China has been investing in Africa for decades, but its influence on the continent grew considerably after Xi Jinping became president in 2013. Under the Belt and Road Initiative (BRI), China has reaped substantial payoffs in Africa; by some estimates, today the African continent does more foreign trade with China than America. Chinese companies operate power plants and railroads in several countries.
The rewards for Beijing have also come in the form of military influence, with an aircraft-carrier capable naval base in Djibouti. A second base may be in the works in Equatorial Guinea. The prospect of a Chinese naval presence in the Atlantic Ocean is worrisome enough that the United States Navy is expanding its recently reactivated Fourth Fleet.
Central economic planning
On the face of it, China seems to have enough momentum to turn Africa into its own fiefdom. However, a closer look suggests China’s best African days may already have passed. While Sino-African economic ties are strong, Beijing has created problems for itself that it does not know how to solve.
The core of its problems can be concentrated into one simple term: central economic planning. The Belt and Road Initiative is a foreign direct investment strategy based on the notion that government not only should, but in fact can lead economic growth. As is always the case with economic arrogance of this kind, the outcome looks impressive upfront, but when the bill comes due, cracks start to show in the impressive façade.
There are two reasons to believe that the BRI will run into a quagmire that is eerily reminiscent of what followed in the footsteps of central planning in the Soviet economy after World War II.
The first reason is in the economic and political theory upon which the BRI projects are built. This theory was highlighted in the 2020 annual report from the U.S.-China Economic and Security Review Commission, an investigative body under the United States Congress. The Commission explained in detail how Beijing combines the Belt and Road Initiative with propagating its communist government model. While preaching “non-interference,” the Commission says, in reality Xi Jinping’s regime is exporting “its model of state-led economic growth under one-party, authoritarian rule.”
Few if any African countries have actually changed their model of government based on Chinese influence, but that was also not really the purpose. The unashamed marketing of one-party rule has weakened ideological opposition to Beijing in Africa, and it has facilitated friendships with similarly minded governments. It has also signaled to more or less democratic governments that it is morally acceptable to play fast and loose with human rights, even the rule of law, in order to advance grand economic investment projects.
While China seems to have benefited from its refusal to add human-rights caveats to its trade and investment agreements, this is also emerging as a problem for them. There is enduring demand across the African continent for democracy and government transparency, demand that will only be reinforced by the inability of the BRI projects to deliver benefits for the people in the countries where the investments take place.
Africa’s Chinese debt trap
Which brings us to the second reason why China’s African influence may have peaked. It is centered around big, credit-funded investment projects, which increasingly are becoming a debt trap for the BRI recipient countries.
None of this is surprising to the student of economics. Capital formation, a.k.a., investments in machinery, office equipment, and buildings as well as highways, railroads, and other forms of infrastructure, does not in itself grow regular economic activity. The construction of a new railroad creates jobs during the construction phase, but when the tracks are laid and the trains are ready to depart the station, not much has changed in the local economy where the train station is located. Businesses have not increased their sales, households do not bring in more money, and government does not take in more tax revenue.
That is not to say investments are redundant. They do help, but only if entrepreneurs, workers, and investors find ways to use them to their benefit. A case in point: when the railroads were built westward from the American east coast in the late 19th century, a couple of creative entrepreneurs invented the post-order catalog. They could operate out of, say, New Jersey and sell their products in states like Ohio and Indiana by means of train delivery.
For creative entrepreneurs to take advantage of new infrastructure, the entrepreneur needs two things: the freedom to innovate and the iron-clad reliability of the rule of law. Neither is helped by China’s BRI; if anything, it looks like the rule of law and government respect for the “little guy”—who is also a future entrepreneur—has weakened in the wake of Chinese investment projects.
This problem is illustrated by three Chinese investment projects: the Bagamoyo harbor project in Tanzania and two railroads, one in Kenya and one in Ethiopia. Both projects emerged from a conference that was held in Beijing in 2017 under the title Belt and Road Forum (aptly abbreviated BARF). At the conference, Kenya and Ethiopia signed economic and trade agreements with the Chinese government.
As The Guardian reported in 2018, one of the outcomes of the Kenyan agreement is a railroad from Nairobi to the port city of Mombasa. The railroad, which was operating at a loss as recently as last year, is partly to blame for Kenya’s deep indebtedness to China. It is questionable whether or not the Kenyan government will be able to honor its debt obligations, with the risk for default in the next couple of years estimated at 35%.
The fact that the Chinese-built railroad is running at a loss illustrates precisely the flaw in the economic theory behind the BRI: the legal and financial conditions for businesses and entrepreneurs have not changed just because the railroad opened.
The Ethiopian example is even more poignant. When the Ethiopian regime signed a deal with the China Railway Construction Company to build a railroad from Addis Ababa to Djibouti, expectations were high that the infrastructure project would bring new jobs to local communities along the 750 km (466 miles) route. Those jobs were supposed to compensate for the land that the tracks and railway stations claimed.
That has not happened, in part because the Chinese company that operates the railroad prefers to staff it with Chinese workers. This is an affront to communities that gave up valuable farmland: as reported by The Guardian, each railway station along the route claimed an average of 300 hectares (740 acres). This is a significant amount, especially since most of it was farmland. Agriculture accounts for more than a third of Ethiopia’s gross domestic product, and dominates the economy of rural communities.
Workers who were hired for the construction of the railroad have their own complaints, according to The Guardian. Those complaints point to low wages and “poor treatment” by Chinese construction managers.
No benefits for Tanzania
Another Belt and Road initiative is underway in Tanzania, centered around an ambitious project in the port city of Bagamoyo. The plans are grand, envisioning industrial parks, tourism facilities, free trade zones, an international business center and, of course, a large port.
The project came about almost a decade ago but has not yet been finished. The main reason is Tanzania’s former president, John Magufuli. After his election in 2015, Magufuli suggested that the Bagamoyo project was not benefitting Tanzania. According to The Citizen, a news outlet under Nation.Africa, Magufuli considered the terms of the project to be “exploitative and awkward.”
He also explained that the Chinese wanted to take over the entire land area where the port and adjacent facilities were to be built. As one of the consequences, the Tanzanian government would be banned from levying any taxes on any activity taking place within the port area.
Another problem, The Citizen reports, was the handling of compensation for displaced property owners. Echoing allegations from Ethiopia of under-compensation of local landowners along the railroad, President Magafuli claimed that the money for displaced Bagamoyo residents never reached the intended beneficiaries:
Magafuli said the $50 million given out to compensate those displaced by the new port project “did not reach the beneficiaries in Bagamoyo but was diverted to benefit a few individuals in Das es Salaam.”
The project, President Magufuli explained, was “tainted with bad terms” and would “never benefit Tanzania.” Therefore, in 2019 he brought the project to a halt.
To make matters worse for the Chinese, in November 2020 the Bank of Tanzania, BoT, the country’s central bank, put the Tanzanian branch of China Commercial Bank Limited under receivership. This bank was used by Chinese corporations to fund projects in Tanzania.
The BoT explained that the Chinese bank had failed to “meet regulatory requirements regarding capital adequacy and inability to effect restoration of capital to required levels.” In reality, things were much worse. In an article from 30 December 2020, Zee News in India revealed that China Commercial Bank Limited had been involved in money laundering. Eight Chinese companies were under investigation and senior managers were arrested by Tanzanian authorities.
In a desperate response, in January 2021, the Chinese began lobbying for the Bagamoyo project. Their foreign minister met with President Magufuli. In addition to negotiating the release of the detained Chinese citizens, the foreign minister apparently also offered investments in President Magufuli’s own hometown of Chato.
Magufuli was apparently undeterred, continuing to block the project until he (entirely coincidentally) passed away in March 2021. His successor, Vice President Samia Suluhu Hassan, quickly resumed talks with the Chinese about moving the Bagamoyo project forward.
On the retreat
To date, President Hassan does not appear to have solved the pressing problem of how to pay back the Chinese debt that comes with the new harbor and related investments. As The Africa Report explains, in lieu of new economic activity that can generate debt-paying tax revenue, Bagamoyo could be a debt boondoggle for Tanzania.
Predictably, the debt trap is becoming a pervasive problem. Deborah Bräutigam, director of the China-Africa Research Initiative at Johns Hopkins University in Baltimore, points to this very problem, which even Beijing is beginning to wake up to. On December 14th, the Business Standard—and Indian publication—reported:
Investments in China’s much-touted Belt and Road Initiative (BRI) have fallen by 54 per cent since 2019 and Beijing is no longer doling out hard cash for projects in Africa, amid criticism over infrastructure debt and loan defaults, according to a think-tank report.
The Business Standard actually under-reports some of the decline in BRI spending. According to Green BRI, the think tank they quote, the average BRI project shrank by 57% from 2018 to 2021. Chinese investments in Sub-Saharan Africa have declined four years in a row.
In other words, it looks like the Chinese are beginning to suffer the consequences of their own central economic planning model. The question is if the economic pullback will also be followed by a reduction in other Chinese activities in Africa. At the moment, this does not seem to be the case: on December 5th last year, the Wall Street Journal reported that China is aiming to build a military presence in Bata, a port city in the west African country of Equatorial Guinea.
According to The Maritime Executive, China’s base in Djibouti, its first on the African continent, hosts 2,000 military personnel. The Stars and Stripes, an official news outlet of the U.S. Department of Defense, reports that the Djibouti base is capable of hosting an aircraft carrier group.
If China has such ambitions for a base in Equatorial Guinea, it is most certainly going to lead to heightened tensions in the Atlantic Ocean, primarily between Chinese naval forces and the reactivated U.S. Navy’s Fourth Fleet.
However, it is far from certain that China will be able to even construct the Atlantic-coast base. There are warnings that the Chinese economy is in deep trouble; a persistent recession, or worse, would quickly force Beijing to scale back its grand foreign plans.