AFRICANGLOBE – Ethiopia is attracting significant Chinese foreign direct investment, but has still been lagging in overall FDI. However, an official from the World Bank says a partnership between the bank and Chinese companies will help remove obstacles that have been preventing Ethiopia from becoming one of Africa’s most attractive destinations for investment.
Guang Z. Chen, country director for Ethiopia at the World Bank, says the bank is a major player in Africa, providing local soft financing and bringing in knowledge-based services and technical assistance. Chen believes the bank’s cooperation with Chinese companies could greatly improve Africa’s development.
“Chinese partners have a relatively small presence in and knowledge of this continent, and their involvement in the past has to a certain degree attracted criticism over labor abuse and pollution,” he says. “But if we can cooperate, the World Bank has the capacity to make Chinese companies better informed and therefore help them maintain international standards.”
He says the bank will leverage more funding to help Africa and China pool critical resources to improve the continent’s development.
“For instance, a survey we conducted in 2012 regarding Chinese FDI in Ethiopia is a very good example of how we can use our experience to give Chinese companies proper guidance, while also suggesting to host governments ways they can attract more investment,” he says.
“Considering China has an export-oriented economy, a developed and prosperous Africa could offer a large market to ensure China’s continued development. A better relationship will be good for both sides and our bank is willing to facilitate that.”
The World Bank surveyed 69 Chinese enterprises doing business in Ethiopia in mid-2012 and released a report in November.
“As the largest trading partner with Ethiopia in 2011, China’s sample was representative,” he says. “Identifying and addressing obstacles could help Ethiopia to take better advantage of foreign investors.”
The survey showed that there are four main drivers of Chinese FDI in Ethiopia: a good understanding of the investment climate gained from entrepreneurs’ social networks, perceived opportunities provided by the current state of the Ethiopian economy, cross-border investment incentives provided by the Ethiopian and Chinese governments and the attractions of stable political environments such as Ethiopia’s.
“But there are also some obstacles that have checked enthusiasm to invest in Ethiopia,” Chen says. “Among the top concerns are trade regulation and customs clearance efficiency, perceived risks due to foreign exchange rates, inconsistent and inefficient taxation, as well as government regulations affecting business efficiency.
He says at this stage, relying solely on the private sector might not be the most effective way to develop a country. This kind of model shouldn’t be judged by ideology because it increased the average GDP from 1 or 2 percent between 1950 and 2002 to nearly 10 percent during the past decade.
“But it’s a process that will evolve into a development model in which the private sector and small and medium-sized corporations will play a bigger role, as the government has limited effects on the economy and the country should walk on ‘two legs’,” Chen says.
He believes this is because, although the country can mobilize resources for state construction at certain times, it has to ensure that economic growth is sustainable.
“Ethiopia must create an environment that fosters its private sector and smaller corporations, and also attracts foreign direct investment,” he says.
“Ethiopia’s endowment is different from many other African countries because it is not based on natural resources and its labor force. Thus, creating jobs is critical for future development.”
Chen says China could play a significant role in this regard as the two countries’ requirements complement each other.
“Labor and land costs in China are getting increasingly expensive, which means profit margins are shrinking swiftly,” he says. “Some manufacturers only make 5 percent profit when producing goods in China. But the costs of labor, land, energy and raw materials in Ethiopia are much lower than in China. For instance, labor costs in Ethiopia are one-sixth to one-eighth of those in southern China’s Guangdong province.”
Labor-intensive industries are one area where the development needs of Ethiopia and China can fit, as it doesn’t make any difference to the Chinese where their goods are made.
“But there are also invisible costs for foreign investors, especially exceptionally high logistics expenses, infrastructure limitations that cannot ensure factories’ normal operations, poor transport and relatively low labor skills,” he says.
However, according to Chen, these are gaps that can be bridged as moving factories from China to Africa is still a win-win approach for both sides.
“China is facing tightened customs regulations and quotas when exporting goods to the rest of the world, but Ethiopia doesn’t have this problem,” Chen says. “And Ethiopia needs to attract FDI to upgrade its economic structure by shifting production from East Asian countries to its own factories.”
By: Zeryhun Kassa