Increased Foreign Direct Investment (FDI) from China to Uganda is instrumental for industrial sector development.
China Uganda co-operation: capitalising on resource endowment or exploitation?
By Martin Luther Munu (pictured) & Isaac Shinyekwa
The roundtable meeting of the 2018 Beijing Summit Forum on China-Africa Cooperation (FOCAC) came to a conclusion on September 4, 2018 in the Great Hall of the People in Beijing, capital of China.
The conference, under the theme "win-win cooperation and building a closer community of fate between China and Africa" adopted the Beijing declaration.
China also pledged $60 billion in financing for projects in Africa in the form of assistance, investment and loans.
According to Chinese President Xi Jinping, the financing with no strings attached, includes $15 billion in grants, interest-free loans and concessional loans, $20 billion in credit lines, $10 billion for "development finances” and $5 billion to buy imports from Africa.
Although highly endowed with both natural resources and labour, Uganda lacks the finances to acquire and utilise capital for building on its competitiveness in international trade. A traditional trade theory approach would be to capitalise on endowments like cheap labour to produce more labour intensive products especially agricultural goods.
Inadequate financing makes this difficult and thus explains the inducement for the country to try and capitalise on the finances that China offers. However, the terms of this financing need to be made clear and the overall process should be transparent, something which is currently lacking.
Increased Foreign Direct Investment (FDI) from China to Uganda is instrumental for industrial sector development, which is central to economic transformation. This is basically because it facilitates growth, increases employment opportunities and potentially increasing the tax revenues.
However, there is need to channel Chinese FDIs more into manufacturing in order to harness more benefits. This is because Chinese investments are largely in the extractive industries and construction which has limited backward and forward linkages. In addition, we need an overall policy framework which ensures that FDI realises its promises of jobs, tax revenues, technological transfer and overall structural transformation.
This requires Uganda to rethink its investment policies which currently make it hard for FDIs to realise these promises. However, existing investment policies lack performance requirement clauses which would ideally facilitate technological transfer, application of local content and reinvestment of some profits among others. With such an investment environment, no amount of Chinese financing will transform the country economically.
China is highly integrated in the Global Value Chains (GVCs), and Uganda could therefore capitalise on increased collaboration with China to get an opportunity to upgrade in the GVCs especially in agro-industrial products. The cotton and textile sector is one area where Uganda can learn from and use China to facilitate technological diffusion for the transformation of the country's textile industry. Uganda currently exports almost 95 percent of its cotton as lint and imports apparel and clothing.
China on the other hand domestically consumes most of its lint and exports apparel and clothing products. In order to replicate this and meaningfully benefit from the relationship with China, Uganda would need to develop and implement a conducive policy facilitating technological transfer and meaningful integration in the global economy through industrial development.
The question of whether cooperation with the Chinese is the magic bullet for the economic transformation of Uganda is an important one to be asked. Integration into the GVCs, addressing supply side constraints like energy, roads, railway and power generation are all key areas Uganda is focusing on. Interestingly, the country is increasingly relying on Chinese cooperation to realise these plans. Uganda should however remain cautions and heedful of examples like Sri Lanka who had to hand over their Chinese constructed port and 15,000 acres of land around it for 99 years to China after failing to repay Chinese debts.
There are a number of unconfirmed reports raising concern that African countries are being forced to hand over their strategic assets like ports and state companies to repay Chinese loans. Much of these reports have centred on Zambia which has a substantial Chinese presence by African standards.
There is also concern that East African countries -particularly Kenya owe too much debt to China as a result of ambitious infrastructure projects with an increasing inability to repay. If such fears turn out to be warranted, the overall FDI objective of economic transformation will be severely undermined.
In conclusion, as Uganda strives to capitalise on economic cooperation with China for its transformation, the country needs to be mindful of the terms of financing and make them more open to public scrutiny. In addition, there is a need to diversify sources of funding and avoid unnecessary borrowing for heavy infrastructure investments without adequate feasibility studies.
The promise by China of no-strings being attached to its funding for African countries is something which should not be taken at face value for as the old saying goes, “there is no such thing as a free lunch”.
Munu is a research analyst, Trade and Regional Integration, Economic Policy Research Centre (EPRC)
Shinyekwa is a senior research Fellow, Trade and Regional Integration, Economic Policy Research Centre (EPRC)