Chinese Money Does Not Create Bad Governance In Africa

protest against corruption in south africa africans on china
Credit: aciafrica

“Corruption is wasting Chinese money in Africa”, reads a 2018 caption of an article published on Foreign Policy. The article forms part of a barrage of explosive opinion about China’s increasing engagements in Africa. Aside from the debt trap narrative, some analysts are of the view that Chinese loans complicate the problem of governance in Africa.

The perception is that Chinese loans provide a disincentive for African leaders to commit to reform programs of the International Monetary Fund (IMF) and World Bank (WB). It is often opined that this sort of attitude undercuts the constructive efforts of IMF/WB in getting African countries to conform to the right governance protocols. This sort of thinking seems to persist, despite a multitude of data pointing the otherwise. This article seeks to restate the facts pertaining to the relationship of Chinese debts to Africa’s governance problem. 

How did we get here: a brief history of foreign finance in Africa

Decolonization of Africa in the mid of the 20th century came with a certain kind of development thinking. The thinking that Africa is far left behind in development for which reason, the developed world must help it catch up. Probably modeled after the US’s Marshall Plan, developed nations gave more development aid to African countries. The World Bank, formerly the International Bank for Reconstruction and Development (IBRD) was set up to champion this policy.  African governments had access to funding to construct huge infrastructural projects across the continent.

The belief was that bridging the infrastructural gap would result in economic growth and development for Africa. Shortly afterward, the development thinking shifted from infrastructure to humanitarianism. Instead of funding roads and bridges, donors started funding NGOs like Red Cross to undertake vaccination programs and the like. Developed countries also formed special purpose aid agencies, such as USAID, UKAID, JICA, etc. to pursue similar goals bilaterally. 

However, the cash flows in Africa that accompanied the Cold War became counterintuitive to the humanitarian-development strategy at the time. For the most part of the second half of the 20th century, the Cold War had contributed immensely to Africa’s recurrent bad governance outcomes. The results were blatant disregard for human rights, corruption, and exacerbation of poverty. 

African leaders, such as Mobutu Sese Seko, enormously profiteered on the back of US support, becoming one of the richest on the continent, while his country, Zaire – now DR. Congo, remained amongst, if not the poorest countries in the World. But, following the collapse of the Soviet Union, Cold War funding ground to a halt. While the US did not have any incentive to keep lining the pockets of its proxies, the new political and economic dispensation in the Soviet Union could not keep up with financing a lost cause. 

Prior to the fall of the Iron Curtain, the prevailing development strategy sought to reduce government participation, hence their funding. This did not help matters for African leaders who had lost Cold War backing but still seeking to hold on to power. The last resort for these leaders was to sign up for IMF/WB’s painful Structural Adjustment Programs (SAPs). Not long after the influence of the USSR faded, the Chinese seized the opportunity to fill the vacuum. 

SAPs, private finance, and corruption in Africa

For this part of the article, I rely on the research of Deborah Brautigam. Angola’s Civil War only ended in 2002. But long before that, Angola’s Marxist ruling party MPLA, funded the war with debts from several European bilateral lenders and private banks, guaranteed with the country’s oil revenue. Angola, by the end of the war, became saddled with unsustainable debts.

IMF decided to help Angola out of the mess. However, in exchange, Angola must commit to a host of forty-four reform conditions. If Angola puts through with the reforms, the IMF would grant it a seal of approval so that it can access debt rescheduling with the Paris Club (a group of European Bilateral lenders). Between 1995 and 2004, IMF signed four reform programs with Angola, however, the country failed to implement any of them. Despite the failure of Angola in completing a single program with the IMF, the Paris Club could not resist the urge to give the country more credit. It is instructive to note that loans from the West normally arrive in cash.

Professor Paul Collier in his book “The Bottom Billion” has observed, “conditionality turned out to be a paper tiger: governments discovered they only needed to promise to reform, not actually do it.” African leaders have come to learn that the IMF is not to be taken seriously. Consciously or unconsciously, the IMF and African leaders have formed an unholy alliance, which serves their interests but neglects the long-term interests of African people. The IMF disburses monies to African leaders with the hope that they will carry through with the conditions of SAPs. There is no guarantee that African leaders, as unscrupulous as they were, would utilize the loans for its intended purpose. Funds end up used for different purposes, like funding the military, lining pockets of party functionaries, etc. Western banks and private lenders also do not require transparency before lending to African governments.

The real losers here are African people, as these loans one way or the other, have to be serviced with taxes. In 2002, debt cancellation and rescheduling, which came under the Heavily Indebted and Poor-country (HIPC) initiative came to rescue African countries from unsustainable debt they had piled up over the years. HIPC was a legacy of the West’s disregard for transparency before dolling out cash to African leaders. 

However, barely twenty years after HIPC, debts in Africa are approaching distress levels again. Do not be quick to point to the Chinese. Unlike what we know, Eric Olander of the China Africa Project, in a virtual event organized by Quartz has revealed that Africa does not have a Chinese debt crisis. We will talk about this issue in the next section. After 30 years, IMF’s SAPs have not achieved their purposes, yet Africa still has access to the unconditional flow of liquidity from Europe.  

The Chinese are not to blame

Since the year 2000, Chinese loans have featured strongly in Africa; however, the continent has no Chinese Debt problem, contrary to what we have been hearing. Data from the John Hopkins China Africa Research Centre indicates that Angola, Ethiopia, Sudan, and Congo hold a significant amount of total Chinese debts in Africa. Eric Olander revealed that of Africa fifty-four countries, only ten have a debt problem with China.

Also, the majority of these Chinese loans are infrastructure-for-resource loans. The mechanism through which they are disbursed probably make them the right kind of financing strategy Africa needs to develop. As Sierra Leone’s former Minister of Foreign Affairs Alhaji Koroma said to Deborah Brautigam in an interview, “they [Chinese] give aid, grants, loans, but you never see that money.” 

The Chinese, unlike multilateral institutions, do not issue funds into accounts controlled by African governments. They rather fund their companies to execute projects in Africa. More creditworthy countries like Botswana and Mauritius may be the exception. This strategy is termed the request-based system.

Here is how it works: let us take Ghana for instance. Huawei proposes to Ghana’s National Communication Authority (NCA) to upgrade the country’s telecommunication technology to 5G. NCA liaises with Ghana’s Ministry of Finance and Economic Planning (MOFEP), which then applies for loans from China Exim bank for instance. Eximbank does preliminary studies and decides to approve the loan, by signing a framework agreement with MOFEP. Huawei does the work and asks for payment from NCA. NCA writes to MOFEP, which also writes to China Exim bank to disburse payments to Huawei. 

With such a system, there was no way the funds could be used for purposes for which they were not intended, as has been the case with funds from multilateral and some bilateral lenders. Request-based systems are not perfect but they are a vast improvement over what we used to have. You can rest assured that Chinese funds will get that muddy road tarred or that hospital built. With western finance, there is no such guarantee. 

Professor Paul Collier in his book, “Bottom Billion” could not have expressed the danger of crediting accounts of corrupt African governments any better. He makes a revelation with a 2004 survey, which tracked monies released by Chad’s ministry of finance intended for rural health. The purpose of the survey was to find out how much of the money actually got to rural clinics. Amazingly, only one percent of the disbursed money got to the expected destination. Chad is a poor country for which the European Union and other multilateral agencies give aid in the form of budgetary support. The intention behind Europe’s aid is good, but it ends up exacerbating the very problem for which it was dished out in the first place.  

In light of the above, it is only fair that some Africans change the prejudicial way that they conceive of China’s engagement, so that the subjective and emotional discourse on Africa-China relations could give way for an objective one.

What do you think? Let us know in the comments.

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