China in Angola: The Pros and Cons of China's Aid Structure

By: Zachary Hylton

Introduction

Development is changing.  Our previous understanding of who needs what, and how that what should be provided, is decided through different types of discussions involving different actors; thus, the results of these conversations have altered.  In contrast to this belief, some may refer to the persistence of the dependency theory and its recognition of the Global North’s exploitation of the Global South, as established through colonialism (Escobar, 2011).  This theory’s relevance is not to be challenged; however, as more actors contribute to development thinking and practice, the classification of the Global South and the Global North fluctuates.  The evolution of development is one of the many effects of a new organization of world power structures.  This essay critically analyzes China’s investment in Angola as it exemplifies the rearrangement of power and the restructuring of development.  It observes the role of context in investments; China’s impact on Angolan development through China’s approaches to and possible effects on governance, specifically with corruption and capacity; and aid distribution, in terms project leadership through searcher and planner approaches.  Through these lenses, the analysis will illustrate the manner in which we consider development to be transforming, and China’s lead in this change to demonstrate that the balance of world power is beginning to tip in a different direction.

China’s Angola Investment

In 2002, after almost 30 years of a combined independence and civil war, Angola was faced with the challenge of reconstruction.  Unappeased by the International Monetary Fund’s (IMF) conditional loan package, the Angolan government looked to China for funding.  On March 21, 2004, the China Export Import Bank (Exim) extended a $2 billion loan for public infrastructure development (Corkin, 2008). This credit line was doubled in 2006, and in 2007 the bank added another $500 million to the loan (Corkin, 2008). In 2010, China's Exim Bank extended another $6 billion to Angola, totaling the bank's loans to $10.5 billion (Corkin, 2011a). Along with the Exim Bank's provisions, two other Chinese banks have invested a significant amount of funding in Angola's development. The China Development Bank (CDB) has agreed to provide $1 billion in loans for development of Angola's agricultural sector, while the China International Fund Ltd. (CIF) granted a $2.9 billion loan for construction projects (Comarmond, 2011).In all, Angola has $14.5 billion of Chinese credit.

Apart from bank financing, China has taken a strong interest in Angola’s oil production.  In 2004, at the same time as the Exim Bank’s initial loan agreement, the China Petroleum and Chemical Corporation (Sinopec) purchased a 50% stake in an oil block for $725 million (Comarmond, 2011a).  Later, in 2005, Sinopec acquired of another oil block and formed Sinopec-Sonangol International (SSI), a joint venture with Sonangol, Angola’s national state run oil company.  With 75% of the partnership’s shares, Sinopec was able to take significant ownership of three off shore oil blocks.  Signature bonuses for these blocks added to $1.1 billion, the highest offered in the history of Angola’s oil industry (Comarmond, 2011a).  Due to technology issues, however, this project has been suspended since 2006.  Nonetheless, the existing oil trade between the two countries, combined with the $14.5 billion credit line, indicates China’s large investment in Angola’s development (Comarmond, 2011a).

Context

To view China’s investment in Angola through the context lens can imply a broadly inclusive range of observation.  For the purposes of this analysis, context focuses on the historic relationship China has with Angola, the contextual considerations within loan structure, and China’s purpose and intentions behind their investments.  These foci and their relevance to this analysis will be explained throughout this critique.

Historic Relationship

China’s interest in Angola, and in Africa for that matter, has been recognized by many as only a recent development.  However, their relationship has a history that dates back to Angola’s civil war.  During the 1960s and 1970s, China provided support to all of the parties within the Angolan conflict.  The most relevant parties, the Popular Movement for the Liberation of Angola (MPLA) and the National Union for the Total Independence of Angola (UNITA) received weapons, training, and other resources from China.  The MPLA and the UNITA were also backed by the Soviet Union and United States respectively, two of China’s enemies (Ndlovu-Gatsheni, 2010).  Throughout the war, the MPLA took the position as the ruling government body in Angola, and thus was very suspicious of their relationship with China.  In the early 1980s China terminated their political relationship with Angola for an estimated six or seven years.  Some authors attribute this temporary termination to China’s embarrassment in supporting its enemies’ initiatives (Corkin, 2008).  Apartheid South Africa also intervened in Angola’s civil war as an ally to China.  This alliance was heavily criticized by even the closest of China’s African partners and greatly weakened relations with Angola and the entire African continent (Corkin, 2011a).  Angola-China relations began to rebuild in the late 1980s with MPLA purchases of Chinese weapons, but a noticeable level of distrust limited the scope of their interactions.  In such a paramount period in Angola’s history, China did not build a very positive reputation.  Today, the MPLA still holds absolute control over the government, and its president, Jose Dos Santos, has maintained his position for over 30 years.  Caught with the “wrong people” at the “wrong time,” China’s actions have not been forgotten.

Although relationships with the Global South have not always proved positive, China shares a common experience as a developing nation.  Critics of China’s expanding influence in the developing world recognize this common experience as a tool to attain special consideration in agreements and access to resources (Haan, 2011).  These special considerations are believed to allow China to exploit vulnerable nations and extract their wealth.  However, through a historical lens, it is difficult to discriminate between China and the Global North’s impacts on the destruction, and displacement caused by war in the Global South.  As exemplified through Angola’s civil war and independence, both the US and China played a significant role in sustaining their internal conflict.  Thus, China’s reputation and standing cannot be used a leverage tool in its relationship with Angola, or any other state in the Global South.  Rather, it is imperative that onlookers notice the structure of China’s loans as attractive to any nation in Angola’s situation.

Loan Structure

After the death of the UNITA opposition party leader Jonas Savimbi, the conflict in Angola came to an end in 2002.  The MPLA took on the duty of rebuilding the country, devastated in all aspects due to the destruction of 30 years of war. Financing for the war and for reconstruction had already accumulated over $10 billion in debt to a multitude of different creditors (Brautigam, 2009).  With little capital or capacity to rebuild on its own, Angola was forced to find additional funding.  Before the end of the war, the IMF planned to provide loans with conditions of market liberalization, transparency improvements and account inspections, and that Angola terminate acceptance of oil collateral short term loans (Brautigam, 2009).  Although market liberalization policies were gradually implemented, there were insignificant transparency improvements. Between September 2000 and October 2001 Angola agreed to seven different secretive loans from international banks totaling to $3.55 billion (Brautigam, 2009).  In the midst of Angola’s frivolous attempts to adjust to IMF demands, China arrived to present its case.  The Exim Bank proposed an oil collateral loan of $2 billion with a concessional interest rate of 1.5% over London Inter-Bank Offered Rate (LIBOR), repayable over 17 years and a five year grace period.  In 2003, the loan was agreed upon and began distribution in 2004 (Kibble, 2006).  As China’s Exim Bank funding later multiplied to $10.5 billion, the international community’s disappointment grew.  Angola turned its back on previously agreed upon structural changes to accept financing from an outside party.

The international community’s disdain for the loan agreement fomented a spate of diatribes toward China’s development strategy.  Criticisms centered on the Exim Bank’s neglect for conditionality and a lack of context consideration.  Claims against the loan’s disregard of the IMF’s structural adjustment planning (SAP) do have merit; however, this does not suggest that the Exim Bank’s loan structure is devoid of conditions.  In fact, China’s loans have strict conditions different from most credit structures in the West.  Firstly, China’s loans cannot be restructured or cancelled, so they must be repaid in full (Carmody, 2011).  Secondly, as a Chinese official states, “…Chinese loans closely fit a country’s ability to repay” (Brautigam 2009, p. 185).  If repayment in economic capital is not possible, China accepts natural resources at market prices as a viable repayment solution (Carmody, 2011).  For instance, Ethiopia was able to pay back its Exim Bank loans in sesame seed exports (Brautigam, 2009).  Similarly, with Angola, its oil collateral can be directly utilized to finance its credit.  As the second largest exporter in Sub Saharan Africa, this could be seen as a reasonable solution for Angola’s credit situation.  Nonetheless, as 93-95% of Angola’s export economy, creating 80% of all government revenue, and making up 40-60% of its GDP, the country relies on oil exports to drive its economy (Ovadia, 2012).  If China took control of this sector, Angola’s economy would suffer greatly.  Unlike the IMF’s “static” credit systems, China’s “dynamic sustainability” approaches to loan financing exercise a diverse range of options to support repayment (Brautigam, 2009).  These conditions recognize the context of recipients and prioritize repayment rather than creating eternal debt.

To complement its concern for context, the processes behind the Exim Bank’s loan agreement further support China’s attention to Angola’s situation.  Initially the Exim Bank required an annual 1% payment on top of the agreed upon interest rate to ensure profits.  However, the Chinese Ministry of Commerce intervened, stating the Exim Bank is a policy bank that should follow policy initiatives rather than profit accumulation, (Corkin, 2011a).  Although the intervention removed this requirement, the World Bank continued to express concerns with the loan agreement.  They reported the loans were only ‘“marginally conditional, although significantly less so than those associated with the official development assistance (ODA) (Foster et al. 2008).  However, the report later asserts that the Exim Bank loans offer two times the grant element percent than that of ODA requirements (Foster et al., 2008; Corkin, 2011a).  The Ministry of Commerce’s involvement in the loan agreement represents not only the supreme power of the Chinese government, but also the state’s investment in a long term positive relationship.  Prioritization of financial need and repayment ability encourages the inauguration of a win-win partnership beyond the tenuous relationship promoted by a self-perpetuating debt system.

Rather than China’s loan package excluding the context element, the IMF’s conditionality seems to conflict more with Angola’s position.  To request a country in the midst of reconstruction to end its pursuit of funding is unreasonable.  Simultaneous expectations to increase transparency and restructure the economy are equally lofty.  As the Angolan Minister of Finance exclaims, “the IMF did not have an accumulated knowledge of Angolan economics… reason for years of failed tasks” (Kibble 2006, p. 537).  Angola was initially borrowing from the ODA at 2.5% over LIBOR and grace periods were either non-existent or short (Brautigam, 2009).  On the other hand, loans from China provide a structure without requirements for grueling and insecure cultural shifts.  Rather, they allow for feasible repayment strategies with a long enough repayment period for Angola to utilize profits from the initial investments.  To accept China’s offer is more sustainable and manageable than IMF loans.

China’s Purpose

Many attacks on China’s Angola investment allude to its interest in the oil industry.  The 2002 Exim Bank loans were accepted with a purchase of one of Angola’s oil blocks.  Many experts accept Sinopec’s securement of the 50% share of Block 18 to have been negotiated with the $2 billion loan (Brautigam, 2009; Corkin, 2011a).  Sinopec’s attainment of another oil block a year later and the establishment of SSI lead many to believe China’s loans to include a clandestine takeover of Angola’s oil production.  These developments, along with the oil backing of the Exim loan, could prove dangerous for the Angolan economy and give reason to support accusations of China’s exploitive intent.

Angola has quickly become China’s largest African trading partner since these events (Corkin, 2011a).  By 2009, 39% of Angola’s oil exports were sent to China (Corkin, 2011a).  Now, there are frequent bilateral visits of state officials and direct air flights have been established from Beijing to Luanda.  Although relationships between the two countries have strengthened, Angola has not allowed China to control its main source of revenue.  After the establishment of SSI, Sinopec planned to develop an oil refinery in Western Angola that would produce 200,000 barrels daily, but the deal was called off (Corkin, 2011a).  The promising offshore drilling blocks controlled by SSI were eventually abandoned due to China’s lack of deep and ultra-deep drilling technology (Corkin, 2011a).  Furthermore, in 2008 Sonangol blocked Sinopec’s 1.8 billion purchase of 20% stake in another oil block because of Angola’s intent for ownership (Corkin, 2011a).

China was definitely looking to secure resources to fuel their energy consumption in their initial negotiations with Angola, and was very straightforward in this pursuit.  Still, this did not blindly lead China to exploit Angola.  China is a relatively minor oil trade partner with Angola (Corkin, 2011a).  Moreover, Angola only ranked 18th in China’s FDI stock and China represents only 0.25% of Angola’s FDI stock (Corkin, 2011b).  China has publicly announced that it does not consider Angola to be a strategic investment, but rather has interest in relations with South Africa (Corkin, 2011a).  If this were the case, why would China invest $14.5 billion in the country?  One compelling argument would hypothesize China’s intent to gain access to the Democratic Republic of Congo DRC, Angola’s neighbor.  As the majority of loans for Angola are for infrastructure, China could look to build the conditions necessary to extract resources.  As a landlocked country, one the biggest restraints for the DRC in the future could be its access to the international market (Collier, 2007).  A well planned road or rail system in Angola would allow China to better reach the DRC’s resources.

Planner vs. Searcher

The planner seeker approach is a spectrum defining the current parameters of development implementation strategies.  At one end of the spectrum, the planner prepares initiatives with overbearing goals that lead projects through a mass of administrative level controlled resources.  It does not prioritize the input of initiative recipients as its plans are preconceived by an outside body.  At the other end of the spectrum, the searcher pursues opportunities to solve problems and values feedback of the people affected by the problems.  It uses trial and error to find the most appropriate measures to deal with an issue.  Although often used to measure individual aid projects, this spectrum is applicable to any level of development planning (Easterly, 2008).

In regards to its overall development strategy, China falls closer to the searcher end of the spectrum.  As a searcher, China does not set goals entering projects beyond repayment and guaranteed project completion.  Its loan policies consider almost every country on an equal footing, as the same policies are presented to governments regardless of development levels in the country, corruption issues, human rights violations, or financial rating, but take context into account in securing feasible loan backing resources for repayment (Brautigam, 2009).  As most of China’s development work involves infrastructure, they focus on completing projects in a cost effective and timely manner (Brautigam, 2009).  As its most significant searcher attribute, China allows the recipient to decide their projects, regardless of the apparent need or possible negative affects it may have on the country’s society.  For example, while in the middle of conflict Sierra Leone received a loan to build a soccer stadium (Brautigam, 2009).  Not long before, China already completed the construction of another stadium in the country.  As a Chinese ambassador to Sierra Leone reports, ‘“From our point of view, it is not necessary to build another stadium…No African country has two [Chinese-built] stadiums.  The infrastructure in this country is bad.  They need other things.  But they insisted.  So, finally we respected their choice’” (Brautigam 2009, p. 138).  As long as the country can repay its debts, and accepts the “One China” policy, China accepts the demands of most countries (Brautigam, 2009).  As a planner, China requires the use of its own companies in infrastructure contracting. Although China conducts its own evaluations of its programs, it does not input a trial and error system.  Furthermore, China’s involvement does not always prioritize a solution, but works to fulfill more political goals with recipients.  Nonetheless, overall, their development approach has more searcher than planner aspects to its design.     In the case of Angola, China has held true to its development design.  The Exim Bank $10.5 billion loan to Angola awards 70% of the funds to Chinese enterprises and, as requested by the Angolan government, appropriates the remaining 30% to Angola’s private sector (Corkin, 2011a).  As this loan, along with the CIF’s $2.9 billion loan, is to be allocated for infrastructure development, Angola has full authority as to where and what the loans should be used for.   With so much of Angola’s infrastructure destroyed by war, its development is a major concern and widely recognized as an eminent barrier to economic growth.  As Brautigam writes,

“Bombs destroyed more than 200 bridges.  Rural roads and farming fields were planted with landmines.  Urban infrastructure ‘dramatically deteriorated,’ streets were ‘in a state of collapse.’  Raw sewage spilled out of the open gutters during heavy rains and ran down the alleys of chaotic shanty towns.  Angolans badly need infrastructure” (Brautigam 2009, p. 275).

Infrastructure inhibits the potential of every development initiative in Angola.  However, Angola has concentrated much of its resources in a few large coastal cities, creating issues of overpopulation and the isolation of its rural populations.  In 2011, Luanda, its capital , was listed as the most expensive city in the world, while 90% of its rural population lives under the poverty line (Carmody, 2011).  Furthermore, the government continues to focus its construction in those areas, reinforcing many of the access issues that already exist.  Chinese companies are building homes, irrigation systems, sewage systems, roads, railways, hospitals, and are expanding the Luanda International Airport (Brautigam, 2009; Carmody, 2011; Corkin, 2008; Corkin, 2011a).  Though many have suggested China’s infrastructure developments to build more access ways to oil extraction areas, there is little evidence to support this claim.  Projects are taking place on the coast, far away from drilling sites (Brautigam, 2009).  This observation may be comforting in that Angola actively controls the decision making, but supports the government’s neglect for the rural populations in the East.

China’s dedication to compliance with recipient nations’ fund allocation strategies is an extreme form of the searcher approach; however can be dangerous.  If decision makers do not accurately and strategically measure the needs of the greater population, they may bind their nations to long term contracts that work against development.  China’s searcher approach also focuses more on the product than the process.  Supplying Chinese labor ignores the local capacity of the recipient nation.  In the case of Angola, with a very high level of unemployment, the labor force can only receive marginal benefits from such a large investment in the country.  Furthermore, this searcher model does not take into account sustainability as a lack of local labor force utilization also qualifies maintenance capacities, imperative to upkeep of any infrastructure project.  Although China uses a searcher approach, its investment in Angola demonstrates its limits.

Governance

Governance in Angola has taken a foremost position as a target for public scrutiny.  Many accept corruption to be one of the biggest inhibitors to the country’s overall development.  There are seven politicians and former politicians with a net worth $100 million or more each, while the majority of the population lives in poverty (Carmody, 2011).  The supermajority of the MPLA party, its entanglement with the judiciary, the disappearance of oil revenues, and the 30 year reigning presidency of Jose Dos Santos also display the pervasiveness of corruption in  Angolan society.  There is little transparency in the actions of the government and information systems on all levels are either inconsistent or nonexistent.  Coincidently, China’s transparency is intentionally limited itself, further evoking protest to the loan arrangement.  Without a value for transparency by both parties and concomitantly China’s willingness to overlook corruption, these issues are often speculated to intensify through China’s development assistance.

However, although China is not accountable to the international community, it remains accountable to itself.  Chinese companies contracted to work on aid projects are individually selected by the Ministry of Commerce and report directly the Exim Bank (Corkin, 2008).  The bank also directly pays its contractors to limit transactions within the Angolan financial system (Corkin, 2011a).  Comparing China’s corruption and transparency policies with those of the Global North, it is revealed that few Western firms involved in development apply any general democracy or human rights considerations to their investment decisions (Brautigam, 2009).  Moreover, Brautigam finds China’s investments to allow for comparably less opportunities to support Angola’s corruption networks.  She writes, “A second look reveals that it was Western banks that gave loans without requiring transparency, and Western companies that exported Angolan oil, providing cash flows for the ruling party” (Brautigam, 2009, p. 276).  Rather than Chinese investment supporting a problem, it may have indirectly worked to mitigate issues.

The China Exim Bank loans were not only large in amount, but also allowed Angola authority in deciding its overall implementation.  With corruption, transparency, and efficacy concerns, some question the capacity of Angola’s government to positively affect its development.  Nonetheless, Angola has made great strides in developing its economy.  Though heavily dependent on natural resource rents, apart from the economic crisis in 2009, Angola’s GDP growth rate has steadily increased every year (AFDB, et al.2013).  Its Paris Club debt, accumulated before the end of the war, has been largely paid off and the remainder is being restructured by the IMF.  Before China’s involvement with Angola, its credit rating was D or highly risky (Brautigam, 2009).  Now it has been upgraded to B+ and is attracting FDI and international creditors alike (Corkin, 2011a).  Furthermore, development creditors, including Brazil, Canada, and Spain, have begun to emulate China’s model employing their own companies to implement initiatives (Corkin, 2011b).  China’s “dynamic sustainability” created long term and short term benefits for Angola’s economy.  Rather than an inhibitor for Angola’s development its loans have proven instrumental for economic development.

Though the economy has grown, many other aspects of Angola’s society remain unaddressed.  Corruption still runs rampant preventing freedom of press and even NGO work in Angola.  Access issues plague Angola’s rural populations and the CDB’s $1 billion loan has yet to rebuild Angola’s once thriving agricultural center (Comarmond, 2011).  Over 50% of all children are malnourished and one in five children die before the age of five (Carmody, 2011).  While competent in expanding economic powers, China’s loans leave many developmental gaps unfilled, and both its population as well as the rest of the world dubious of real change in Angola.  As the thinking behind development evolves, academics and practitioners alike have come to recognize this process as a comprehensive societal movement beyond the limits of the economy.  In this regard, Angola’s economic advancement relies on a volatile natural resource market, and its government has yet to demonstrate any effective reinvestment of its wealth in its population.  Without the growth of its society to support the growth of its economy, it is questionable if the effects of China’s loans are sustainable.

Conclusion

The effect of China’s Angola investment has been both positive and negative.  However, as economic growth is most valued by international organizations and foreign investors, Angola’s economic development has somewhat hidden its lack of development in other sectors.  Without the support of the international community, China’s involvement in Angola’s development has more recently built a more positive reputation for China’s aid system.  Their interventions have not only affected the approaches to aid initiatives as more countries provide similar types of loan structures, but also demonstrate that economic development is not comprehensive development.  Until international organizations give more attention to this fact, Angola will remain in its liminal and limited development status.

 

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