Chapter 3 – Background Chapter

3.1. Introduction

This chapter will look at the broad setting of the analysis. It will start by summarizing what the conditions in international political economy which are drawing China closer to Africa. Then, an exploration of the dynamics of China’s rise is carried out in order to understand its actions in Africa. It will recount the story of the economic and political evolution of Mozambique with a particular focus on the period of 2000-2008 and describe the unfolding relations between China and Mozambique. Lastly, it will finish by investigating in more detail a few key actors in the engagement, namely China Exim Bank, the African Development Bank (ADB) and FOCAC. The description of these unfolding relations and actors will provide an historical and institutional framework to inform the analysis.
3.2. Historical snapshot of China in Africa

In many cases China’s ties with African countries date back to its support for African anti-colonial struggles in the 1960s. Following the establishment of the People’s Republic of China (PRC) in 1949, relations were founded with post-colonial Africa through “moral and material support for different generations of national liberation and independence movements” (Le Pere & Shelton 2007:18). China’s first official ties with an Africa country began with Egypt in 1956. Since then, the intensity of China’s engagement has been intermittent, coinciding with more or less favourable economic and political conditions at home, the trends in international political economy and the very political situation of Africa. This meant that there was a period of particular interest from China in Africa during the 1960s and early 1970s that coincided with China’s venture into the power struggle of the Cold War occurring after the Sino-Soviet split. This period contrasted with the quieter decade of the 1980s when China was focusing on its internal affairs and organizing its recovery for a post-Mao era under Deng Xiao Ping (Alden 2007:9).
3.3. The role of the changing political economy

The international architecture of power is at a crossroads. United States power, if not waning, is at least visibly being challenged as downturns in the traditional power’s economy are set to push China to look further into other alternative markets and economic partners. The growth of the BRIC countries, which include China, as well as the affirmation of the European Union as causing them to assume prominence. Simultaneously, the United States and China maintain an informal system of chain gang economics through which China’s economy has been closely interconnected to that of the United States and vice-versa, by means of China’s purchase of American treasury titles and also simple trade (Bello 2008). Meanwhile, the systems of international finance and trade endure sturdy, save for the challenges of crisis, market corrections and the ambiguities of speculative capital. In a curious and very significant development, previously liberalization-friendly developed countries now tend to be protectionist, losing their traditional role of liberalizing leadership in the key organization that seeks to expand and uphold common rules for international trade – the World Trade Organization (WTO) and its trade rounds. American-led liberalisation of multilateral trade, witnessed particularly in the Uruguay round and during the 1980s and 1990s, has now come to a standstill. Lobby groups from uncompetitive sectors such as steel, textile and farming, important for the constituencies of those negotiating the deal, pushed the Americans and Europeans to put the “brakes on” liberalization and become more protectionist. Indeed, as Brazilian foreign minister Celso Amorim observed, “the proposals set forth by the G20+ , which Washington holds responsible for the meeting’s failure to reach an agreement are 70 to 80 percent in line with the positions held by the United States at the start of the Doha Round” (IHT 2007). The European Union has gone through a very similar transformation, with the added detail that it is far more concerned with its own integration process with the East. Emerging powers like Brazil and China are in this context now part of a group of shifting alliances in the developing world who are pushing the most for liberalization in certain sectors in ways that developed countries are not.
3.4. More dynamic South-South Cooperation

Improvement of transportation and financial systems, supply chains as well as in information and communication technologies are other important vectors allowing for the scale of current engagement. In this context, the G20+example comes about as an important example of South-South cooperation and of remarkable stance coordination for a variety of reasons. It was the first time that China assumed a more proactive and leading role. It also brought together very diverse regional powers, something that is notable not just in harnessing synergy in economic trade bargaining, but also in the symbolic underpinnings of the coalition and in the moral weight it carries, representing over half of the world population (Narlikar & Tussie 2004: 953). This picture gives the G20+ a window of opportunity to simultaneously lead international negotiation in trade and economic relations and invert the traditional bargaining stances. This switch has now put developing nations as leading promoters of broad trade liberalization with small adaptations, and rich countries resisting it. We are witnessing, in the words of Mario Marconini, former Brazilian Secretary of Foreign Trade, a “shift in paradigm” (IHT 2007). The telling story of how the G20+ maintained cohesion at Cancun despite many believing in the impossibility of it happening (Tussie & Narlikar:2004) is a rather encouraging example of how slowly developing countries are taking their development into their own hands.
On a different level, the Macau-Forum can also be understood as a tool designed in part to stimulate such cooperation, and is a telling instance of collaboration of such nature, one that will be analysed in more detail in Chapter 7. The organism was created to foment economic and political relations between China and Portuguese-speaking countries and although it has Portugal, a developed country from the North, as one of its members, it consists for most part in a group of countries from the developing world coming together and discussing issues that they are directly interested in. China has been using it as a multilateral platform for conveying political and economic exchanges that complement the more traditional bilateral channels. An important additional dimension as to why China has turned towards Africa at this particular point in time is that the African continent is experiencing increasing political stability and growth. These relatively more peaceful times have coincided with China’s economic boom and an adjustment of the international economy from being pushed by the economies of mature developed countries to having developing countries’ emerging markets (like China) as the major motors of growth. As this trend goes full circle, China’s extensive and sometimes disorganized economic boom has witnessed a transformation of China’s interaction with the international economy from reactive to proactive. Strategies are no longer devised in an ad-hoc manner, following pushes from international actors and investors wishing to take a piece of the pie of China’s great economic potential but in fact, China now assumes the driving seat, becoming innovative and strategic trend-setters at the international level. China’s presence in Africa is, in this context, one of several components of this pro-activeness in China’s international relations strategy. This global trend shows how different aspects in the architecture of the global political economy have acted as “incubators” for China’s engagement with Africa. The subsequent economic boom of these emerging powers has raised a strong demand to source resources and to find new markets for products.
3.5. A new era in Africa’s renaissance

In contrast, the concept of constituency-economics can also be usefully put to use when looking at China-Africa relations. The inevitability of what can be understood as “constituency-economics”, originally reflected in Putnam’s two-level game theory (Putnam 1988), becomes evident when traders and investors allude to their home constituencies as having insurmountable interests they need to uphold and defend on the international stage. The term “constituency-economics” alludes to the persistence of a “zero-sum” game in the politics of international trade, something that Krugman (1997) also acknowledges. This is important on two levels. Firstly, it shows how crucial it is for developing countries, like China and Mozambique, to come together and coordinate their economic and political stances by forming coalitions and bandwagoning. Secondly, it explains why, China has also occasionally been “shying away” from multilateralism and, in parallel to its South-South multilateral initiatives, been paradoxically pushing for bilateral and Preferential Trade Agreement Agenda when it suits its goals. The same can be said for the rule-setting of trade negotiations that underpin Mozambique’s stance and bargaining vis-à-vis China. In order for the negotiation dynamics and outcomes between the two states to effectively work towards the development of Mozambique, the GoM’s stance and economic diplomacy will have to be, to some degree, at par with the needs of the constituencies affecting this very development the most, namely trade unions, organizations in charge of the strategies of the leading sectors in the economy, farmer’s unions among others. Achieving a situation of optimal compatibility of the different constituencies, whose interests are projected in the international dimension of economic diplomacy, is not an easy, straightforward task but one that should first acknowledged and second sought after.
3.6. General analysis of China and Africa relations

Issues of trade and investment between China and Africa will be analysed in more detail in Chapter 4 but a brief overview of continent-wide data is useful at this stage. Traditionally, private money has been sceptical about investing long enough in Africa to build infrastructure because of the risks and in spite of the high returns associated with such endeavours (Hughes & Brewster, 2003). This has meant that most investment in Africa’s infrastructure has come, in the last three decades, from aid/development funds and from institutions such as the IMF and the World Bank. Apart from the TAZARA railway linking Zambia and Tanzania, China’s flagship infrastructure project embodying China’s aid to Africa in the 1970s, no new railways have been built in Africa since colonial times. Although apparently not directly affecting Africa, purchases such as that which saw China buying a considerable stake in Blackstone (BBC 2007) can have important developments for the continent in the medium-term. First of all, a considerable part of the funds that Blackstone is set to invest are to be 'put aside' for more risky and development orientated goals. Second of all, and most importantly, Blackstone is not likely to be investing in China since a figure of around US$1.4 trillion reserves would invariably appreciate the yuan, something the PRC government has been clearly avoiding at all costs. As long as China Central Bank maintains the peg to the dollar and continues to run trade surpluses, getting excess FDI, that reserve amount will grow and will be destined to remain outside China. This leaves Africa with great potential as a destination for capital looking for higher risk and return investments. As Chidaushe (2007:123) notes, “Chinese planners foresee an era where African minerals and genetic resources will be more worthwhile than US treasury bills”.

China has then recently turned to engage with Africa, and trade volumes with the continent have witnessed exponential increase over the latest decade with the value of trade between China and Africa increasing by an average 24 percent between 1995 and 2007 and total trade standing at approximately US$ 74 billion in 2007 (TRALAC 2008). Oil exports dominate exports from Africa to China while the breakdown of China’s exports to Africa, although having an important component of textiles and manufacturing, are more multifaceted and varied.

According to an April 2007 IMF report (2007), developing countries in general and Africa in particular are expected to keep growing strongly thanks to benign global financial conditions and high commodity prices. The purchasing power of Mozambique and that of the rest of Africa, except for South Africa, still remains minimal but the situation is slowly changing as is evident from recent economic reports about the continent (UNDP 2007). Nevertheless, given a parallel global recession, Africa’s growth rate is still predicted to slow down over the coming years, albeit not significantly. With a growing population and rising consumer incomes, Africa can progressively offer the markets that China needs to vend its products, and its resources can also be explored more efficiently during peaceful circumstances.
The politics of China in Africa are of a great complexity. Migration has been an important dimension and gauge of the different intensities in successive historical periods of the engagement. Chinese migrants have been entering Africa in waves for decades that roughly vary with the intensity in economic and political exchanges between China and Africa. Corkin (2008:5) noted that “many Chinese communities were established in African countries before the latter’s independence. Having settled for several generations, some of these migrants have naturalised and are a recognised minority group in many countries”. Interestingly, the Chinese Diaspora in Africa is generally neither as deeply rooted as for example the Indian although there are a few exceptions such as in Gabon and South Africa where Chinese migrants are rooted since early 20th century (Corkin 2008).
In its engagement with Africa, China is in some instances challenging the sovereignty and the traditional moulds of inter-state relations, and in other instances cementing it. On the one hand, the challenge to sovereignty occurs for example when China focuses its engagement with private companies or particular stakeholders within particular regions within sovereign states. This is the case for example with the Niger Delta areas and the private oil companies operating in Nigeria as well as the example of the oil-rich area of Southern Sudan. In such cases, although China is on the side of the sovereign governments as it deals directly with the capitals (Abuja and Khartoum) its concrete interests sometimes reside in areas which have been in conflict with their central governments (Southern Sudan and the Ogaden region). China’s expressed interests, involvement and investments make these areas ever more appetizing for central governments to hold on to, but at the same time it exacerbates the will of these groups that have been economically and socially oppressed by central governments and who engage in conflict to retake what they perceive to be rightfully theirs. The case of the Niger Delta region in Nigeria illustrates this point. The Movement for the Emancipation of the Niger Delta (MEND) sees no socio-economic dividends from the oil revenue that is paid by MNC’s to the central government be reinvested in improving social and economic conditions in the area.
In some of Africa’s most politically fragile states, neo patrimonialism, whereby leaders use the realist state template of the international order as a platform for sustenance by corrupt behaviour, is widespread (Herbst 2004). In such cases, China’s strategies have adapted well to the workings of neo-patrimonialism. In a handful of African countries there are successive stories of political instability or of chronic autocracy that show how regime-seeker factions tap into a template of sovereignty that is discursive but also institutional. In patrimonial networks, resources flow from a top-down patriarchal-pyramid of hierarchy, on whom the rest of the networks are dependent. If these persons lose their resource bases or positions of power, large numbers of people are negatively and dramatically affected at once. The result is a situation of persisting structural insecurity and unpredictability (Vigh and Whyte 2003:148) that China now has to deal with. So far China has shown good skills at navigating these political waters, doing so with pragmatism but also an obvious willingness to take risks and that has given her an edge over other actors that are engaging with Africa such as India, Japan and Brazil. It is not clear to what extent the added importance that China’s engagement brings to these sub-state actors. It does however give “food for thought” on how to understand the unit of the state, international relations and most importantly the meaning for Africa of today’s acceleration in economic exchanges.
On the other hand, China generally prefers high level diplomacy to set up its aid, trade and investment. As a rule of thumb, the public and the “corporate” private sector are at times one and the same in the African state given the tendency for the appropriation of the state by patrimonial networks of patronage (Chabal & Daloz 1999). Indeed, because the use of the state as an instrument for the accumulation of wealth is particularly prominent in some African states, top private sector companies of those countries sometimes lack the efficiency and the will to seek markets and expand. China’s engagement therefore tends in some cases to reify the sovereignty and the political leverage of patrons in the state apparatus. This connection between African elites and external actors via the international global economy puts into evidence what is a drastically different interaction of regions and states with the current accelerated processes of economic exchanges.
3.7. Knowing China to know China abroad

The reform and opening up of the Chinese economy started in 1978. In the 1990s China’s option of reaching out to opportunities for foreign investment and resource security in the international arena became clear. After considerable growth rates in the 1980s, the Chinese economy began a truly thunderous and unprecedented expansion in the 1990s averaging around 11 percent GDP growth per annum. Any analysis of Chinese dealings abroad must be understood against China’s internal background and refer back to it as a prime engine motivating Chinese international relations. The economic boom provides China not only with indispensable capacity and leverage (for example in the ability to provide loans) but most importantly with the determination to seek out new or renewed markets, suppliers and allies.
The year of 1992 is a landmark in China’s economic history. This was the year in which China went from being a self sufficient energy producer to a country that is dependent upon external sources to meet its energy requirements. The fact that the country possesses so few natural resources relatively to its needs has put China in a position where the natural resources of other countries have become crucial to its continued economic development (Pamlin & Baijin 2007:24). So, while there seems to be no visible end to China’s growth, its demand for energy is also going off the charts. China is now the world’s second largest energy consumer with its consumption almost trebling since 1978 (RICS 2008). China’s strategy now consists of diversifying its energy interests in different baskets. In the internal market, it recognizes the problems of dominant energy production through coal and will seek to have its Research and Development departments to, in the medium-term, find “greener” and more efficient options for coal production and alternative renewable energies. According to the “China Sustainable Energy Program” (2008), China has “established the world's most aggressive energy efficiency target, calling for a 20 percent reduction in energy intensity (which is a nation's energy consumption per unit of GDP) between 2005 and 2010”. Externally it has no choice but to try and keep up with demand by securing deals in the Middle East, Central Asia, South America and Africa as its limited reserves domestically deplete. China’s demand for raw materials has been rising over the last ten years. At the same time, demand for primary commodities is likely to remain volatile, as has been observed by the OECD (Goldstein et al 2006). This reality might engender strategies that over-rely on mono-commodity export and cash crops as an enduring threat for the future of African economies.
In effect, the success in the accumulation of capital by China in the last couple of decades has been tremendous. As Callinicos (2005:362) puts it: “where would the world economy be today without the prodigious accumulation process under way in China, a process that is made possible by a very tight set of linkages between the state, the banking system, and both publicly and privately owned firms?”. In the early days of its growth China used to be in competition with Africa in much more direct way, as Chris Alden notes, “before it became a leading FDI exporter to the continent, China could be said to be a serious competitor for foreign investment in Africa” (Alden 2007: 127). In order to explain such ascension, Hussain et. al. (2006:56) identified three salient institutional features for the Chinese development: decentralisation, reforms of the rural economy and moving from old to new enterprises.
When the economic reform of China started, around 80 percent of Chinese labourers were active in rural areas. When privatisation of Chinese agriculture was introduced, its output was raised dramatically. As rural income was raised, the market for rural enterprises expanded and rural industrialisation came about to an extent unseen in any other developing country – village and township enterprises were important elements of growth in the 1980s and in the early 1990s (Hussain et al 2006:65 and Chow 2000). Chow notes that “the secret of success of China’s economic reform is to allow the non-state actors to develop in the setting of a market economy” (2000:427). In 2001, the Chinese government initiated its ‘Going Out’ strategy whereby the corporate sector was encouraged to invest abroad (Kaplinsky et al 2006: 15). It has also been argued that one of the conditions that stimulate growth generally is the “experience of linking new ideas of science and technology to a home-grown path of reconstruction” (Chidaushe 2007: 122). The argument holds that this constitutes a model of development that holds a seemingly important lesson for Africa, and that China’s engagement provides an opportunity for Africa to learn how to organize trade policy, move from low to middle-income status and educate for quick pay off (Chan-Fishell 2007:139). Such a lesson can however be markedly double-sided; China’s growth in the last decades has at times been characterized by high labour flexibility, regional inequalities, initial low labour standards and lenient environmental norms. In the case of China’s development of businesses and companies, the Chinese State has begun to address and overcome these issues only when they developed into a higher-end productive apparatus (Moran 2002). Africa needs to be aware of such problems as the flows of investment keep growing.
3.8. The importance of China’s political layers

When it comes to China’s political dimension, it is important to remember that China as a state is not a closed, uni-dimensional entity and is in fact extremely multi-layered particularly when it comes to its economic dimension. It has been notable for example how its different provinces holding considerable autonomy courtesy of a central government which actively fosters economic competition between regions for better economic performance. At the time when the government “releases” its “Chinese champions” (The Economist, 2005) in the international arena, equipping them with all sorts of economic incentives and government back-up, these companies have already gone through a careful process of creative destruction that selected the most competitive and profitable companies that have previously proven themselves in China’s internal and inter regional economies (Zeng & Williamson, 2007).
The difference in diplomatic behaviour towards Africa can also partially be explained by looking at its dynamics as an extension of its understanding of the workings of its internal politics. In China political reform has been carried out primarily through inner party democracy (dangnei minzhu) while China’s political structures of “soft and modern authoritarianism” (Shelton 2005:87) puts into evidence how the regime gives precedence to economic growth over political reform. This modus operandi reflects itself in China’s engagement of Africa showing China as less demanding when it comes to governance and as offering a viable and friendly alternative development model. It has notoriously led African states to re-evaluate and question the premises of traditional western-style diplomatic engagement.
3.9. China and international civil society

As was witnessed in the literature review, accounts of the Chinese engagement with the African continent are rife and contradictory. Notions of benign engagement with mutual benefits often put forward by African leaders are contrasted with fears of a new era of colonialism and scramble for resources by the “Yellow Peril of the East”. In 2008 Beijing faced serious criticisms over the Tibet issue and its engagement with the Khartoum regime over Darfur. These tensions are being played out in the global public space by international civil society groups calling for a boycott of the Olympics, which China hosted in August 2008. Such global domestic opinion has seen China face a serious public relations backlash that impacted on the Olympic torch relay which was marked by controversy and had very bumpy ride around the globe (Taylor 2008). It also brought into focus some of the issues that China has to deal with regarding investments in domestically unstable environments in Africa where there is intra-state conflict. Conversely, China is, for example, not the only country that is economically active in Sudan. In 2003, India’s Oil and Natural Gas Corporation, Videsh Limited, acquired a 25 percent stake in Greater Nile Petroleum Company, a conglomerate also including CNPC (Beri 2005:13). Biswas (2007: 8) notes that ”the Government of India went for the deal and helped the Government of Sudan develop its oil industry in spite of threats from Sudanese rebel groups, on the one hand, and United States sanctions against Khartoum over the crisis in Darfur, on the other”. In effect, not much is reported on India’s investments in Sudan nor is there any criticisms levelled at Delhi for doing business with Khartoum. Perhaps it is China’s permanent Security Council status that puts it in the firing line because it has to be responsible. But this is not a good indicator of global responsibility as demonstrated by the United States invasion of Iraq or Washington’s own strategic interests in Sudan, or Russia in Georgia.
Furthermore, Sudan is an important producer of gum Arabic, supplying more than half of world output of this commodity used to make food stuffs, pharmaceuticals and sodas, of which the most well-known is the soft drink Coca-Cola (Cecil 2005). The United States currently imports gum Arabic from Sudan worth several billion dollars each year. Moreover, more than half of the oil that China extracts in Sudan is sold on the international market (Downs 2007). Hence, the Sudanese oil is sold to many of the countries that criticise China’s presence in Sudan. The above examples seek to contextualise the critique against China. The aim is not to excuse the behaviour of any superpower, but to understand the current debate and ‘call a spade a spade’ (Alvarenga, Jansson, & Naidu, 2008 incoming).
3.10. China’s engagement and the importance of symbolism

For China’s diplomats, symbolism is absolutely central to any concrete or material set of diplomatic moves (Alden 2005:140). In fact, China’s engagement with Africa has been described early on as a “charm offensive” (Kurlantzick 2007) and noted as a constructivist-friendly way of analyzing China’s engagement. Getting Africa on its side through gestures, history, ideas and symbolism goes a long way. Such symbolism does in fact hold an important historical dimension, as it is history that “imbues the language and approach of China-Africa relations use of an interpreted shared past, seen in ritualistic symbolic and instrumental forms” (Large 2007:156). The benefits of China’s warm relations with Africa will be evident at the formal stage of international institutions (such as the UN and the WTO) but also in the informal affairs of international relations realpolitik, particularly when it comes to the Taiwan affair. These wider intents are materialized in the form of well orchestrated donations such as those that comprised the widely publicized gestures by China of offerings or partial (financed) offerings to Mozambique: the parliament buildings in 1999 (US$ 5 million); the Ministry of Foreign Affairs in 2004 (US$12 million); and the Chissano Conference Centre in 2003 (US$3.9 million). It is in the context of symbolism and of a diplomatic charm offensive that for example the supply by China of material to Mozambique’s newly integrated army (Alden 2005:141) must be understood.
3.11. Brief Institutional Profiles

This section on China Exim Bank, FOCAC and Africa Development Bank serves to introduce a few actors which are particularly important for this analysis of China and Mozambique’s development. China Exim-Bank is a major channel through which China has presented Mozambique with investment and concessionary loans. FOCAC is the flagship institution through which China and Africa define the general lines of their political and economic relations. African Development Bank is a major development partner and influential policy-maker when it comes to Mozambique’s strategies and visions to achieve sustained development
3.11.1. Review of China’s Export and Import Bank (Exim Bank)

Exim Bank was created in 1994 and was by 2007 the world’s third credit agency (Ellis 2007). On the receiving ends there have been projects such as dams, railways, power plants, mines and oil facilities. China Exim Bank traditionally works with loans, guarantees, bonds as well as miscellaneous credit. Together with China Development Bank, the two are the sole administrating bodies of concessional loan financing. Exim Bank is in turn divided in two divisions overseeing financial outflow, a commercial and a concessional arm. Lastly, it carries out three major functions: 1) it is the official export agency looking after trade and investment guarantees, 2) it provides aid administration (i.e. evaluating projects) and 3) it acts as the policy bank that deals with foreign aid that comes to China (Davies 2008: 20 - 21). The policies of China Exim Bank are seen as being close to China’s foreign policy. The bank is the most important broker through which both China’s government and great quantities of quasi-private money flowing into Africa. This has meant that, in its way of operating, one has witnessed a tendency for loans to have conditionality that tie countries down to medium/long term obligations in the provision of resources and raw materials. Literature from IRN by Peter Bosshard (2007) has looked at the bank as having a negative impact on governance, environment and the social fabric of African countries. On the other hand the project has been welcomed by government and drawn compliments by some private investors and Mozambique economic agents.
In their partnership with Justiça Ambiental, IRN dissected the particular case of Mphanda Nkuwa and the foreseeable impact of the dam. Exim Bank’s financing and government dealings are in their report on the dam regarded as lacking enough transparency. In addition, the bank is understood as potentially becoming one of the main drivers of a new wave of debt in Africa. To this regard, the chairman of the African Development Bank provided a comment which is worthy of note and must be cautiously analysed. He argued that “Yes, debt sustainability is important but development sustainability is what we are after" (Kaberuka 2007). Improvement in Exim Bank´s environmental, social and developmental standards are therefore likely to evolve slowly and take some time to reach the standards of most developed countries and its lending agencies. The interesting dilemma here is that although Exim Bank is of considerable size and no smaller than its other financing counterparts such as OECD, IMF and the European Investment Bank, its way of operating in the developing world is said to have yet to even comply with the environmental standards applied in China itself. This means that there still needs to be an adjustment process of Exim Bank with the very standards applied in China before it is taken to an optimal level. Domestically, China’s environmental regulations are changing quickly as well but still lag behind some of the stricter processes and environmental protection measures put in place in developed countries.
In 2007 CNPC started claiming, at least in the rhetoric of Cheng Siwei (vice-chairman of the standing committee of the CNPC), that Chinese companies misbehaving in their environmental and social responsibilities abroad would face sanction at home (China View 2007) and Li Ruogo, president of the China Exim Bank, said he wanted “to put his institution on a sounder commercially oriented basis and, in so doing, reduce its reliance on state subsidies” (Alden 2007: 131). Exim Bank, a newcomer International Financial Institution, has been seeking to quickly gain experience in its practice by sending observers to agencies such as USAID, DFID and Millennium Challenge (Carriço 2008), at the same time it has not limited itself to replicating other lending models. It has presented an alternative channel to financing that is more flexible, less risk adverse and more responsive to African governing-elite needs (Alden 2007: 25). Finally, on 21 May 2007 a Memorandum of Understanding (MOU) was signed by senior managers of the Export-Import Bank of China and the World Bank with a particular focus on Africa. It was aimed at improving coordination and cooperation between the two organizations on matters of development (Davies 2008: 22). The involvement of Exim Bank in the Mphanda Nkuwa Dam and other big projects in Africa can be understood within the greater objective of Chinese push towards consolidating itself as a major power through economic development but most importantly enhanced political influence.
3. 11.2. FOCAC

The FOCAC (Forum for China-Africa Cooperation) meeting in November 2006 and attended by 48 African heads of State in Beijing was a grand milestone in China’s strategy towards Africa. The inaugural ministerial conference that took place in Beijing in October 2000 was attended by Chinese and African ministers and representatives from international and regional organisations. During the meeting the Beijing Declaration of the Forum on China-Africa Cooperation was established, and since, two Ministerial Conferences have been held – in December 2003 and in November 2006. The next meeting is scheduled to be held in Cairo in November 2009. During the 2006 FOCAC meeting a substantial number of cooperation agreements were signed. China promised among other things to double its assistance to Africa by 2009, provide preferential loans to a value of US$ 3 million, establish a China-Africa Development Fund of US$ 5 billion for the support of Chinese companies operating in Africa and cancel extensive amounts of debt owed by HIPCs (highly indebted poor countries) maturing at the end of 2005 (Marks 2007:2). FOCAC represents an important platform for China in its interactions with African leaders.
3.11.3. African Development Bank

The ADB meeting in Shanghai (2007) also constituted a landmark in China-Africa relations. The event was charged with symbolism and meaning, illustrating the growing ties between China and Africa but also the strategic importance attributed by both to their economic ties. ADB is an African financial institution concerned with state building, inter-state economic integration and region-encompassing economic development. It primarily finances big infrastructure projects which have region-wide impact. In 2007 it financed up to US$4.7 billion in projects and is now set to continue expanding in the modalities and range of its loans as Donald Kaberuka, the head of ADB, seeks to merge its institution with the African Development Fund. It is of particular importance to understand and follow the activities of the ADB in this analysis as the bank has considerable clout in influencing the development policies of Mozambique. The ADB is an active participant in the design of the PARPA guidelines of the country – the strategic policy lines set out by the government of Mozambique to achieve development.
3.12. Profile of Mozambique – The governance of development economics

Mozambique’s recent history is best known for its destructive anti-colonial confrontations and post-colonial civil wars. After a Maoist-sponsored anti-colonial war waged by FRELIMO, a socialist government with a centralized planning economy was set up. After the civil wars there was no abrupt shift of this centralized economy into a liberal, market-led one but in fact this reform has been occurring in a progressive way. The country went from a state-party regime arguably into a multiparty democratic system. It has a two-party system formed by the organizations which fought against each other during the civil war, RENAMO and FRELIMO. Despite the bloody history of relations between the two organizations, the country is stable and political exchanges have been relatively constructive. Other general traits of the country are also worth mentioning, Mozambique has a population of around 19 million in 2008, of which a great part is very young, with 45 percent of the population younger than 15 and the median age at 17.5 years (ADB & ADF, 2006). Its economy is growing but regional economic ambitions and coordination are still somewhat limited and restricted to the sectors of transport, energy and water resources. As noted by a report by the ADB and ADF (2007:9), the economy still remains considerably inward-looking.

In geographical terms, Mozambique is in a strategic location. Its long 2.700 km coast gives it great potential for it to become a regional trade hub and have its neighbours conduct through its ports their trade outside and inside of Africa. Forty five percent of its land is arable and agriculture, though not the most productive sector, it remains the most dominant one, employing the most people (FAO/WFP, 2005).

Relevant literature on Mozambique can be sub-divided between that which looks at: the evolution of the country’s economic structure; Mozambique’s political system, government and governance (Carbone 2005; Galli 2003; Harrison 1999); and the country’s regional and international diplomacy. When it comes to the economy, as can be noted in Figure 1 below Mozambique has averaged a growth of eight percent a year between 1992 (cessation of the 16 year conflict) and 2007. Paradoxically, Mozambique has found itself included on the UNDP list of least developed countries in the world, indicating that it is extremely susceptible to political instability and economic downturns which will result in visible decreases in economic growth. In addition, low inflation rates, stable monetary policies, slight improvements in agricultural productivity and the considerable economic impact of mega projects all contribute to a positive overall outlook of the country’s economic performance (Bila 2007: 3).

Figure 2- Real Growth Rate in Mozambique by Sector

Source (ADB and ADF 2006:3)
However, if one looks more attentively to the poverty indicators of the country, despite once again marked recent improvements with the incidence of absolute poverty going from 69 percent to 54 percent in 6 years, the situation remains bleak, with the country staying low down in the UNDP (2007) Human Development Index at the 172nd place. A closer look at the Gini coefficient also suggests that the country’s economic growth has occurred simultaneously with widening inequalities. To be more precise, Mozambique’s Gini coefficient went from 0.40 in 1996 to 0.42 in 2002 (World Bank 2008).
In effect, the growth rate can be misleading as: exports are very dependent on the existence of mega projects (such as Mozal smelter and Cahora Bassa Dam); the formal sector remains weak; and agricultural productivity remains considerably low. For Mozambique the path ahead is challenging and uncertain both economically and politically. With its political system stabilizing and the prospects of sweeping changes in its economic structure, Mozambique's policy-makers will be at hands with a great deal of important decisions to make and options to take. According to the Ministry of Planning and Development the trend is for Mozambique's economy to become more and more natural resource dependent. In addition, there is a great likelihood that Mozambique holds oil reserves set to add up to the already prominent electricity, gas and the aluminium economic sectors. This means that Mozambique's institutions and policy-makers in charge of crafting the governance of its political economy are set to be put to the test by the challenges presented by the so-called “resource curse” (Bucuane & Mulder 2007).
According to Mozambique’s Ministry of Planning and Development, the economy is currently running the risk of becoming excessively natural resource-dependent. These claims are based on studies concerned with the governance implications of an eventual finding of viable oil reserves in the Northern Rovuma basin ” (Bucuane & Mulder 2007). They also allude to the patent prominence of the gas, aluminium and forestry sectors in the economy. At the end of the day, Mozambique's policy-makers are now charged with formulating pre-emptive measures to counter the so-called “resource curse” (Auty 1993; Collier 2003; Le Billon 2006).
As already mentioned, in its interactions with African countries and Mozambique, China has presented itself as a collaborative partner with “no strings attached”. As such, it is supposedly challenging the traditional moulds of Western development cooperation. In the longer run however, as China’s engagement increases and matures, its investment preferences will gradually become more decisive in determining which sectors of Mozambique’s economy are consolidated. Traditional donors will also have to accommodate such changes. Two possible scenarios arise for the role that China’s investments might play. They can either exacerbate the “curse”, or alternatively, innovative investments in services, manufacturing and agriculture might help pioneer an alternative development path. In this regard, an example of a concrete issue that Mozambique must promptly address is the illegal logging occurring in the Northern Zambezia province by a handful of Chinese private companies. The agro-forestry sector will constitute one of the particular case studies assessed in Chapter 5. There is a group of actors and stakeholders on the Mozambique side whose actions will be of particular importance. Sub-government departments will become increasingly decisive and key as they become more autonomous from central government and tasks that used to be carried out by foreign donors become their responsibility. This is the case for example with the Ministry of Foreign Affairs and Cooperation (in charge of coordinating foreign aid, including China’s) and with the Ministry for Planning and Development (responsible for managing PARPA).
Mozambique also needs to improve in virtually every category in terms of providing a business friendly setting. The bureaucratic process for setting up a business is lengthy and inefficient, labour markets are restrictive and corporate judicial capability is unsatisfactory, not to mention enduring difficulties in accessing capital, energy and value-adding infrastructure. An important distinction to be made when it comes to Mozambique's employment structure is between formal and informal employment. The latter has witnessed a far greater expansion than the former with the number of informal employment in urban areas witnessing an increase of around seven to eight percent (ADB & ADF 2007:11).

3.13. China-Mozambique: the story so far

Contemporary China-Mozambique relations contain many of the recurrent trends, strategic options and unique nuances that China faces in its engagement with Africa. It also contains many of the common dilemmas that African countries face when trying to make this new engagement work towards their economic development. A brief initial snapshot of relations between the countries will now be provided. Relations between the two date back to the early 1960s, when the Chinese Communist Party politically and militarily supported FRELIMO in its independence struggle. Right after independence, on the 28th of June 1975, President Samora Machel proceeded with the formalization of diplomatic relation between the countries with the accreditation of the first Chinese ambassador in the country (Bila 2007:5). From then onwards links intensified. In the last few years, Mozambique-China economic and political relations have experienced a tremendous acceleration. Bilateral agreements for technical cooperation in agriculture, education, health, and light industry were signed. Mozambique was one of the selected stops in Hu Jintao’s 2007 FOCAC follow-up African tour as two-way trade tripled in only two years, making it one of the fastest growth rates experienced by any nation's trade with China. Among the “good diplomacy” events they took part in there were: the inauguration of a pilot project in the agricultural technology cooperation (Xinhua 2007). Together with aid, debt cancellation and lower trade tariffs, China has been investing greatly in Mozambican infrastructure. This investment in infrastructure fits China’s wider strategy in the continent by enhancing the attractiveness of Chinese ventures to African governments and linking investments to tie-in projects. Such investments also improve the export efficiency of enterprises (Alden 2007:13), including agriculture and manufacturing.
Investments have included a stadium as well as several bridges and roads. Trade volume between the two countries has increased substantially. It almost doubled in two years from US$119 million in 2004 to US$210 million in 2006 (Mofcom 2007; Market Access Map 2008). China imported mostly agricultural and fishery products from Mozambique and it exported varied manufactured goods and machinery. A more detailed analysis in the evolution of FDI and trade exchanges between China and Mozambique is carried out in Chapter 4 below. In Mozambique, like elsewhere in Africa, China´s use of symbolism in the form of well-orchestrated donations has been a routine trait in its diplomatic engagement. To this effect there has been a steady provision of gifts or partially financed gifts by China to the government such as the parliament buildings and the Ministry of Foreign Affairs. With the implementation of the first phase of the SADC Agreement on the 1st of January 2008, 85 percent of goods produced in Southern Africa can enter Mozambique tariff free, meaning that overall inter-regional trade is expected to pick up considerably. China’s investment can play a key part in accelerating this process, boosting the pace and volume of trade, both through its role in infrastructure development and FDI. It has been reported that China is now Mozambique’s sixth largest investor, having created as many as 11.000 jobs since 1990 (Macau Hub 2008) with figures for investment totalling US$ 148 million, of which US$ 69 million arrived between 2003 and 2008.
Lastly, Mozambique is part of the list of 77 countries that comprise the SINO, a group of countries in Asia, Africa and the Middle East that China has assigned as being of particular long-term strategic importance.
3.14. Conclusion

Besides providing important background information for the rest of this study, it has been noted in this chapter how, for Mozambique to tap into China for its development, it should make the most of China’s overture. Mozambique should push its agenda in the context of a surge in South-South economic and political cooperation. Mozambique needs to be aware of what is pushing China to engage with the country and China should in turn be aware of Mozambique’s specific history of economic development and the current challenges it faces. These needs should be met in order for an actual win-win engagement to be established as much as possible, for Mozambique to effectively negotiate with China and channel its engagement in a coordinated and effective way and for China to make the most of its investments, loans and its diplomatic relations with Mozambique. Mozambique and China need to be aware of the economic and political tensions that underpin their engagement and the nature of the forces within their own constituencies pushing towards greater protectionism in opposition to those pushing towards greater openness and economic competitiveness.
The narrative of China-Africa relations tells a story of accentuated acceleration in the last decade and one that seems destined to keep expanding. It is at the early learning stage of this expansion and surge in engagement that policy-making and the guiding strategic decisions both from Mozambique’s and China’s side will have the greatest impact. It is in this sense important to carry out the dissemination and assessment of the first impacts of China’s engagement in Mozambique’s development.
In order to understand the specific nuances of China’s impact on Mozambique’s development it is also helpful to look at it in comparison with the engagement of other emerging powers such as India. Finally it is important to look at the background of a group of institutions such as Exim-Bank, FOCAC and the ADB which are of a particular importance in defining the nature and the strategic lines of the engagement as well as in how they can influence Mozambique’s development.

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