Sad Flip Side To China-Congo Deal

I've taken a very cautious attitude toward the $6 billion deal between China and the Democratic Republic of Congo. My hesitation to endorse it has been based on the economics of the deal, which calls for Chinese companies to build infrastructure in the DRC in return for large copper concessions. This isn't a gift--the DRC is paying for those projects by not collecting royalties for the copper the Chinese will be mining. The projects will also be completed by Chinese companies, so the profits from the road building, etc., will go not to Congolese companies for further circulation through the DRC economy, either. Those objections aside, however, there is a positive flip side to the structure of the deal.

It actually lies in the way the DRC is paying for the infrastructure projects. Under a normal mining concession, the company, Chinese or otherwise, would pay royalties and fees into the national treasury based on the amount of material the mines produce. They would also pay taxes (albeit usually very small amounts) based on their profits. This cash is a significant source of revenue for the government. It is also a significant temptation.

There is no guarantee that the funds would be used by the DRC government to build roads, hospitals, or schools. There are no assurances that the funds used for military payrolls don't end up in the off-shore bank accounts of corrupt officers. It is almost as likely that the money will go for buying votes in the next election or vacations on the French Riviera for bureaucrats as for training nurses or maintaining roads so farmers can get their goods to market.

In other words, by keeping the Congolese people's share of the mining revenues out of the hands of the government, the deal accomplishes the quite worthwhile goal of rebuilding some of the infrastructure that was destroyed in the war and subsequent on-going conflict. That approach doesn't say much for the ability of the Congolese to govern themselves, but it puts trains back on the tracks.

Dave Donelson, author of Heart of Diamonds a romantic thriller about blood diamonds in the Congo.

Nitty-Gritty Of Congo - China Reconstruction Deal

One of the more interesting chapters in Paul Collier's thought-provoking work, Wars, Guns, and Votes, discusses the economic effects of armed conflict and the nitty-gritty of post-conflict reconstruction. He talks not about the horrors of rape and the disruption of societal services, but the more mundane but no less disastrous destruction of infrastructure and, perhaps even more importantly, the collapse of industries like construction, which he explains is one of the hardest hit.

Collier points out that while aid agencies rush about setting up conferences on reconciliation and lining up financing for big construction projects in the post-conflict period, they overlook the fact that the civil conflict has most likely decimated the skilled labor force. In a normal economy, the construction industry is a key provider of jobs for unskilled youths who learn from the older workers who have been on the job for a while. When armed conflict disrupts that educational process, the capabilities of the labor force atrophies, creating an impediment to development.

The shortage of skilled labor creates a bottleneck that pushes up construction prices, further undermining government and donor efforts to rebuild the country. Many countries turn to outside contractors like the Chinese to rebuild their infrastructure. As Collier says:

"...the Chinese face no bottlenecks because they routinely bring in absolutely everything, including the entire workforce. But resorting to the Chinese throws out the main short-term benefit from the recovery of the construction sector, which is to generate jobs for young men"

Without those jobs, the young men don't learn the skills necessary to build their country over the long term. The lack of jobs also makes them more inclined to look for employment with rebel groups and armed gangs preying on the civilian population, thus further undermining the possibilities of peace during reconstruction. Collier continues:

"Post-conflict situations need squads of bricklayers, plumbers, welders, and so forth, who set about training young men. Unfortunately, it is too mundane for the development agencies to organize it. We need Bricklayers Without Borders."

Such drawbacks aren't necessarily inherent in development-for-minerals deals with the Chinese like the $6 billion deal the Democratic Republic of Congo is in the process of negotiating. If the deal follows the patterns of other Chinese projects in Africa, however, it is a likely side effect.

That is not to say that there are no advantages to the controversial DRC-China pact. I'll discuss one of the biggest tomorrow.

Dave Donelson, author of Heart of Diamonds a romantic thriller about blood diamonds in the Congo.

"Dead Aid" Review Draws Comments

My review of Dead Aid, Dambisa Moyo's provocative book about the failures of aid in Africa, has drawn comments from several places. One of the more interesting exchanges was with "An American in Kathmandu" that occurred on my blog on Daily Kos. The exchange began with a quote from my review:

I also fail to see how corrupt leaders and their minions will be any less likely to steal funds from private lenders than they are from the World Bank. Perhaps my most significant objection, though is when Moyo says the developing nations will be better served paying ten percent interest (the rate she quotes for emerging market debt in 2007) than the 0.75% they are charged by the World Bank. How does that work to anyone's advantage other than the investment bankers?

"American in Kathmandu" wrote:

Exactly. So what to do? Just walk away? That's hard to do in the face of the kinds of human suffering that you see. And there are some successes. Sometimes two steps forward and one back. Sometimes the other way around, depressingly. Sometimes it's in one sector, or one district, or simply for a few thousand people before the good policies are reversed.

I don't think there are easy solutions, but I do want to grapple for what the harder answers might be.

My response:

There is no one-size-fits-all solution to Africa's economic problems. As you know, every country is different, every situation unique. In general, though, I rather admire the Chinese approach similar to the deal being negotiated now in the DRC: we'll build you a railroad; you give us rights to develop these mines. Ignoring the way they treat their workers (for the sake of this argument), such a deal pretty much gives everybody what they want without a layer of ideology. Local companies and/or labor do much of the work on both the project and the mines, the government gets revenue from the mines in the form of royalties and taxes, and the Chinese get a source of minerals for their industries. Such deals don't have to be for extractive industries, either; they can cover manufacturing, agricultural, or even service industries where direct foreign investment (not government-to-government aid) makes sense. Of course, there are several miles of hurdles to be jumped to get to these deals and make them fair, etc., but they are doable. They are also only one of a number of ways to approach the development dilemma.

Which brought this reply from "American in Kathmandu"...

China's doing a lot of this in Africa now, the downside though, is that as you say, with the ideology removed, it really becomes about pure self-interest for China. Thus very little concern with environmental sustainability and social impact - e.g., the way everyone didn't like that institutions like the World Bank used to behave time 100. There's quite a lot of emphasis being put on public-private partnerships these days, including on models like what China is doing on such a massive scale now across Africa, but it also raises issues about who owns things - water resources, the best agricultural land, etc., being big concerns.

It's an approach that should be considered - but at the same time, fraught with difficulties about how you avoid the same "colonialistic" seizing of things of value in the global South by outsiders with very little concern for the sustainability and impact on the average citizen in those countries, with the deals being approved by an often corrupt and undemocratic ruling elite.

My response was:

What public-private partnerships need in Africa is the element that's sorely missing in opaque societies like the kleptocracies that are the norm: rule of law. If there is a fair commercial code and other body of law, an independent judiciary to enforce it, and a transparent process for awarding of contracts for development, the rights of the people of the nations involved can be protected along with their interests in the land and other resources being developed. Every party, be they the governments of China and the DRC, multinationals like Freeport McMoRan, or the World Bank, operates in its own self-interest; the rule of law makes sure the people don't get trampled in the process. Private developers aren't evil, they just need to be controlled for the interests of the nation, not the kleptocrats. A company that provides capital to develop a resource that builds jobs for the country and spawns ancillary supporting industries and infrastructure can also pay substantial taxes and royalties, which is a good thing as long as they go into the public coffers and not into Swiss bank accounts. The rule of law is necessary to make that happen.

"American in Kathmandu" replied "I agree the rule of law is critically important."

Dave Donelson, author of Heart of Diamonds a romantic thriller about blood diamonds in the Congo.