Curse of Friendship

It's not wise to go into business with old friends, or so the saying goes. Yet one of the arguments from investors pouring out of China, India and other rising economies is that they are natural friends to other emerging markets. China, in particular, has pitched itself as a different kind of superpower, out to cooperate with rather than dominate other countries. But critics have begun to argue that the investing practices of these new players fall short of the promises. "I don't see it as being a type of social solidarity," says Josephine Osikena, program manager for International Development and Good Governance at the Foreign Policy Centre in London. "It's an economic relationship. It's about the availability of investment opportunities."

Indeed, although total south-south investment has been increasing steadily over the past 15 years, that may not be a win-win for everyone involved. According to a recent report from the United Nations, foreign direct investment (FDI) from developing countries reached a record of $120 billion in 2005, up from just around $18 billion in 1990. Total south-south trade shot up from $2 billion in 1985 to $60 billion in 2004; last year 70 percent flowed from Asia alone via new trade routes that bypassed traditional Western economic powers. In the race to feed their rapidly modernizing industries and burgeoning middle classes, countries like Brazil, China and India are increasingly willing to invest in poorer, riskier and more remote locales. Last week Beijing hosted a two-day summit of leaders from 48 African countries, which was designed to cement Chinese influence in this process. "China will forever be a good friend, good partner, good brother of Africa," said Chinese President Hu Jintao as he opened the summit.

Some Western countries have been angered by the consequences of this new trade, as when China threatened to veto a 2004 U.N. Security Council resolution against Sudan in order to protect its oil interests there. Civil-society groups inside some of these nations, too, have criticized China and India for putting their thirst for natural resources and energy ahead of good governance and human rights. In an Oct. 19 interview with a French newspaper, World Bank president Paul Wolfowitz raised a new concern--that China, along with India and Venezuela, were not only disregarding human-rights and environmental standards but lending irresponsibly, threatening to burden the poorest African countries with mountains of debt. "There is a real danger," said Wolfowitz, "that those countries could become highly indebted poor countries all over again very quickly."

He has a point. World Bank and International Monetary Fund (IMF) loan agreements require African states to promote economic reform, as well as keep interest rates moderate and inflation down. Debt cancellations depend on how well such measures are followed and require the support of the international community. With Beijing offering lots of money and few questions, countries have little incentive to stick to their promises. Last year Robert Mugabe's autocratic regime in Zimbabwe launched a slum-clearance project that destroyed 700,000 homes and businesses, and was condemned by human-rights groups and the United Nations. Beijing issued not a peep.

The World Bank estimates that Chinese loans to African countries, mainly for power, telecom, transport and other infrastructure projects, totaled $12.6 billion between 2002 and mid-2006, and continues to grow. At last week's summit, Hu offered $5 billion more in preferential loans and export credits, and a doubling of aid in the next three years.

With anywhere from 50 to 80 percent of incoming FDI going to exploit natural resources in Africa, the long-term benefits are fragile. Relying on wildly variable commodity prices is a precarious foundation for any economy. Africans have also accused Asian firms of unfair hiring practices and squeezing out local businesses. The South African Textile Union blames Chinese competition for the loss of 60,000 jobs and Nigeria's Textile, Garments and Tailoring Senior Staff Association estimates 350,000 jobs have disappeared mainly for the same reason.

There has also been tension over low wages and poor working conditions in Chinese operations. In July, five workers were shot during violent protests over pay disputes at a Chinese-owned mine in Zambia's usually peaceful capital of Lusaka. Other states, such as South Africa, have passed legislation that specifically limits Chinese imports that compete with local industry.

If the notion of raiding Africa for its resources while propping up corrupt government officials sounds familiar, that's because it is. The United States and Europe have done it before, perhaps most dramatically when, backed by France and America and with World Bank funding, Joseph Mobutu Sese-Seko took control of Zaire (now the Democratic Republic of Congo) in a 1960 coup. "I worry at times that [China is] going to make all the same mistakes that the United States and France made," Wolfowitz said in his recent interview.

And yet, given that Africa's economy grew a record 5.5 percent in 2005, it is difficult to argue that Asian investment is not good for Africa. When critics point to Sudan (where China was happy to turn a blind eye to genocide and walk away with 50 percent of the country's 2005 oil exports), the Chinese point to billions spent building roads in Kenya, a hydroelectric dam in Ghana and a mobile-phone network in Ethiopia. "If these investments are taking place," says Harry Broadman, economic ad-viser at the World Bank and author of "Africa's Silk Road: China and India's New Economic Frontier," "it means there are gaps that are not being filled by the North or by domestic firms."

Broadman believes the suspicion surrounding China's and India's trade with Africa is hardly unique. "Worldwide, anytime there's investment, existing firms always feel threatened," he says. But consumers should benefit from cheaper, better quality products, and though some firms may have to lay off workers, others will be hir-ing. (China claims it has trained more than 14,600 African personnel in various fields.) "In the south generally, by dint of the fact that these are developing countries, there is a lot of transition that needs to happen to become developed anyway," says Broadman.

In theory, developing countries should work well together. Though Third World firms might lack cutting-edge tech-nical equipment, their experience often makes them more adept at operating in developing markets. Smaller technological gaps mean training runs more smoothly. But the way this trend is developing, Africa in particular may find it is sim-ply swapping one master for another, says Timothy Armitage, an economist at Global Insight in London. He adds that China, who could easily punish econo-mies in crisis by hiking interest rates, is a much less forgiving lender than the World Bank. If that's the case, Africa might soon be wishing it had stuck with the devil it knew.