Bully for Africa: but are there risks to the new commodities craze?

• Author: Kleiman, Gary N.

On his maiden visit to Africa in November, U.S. Treasury Secretary Henry Paulson echoed a crystallizing view of Africa's economy from Wall Street and multinational boardrooms of economic and investment turnaround. He cited key shifts and statistics from public and private sector reports: GDP growth above 5 percent for several years, single-digit inflation, lower external debt with official relief programs allowing buildup of record foreign exchange reserves, commercial and financial market progress as measured by the World Bank's "Doing Business" indicators, and rising bond and stock activity. However, recognition of high commodity prices and global demand is always at the core of such presentations on the continent's nascent emerging market status. Natural resource over-reliance and expectations of bottomless new appetite from Asia and elsewhere could be tested in future cycles, especially as the world economy enters a cooling phase.

Recent multilateral development bank reviews for the region repeat broad themes. Oil-producing countries have grown faster, and account for over half of exports and foreign direct investment. In most of the sub-Sahara one or two raw materials dominate trade. Agricultural output is particularly at risk of bad weather and credit and input constraints. While exchanges with Asia, particularly China, have "expanded dramatically" in the words of the International Monetary Fund, import shares from traditional partners in North America and the European Union remain over twice as large. Overseas portfolio inflows are limited by an array of access, regulatory, liquidity, and operating restrictions.

The United Nation's latest compilation of direct investment numbers shows that Africa took less than 5 percent of the cross-border total, concentrated in Nigeria and South Africa. The other top recipients were mainly oil and gas producers, such as Chad, Equatorial Guinea, and Sudan, along with a handful of mineral processors, led by the Democratic Republic of Congo. With their former colonial relationships, European firms, joined by new entrants from Russia, maintain the biggest presence, but U.S. and Chinese firms have also arrived in force, focusing on energy. Chevron, ExxonMobil, and Marathon are among the petroleum giants in Nigeria, Angola, and Gabon, which supply one-quarter of American needs.

Chinese projects came to almost US$7 billion in 2006, typically with oil stakes accompanied by packages of aid and concessional...