Author: Robert Kappel
Affiliated organization: Library FES
Type of publication: Report
Date of publication: January 2021
EU-African economic relations
European and African countries are at different stages of economic development, with European gross domestic product (GDP) more than ten times that of sub-Saharan Africa. Africa’s GDP, while recording average annual growth of 4.6 per cent over the last 20 years, has not grown evenly across the continent. Nigeria and South Africa have been languishing for a long time and, as a result, are depressing the continent’s average economic growth. Other countries, such as Ethiopia or Rwanda, on the other hand, recorded very high growth.
Although average per capita income has been on the increase for the last 15 years, the current trends suggest that by 2030, around 380 million Africans will still be living in poverty. Most African countries do not converge. One of the reasons for this is the lack of economic dynamism. Africa is falling behind other continents, rather than catching up, despite its relatively high growth. That said, following the lost decades of the 1980s and ‘90s, many African countries are now undergoing fundamental transformation. Thanks to urbanisation, digitalisation, integration into regional and global value chains, modernisation of agriculture and a new generation of dynamic young Africans, African populations are becoming increasingly self-confident. Another harsh reality, however, is that in some African countries, clientelist rulers have not embarked on the path of modernity and reform, but remain focused on keeping hold of power instead.
Africa currently accounts for less than three per cent of global trade. In 1980, the corresponding figure still remained at 4.6 per cent but dropped to below two per cent in the 1990s, before increasing slightly post-2000. This latter development can partly be put down to rising export prices as well as increasing foreign direct investment (FDI), both of which contributed to increased trade. Above all, however, it can be attributed to the high demand for raw materials in China.
The EU is Africa’s largest trade partner, although Africa’s share of exports to the EU has been on the decline for a number of years now. This shift is mainly due to the fact that European countries have diversified their imports of raw materials, and other countries – such as China, India, Turkey and the Gulf countries – have linked their rise to the expansion of their commodity trade with Africa. In 2018, trade in goods between the 27 EU Member States and Africa reached a total value of 235 billion euros (32 per cent of Africa’s total trade). Africa’s trade with China by comparison amounted to 125 billion euros (17 per cent), while trade with the USA totalled 46 billion euros (six per cent).
In 2009, the EU’s exports from and imports to Africa were more or less balanced. The European trade surplus was as little as 2.3 billion euros (see Figure 5). In the subsequent years, both imports from and exports to Africa increased, although there was slightly more growth in imports. This trend continued into 2012 when the European trade deficit reached 25 billion euros, which was largely a result of the increase in the price of raw materials. After 2012, imports from Africa declined, while European exports continued to grow. 2014 was a turning point, with the trade deficit turning into a 5.1 billion euro surplus. In 2016, the EU surplus in commodity trading surged to a record 33 billion euros. Growing imports from Africa subsequently resulted in a decline in the European trade surplus.
Industrial goods made up the lion’s share of European exports to Africa, with 77 per cent of EU exports to Africa in 2009 being manufactured goods. This dropped to 68 per cent in 2019, while the share of primary goods rose from 20 to 32 per cent. The declining share of manufactured goods was caused primarily by the decrease in machinery and vehicle exports as a share of total European exports to Africa (42 per cent in 2009, 36 per cent in 2019). A considerable proportion of raw materials exports are food products, accounting for approximately 14 per cent of total European raw materials exports since the 1980s.
Primary goods dominate Africa’s exports to Europe. Between 2009 and 2019, however, their share dropped from 77 to 66 per cent, primarily due to the declining share of energy exports resulting from falling oil and gas prices. During the same period, the share of industrial goods increased from 21 to 32 per cent. This is largely due to the increase in exports of machinery and vehicles from South Africa and North African countries.
The composition of exports and imports is also different, with Africa exporting mainly unprocessed raw materials and agricultural products and the EU’s exports to Africa mainly comprising capital and consumer goods. Exceptions here are the North African countries of Morocco, Tunisia and Egypt, as well as Mauritius, Kenya and South Africa, which have a more diversified export structure. Some countries such as Ethiopia and Senegal, for instance, have also successfully industrialised in the last few years and are now exporting more manufactured goods.
North Africa8 is the EU’s largest African trade partner. Goods exports from the EU to North Africa increased from 54 billion euros in 2009 to 76 billion euros in 2019, which corresponds to an average annual growth rate of 3.5 per cent. Growth rates for trade with East Africa was even higher (5.7 per cent), closely followed by West Africa (5.4 per cent) and Southern Africa (5.2 per cent). Goods exports to Central Africa, in contrast, declined during this period (2.3 per cent).
The African continent remains a peripheral region when it comes to international investment activity. While Africa’s share in international investment was still around the 5.3 per cent mark in 1967, by 1980 it had plummeted to 2.6 per cent, subsequently falling to some two per cent by 2018. The importance of foreign direct investment inflows and stocks to and in Africa is declining. Investment data since the 1980s show that Africa’s declining share of global investment appears to be of a longer-term nature.
Primary goods dominate Africa’s exports to Europe. Between 2009 and 2019, however, their share dropped from 77 to 66 per cent, primarily due to the declining share of energy exports resulting from falling oil and gas prices. During the same period, the share of industrial goods increased from 21 to 32 per cent. This is largely due to the increase in exports of machinery and vehicles from South Africa and North African countries
In 2017, direct investment from Europe amounted to 222 billion euros (capital stock), which was five times higher than investment from the USA (42 billion euros) and China (38 billion euros). British, French, Dutch and Italian companies are the most important European investors in the African continent. Over the last ten years, Chinese FDI has been on a sharp upward trajectory placing it in fourth position when it comes to inflows after the USA, UK and France. China’s FDI stock in Africa is still lower than that of European countries, amounting to just 15 per cent of total European FDI inflows. Our statistical analysis also illustrates that, although the PRC has become an important investor, the gap between the EU and China is getting bigger rather than smaller. This is largely being caused by the steeply increasing Italian and Dutch investment volumes, which have compensated for the decline in FDI from France and the UK.
Germany, too, is an important investor in the African continent (ranking tenth for FDI stocks in Africa). Its investment structure differs significantly from the other countries, however. The UK, France and the USA invest mainly in the raw materials and financial services sectors, while Germany is very strongly represented in industrial sectors. Germany’s main investment focus is car and auto parts manufacturing. This diagram presents a highly distorted picture, however. A significant share of German FDI is directed to the automotive and automotive parts manufacturing sector in South Africa. Removing South Africa from the equation would deliver a far less favourable picture of the sectoral distribution.
Compared with companies from the USA, France, the UK, China, South Africa and the United Arab Emirates (UAE), German investors create more jobs per one million US dollars invested (see Table 1, Figure 19). The reason for this is that German businesses invest predominantly in the manufacturing industry. The large number of jobs created can essentially be explained by Germany’s high level of industrial investment in South Africa and several countries in Northern Africa. These are all middle-income countries with an emerging middle class, a relatively diversified industrial structure and a comparatively strong manufacturing industry.
Between 2000 and 2017, China issued 130 billion euros in loans to African governments and state-owned enterprises, with the funds being used mainly for infrastructure expansion. According to the China Africa Research Institution (CARI), China is now the largest bilateral creditor in the region, accounting for 20 per cent of Africa’s public debt.
In 2017, direct investment from Europe amounted to 222 billion euros (capital stock), which was five times higher than investment from the USA (42 billion euros) and China (38 billion euros). British, French, Dutch and Italian companies are the most important European investors in the African continent
In every respect, the EU is an important external actor for Africa and has indeed been strengthening its position on the African continent rather than scaling down its activities. The increasing share of European FDI in manufacturing and services, in particular, – along with the diminishing focus on the raw materials sector – has enabled European companies to consolidate their economic position. Nevertheless, here too, caution is called for: Contrary to all assertions, FDI and trade – and this includes with the EU – are not overly effective. They neither generate a large number of jobs, though certain high-quality investments can give knowledge and technology transfer a boost, nor do they make a significant contribution to industrial or agricultural development on the African continent. As demonstrated below, this is related to the asymmetrical relationship between the two continents, FDI’s weak links with local industry and especially with the endogenous dynamics of Africa’s economic development, which is less dependent on external transfers today than ever before.
Cooperation with Africa: from Lomé to a comprehensive strategy with Africa
In recent years, the European Union and EU member states have developed numerous new Africa strategies. These reflect the challenges of cooperation in very different ways as well as the respective shifts in economic policy. For example, commodity stabilisation policies were linked to the ideas of the New World Economic Order promoted by UNCTAD during the 1970s and stabilisation concepts to the neo-liberal ideas of the Chicago School of the 1980s and the policies of the Thatcher and Reagan administrations, while today’s concepts are partly guided by the ideas of inclusive growth (pro-poor growth), redistribution of global inequality and sustainability agendas.
In as early as 1958, the Treaty of Rome set out the foundations for postcolonial relations between the then European Economic Community and Africa. The subsequent Yaoundé, Lomé and finally Cotonou Agreement between the EU and the African, Caribbean and Pacific Group of States (ACP) created close ties, for example through commodity price stabilisation, development aid, the creation of jointly staffed institutions, and the establishment of an ACP Brussels Office. Measures to promote industrialisation in Africa, however, were not on the agenda.
The Cotonou Agreement signed in 2000 and in particular the Joint Africa-EU Strategy (JAES) adopted in 2007 signalled a gradual turn in the relations between the EU and Africa. Up until then, the relationship had been characterised by postcolonial dynamics. There are four main reasons behind this development: Firstly, China’s strategic approach made it the EU’s main competitor in trade, investment and development cooperation. Secondly, for some 15 years already, African countries had been recording relatively high growth rates. Thirdly, migration from African countries to the EU had been on the rise as a result of conflict and crisis. And, fourthly, numerous new African initiatives, such as the African Union’s Agenda 2063 plan for the transformation of Africa and the African Continental Free Trade Area (AfCFTA) adopted in 2019, bear witness to the fact that African states are acting increasingly strategically and are exploring opportunities for cooperation with multiple actors.
The JAES adopted in 2007 had already emphasised the need for »a move away from a traditional relationship« to »forge a real partnership characterized by equality«. The Juncker Plan – the Africa-Europe Alliance for Sustainable Investment and Jobs (AEA) aimed to take the development of cooperation with Africa in a new direction. China’s geostrategic moves acted as a catalyst for Europe to develop its own geostrategic concept. The AEA was ultimately replaced by the »Towards a Comprehensive Strategy with Africa« (CSA) proposal in March 2020. The CSA is a European document which serves as a framework for talks between the EU and the AU. The third main agenda dedicated to a new form of cooperation with Africa is the External Investment Plan (EIP).
The challenges facing EU-African relations are immense. Over the next ten years, the focus will be on transforming what has so far been paternalistic cooperation into a strategic partnership. In order to achieve this, however, a number of fundamental decisions need to be made. EU political leaders claim that 2020 is »pivotal year« for the EU’s relationship with Africa. The new EU-Africa Strategy adopted in March 2020 envisages building a »stronger, more ambitious« partnership with Africa. Ahead of the strategy being adopted, the European Commission president Ursula von der Leyen called for a »partnership of equals«, moving beyond the donorrecipient dynamics that have characterised relations between the EU and Africa for so long. Instead, the EU-Africa Strategy seeks to pave the way for genuine cooperation.
Forging a strategic partnership: recommendations for action
Combatting the pandemic
In March 2020, the High Representative of the EU for Foreign Affairs and Security Policy, Josep Borrell, announced that the EU would be supporting its partners around the world in fighting the virus, particularly those in Africa. This assurance was translated into real action when the EU initiated its »Team Europe« package to support partner countries in the fight against the coronavirus pandemic. The EU and its Member States have taken a variety of initiatives to help Africa tackle the outbreak of Covid-19. These include immediate short-term measures such as the procurement of tests and laboratory equipment, followed by longer term pandemic prevention through the development of the laboratory infrastructure, the provision of funding for training measures, information campaigns and national pandemic response plans.
The EU’s support is crucial and could also help to strengthen Africa’s public health sector in the long term. A whole raft of African initiatives, however, likewise demonstrate how much African countries are taking the reins themselves when it comes to combatting the crisis.
New agricultural policy
A common agricultural policy that serves the interests of both sides and involves the key African and European players must be developed in cooperation with the African countries. One area of focus should comprise measures to ensure or improve food security.
Thanks to its extremely high productivity and billions in subsidies, the European agricultural sector is superior to African agriculture in every respect. It is repeatedly argued that European subsidies exacerbate poverty and food insecurity by facilitating cheap exports. The EU’s Common Agricultural Policy operates via what is known as the »export and import hinge«: »If the EU, the world’s biggest exporter of agricultural products, were to increase its exports, world market prices would fall. They may well also fall in developing countries, undermining their competitiveness and displacing local products«64. European agriculture receives 45 billion euros a year from the European Agricultural Guarantee Fund (EAGF). These funds primarily benefit farmers and food companies. In 2016, the average subsidies received by farmers amounted for almost 300 euros per hectare, meaning that a farmer with 30 hectares of land would be awarded a direct payment of around 10,000 euros each year. An additional billion euros comes from the European agricultural fund for rural development (EAFRD). This money is earmarked predominantly for environmental protection, climate change mitigation and animal welfare as well as rural development. These substantial direct payments have played an important part in the EU becoming the world’s largest exporter of foodstuffs. African farmers are at a significant competitive disadvantage in every respect due to the protectionist measures of the EU (and also of the USA and China).
Supporting transformation processes
What is also needed is a proactive policy for economic and social transformation. The creation of more productive jobs for Africa’s rapidly growing population is of pivotal importance. Investment in urban agglomerations can be an important driver of structural change. In the cities, in particular, work in the informal sector constitutes the all-important basis of survival for the majority of the population. The pandemic has meant that millions of people working in the informal economy face having their livelihoods destroyed, which is something that has hit the poorest members of the population hardest. For many years, the growth process on the African continent has led to the emergence of a growing middle class, although this class is itself volatile and could slip back into poverty.
Linking foreign direct investment with local businesses
Foreign direct investment (FDI) can make an important contribution to Africa’s economic development, provided it does not merely comprise exploiting raw materials. Investment in agriculture and the manufacturing industry, in particular, but also in the service sector can help create highly skilled jobs and foster technology and knowledge transfer, thus boosting Africa’s productivity development. In many of Africa’s less productive microenterprises, this form of investment is virtually impossible. Instead, for these enterprises to grow, government support initiatives are needed, for instance in the form of vocational training, better access to loans and a reliable supply of electricity.
In many of the countries on the African continent, however, this support has been non-existent. Large-scale and medium-sized enterprises may be developing, but growth is sluggish, meaning they are not really in a position to drive Africa’s economic transformation forward on their own. FDI can help achieve specialisation and generate economies of scale. A number of foreign enterprises are already working in close collaboration with local businesses, creating industrial zones, engaging in long-term projects and contributing capital, knowledge and technology. Fundamental change, however, must take place in Africa itself. In fact, the contribution that foreign direct investment has made to reducing poverty or youth unemployment has proven to be limited.
Total foreign investment in the period 2014 to 2018, for example, led to the creation of as few as 140,000 new jobs per year on average, primarily in Egypt, Ethiopia, Morocco, South Africa, Nigeria, Algeria and Tunisia (in this order). Virtually the only way to create jobs for 20 million people per annum is through local businesses and farmers. And it is down to local governments to support and foster rather than hamper their local economy.
Redefining trade relations
Up till now, trade agreements between the EU und African countries have not been properly regulated. In fact, the EU’s trade and cooperation policy has most certainly been partly responsible for the asymmetrical relations and exacerbated the debt crisis, which is now ramping up again. Africa has largely failed to industrialise, with no Africa-wide industry agenda in place to this day. African and European countries debated the Economic Partnership Agreements (EPAs) over many years yet failed to come to an agreement. To date, the EU has entered into trade agreements with North African countries and five Economic Partnership Agreements with regional groups of sub-Saharan countries. Critics argue that these agreements might impede the structural transformation of the African continent by undermining intra-regional trade and integration.
Lowering tariffs on EU imports to African markets, as set down in the EPAs, is predicted to divert the region’s trade away from local suppliers towards European manufacturers. With the EU’s EPAs being negotiated with regional blocs as opposed to the African continent as a whole, they have increased the heterogeneity of the liberalisation commitments of African countries, adding to the challenge of rationalising the African continent’s trade regimes under AfCFTA. The limited benefits the EPAs are expected to bring explain why many African countries, especially low-income countries, have refused to join them. The long-overdue reform of the trade regime between the European Union and Africa requires the EPAs to be abandoned. Given the EU Commission’s for global markets to be opened up even further, African businesses and smallholders are at an even greater risk of being marginalised by European imports. To be able to grow and develop competitive industries and agricultural economies, African countries are demanding external protection that will help them compensate for unfavourable locational conditions.
Supporting digital transformation
Another important goal for African countries is the implementation of digital transformation in Africa. In the CSA, the EU makes a strong plea for the development of a digital single market in Africa in order to boost growth across all sectors of the economy. One of the most important prerequisites for participation in the digital transformation, however, is a reliable energy supply, something which is not guaranteed for 60 per cent of the African population.
Supporting debt reduction
Many African countries are at high risk of debt distress. Even before the Covid-19 pandemic, Africa’s growing national debt was the subject of much debate. Numerous experts have proposed a debt moratorium to give Africa leeway to overcome the pandemic crisis. Whether this moratorium would ultimately become a waiver of debt, however, remains unclear. With the IMF classifying 16 of the 36 lowest income countries in sub-Saharan Africa as being »in debt distress« or having a »high risk of debt distress« even before the Covid-19 outbreak, it is very likely that some countries will have difficulties servicing their debts in the near future.
The decision by the G20, the IMF and the Paris Club to offer a temporary suspension of debt as part of the Debt Service Suspension Initiative (DSSI) caused quite the stir; at just 0.6 per cent of GDP, the impact for Africa, however, was modest to say the least. This is due to the fact that in the past 20 years African countries have increasingly taken on loans at commercial conditions from multilateral creditors (e.g. the World Bank, the African Development Bank), from China as well as on capital markets and with private creditors. In fact, African Eurobond debt increased ten-fold over a period of ten years to 58 billion US dollars (see Figure 21). Neither the Eurobonds nor the commercial loans are covered by the DSSI. The World Bank is not involved in the DSSI either, claiming that, in light of their net resource transfer to African countries, it would make no sense to suspend their debt repayments, and that a moratorium might adversely impact broader poverty reduction efforts. Chinese President Xi Jinping, on the other hand, confirmed that China would be participating in the DSSI, stating that the Chinese government was willing to cancel the sub-Saharan countries’ interest-free debt that was due for payment in 2020.
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