The eyes of the world remain on the violence in Libya and the ongoing unrest across North Africa and the Middle East, with oil prices reacting to the potential disruptions to a critical resource. Further south, the countries that offer some of the world’s richest reserves of minerals are also undergoing fundamental changes, BRIC-style. As the world enters a period of potential resource scarcity, the scramble is on to secure future supplies of critical raw materials. Africa has plenty to offer (as an FT graphic shows): Oil, timber, coal, copper, bauxite, gold, diamonds, uranium, gas and more. And despite significant economic and social development improvements in the last decade, many economies on the continent still suffer poverty, skills deficits and high levels of unemployment – making the context right for wealthier nations to come in and help boost African development, often in exchange for resources. As China, India and increasingly Brazil compete to seize the opportunities, a phrase originally used by Warren Buffett in 2003 to describe the US trade deficit comes to mind, “colonized by purchase rather than conquest.” Is this a risk for African nations (and potentially other resource-rich countries)? What are the implications?
A February report on Brazil’s investment in Africa by Reuters highlights the fact that in sheer financial terms and companies on the ground, China leads the pack by a long way in the scramble for Africa’s resources. In 2010 China’s trade with Africa reached US$107 billion (source: IMF) versus US$32 billion between Africa and India, which has also been boosting its position in recent years. This puts Brazil, with US$20 billion in trade in 2010, in third place, with Russia trailing a distant fourth among the BRIC with just US$3.5 billion of trade with Africa. China too dominates in terms of overall investments in Africa. South African consultancy Frontier Advisory quoted in the Reuters report suggests that by 2007, cumulative Chinese foreign direct investment (FDI) in Africa had reached US$13.5 billion, or 14% of all Chinese FDI. In contrast Brazilian FDI in Africa between 2001 and 2008 is estimated at US$1.12 billion. This is not surprising – China has a much weaker overall resource position than Brazil, plus much deeper coffers in terms of foreign exchange reserves to underpin its investments. Since 2000, China has established a series of resource-backed deals, with strong government support and financing, in which African nations handed over oil, bauxite, iron ore and copper and cobalt in exchange for dams, power plants and other infrastructure projects worth billions of dollars. The aim: Secure future access to resources to power China’s continued rapid economic expansion. On the back of these investments, some 2,000 Chinese firms are now operating in Africa, building infrastructure and helping to fuel the renewed economic growth of the continent.
In contrast, Brazil’s investments in Africa are largely private sector driven. Although former Brazilian President Luiz Inacio Lula da Silva worked hard during his presidency to successfully build strong relations and trade with African countries – a policy which it is expected new President Dilma Rousseff will continue – the state-funded financial muscle brought by China was simply not there. Rather Brazil’s approach is different. Investments are far less about resource extraction – it has much less need than China – and more based on leveraging Brazil’s deep knowledge in resource sectors to expand the markets in which its companies operate.
This translates into a very different attitude and approach to investments. Whereas Chinese investments are spread widely across the continent and industries, Brazilian companies’ activities tend to leverage their resource-based heritage and knowledge and to concentrate in a small number of countries including Angola, Mozambique, Egypt, Nigeria and South Africa. With many of these countries Brazil shares some cultural heritage, given that around 90 million of Brazil’s population has some African origin. Brazilian companies also tend to hire local people to work on projects, versus Chinese companies who often bring in teams of Chinese workers and have a reputation of poor treatment of locals in some countries. While cheap local labor obviously has benefits for the Brazilian companies, it also serves to build local economies and communities in regions where unemployment is typically high especially among the young, and creates positive reputational benefits and loyalty for the companies. This focus on mutual benefit and accountability extends to social programs supported by Brazilian companies and aligning interests with African governments to support economic and social development more broadly.
So what does the Brazilian approach mean for Africa? Certainly there will be – and already has been – competition between at least 3 of the BRIC nations (excluding Russia), for the potential opportunities in Africa, resources and beyond. And don’t forget the US, Europe and Japan. However, sentiment in a number of countries is likely to favor the Brazilian partnership approach in future, over the more transactional Chinese approach, given the former is seen as actively empowering local people to build a more stable future. But money will still talk, so expect competition to be intense. The bigger question for many African countries is whether the deals made now will allow them to control their own destinies in the longer-term. The economic power wielded by the overseas investors is enormous – and may indeed by colonization by purchase rather than conquest – a factor which African governments and those promoting development there need to continue to watch closely. Strategic resources may become more closely regulated in future – as already happens in other parts of the world including North America and Australia.
For businesses worldwide, whether active in Africa or not, how control of and access to critical raw materials evolves in Africa is of huge importance. The continent is the source of vital supplies for many, many industries, from food to fuel to high tech – who controls access in future will be crucial. It is also a growing source of consumer markets, as economic growth improves after many years of stagnation – remember all the reports on the potential of African markets in the last year or two? But some of these markets, and the incomes of consumers, are highly dependent on foreign direct investments and industries fuelled by the demands of overseas markets. These influences need to be assessed clearly in developing strategies to realize the opportunities of the emerging African consumer markets. Where and who the incomes come from will be critical in determining future market potential.
Africa has amazing potential and opportunities for development. It also offers significant challenges to those would do business there. The key factor is finding a way to realize mutual benefit for both societies and businesses. If not, the young and unemployed may well start finding their voice in the same way as nations in the North of the continent, which would have undesirable consequences for all.
