Africa’s Eastern Promise

Last November, in the Egyptian resort town of Sharm el-Sheikh, Chinese Premier Wen Jiabao announced a series of new pledges for Chinese assistance to African countries -- and in the process, made many observers in the West very uneasy. Westerners think they know what Africa needs to do in order to develop: liberalize markets, get prices right, promote democracy. And they think they know what China is doing there: offering huge no-strings-attached aid packages to resource-rich countries that prop up pariah regimes.

But a closer look reveals a somewhat different story. Over the past few decades, China has managed to move hundreds of millions of its people out of poverty by combining state intervention with economic incentives to attract private investment -- the kind of experimentation that the Chinese leader Deng Xiaoping once described as "crossing the river by feeling the stones." Today, China is feeling the stones again but this time in its economic engagement across Africa. Its current experiment in Africa mixes a hard-nosed but clear-eyed self-interest with the lessons of China's own successful development and of decades of its failed aid projects in Africa.

The first prong of Beijing's efforts is to offer African states resource-backed development loans, an initiative inspired by its experience at home. In the late 1970s, eager for modern technology and infrastructure but with almost no foreign exchange, China leveraged its natural resources -- ample supplies of oil, coal, and other minerals -- to attract a market-rate $10 billion loan from Japan. China was to get new infrastructure and technology from Japan and repay it with shipments of oil and coal. In 1980, Japan began to finance six major railway, port, and hydropower projects, the first of many projects that used Japanese firms to help build China's transport corridors, coal mines, and power grids.

Since 2004, China has concluded similar deals in at least seven resource-rich countries in Africa, for a total of nearly $14 billion. Reconstruction in war-battered Angola, for example, has been helped by three oil-backed loans from Beijing, under which Chinese companies have built roads, railways, hospitals, schools, and water systems. Nigeria took out two similar loans to finance projects that use gas to generate electricity. Chinese teams are building one hydropower project in the Republic of the Congo (to be repaid in oil) and another in Ghana (to be repaid in cocoa beans).

So far, most of these loans have been issued by China's export credit agency, the Export-Import Bank of China (China Eximbank). Offered at market rates, they do not qualify as official foreign aid but nonetheless can help development. In poor, resource-rich countries, which are often cursed rather than blessed by their mineral wealth, resource-backed infrastructure loans can act as an "agency of restraint" and ensure that at least some of these countries' natural-resource wealth is spent on development investments.

Of course, China's loans pose some risks for the African recipients, particularly if Chinese firms are awarded infrastructure contracts without competitive bidding or if prices for the resources, the basis of the loan repayments, are fixed in advance. There is always a risk that African governments will not maintain infrastructure investments and that the Chinese projects' environmental and social safeguards will be too lax. Chinese construction companies often bring in Chinese manpower -- on average about 20 percent of the total labor their projects require -- reducing opportunities for Africans. When they do employ locals, Chinese firms often offer low wages and low labor standards.

But there are ways to mitigate these dangers. Under most of the agreements, the earnings from exports of natural resources are deposited directly into escrow accounts and their value is assessed at that moment, not fixed in advanced. This removes the potential for unfair pricing. Moreover, African governments are already driving harder and better-informed bargains. Angola required Chinese companies to subcontract 30 percent of the work to local firms and insisted that the Chinese solicit at least three bids for every project they planned to undertake. The Democratic Republic of the Congo (DRC) will receive a $3 billion copper-backed loan from the Chinese government, which will help finance railways, roads, hospitals, and universities. According to some reports, the Congolese government has stipulated that 10 to 12 percent of all the infrastructure work undertaken under this arrangement must be subcontracted to Congolese firms, that no more than 20 percent of the construction workers involved be Chinese, and that at least one-half of one percent of the costs of each infrastructure project be spent on worker training.