Chinese_Fdi_in_South_Africa

Chinese FDI in South Africa; Positive or Negative' Table of Contents Introduction 4 Economic Situation of South Africa 4 Quick look at GDP 5 Monetary policy 6 Current account balance 9 Fiscal policy 10 Electricity crisis 12 Unemployment rate 12 Hiv / Aids 13 Inequality 13 China FDI in South Africa 14 Infrastructure 15 China-Africa Development Fund 16 Agriculture 16 Cheap Loans 16 Positive Aspect of China’s Foreign Direct Investment in South Africa 17 Mutual Benefits 17 Economic Growth 17 Trade 18 Job Creation 18 Technology Diffusion 18 Wrap-up of positive effects of Chinese FDI in South Africa 19 Negative effects of Chinese FDI in South Africa 19 Neo colonialism 19 China supports repressive governments 20 Technology transfer 20 Job losses 21 Wrap up of negative effects of Chinese FDI in South Africa 23 Future outlook of Chinese FDI 23 Economic Perspective 23 China expands investment in South Africa 24 China and South Africa Trade volumes might slightly slump 25 Chinese and South African relationships 25 Suggestions 26 Conclusion 27 Introduction In this research report, we focus on South Africa as an emerging financial market. We will focus on how huge amounts of foreign direct investments of another emerging financial market, China, affect South Africa economically and socially. We will see that in many ways, it seems like China is exploiting South Africa because of its natural resources while not educating the local people enough. On the other hand, foreign direct investments brings many positive effects with it, mainly in terms of economic growth. All in all, we came to the following research hypothesis ← H0: Chinese Foreign Direct Investment will have an overall positive effect on South Africa. ← HA: Chinese Foreign Direct Investment will have an overall negative effect on South Africa. By overall we mean the average of the economic, financial, political, and social consequences. By positive we mean whether or not they are better of with Chinese investments than they would be without it. We will start this research report with background information about South Africa’s current economic status. Here we will see how favorable the South African climate is for foreign investment. After that we will show data about the growing investments of China in South Africa. Then, the positive and negative effects of these investments will be discussed in order to get a balanced answer. After that we will have a look in the future and give some suggestions to the South African government in order to benefit more from the foreign investments. In the end, a conclusion to the research hypothesis will be given. Economic Situation of South Africa South Africa is one of the most emerging financial economies from Africa. It is considered a middle-income emerging market. It has been able to reach this status due to its “well-developed financial, legal, communications, energy, and transport sectors: a stock exchange that is 17th largest in the world; and modern infrastructure supporting an efficient distribution of goods to major urban centers through the region.”[1] South Africa is one its way to become more developed, and is setting an example for the rest of the African countries. South Africa is the most emerging financial economy in Africa ranking at 11th in the “Emerging Financial Index”[2] , an index that ranks the 65 most influential cities among emerging market countries which uses eight evaluative dimensions. Johannesburg claimed a spot on the 11th place while Cape Town and Durban ranked 33rd and 37th respectively. All three of the South African cities ranked ahead of the other African cities that appeared in the index. Topping the Index was Shanghai which is accompanied by an additional 14 Chinese cities, all of which are ranked in the top 30, and four of which are ranked in the top 10, making China the Index's best-represented country.  |2008 Emerging Markets Index Rank |City |Country |Index Value | |1 |Shanghai |China |66.01 | |2 |Beijing |China |62.35 | |3 |Budapest |Bulgaria |58.82 | |11 |Johannesburg |South Africa |55.42 | |16 |Xiamen |China |53.43 | |33 |Cape Town |South Africa |48.99 | |37 |Durban |South Africa |47.27 | Table 1; Emerging markets index (source; http://www.sagoodnews.co.za/economy) Quick look at GDP As can be seen from Figure 1, South Africa has experienced a growing economy for the last 15 years until 2008. South Africa’s GDP has been growing steadily. We can see that GDP in 2006 was 1174.078 billion Rand, 1233.93 billion Rand in 2007, and 1271.72 billion Rand in 2008. The real GDP growth rates were 5.3%, 5.1% and 3.1% in 2006, 2007, and 2008 respectively. [pic] Figure 1; GDP of South Africa (source; www.img.org) The projected real growth rate for 2009 is currently at -2.1%, this is mainly due to the financial crisis.[3] From these figures it can be seen that South Africa is turning into a major economy and it’s the 26th biggest economy in the world with growth figures showing that it is also heading in the right direction. Further, South Africa realizes the importance of opening up its economy for international trade. It has been adopting more liberal trading policies after the end of ‘apartheid’, as they became an active member in the WTO. This caused them to end their domestic subsidies, reduce tariffs and open their market to competitive forces. Also they entered free trade agreements with the EU, the Southern African Development Community. South Africa’s economy is also becoming more diversified, and less dependent on commodities such as minerals, instead South Africa is really focused on developing its manufacturing base to produce more industrial goods (e.g. cars and chemicals).[4] Monetary policy South Africa is emerging and profiling itself as a good place for Foreign Direct Investment (FDI). In order to attract FDI a country needs to have certain qualities, which include a stable and effective monetary and fiscal policy, as well as have a law system that upholds property rights. South Africa has a relatively good monetary policy, where its central bank focuses on taming their inflation rate to a healthy one. Inflation is an important indicator for foreign investors, as this influences their perception of whether or not a country is worthwhile to invest in. South Africa started a policy of inflation targeting in 2000 to bring the consumer price index under control. Before then, inflation had been running into double digits on a yearly basis. Figure 2 shows that from 2002 to 2005, South Africa has been able to significantly lower their inflation rate on a yearly basis. [pic] Figure 2 Inflation in South Africa (Source: Federal Reserve Bank of Saint Louis) This offered the South African Federal Reserve Bank the chance to lower the interest rates. This was something they were particularly afraid of because this might trigger inflation, and consequently depreciate the South African currency, the Rand. These two economic variables are of great importance for a country seeking for incoming FDI and they had been highly volatile in the past. Figure 3 illustrates that the Reserve Bank decreased interest rates from 11.5 % to 7 % between 2002 and 2005. [pic] Figure 3 South African interest rates (Source: Federal Reserve Bank of Saint Louis) The decrease in interest rates gave a boost to the economy as consumer and construction spending increased. When we look at the GDP of South Africa, we see that this also increased between 2002 and 2005 from around 980 billion to 1.114 billion Rand. [pic] Figure 4 GDP in South Africa (source; www.img.org) But what happens after 2005' Figure 2 tells us that inflation reaches its all time low in 2005 but after that it starts increasing again. This could be a sequence from the decreased interest rates so the government started to increase the rates again in 2006. They continued doing this until 2008 when the financial crisis hit South Africa particularly hard. This was the first time in 3.5 years that South Africa decreased their interest rates again. These rate cuts have continued throughout 2009, the cut the rate for the first time on the 12th of December, 2008 from 11.5% and are currently around 7%[5]. Figure 4 tells us that the high GDP sustains its growing level until 2008. After that, the economic crisis caused South Africa to experience a negative GDP growth in 2009 for the first time in more than 15 years. Starting 2009, unemployment increased, which consequently has a dampening effect on domestic demand. Domestic and International demand for South Africa’s main exports of gold, diamonds, platinum, and other metals and minerals has also decreased, thus hurting the economy[6]. These negative effects however have nothing to do with the monetary policy but because of the exogenous factor of the economic crisis. In addition, South Africa has a strict and disciplined approach to their fiscal policy. The government focuses on trying to keep deficit spending to a minimum and keeping debt low. Also, the country has succeeded in having a strong currency. Current account balance Another interesting macro economic indicator is the current account balance for South Africa. Looking at the Figure 5, we see that this balance was positive in 2002, but after that has been declining until today. [pic] Figure 5 SA's current account balance (Source: Federal Reserve Bank of Saint Louis) This is because of increased imports from china which we will discuss later in more detail. It is generally assumed that an increasing current account deficit creates depreciation of the home currency. This is the supply of the currency, generated through export, is greater than the demand for the currency, created by imports. The Rand has indeed been depreciating since 2004 up until now[7]. Currency depreciation can be seen as inflation because it makes people paying more money to buy the same things. This is another reason that inflation went up after 2005. So we see that the increased imports from China have a negative influence on both the Rand as a currency and inflation. This in turn scares of foreign direct investment. So should we conclude that Chinese investments in South Africa are bad for the economy' This sounds rather contradictory and it is. Even though it is often assumed that a growing trade deficit is a bad sign for the economy, we argue differently. We think that the growing trade surplus is more a result of economic growth. An expanding economy needs more products to sustain its growth, not only from domestic production but also out of imports. This also stimulates domestic investments as demand for products goes up. In other words, there are more investment opportunities and they in turn can create new foreign capital, or stimulate foreign investments. So although a current account deficit is not the cause of economic growth, it is often a indicator of it and not necessarily a bad sign[8]. Fiscal policy The fiscal policy is another factor that can influence foreign investors confidence. After monetary policy, this is the second tool available to a government to influence the domestic economy. It refers to the public expenditures of a country and how it finances it. South Africa is doing a good job concerning its fiscal policy. Even if investors would worry about South Africa’s current account deficit, their fiscal policy will offset this concern. If we look at figure 6 we see that South Africa has been able to decrease its government debt while at the same time turning their fiscal deficit into a surplus. [pic] Figure 6 SA's debt and fiscal balance (Source; IMF) The question is how they were able to improve their fiscal balance while decreasing the amount of borrowed funds. This can be either because they expended less money or because they increased their tax revenues. When we look at the government expenditures in figure, we see that these have been relatively stable over the years, or even increased slightly. [pic] Figure 7 SA government expenditures (source; IMF) So the answer must lie in increased tax revenues and figure 7 supports this view. Increased corporate tax revenues can be either because of an increase in the tax rate or an increase in the taxed money supply. If we look at corporate tax rates, we see that this hasn’t increased over the years. It has even decreased over the past ten years and is now around 28%[9]. Rather, the increased tax revenues are the result of increased Chinese business in South Africa. Figure 8 gives us the story graphically where we see that the country’s revenues have increased mainly because of the increased corporate tax incomes. [pic] Figure 8 SA government revenues (Source; IMF) So concluding, South Africa has been able to keep government expenditures relatively stable and decreasing their foreign debt while on the other side it has been able to improve their fiscal balance mainly through increased tax revenues. These tax revenues mainly stem from the increased Chinese businesses in South Africa and not because of an increased tax rate. So we can conclude on this part that the Chinese investments have significantly improved South Africa’s fiscal balance. This creates a positive spiral where investors get more confidence about the country’s economy and this will trigger even more investments in the country. After discussing positive things about the current economic status of South Africa, we will now look at some challenges that the government is facing. Electricity crisis South Africa’s growth has been constrained since 2007 due to its electricity crisis. The crisis is caused by the outdated infrastructure of the national electricity company, Eskom. Due to the monopoly of Eskom, the company experienced years of inefficiency, poor long-term planning and underfunding. This lead to a situation where there is not enough supply of electricity to fulfill the demand of electricity. To deal with this situation Eskom has introduced ‘load-shedding,’ where the company cuts the power to certain regions when there is excess demand, so that other regions can remain efficient.[10] Businesses had to be closed for days, especially the mining industry has been strongly affected by the power cuts (which is one of South Africa’s main export products). But the backbone of this problem is due to South Africa’s economic growth and increases in standards of living (as more homes have access to electricity), which have increased demand of electricity beyond supply. Thus, according to the government, “in a sense we are the victims of our own success.”[11] Unemployment rate Even though South Africa has been experiencing increased economic growth rates (as presented by the figures before) the country has been in a constant battle with unemployment. South Africa has very high unemployment rates, as in 2008 the unemployment rate was at 23% (see Figure 9). The economic growth that South Africa has been experiences has been mainly jobless. The economy is not keeping up with the population growth either, as employment grew at a slower rate than that of the labor force. Thus the economy is far from reaching its full potential. The government has estimated that it needs to grow at a 4.5% rate until 2010 and then at 6% to be able to halve South Africa’s unemployment level by 2014.[12] From this, South Africa is far from reaching its economic potential. [pic] Figure 9 SA Unemployment level (source; tradingeconomics.com) Hiv / Aids Another obstacle that keeps South Africa from reaching its full potential is their high population of people infected with the HIV disease. As current estimates are that 18,1% of the adult population battles with this disease. This puts extreme strains on the underdeveloped health care system as well as the productivity of the workforce. Inequality With economic growth also comes unequal distribution of wealth. South Africa has a long history of racial discrimination, but now unequal distribution of wealth has also become apparent. The gap between the rich and poor is widening. Fifty percent of South Africa’s population is living underneath the poverty line. As seen in Table 1, South Africa has one of the poorest populations in the world. |Province |No. of poor persons |% of population in |Poverty gap (R |Share of poverty gap | | |(million) |poverty |billion) | | |Eastern Cape |4.6 |72% |14.8 |18.2% | |Free State |1.8 |68% |5.9 |7.2% | |Gauteng |3.7 |42% |12.1 |14.9% | |KwaZulu-Natal |5.7 |61% |18.3 |22.5% | |Limpopo |4.1 |77% |11.5 |14.1% | |Mpumalanga |1.8 |57% |7.1 |8.7% | |North West |1.9 |52% |6.1 |7.5% | |Northern Cape |0.5 |61% |1.5 |1.8% | |Western Cape |1.4 |32% |4.1 |5.0% | |South Africa |25.7 |57% |81.3 |100.0% | Table 2 Poverty in SA (http://www.sarpn.org.za/documents/d0000990/) In addition, the population with the lowest 10% of the income has 1.3% of South Africa’s total wealth, as the highest 10% has access to 44,7% of the country’s wealth. Also, the Gini index is currently at 65, while it was at 59.3 in 1994, so the situation has only worsened in accordance with economic growth.[13] So overall we see that South Africa can be considered as a good country for foreign direct investors because of its strong fiscal and monetary policy and steady growth of GDP. Clearly it has some challenges for the future like battling the unemployment rate and finding a solution to the electricity crisis but these are minor things in comparison to the positive factors. China FDI in South Africa Over the past two decades, South Africa has been experiencing steadily increasing FDI and trade from China. As reported by the China Daily, “two UN organizations said that China can be expected to become one of the continent’s largest FDI sources in the not too distant future.”[14] Currently China is South Africa’s 4th largest trading partner, where 8.7% of their exports go to China. Similarly, China is South Africa’s largest import partner as of October 2009 (replacing Germany), as 10.3% of total imports come from China.[15] However, China still benefits from a massive trade surplus with South Africa. One of the reasons that the economic ties between South Africa and China have been growing is due to their complementary nature. From the one side South Africa needs Foreign Direct Investment (FDI) to be able to grow and develop their economy, as well as focus on improving standards of living. On the other side China is also able to benefit from their investments and relations with South Africa. For one, South Africa has a substantial domestic market compared with the rest of Africa, this is due to its size, income level and sophistication. Also, South Africa is home to a large mineral and resource base that China needs to be able to keep their economy going. However, what seems odd about their strong ties is that South Africa does not have a lot of oil exports compared with other countries in Africa. Infrastructure Most of China’s FDI in South Africa are based on infrastructure projects. These infrastructure projects have a main focus on increasing Chinese exports to South Africa and on China gaining valuable and essential imports from South Africa. Recent FDI from China have been focused on agricultural industries, electricity, road construction, textiles, tourism, and telecommunication. When looking at the main Chinese exports to South Africa, these export products fall in line with China’s recent investments. China’s main exports include mechanical products, garments and accessories, cereals and cereal powders, electric appliances and electronic products, textile yarn and related products. China has strategically thought about their investments in South Africa, as their infrastructure developments increase the demand for their main export products, namely, cheap manufacturing goods. In addition, China is also able to attain access to mineral deposits. This way, China is creating a positive win – win cycle for its own investments as their investments are complementary to each other. China-Africa Development Fund The Chinese government has been encouraging their domestic firms to invest in South Africa by using their ‘China-Africa Development Fund (CADFund)’ which was founded in 2007 with an initial investment budget of $1 billion .[16] The CADFund is mainly run by the China Development Bank to grant loans to Chinese firms investing in Africa in specific areas, and encourage other Chinese firms to undertake investments in South Africa. Until now, this fund has been able to raise investments of around $20 billion from Chinese firms in South Africa. This fund is focused on four areas: power, construction, materials and mining. All these areas are major economic focus areas in China. At the same time, these projects develop basic infrastructure sites of South Africa, which the country needs as a base to have economic development. Agriculture One of China’s main infrastructural focus points has been on agriculture, which seems surprising at first, when you compare it to their other infrastructure projects, as most of these are focused on gaining important minerals and resources. China has been focusing on increasing South Africa’s agricultural infrastructure for their own import purposes. As China’s and South Africa’s agricultural markets have major seasonal differences they aren’t competitors, so they are able to utilize this complementary nature to their advantage. South Africa is able to benefit from this agricultural relationship, as one of their major industries is still agriculture, but they have trouble competing in the EU and US markets due to local subsidies and tariffs. Cheap Loans Besides FDI in the form of infrastructural investments, South Africa has also received aid from China in the form of cheap loans. One remarkable aspect is that, unlike ‘Western Countries’ and organizations, China has not put any preconditions and requirements on this aid. It can be argued from either side if this is effective aid or not. The UK has considered this as inefficient aid, as the money may not be invested properly. But at the same time organizations such as the IMF have been accused of promoting the wrong policies for developing countries. Thus only time will tell to see how South Africa handles and invests these loans. Positive Aspect of China’s Foreign Direct Investment in South Africa Every relationship can be characterized by having different characteristics and different outcomes. The South African and China relationship has attracted a lot of attention and criticisms over the last five years, as China is criticized of exploiting South Africa. What needs to be considered is what the positive and negative sides are to their relationship and what the outcome is of their relationship. Mutual Benefits China’s has made the following statement that “under the principle of no political strings attached, China’s trade with the continent has no hidden ideological agenda. China and Africa share the view that countries should not meddle in each other’s affairs.” This statement illustrates that South Africa shouldn’t worry about a hidden agenda, and about too much unwanted Chinese influences in their country. Both countries “have acknowledged that they can achieve common development only through cooperation based on mutual trust and mutual benefit. The pursuit of their own interests has brought them closer.”[17] Thus, both countries see their relationship as being a relationship where there is a win-win situation. South Africa benefits from Foreign Direct Investment in different ways. First, South Africa experiences from increased economic growth and trade. Second, FDI usually comes hand in hand with increased employment and skill training sessions for employees, which increases the skill level of workers. Third, as China is doing a lot of FDI in the infrastructure sector, South Africa can experience technology diffusion and knowledge transfer. Last, FDI can have lots of indirect impacts on industries outside the infrastructural industries, where many domestic firms can benefit from. Economic Growth One of the main benefits that Chinese FDI offers to South Africa is that it increases South Africa’s domestic investment, which can lead to economic growth. China’s FDI has been mainly been in the form of infrastructure. The Chinese government has contributed by building schools, roads, railway lines, hospital and clinics. But to China’s disadvantage, these contributions are usually ignored by western media. South Africa is not only able to make use of these infrastructural changes and benefit from them, it also releases scarce domestic funds for other investment purposes. When China invest in infrastructural projects that South Africa would also have invested in, then this results in funds being available for other investment projects. Thus South Africa is able to benefit from the infrastructural improvements as well as from more fund being able to be more efficiently used. The FDI from China brings capital to South Africa. One of the benefits of FDI compared to Foreign Portfolio investments and short term capital flows is that FDI is more stable and long-term. Thus, the capital that comes into the country is not as likely to leave with economic shocks or economic trends. In addition, FDI contributes to increased income growth, or at least beyond what South Africa is able to achieve by itself. FDI also increases government tax revenues (as previously discussed in the section about fiscal policy), South Africa benefits from this as the government can redirect these funds toward their economy and their people. In the last couple of years, South Africa has been using this taxation revenue to pay off their international loans, thus making their capital account healthier. Investors can see this as a sign of a healthy economy, thus making South Africa seem as a good place for FDI. Trade For South Africa to become a developed country, they need to be able to integrate their economy more closely into the world economy. This would allow South Africa to more efficiently use their resources, as they are able to benefit more from trade. China has been able to help South Africa step in the right direction. Strong economic relations with South Africa, has already increased South Africa’s exports, which increases their total trade volume. Due to China’s large investments in South Africa, South Africa may develop a preferential access in the Chinese market, increasing South Africa’s exports even more. Thus, South Africa is one step closer to being closely integrated into the world economy. Job Creation FDI brings with it a lot of benefits for the South African population. For one, China’s FDI in South Africa supposedly helps create new jobs. Second, FDI permits the transfer of capital inputs. This entails China bringing advanced technology into South Africa as well as a set of skills. South Africans can learn from the Chinese, thus increasing the South African knowledge base, this knowledge can be used within the local economy. However, the Chinese have been criticized on making sure there is no to limited technology transfer, (which will be discussed later.) Technology Diffusion Chinese FDI in South Africa has indirect effects on domestic firms. For one, foreign direct investment increases competition in the domestic markets. This makes the industries in South Africa more efficient as well as due to the competitive pressures, South Africa can learn from the Chinese firms. On the other side, for South African firms, the Chinese market becomes more accessible, thus opening up more markets to them. Wrap-up of positive effects of Chinese FDI in South Africa Overall, Chinese FDI in South Africa can have positive outcomes for South Africa from various perspectives. However, on every positive side there are also negative aspects to consider. Negative effects of Chinese FDI in South Africa Even though there seem to be a lot economic benefits for South Africa coming from Chinese investments, there are also some negative effects. We already discussed the negative effect of the cheap loans that China provides to African countries. It is claimed by the UK that these loans will significantly increase the debt burden. Western countries have been trying to help Africa decrease their debt for years. In this section we discuss more negative effects. To present these negative effects however, we will first have to zoom out from a country based level to the continent based level. We do this because as we zoom out, we will see more examples of negative effects in other African countries that might be very well happening in South Africa as well, but just hasn’t been picked up by the public. We will start by rough abstract accusations towards China and end with specific negative effects for South Africa. Neo colonialism The main critic against Chinese involvement in Africa comes from the European Union as they call China’s involvement neo- colonialism. And it does have some characteristics of colonialism. China is in Africa mainly because of its natural treasuries and as we will explain later, China is not doing everything it can to develop Africa sustainably. Another important figure who pointed out this possible colonizing danger was the former president of our country of investigation, Thabo Mbeki. During a speech in 2006 at a university in Cape Town he said that “Africa must guard against falling into a ‘colonial relationship’ with China”[18]. He further pointed out to the trade imbalance – Africa just exports raw materials to China while importing Chinese manufactured goods – and said that if this would continue, Africa could be "condemned to underdevelopment”. Further he mentioned that this relationship would simply mean "a replication" of Africa's historical relationship with its former colonial powers”. Mbeki is afraid that China will lack sustainable development support in Africa and that they’re just there for the short term gain of raw materials. However, when these will deplete, China might leave Africa directly and Africa will go back to its state before the Chinese came. We will talk more about this issue under the header “Technology Transfer”. How far the critic of neo colonialism directly applies to South Africa is difficult to say. We will examine some more critics and then wrap up whether this critic is in any way justified. China supports repressive governments The EU also blamed China for the fact that they seem to support human right abusers and repressive governments. Take for example Sudan that exports a lot of oil to China. It is from this money that Sudan was able to fund its war in Darfur, which went on for 4 years and costs 300.000 lives. It is further claimed that China sold weapons directly to Sudan, notably Fantan ground attack aircraft. Further south there’s been another African dictator receiving support from China. The Telegraph says that Robert Mugabe, who ruled Zimbabwe since 1987, received civilian and military aircraft. Mugabe has been accused of violation human rights during the period 2000 – 2009. China even sponsored and helped design a new mansion for Mugabe, in the style of a Chinese pagoda[19]. China says she’s not investing in Africa with any ideological agenda, like the West used to do. It seems that China just wants to make money, and isn’t too concerned with the political background of this. Technology transfer Another important critic is that China is lacking in the technology transfer. Technology transfer is defined by Wikipedia as “the process of sharing skills, knowledge, technologies, methods of manufacturing, etc. among governments and other institutions. This to ensure that scientific and technological developments are accessible to a wider range of users who can then further develop and exploit the technology into new products, processes, applications, materials or services”[20]. In other words, China doesn’t teach Africa how it should do the job. This point contributes to the critic of neocolonialism. China is keeping the African people dumb, while are exploiting the natural resources. As a famous saying goes “give a man a fish and you have fed him for a day, but teach a man how to fish and you have fed him for a lifetime”. China doesn’t seem to want to teach the Africans how to fish however. This critic is not only heard from the European Union but also from within South Africa. For example, Tsidiso Disenyana, a South African researcher claims that China is merely bringing their own engineers, and other laborers when it comes to building infrastructure for example[21]. This way, Africa will not be able to benefit from the Chinese capital inflows in the long term. As soon as China is done with Africa, they will pull out all their capital and Africa is back where it started. That’s why Disenyana argued that South Africa needs to “have some clauses that assure that (there is) some sort of technology transfer, training and the likes for local employees.” Further, we already mentioned that Thabo Mbeki also criticized China’s involvement in that he warned his continent for underdevelopment of its people. By this he directly talks about the technology transfer since if this is insufficient, the Africans will indeed be underdeveloped. So technology transfer is of vital importance when we try to answer the question whether Chinese involvement in South Africa will help the latter to develop or not. We argue that at this point, many progress can and should still be made. Job losses The high unemployment rate of south Africa has already been discussed as one of the most challenging economic challenges. China is not having a positive influence on this unemployment rate. South Africa is mainly important cheap products from China. Because of these cheaper imports, local businesses are experiencing tough competition and many stores have to close down. There are clear examples of this in South Africa, in the textile industry in particular. South African company’s lost the battle for competition and many local jobs got lost. In April 2006, South Africa’s largest clothing and textile manufacturer, Seardel, announced the closure of Frame Textiles, which affected 1400 workers directly and many other local companies and workers indirectly. Seardel said they had to close because of “competitive pressures subsidized goods in peer markets, increases in input costs and the noncompliance of local competitors with the minimum conditions of employment legislation”[22]. This last point is another point of concern about Chinese involvement in Africa. China has build up a reputations within Africa of not living up to employment regulations. In addition to China’s textile firms in South Africa, there have been other well noted cases where Chinese firms has not been able to uphold local employment standards. In Zambia for example have been clear signals about poor workers treatment. The British newspaper the Telegraph reported in 2007 that Zambian workers were being exploited and all health and safety regulations ignored. An industrial accident at one Chinese-run mine claimed 46 lives in 2005. Later, workers rioted over low wages and poor conditions[23]. In South Africa, the local community is also rioting against Chinese businessmen as described by the “People’s Daily” of February 2006. It reports “more than 40 armed robbery cases against Chinese citizens or overseas Chinese occurred in South Africa last year, leading to eight fatalities.” It further reports that, “three Chinese business people were killed by armed robbers in South Africa within 36 hours since last weekend, while another one was murdered earlier this year[24].” Chinese businessmen got scared after these attacks on their colleagues and they urged both the South African as the Chinese government to come up with policies that guarantee their safety. In a response to this, the Chinese government installed a special fund to fight violent crimes against Chinese people in South Africa. The fund will be used to award police, detectives and informers who make contributions in solving cases[25]. The South African government has been trying to find a solution for the problems related to Chinese competition in local businesses. In June 2006, Chinese premier Wen Jiabao visited South Africa and signed an agreement with President Mbeki that China would cut textile imports to South Africa by a third, with quotas on Chinese textiles and clothing imports to be imposed for three years. Question remains however if this is enough, as there are still signals rising of increased unemployment due to Chinese investments[26]. Wrap up of negative effects of Chinese FDI in South Africa In this section we have discussed a couple of possible negative effects of Chinese investments in South Africa. The technology transfer is a very important factor in this because this determines whether China is helping South Africa to develop or if it’s just exploiting the country. And if the latter is true, then you could even argue that China is in some way indeed colonizing South Africa. The fact that China seems to be supporting repressive governments doesn’t matter much for South Africa as their government is democratic and in no way repressive. Another big concern for South Africa specifically is the potential of job losses. With an unemployment rate that has been more than 20 percent for a very long term, the country can’t afford that another country brings their own workers and less labor intensive business. Therefore we argue that China should improve the technology transfer so train local workers who can take over the work of Chinese people. Further, China should try to invest more in labor intensive business in South Africa, in order for South Africa to maximally benefit from their investments. Future outlook of Chinese FDI Economic Perspective Due to the economic crisis, for the first time in a long time, South Africa is experiencing no FDI growth this year. Crowding out the private sector from the capital markets in a low savings economy remains a risk for South Africa's economic outlook. Business confidence and economic performance will however to a large extent depend on the pace of the global economic recovery and the ability of South Africans to seize opportunities[27]. This is South Africa’s first recession in 17 years and the emerging consensus among economists that South Africa will recover after other countries to properly emerge from the financial crisis. The global crisis has pushed South Africa into recession, but many statistics predicted that the recovering will happen in 2010 when policy stimulus, global recovery and the staging of the soccer World Cup will boost activity. Unless capital inflows weaken again or South Africa forces even greater import compression, the GDP growth is predicted to be 2.5% in 2010 while there is the negative predicted growth of -2.1% in 2009 (as seen on table x). The local economy was starting to show "solid signs of recovery" following the consolidation of economic growth in the rest of the world. The consumption demand has grown from 0.3% to 2.6%, GDP growth is coming from strong private demand, as well as the government demand pulling up the economy. The improved exports from -0.2% to 0.6% also contributes to GDP growth is also supportive of growth. [pic] Table 3 South Africa macroeconomic indicators The biggest threat to South Africa is that South Africa is dependent on other countries and outside investors on FDI inflow. Those investors need to regain their confidence back into the economy, as well as the South Africa’s economy[28]. China expands investment in South Africa FDI is important to South Africa, as South Africa badly needs reliable inflows of capital to help create economic growth and jobs. Chinese involvement in Africa is focused on their relations with South Africa. In the relationship between China and South Africa, these two countries are highly complementary in terms of economy, FDI and trade. All the evidence indicates that China has encouraged the continuing flow of Chinese private entrepreneurs into Africa. Thus, it can be expected that Chinese FDI will continue to rise. The China-Africa Development Fund (CADF) has already come on-stream, with a medium-term facility of US$2 billion, and a projection of $5 billion under management in five years. About $400 million has already been sunk into an array of prospects[29]. The Chinese government is encouraging Chinese businesses to invest in and trade with South Africa in the future. In the other side, China is assisting South Africa in other areas of development, such as the Accelerated and Shared Growth Initiative for South Africa (Asgi-SA). China would consider further financial contributions - beyond the RMB19-million it has already committed - to SA's skills training and economic development programs which appears that Chinese investments into South Africa are accelerating[30]. It is not a zero-sum game under the current international circumstances. It appears China-South Africa ties can continue to accelerate, especially given Beijing’s penchant for investing abroad in resources. China and South Africa Trade volumes might slightly slump Bilateral trade between China and Africa increased from $10 billion (2000) to $70 billion (2007), as well as China has been benefiting from resource agreements with South Africa. However, planning for a South Africa-China Free-trade pact agreement might fall through, it could become too successful and China-South Africa trade might become too unbalanced and threaten South Africa’s indigenous manufacturing industries, textiles, and communications technology. Possible trade protectionist backlash could manifest against Chinese. Chinese and South African relationships The number of Chinese living in South Africa has risen almost exponentially. However, lots of crime against Chinese national also happening in South Africa. There appears to be a massive anti-Chinese backlash among South Africa’s citizens. Although China has set up a fund to solve these crimes, the high crime rate in South Africa may deter many Chinese investors. In the political situation, Jacob Zuma, the incumbent president profiles himself as someone who listens closely to labor unions. However, these labor unions tend to oppose immigrant China labor and China-run businesses. At the same time, Zuma has been keeping close contact with China. Thus, only time can tell what the future political relations between South Africa and China will be. Suggestions As can be seen by the outcome of the performed research, South Africa needs Foreign Direct Investment to be able to grow and develop, however, they should make sure that China does not take advantage of them. In addition, South Africa needs to keep reminding itself to look beyond economic growth, and make sure that they also focus on economic development. Economic development is essential for South Africa if they want to grow and continue to grow in the future. For this they need to ensure technology transfer from their relationship with China. This is a difficult thing to achieve, but there are some actions South Africa can undertake to ensure that there needs to be technology transfer from foreign firms if they want to operate within South Africa. For one, the South African government can set up regulations that incoming firms need to set up some types of training or learning sessions. Another addition measure South Africa can take, is to set up rules that are similar to the rules established after Apartheid. From Apartheid, companies were forced to have a certain percentage of the company and especially high rank jobs be taken up by black people. South Africa can do the same for foreign firms, that they are required to have a certain percentage of their high ranking jobs being manned by South Africans instead of by their own people from abroad. This makes sure that these foreign firms educate the locals, and this way South Africa is able to learn from the foreigners. South Africa has been focusing on decreasing their unemployment levels as one of their main government goals. However, China is coming into South Africa and most of their FDI is capital-intensive production instead of human-intensive production. Thus, this does not help South Africa decrease unemployment. Thus, it may be an option from a South African point of view to set up certain types of regulations that would encourage job creation. Another aspect that South Africa needs to be concerned with is that the Chinese competition with South African firms doesn’t overpower them. Many manufacturing industries are just starting to develop in South Africa, and these firms don’t enjoy economies of scale in the way that Chinese firms do yet, thus their find it difficult to compete with Chinese firms. To protect the infant industries of South Africa, it may be smart on the part of South Africa to introduce some small forms of tariffs or local subsidies for those infant industries. This way, these infant industries can grow and learn from the competitive forces, but at the same time survive. However, the government must constantly make sure that they keep track of these subsidies or tariffs, that they remove them once the infant industries have grown into mature ones. One concern with Chinese FDI in South Africa is that Chinese companies have established a reputation for themselves that they don’t uphold labor regulation laws. To make sure that South African employees are not taken advantage of, the government needs to make sure that they regulate and check up on companies, especially Chinese companies, that they uphold labor safety regulations. This would make sure that South African workers aren’t being exploited. Even though South Africa is desperate to grow and develop, they need to stay ‘smart.’ First, South Africa needs to make sure that they keep ownership of the main resource bases and that the firms that do own those resources stay in South African hands, and not those of foreign firms. Second, the Chinese government has specific rules for foreign firms that want to have FDI in China that these firms need to have a joint venture with a Chinese firm. In addition, the foreign firm cannot earn more than 49% of the shares. South Africa currently does not have these rules, but the government may consider adopting rules like those of the Chinese. For this, they are more guaranteed of a technology transfer as well as that important South African firms are not taken over by the Chinese. So all in all, South Africa needs to focus on maintaining and developing their own companies and industries for the long term, and not just look for short term gains. Conclusion From the research conducted throughout this paper, were based on trying to reject the null hypothesis. The conclusion that can be made is that the null hypothesis cannot be rejected. The null hypothesis is partially supported. This is because Chinese FDI in South Africa has an overall positive outcome if you look at all the different aspects. For one, South Africa is very dependent on FDI, thus they almost have no other choice. Currently, the short term gains are visible, however, the long term gains are at this moment unlikely. Even though the results point to that the Chinese FDI in South Africa can be considered positive, there are a couple points of major concern. The first on is the technology transfer from China to South Africa. So far, there does not seem much of a technology transfer to be happening, which means that China is not teaching or sharing skills with South Africans as much as it could. This is however very important for South Africa if it wants to develop sustainably. This way, after China would leave the country, South Africa would still have learnt from their involvement and be able to grow economically even after the Chinese are gone. This way you can see that technology transfer ensures long terms gains of foreign direct investments. Second, China is not helping South Africa decrease their high unemployment rate which is, and has been for a long time, a huge problem for South Africa. China needs South Africa just as much as South Africa needs China. This is because of South Africa’s natural resources and its strong domestic market which is good for Chinese exports. Thus, South Africa should not be afraid to attach more strings on Chinese FDI, in the forms of regulations or contracts. China has been mainly focusing on their own gains. For one, there is a bad technology transfer, and with this China can be criticized of practicing colonialism from an economic point of view. Thus, South Africa needs to focus on their long term gains from FDI and not let China exploit them and their resources for the short term gains. They can do this by stricter regulation where they ensure technology transfer from Chinese FDI as well as direct job creation for their own citizens. ----------------------- [1] CIA worldfactbook https://www.cia.gov/library/publications/the-world-factbook/geos/sf.html [2] http://www.sagoodnews.co.za/economy/sa_leads_africa_in_emerging_market_index_.html [3] IMF Concludes 2009 Article IV Consultation with South Africa, Public Information Notice (PIN) No. 09/114, September 10, 2009 [4] (http://southafrica.usembassy.gov/hume040630.html) [5] http://www.economy.com/dismal/country_pages.asp'geo=IZAF [6] http://www.economy.com/dismal/country_pages.asp'geo=IZAF [7] Research Division. 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