Saturday, May 17, 2014

Evaluating China's Investments in Africa

I am in Las Vegas and staying in the hotel where Elvis played many shows and lived in the Penthouse.  This hotel hasn't changed much since when Elvis was here in the 1970s.   Yesterday, I was at Stanford's GSB.   They are a high IQ crowd and I always learn a lot when I'm there.   Today, I'm in Las Vegas but I'm thinking about Africa because I read this piece.

The author wants to tell a familiar tale that China is an extractive institution and has used its monopsony power to suck out Africa's ample natural resources.  This trade in natural resources enriches a few leaders but leaves the people with crumbs and environmental degradation.  The author optimistically argues that Africa needs a more "sustainable" jobs base that is based on manufacturing and other sectors with higher value export potential.   The author is trying to raise "Western consciousness" to put more soft power pressure on China to offer African nations better terms of trade in their bilateral negotiations.

Such China bashing is crowd pleasing for the people who read the New York Times but how do we evaluate these claims?

What is the right control group for measuring the "China effect"?  Are there any African nations endowed with natural resources who have not contracted with China?   Intuitively, for every person in Africa --- how much poorer would they be if China had never showed up?

When there are gains to trade, there is a fascinating question of how they are divided between the buyer and seller and if the government is the seller, do the "people" gain anything?

Permit me to say something optimistic.  In recent years, a literature in economics is emerging on roads and transport networks and the central role they play in economic growth.  Researchers such as Nate Baum-Snow and Dave Donaldson have worked on this.   If China hadn't built the transport network, would the World Bank have done so?

Now that the transport network exists, what trade in labor and goods is taking place in African nations?  Vern Henderson and co-authors have examined whether Africa's urbanization differs from other continents.    Does the mix of China infrastructure's investments and ongoing urbanization offer prospects for enhanced urban economic growth?   If this is the case, then the author of the NY Times will sleep better at night.