The Growth Between China and Sub-saharan Africa

Introduction

In this essay, the growth between both China and Sub-Saharan Africa (SSA) will be explained in terms of their contrasting growth since the 1980s. The growth between the two will be explored from the perspective of institutional theory. Key influences both internal and external will be identified and will be evaluated in reference to how they have shaped the economic and business landscape of the two emerging markets. Institutions are an essential part of any society, they impose structure on how individuals behave. Institutions and their rules definitively guide what we do which is how they can impact on economic growth.

A few of the institutional models and theories that will be applied and evaluated in relation to the growth of China and SSA are the linear stages theory, the Lewis theory of development and the neo-classical model, these theories attempt to explain the process of development and what has happened up until now. To explore some potential constraints on future growth then the key concepts of diminishing and increasing returns can be explored, with technology playing a part in providing a possible solution.

Growth in Sub Saharan Africa

In an academic journal the Third World Quarterly an article called "Orientalism and African Development Studies: the 'reductive repetition' motif in theories of African underdevelopment", Edward said that the images we see in the media in regards to Africa and they're under development are different to the reality. An example of this would be the issue of The Economist titled ‘The Hopeless Continent’ published back in May 2000, which portrayed Africa as having war-torn weak states.

As a region, SSA is made up of 48 countries, 32 of which are independent and has over 910 million people. Only 37% is urbanized and the electricity generation of all of SSA is equal to Spain. SSA has the lowest share of world economic output is highly dependent on commodity exports such as gold, oil, and diamonds. The majority of the region is agricultural and many are aid dependent. However, SSA has a collection of diversified economies in terms of growth, for example, Ethiopia, Mozambique, and Tanzania were within the top 5 fastest growing countries in terms of annual average GDP growth with a percentage of over 7% between 2010 and 2015.

GDP growth rates in Chad in 2016 were -7% and in Equatorial Guinea -9.75% which shows the contrasting development rates of the countries. However, this is GDP growth and a better indicator of wealth may be GDP per Capita which shows total output which is then divided by the population figures and that therefore gives us the average amount of money people make. This is a better indicator to show the standard of living in these countries. (See Appendix 1 to see GDP per Capita annual growth % for these countries).

SSA has been the slowest growing economy, it is now rising. Aid is shrinking and foreign direct investment (FDI) is growing. Conflicts are causing less disruption and some places are becoming less violent. In a report called The Rise of African Consumer by Mckinsey and Company a global management consultancy firm reported that their findings from the survey they had conducted showed that "Africans are exceptionally optimistic about their future. 84% say they will be better off in two years. African consumers demand quality products and are brand conscious.

African consumers want the latest fashion and a modern shopping experience". This supports the idea that there is now a new African middle class where 300 million people are now on the middle-income scale. The Economist previously mentioned before for their issue calling Africa "The Hopeless Continent" have also supported the idea by publishing an article years later called Africa Rising stating that ‘After decades of slow growth, Africa has a real chance to follow in the footsteps of Asia’. However, there are arguments against this which support the Lewis theory of development in terms of labor transition between two sectors. In the well-known articles by Time Magazine and The Economist, both articles do not mention the absence of manufacturing within Africa. (See Appendix 2 to see Africa’s total exports).

Commodities are natural resources and they are dead-end activities. For the future Africa will need to industrialize otherwise they run into the issue of diminishing returns, in order to raise GDP growth percentages a country needs to produce more, they need the technology and machinery accessible to them in order to provide increasing returns. David Ricardo a classical British economist from the late 18th and early 19th century suggested there would be a limit to growth due to prices rising so high, consumers would not be able to afford products.

However, Ricardo was wrong as he at that point in history would not have been able to predict the technological advances that have occurred in more recent years. Technological advances mean that production can be done more efficiently and can be done by machines which therefore has lowered the prices of products as there are no labor costs. Also, Ricardo though we would run out of land to grow food but he did not foresee us going to other countries to source food.

The Lewis theory of development is trying to explain the growth of a developing country in terms of labor transition between two sectors. The two sectors based around a dual economy where the first sector is about agriculture, traditional etc. and the second sectors is the manufacturing/ industrial sector. When there is a shortage of land and an unlimited amount of labor to work the land it results in surplus labor. Growth comes when more workers chose manufacturing and the industrial sector because of more attractive wages, resulting in surplus profit reinvestment helping to grow the economy and currently this is not something that SSA is taking advantage of in order to emulate growth success stories such as the East Asian Miracle.

The East Asian Miracle is an example of how rapid economic growth can be achieved with industrialization. The East Asian Miracle is about the high performing Asian economies such as Hong Kong, ‘the Tigers’ e.g. Taiwan, Indonesia, Thailand, and Malaysia, who turned translated sustained growth rates into real wealth gains. All of these countries started from a low base so growth was rapid. They employed more resources by investing in more capital and infrastructure and they used their existing resources more effectively.

The World Bank report in 1993 suggested that the reasons for the successful growth were down to sensible stable macroeconomic policy, there was low inflation during growth periods which helped as if there was high inflation it would mean that wages would rise and prices would not be competitive. But as inflation was low prices stayed competitive for export. Also, there were small fiscal deficits/ low government borrowing and low stable interest rates. There were secure financial systems, trusts were set up and firms were able to invest.

The trade policy and exchange rates were very important, there was an import substitution policy whereby the government would stop the importation of products that they believed could be manufactured themselves. They had a pro-export regime and export credits and government incentives were offered to businesses that export e.g. tax breaks for exports and targets were set, elements such as lower taxes or tax breaks, privatization and less state intervention is what the neoclassical theory suggests will help to grow an economy. Also, Asian countries have weak currency policies so that the weaker currency made goods cheaper when exported to other countries which made the market more attractive to foreign buyers.

The institutional basis for growth in the East Asian Miracle was the basis of shared growth and equality. From the late 1950s to 1990s Japan had the same political party which shows the cohesiveness and the overall agreeing census within their communities. There are a business-friendly environment and even deliberation councils where countries meet and discuss long-term planning on how to improve the economic state. Deals are made with government and business in an effort to keep improving. When it came to accumulating human and physical capital there were focuses on improvement in education, infrastructure, and savings.

The Harrod Domar model of growth was that to improve the economy people would need to have saved in order to fund the investment this model supports Japans action to set up their post office which allowed people a place to keep their savings to use as an investment. The East Asian tigers have an openness to foreign technology which also helped their growth, for example, they would copy technology from other countries and they would promote specific industries by the government picking the best industry to invest in. A combination of all of this was important but there are is an argument made by Paul Krugman an American economist who believed the East Asian miracle is similar to the Soviet Union in the 1950s which then collapsed and that believes that diminishing returns will soon set in.

The development of the East Asian tigers is very impressive and is a model in which other emerging markets could use, however, for SSA this might not be achievable due to the barriers to conducting business in the region. For example, the Tigers were very export-led, there was a focus on keeping costs low, manufacturing the good and making them attractive to foreign buyers. But due to the location of SSA, many countries are landlocked and shipping costs are two to three times higher than for coastal countries according to the World Bank. They have weak chains of supply and do not have the advantage which the Tigers had as they do not have access to the seas. Without government institutions stepping in to help build transportation links throughout SSA, this these costs are not going to get any lower.

Also in an Afrobarometer survey conducted for the region of SSA found that ‘1 in 5 still often lack food, clean water or medical care and 1 out of 2 experience occasional deprivation. More than 2 in 5 frequently lack cash income to meet basic needs and 3 out of 4 reports going without money at least once a year. Such ‘lived poverty’ decreased in 5 countries Cape Verde, Ghana, Malawi, Zambia, and Zimbabwe but sadly increased in 5 others: Botswana, Mali, Senegal, South Africa, and Tanzania’.

The survey shows that unlike the tigers they are unlikely to be able to follow the Harrod Domar model of growth as the economy cannot be improved by people saving in order to fund the investment as there is a low rate of domestic savings which are very steady and very unlikely to change. Other criticism of the Harrod Domar model is that countries such as the ones in SSA do not have the cultural and institutional conditions in place to fully utilize savings. Although a lot of African people do now have access to online banking via mobile phone access it is not substantial enough to be the difference that SSA needs. There is also not a lot of social cohesion within SSA, law, and order is weak in many African countries and firms in Africa pay higher bribes (as a percentage of sales) than other emerging market regions.

Growth in China

China’s major economic growth and development came after 1976 the year that Mao Zedong died. Mao Zedong who was referred to as Chairman Mao dominates China’s 20th-century history, he was head of the communist party and was a leader during the 1953 – 1978 isolationism. Prior to this was the civil war in China where the nationalists were defeated by the communists and nationalists were exiled to Taiwan. After the events, Chairman Mao isolated China from the rest of the world and China adopted a collectivist way of life.

Collectivism meant that nobody owned private property and everyone lived together and were assigned jobs. Chairman Mao put into place his first five-year plan. Chairman Mao’s first five-year plan focused on industrialization soviet style this meant the collectivization of agriculture, political centralisation, and a census was carried out in 1953 which showed China as having a population of over 503 million people and by 1958 there were around 750,000 agriculture co-ops.

The result of Chairman Mao’s isolation in 1953 meant there was famine within China with estimates of between 18-40 million deaths, which many Chinese people refuse to believe to this day, economic regression and it was what economist Perkins described as a "disaster". Chairman Mao became marginalized and responded in 1966 by launching the cultural revolution.

All traditional Chinese culture was removed, all elements of capitalism were removed and he put into place the red guards who were a group made up of mostly students that would actively and aggressively defend Mao. After Mao died, China was to do two things. First was whatever policy originated from Mao they must continue to support and whatever directions were given to the country by Mao they will continue following. Chairman Mao’s legacy left China a technologically backward country with a huge peasant population. There were mass food shortages and mass poverty.

In 1978 Deng Xiaoping took over. Xiaoping was open-minded to new policies, the country would try new things whatever didn’t work they would change and go in a different direction. Early reforms made under Xiaoping’s leadership were the one child per family policy to help take control of the population. In terms of agriculture, families were given land although they did not own it, they were able to farm it themselves. They were given certain amounts to produce on their land by the government and anything over that amount could be kept for themselves and sell to make a profit. Xiaoping incentivized the system.

The town and village state-owned enterprises were part of the reform but ended up not working out too well due to the corruption and bribes that were made over quotas with the government. Big industrial state-owned enterprises were kept and the smaller ones were eventually let go. In terms of banking and finance, there became 6 major banks in China that were all state-owned, they were government controlled and mostly just lent money to the larger state-owned enterprises.

Trade and investment gradually grew over a period of time China continues to control the exchange rates and are now a member of the world trade organization. Realistically the Chinese Yuan, the Chinese currency should be higher than what it is but it is closely monitored and controlled so that they remain good business in terms of exports. This similar to the East Asian Miracle countries and their pro-export regime and as well as the East Asian countries having a weaker currency policy. Another similarity is the location, China is not a landlocked country like many of the countries in SSA are, they have a large coastline that can be utilized and provides more easy access.

Another similarity between parts of SSA and China is there is an increasing middle class, in 2012 there was over 125 million and this is expected to rise to over 356 million by 2020. This will mean more people will be spending and wages will continue to rise. (See appendix 3 for the graph of wages growth in manufacturing). If wages do continue to rise it means the price of goods will need to rise in order to accommodate this. This could make China not as attractive to foreign buyers and China may need to use SSA more for manufacturing at labor costs would be lower.

The Chinese and SSA relationship is supported by China’s ‘Going Out’ policy which provides financial support, information dissemination, tax incentives, credit and loans to SSA and so far spent over £48 billion in SSA over the past 10 years and have an estimated 1673 aid projects running. Other challenges that businesses in China may face are based around the ‘formal’ and ‘informal’ institutional framework.

Conclusion

In conclusion, the Chinese growth and development since the 1980s have been successful. Over half a billion people have been lifted out of poverty in a matter of 30 years which is very impressive in comparison to western Europe who took over 200 years to achieve this. It shows that even for SSA and the vast amounts of people living in poverty there that there is hope and it is possible. However, I believe that SSA it will be very difficult for SSA to achieve anything near to this in such a short amount of time.

SSA is a region made up of different countries and different leaders, they would need to come together and show the type of community cohesiveness that the Tigers had in order to bring growth to the region as a whole. The evidence suggests that the way forward for growth in both SSA and China would be to continue their trade relationship. The Chinese and SSA trade relationship is overinflated by other countries and the belief that the relationship is unbalanced and benefits China more is not supported by FDI data. China is less concentrated on oil than FDI from the more developed western countries. Although most Chinese FDI is spending on mining, a lot is still spent on manufacturing (see appendix 4).

According to The Economist Issue called More than Mining ‘Africa is now more often seen by Chinese firms as a place to do business other than digging stuff out of the ground. China may see a chance to transplant some low-value-added industries, such as textiles, to Africa in the hope of escaping labor cost increases at home and to find easier export routes to America’. This is most likely SSA’s best opportunity to make the shift over to manufacturing to ensure a brighter future.