in light of your refinement of terms.

    I make frequent use of example and analogies, I try to distinguish models from advocacy, but I sometimes fail in that regard. To be clear, I in no way think that Zambia can act in this manner on her own. None of the speculative bargaining tactics described can work without coalitions of nations either by geographic region and/or commodity specialization. No investor is going to touch something that doesn't show a clear promise of turning a competitive profit in the global market (no matter what the local government says). Zambia is in a poor bargaining position in almost every single metric for attracting international investment, and all of us need to realize that no solution is going to be simple or easy. Where timetables and/or %'s are used, it is intended as example only, not a tested formula (I am used to haggling, so I habitually tend to start higher or lower than I expect to wind up once negotiations are done ;). China is a good trading/investment partner to Zambia, especially in times when no-one else seems interested (though I want to explore why not). However, ultimately if Zambia is to become a "real player" in economic terms, China and everybody else is a competitor. China is leading, so how do you beat China?

    You are quite correct to point out that China has a potent copper industry (as does the US), just not sufficient to support its own export manufacturing (or consumer demand in the US case). I would add that there is as much copper (pre-refined even) in US landfills as there are proven reserves remaining in Zambia, so pushing the price too high just gets them off their asses to access their own waste stream (which they are bound to do eventually, no matter how low WalMart prices are). I admit that I am influenced by the Silicon Forest nature of the consumers that make up my primary market, and that may take me off the global middle class attitude in my predictions. Around here, the idea of fair trade is becoming big business, from Nike to Intel to Starbucks, incorporating the "fairness" of manufacture is becoming important to bottom lines (as I recall, the "word of the year" just a couple years ago was "truthiness," or the quality of feeling true with or without empirical evidence to the contrary. Given quality of information, this aspect of consumer consciousness is very much about perception more than reality still.) People here replace cell-phones several times per year (often even the ones I counsel that are on public assistance, much to my dismay), the cobalt is probably more expensive to the consumer than the copper in this particular product from a Zambian exports perspective; again, just an example.

    I do like your pre-fab house analogy, it really is quite apt. It is just that having reviewed every single low cost pre-fab housing innovation that I can come across with an eye towards Zambian adaptation for years has taught me that these often look incredibly different from one another. Ever since Operation Murambatsvina I have been looking very hard at unplanned settlements as well. The modules you mention as crucial I agree with completely, but of the bunch the only two that are easy to offer without help over the next 5-10 years are access to raw materials and rule of law/government policy. Infrastructure keeps coming up over and over as the bottleneck, or Catch-22, where to build it requires investment which won't materialize until it has been built. The skilled workforce has a similar dynamic, though your examples of corporate action to create the skills they require in Brazil comes to mind as potential alternative to purely taxpayer funded education.

    I am grateful for and accept the criticism on over-emphasizing raw materials sourcing, I think that I overstated my case. I would however caution against underemphasis on it over the longer term, which is where I anticipate increasing commodity specific effects as a result of shortage (Elemental materials, due to inability to synthesize, are likely to experience these effects sooner, all other things being equal). While raw materials sourcing is currently the only decent card in the Zambian hand, I in no way want to indicate that it is any better than other "trumps", and one should be assured that there are others holding more. I am more or less desperately trying to think of ways that this lonely trump can be played in such a way that the nation at least comes through the current global malaise no further behind the pack than she currently finds herself. Your prudence is both appropriate and appreciated.

    I will close by saying that one does not need to monopolize production of a commodity in order to exercise significant price control. Even at the height of its influence, OPEC directly controlled only about 40% of total crude oil production, I think that this has slipped over time to just above 26%, but I may be out of date. Sometime in '07 I remember looking at worldwide copper output and demand, and it was not hard to put together relatively small numbers of countries to control significant market shares. Chile is of course the gorilla, going with them much easier, against them nearly impossible. Peru, Mexico, Kazakhstan, Indonesia -- any three out of the four would make for a powerful coalition, as long as it included Chile.

    Other countries are unlikely to get energized much over copper, in fact as copper importers themselves they have incentive to oppose measures which might lead to higher prices. It is for this reason that I see utility in expanding the fractal metric to include raw materials of many kinds from multiple sources. I have no difficulty in inclusion of former soviet colonies in central Asia with the rest of the post-colonial world ("South" is as much in the mind as "3rd World"), the bottom billion, whatever. Unfortunately for the Mongolians and Tibetans, they will have to wait for liberation from colonial status before they can be seriously engaged as partners. In the end it is all about leverage.

  10. Thanks for sharing this video. Everything is well-explained there. Great video!!!

  11. I want to appreciate your effort on posting this valuable video from this I came to know Chinese Investment in Zambia.


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