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Chinese Growth and Poverty Reduction: Lessons for Sub-Saharan Africa

Thursday October 08 2020
CHINA 2 PIC

China have transformed its economy and reduced poverty dramatically over the last forty years. Sub-Saharan Africa (SSA) have not done very well on this front. While efforts are made to reduce poverty, and growth averaged 4.8% between 2000 and 2010, only modest results in poverty reduction was achieved. Generally speaking, the average growth in SSA was relatively very low compared with China’s growth average of 9.56% between 2000 and 2015, with a consecutive four-year period of double-digit growth that climaxed at 14% in 2007.The World Bank data showed half of 736 million extremely poor people living on less than $1.90 a day lived in SSA. In his 2008 paper, Martin Ravallion, a renowned economist, showed that two thirds of Chinese people lived below $1 a day in 1981, and the World Bank data shows that in 1990, 54% of the population in SSA lived below $1.90 a day. While this proportion had fallen to 4% in East Asia in 2013, it declined to only 41% in SSA. The World Bank projects that, while the number of extremely poor people in other parts of the world is declining, it will rise in SSA and constitute 9 in 10 of the extremely poor by 2030. Negative growth rates, rapid population growth, political instability, and gender inequality are among factors hindering  rapid change. The experience of China suggests that accelerated growth accompanied by effective socio-economic transformation is key to resolving the “poverty trap” in SSA. The UN Sustainable Development Goals (SDGs) and the AU Agenda 2063 clearly recognize this.

 

Why did China succeed to achieve high growth rates and reduce poverty?

 

China’s transition efforts began 42 years ago. In his 2010 paper titled “China’s Miracle Demystified”, Justin Yifu Lin, former World Bank’s Chief Economist notes that, while the vision of its leader Deng Xiaoping was to quadruple the economy in twenty years by maintaining an average growth of 7.2%, that target was surpassed to reach average of 9.8%. Chinese economy transformed dramatically, raising manufacturing share to GDP, exports as a share of GDP from 9% to 70%. Over 600 million people were lifted from poverty. Today, China is the second largest economy in the world, after the United States, and up from 7th position in 1980. What explains this rapid transformation?

 

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The first is China’s strategy of learning and adapting manufacturing technology for the global market. As Justin Lin puts it, China took the advantage of backwardness by borrowing technology, industries, and institutions from the advanced countries at low risk and costs. This strategy earned it a status of the “factory of the world”.

 

The second is Chinese leaders’ right decision to consciously and gradually transform the country’s economic governance from a centrally planned one to market economy. China adopted a gradual and dual track approach of continued state’s transitory protection of non-viable state-owned enterprises in priority sectors, while allowing for joint ventures in labour-intensive sectors. The abundance of skilled and semiskilled labour provided China with a comparative advantage. Overtime, more space was opened for the private sector and competitive markets that stimulated dynamic growth and innovation, while maintaining domestic political and social stability.

 

The third is the relative political and social stability during the reform period. Stability allowed the state to experiment various policy options, learn from its own errors and adjust as it progressed. It allowed state to deepen interventions with consistency and depth. The fourth is urbanization associated with economic growth, reinforced by labour-intensive industrialization that preceded subsequent industrial revolution driven by evolution in technology and innovation that gradually transformed the nature of wealth creation towards capital intensity, services, and now robotics and digitization of production systems.  

 

What can Sub-Saharan African Countries learn from China? 

Prospects for faster development and poverty reduction in SSA exist, signaled by high growth momentum in some SSA countries, albeit with different social development outcomes. Botswana, for example, has achieved an upper-middle income status, although its limited diversification makes it vulnerable to commodity price shocks. Ethiopia, Tanzania, and Rwanda are heralded as among the fastest growing economies in SSA, and recently, Tanzania became a lower, middle income economy.

So, what can SSA countries learn from China’s experience, recognizing the heterogeneity of the continent? First, SSA must avoid misguided strategies of development. China made its mistakes, by attempting to develop capital- and technology-intensive industries in an inward focused economy dominated by agrarian economic and social relations. This created distortions, inefficiencies, and slowed growth and poverty reduction. Some SSA countries tried similar strategies without due attention to their initial conditions and relative comparative advantages, leading to misallocation of resources and distortions by applying policies, regulations and taxation regimes that are biased against rural majority.

 

Second, while industrial policies may be warranted due to significant externalities and coordination failures inherent in SSA economies, such policy actions must be time-bound and targeted to eliminating binding constraints to activities and sectors that drive and sustain economic growth. Such policies must translate comparative advantages into competitive advantages, and ensure that the benefits of growth trickle down to the poor.  

 

Third, agriculture reforms are necessary for market incentives to drive rural productivity, supported by capable institutions for reforms and public investments necessary for rural transformation. Effective transformation of the rural economy is a viable intermediate strategy for absorbing large and growing size of unskilled workforce in the continent.

 

Fourth, structural transformation and economic diversification have proved to be necessary for promoting growth, reducing poverty, and building resilience to economic shocks. To achieve these outcomes, as Ravallion pointed out, SSA countries needs to combine  pragmatic, evidence-based policy making with capable public institutions and strong leadership committed to structural transformation and poverty reduction.

 

Conclusion

 

In learning from China, SSA needs greater efforts and policies to transform agriculture and rural economy, strategic manufacturing sector, and to support productivity growth and gradual upgrading of the informal sector. Various factors such as technology gap, deficiencies in international trade governance, and the Covid-19 pandemic make sustained growth and poverty reduction in SSA a daunting task, requiring international cooperation to achieve the SDG agenda in ending poverty. The author is Executive Director of REPOA.