Thursday, August 20, 2015

What does China's shock currency devaluation mean for Africa?

Prof. Deborah Brautigam (Johns Hopkins SAIS) wrote on Tuesday on about how China's recent shock currency devaluation will affect Africa.

The devaluation, unlike what China was apparently doing in earlier decades, was not a move toward "undervaluing" the currency; China's currency before the recent devaluation was reportedly "overvalued" because of its link to the increasingly strong dollar, and this devaluation brings it closer to market value for a basket of currencies. 

But the result of the devaluation, regardless of its motivation, will be the same. China's imports into Africa will be cheaper, and China's buying power for African exports will be weaker. 

Although cheaper imports from China will be nice for some African consumers (when I was a volunteer in Benin, most of the local bicycles were made in China, for example; many cell phones in Africa today are made in China), the currency devaluation poses a number of developmental challenges for Africa. 

Africa's main exports to China are fuel and crude materials such as copper and gold (see figure below). As China's buying power drops, there will be less demand for those exports in the short term. On the other hand, if China's devaluation enables it to return to stronger export-driven economic growth, it will buy more commodities in the medium term. 

Africa’s Rising Exposure to China: How Large Are
Spillovers Through Trade? IMF Working Paper 13/250
Furthermore, to the extent that commodity exports such as oil and minerals result in a "resource curse", such as Dutch Disease, meaning reliance on exports of valuable mineral commodities increases a currency's value and makes it less competitive in the manufacturing sector, a reduction in the value of commodity exports might have a positive effect on development in the medium term. 

However, cheaper imports from China will put African manufacturers at a greater cost disadvantage, which may undermine development. Most (all?) countries in Africa are members of the WTO and so are constrained from raising tariffs to protect local manufacturers from cheaper imports. 

As for investments, China's buying power for new investments in Africa will also be weaker, but profits from investments in Africa will be more profitable (when repatriated to China) will be more valuable, which might offset the investment cost disincentive. 

What about ECOWAS countries?
Many of the African countries that export heavily to China are, unsurprisingly, closer to China geographically (see figure below). There are three ECOWAS countries for whom China bought more than 10% of their exports: Benin, Burkina Faso, and Liberia. But even countries who do not sell directly to China will be affected by the depressed commodity prices that China's devaluation is likely to cause. 

Commodity exporters in ECOWAS countries include Ghana (chromium ores and concentrates, platinum, diamonds, petroleum oils), Cote d'Ivoire (platinum, aluminum, petroleum oils), Chad (petroleum oils), Liberia (iron) and Nigeria (petroleum oils). So these countries will likely take a hit from China's recent devaluation in the short term.

In the medium term, though, if China's devaluation leads to more domestic investment in China, this will lead to increased investment to Africa and purchase of African exports in the medium term. Some of the ECOWAS countries that benefitted most from China's domestic investment in 1995-2011 (indicated by the green line in the figure below) include oil-exporters Nigeria and Chad and non-oil resource-exporters Mali, Niger, Cote d'Ivoire, Liberia, and Guinea. 

That's in the medium term, though. In the short term, it's African consumers who will be happy while African commodity exporters and manufacturers face short-term challenges. 

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