China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

Africa – a continent of future “growth lions” ?

May 7, 2014

Africa – a continent of future “growth lions” ?

Some minutes ago, I listened to Toto’s wonderful song “Africa “ from the early 1980s. Good music and jogging often lead to new ideas. So why not changing the topic of my blog contribution a little bit and writing some lines on the economically and politically lagging – but wonderful and kind – continent of Africa?

Sure, I have visited Sub-Saharan African countries to a much lesser extent than all the Asian “growth tigers”. But I read also all over the years all the discouraging reports on Africa and – more or less – most individual Sub-Saharan countries. Just a few countries proved to be a little bit more future-oriented than all the others since the 1980s. In quite a number of countries, economic conditions have even worsened considerably in the past decades. The rest of the Sub-Saharan countries remained more or less unchanged on low economic and social levels, at least during the past decade.

Now – finally – Africa is increasingly “in” – particularly in the eyes of many politicians and analysts/strategists in our part of the world. Positive messages are spread all over the world, more lately also by the Swedish minister of finance. Africa is more and more praised as the continent of the future.

I really do hope that these conclusions turn out to be right. Looking at the African country-wise GDP-growth for the past decade, however, does not reveal any major acceleration of growth rates. According to the African Development Bank (AfDB), GDP-growth rates have been more and more less unchanged during the past decade, something like stable 5 ½ percent on average (Morocco, Tunisia and Libya included) – without major volatility. Also on country levels, growths fluctuations were quite limited in the past ten years. Positive outliers are, for instance, Ghana, Togo and Zambia, whereas South Africa, Sudan and Uganda are characterized by a weakening growth trend.

Some of the Sub-Saharan African countries have achieved structural improvements in the past 10-15 years or so. What may be even more important is the fact that also foreign investment interests in Africa has been growing. However, there are still only six Sub-Saharan countries among the leading 100 countries when it comes to the World Bank’s/IFC’s ranking of business conditions out of totally 189 countries (Mauritius on number 20, Rwanda [!] 32, South Africa 41 (only!), Botswana 56, Ghana 67, Zambia 83, Namibia 98 – and 20 countries are among the last 25 countries on the list of “Doing Business 2013”).

All in all, things have been moving (somewhat) in the right direction all the same. However, by far too many African countries south of the Sahara still have not created satisfactory political and institutional conditions for a sustainable upward trend. Modern definitions of institutions are quite broad and include also traditions and habits, both the good ones and the bad ones. The bad habits and traditions include even factors like corruption, lagging application of existing laws and insufficient statistics. Badly working institutions may exist within the political, social and financial sector, government administration, property rights, etc. Both researchers and practitioners know that it usually takes a long time to change institutional shortcomings to the better. This includes also health care, the environment, more broadly anchored education, etc.

It is, of course, positive that the economies in a number of Sub-Saharan countries probably have entered a more positive – or less negative – stage of their economic development. In certain cases political progress can be noted as well. But these specific cases do not allow putting all Sub-Saharan African countries in the same promising basket. Africa has to be analyzed country by country and case by case – and not so much by using general conclusions that unify developments to the “African economy”. Similar – misguiding – aggregated views were already created after the fall of the Berlin Wall and the Iron Curtain by summarizing all the reforming countries to “Eastern Europe” – and not to forget the BRICS countries which nowadays definitely do not manifest themselves as a homogenous group of countries.

In many ways, impressing developments in China are often taken as an argument against the quite common view that institutions mean a lot to economic growth – as, for example, institutional economists like Douglass North, Dani Rodrik and Daron Acemoglu so strongly are pleading for in their research. In other words: Opponents to the strong supporters of institutional economics normally use China’s on average poor institutional standards and its simultaneously good economic growth as the most prominent example for their skeptical position (result from our very recent China Survey Panel for Chinese institutions on a scale from 1-10: 4.1 , 10=very good).

On the other hand, we have noticed more recently that also China must do much more for a sustainable future good GDP growth than in the past (which is reflected in the official documents from the Third Plenum last November). There is no doubt that also China has to improve its institutional standards substantially in the next five to ten years for not be being caught in the so-called middle-income trap.

Thus, the main conclusion of this article is that Africa south of the Sahara should not be analyzed in the aggregated way as it’s mostly done these days. Analysis and investments there should be made country by country – even if the currently more positive mood for the continent may help. Hopefully, China can manage its growth problems smoothly – also because of most African countries´ dependence on commodity prices (where Chinese demand usually is the main price driver). But more value-added production should be created in Africa, too. Hopefully, trends in the world economy are moving to a new kind of equilibrium that favors the whole global economy, Africa included.

Right now, there is at least a starting point for more hope, supported by a better psychological mood on Africa outside the one-billion people continent. GDP growth around 5-5 ½ percent means that at least the younger lions have entered the global economic growth scene – like the young Asian tigers did young some 25-35 years ago. However, we have to understand that lions and tigers are very different – like the fundamentals for the Asian and African economies. But this should not refrain from hoping for Africa’s best while the young lions are growing up! They will have a long way to go …

 

Hubert Fromlet
Visiting Professor of International Economics, Linnaeus University
Editorial board

 

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The Mantra of Consumption-driven Growth and the New Urbanization Plan

April 2, 2014

For years, China has been discussing the necessity to enter a new growth path. Originally, the discussion arose from economists’ warning that China’s growth will not be able to rely on cheap labour and exports endlessly as population growth slowed. The thrust of the argument at that time was that China had to shift to a more knowledge-based, innovation-driven development path or, in other words, should shift to higher stages on the global production chains. The warnings seemed increasingly plausible when wages rose in Southern China due to a lower flux of migrants and the impact of the new labour law of early 2008.

Later, representatives of the US government, amongst others, pressured China for supporting local demand as part of the global remedies against the global financial crisis and China’s huge trade surplus with the United States. China’s export-driven growth model was said to be unsustainable, as it contributed to global imbalances and exposed China to too much risk. Hence, China’s stimulus package, announced in late 2008 and implemented throughout 2009 and 2010, was lauded internationally. The stimulus package did trigger an investment boom, even though, as was to be expected then and has become obvious today, it created substantial follow-up problems. At any rate, the contribution of final consumption to GDP did not change significantly. As far as there was a tiny increase in final consumption to GDP this resulted from government consumption, not household consumption.

The discussion about a necessary change in China’s development path again gained traction in the months before the Chinese leadership change. This time the discussion expanded against the background of local government debts, declining profitability of state-owned enterprises, fluctuating exports and ever increasing environmental problems that were perceived as a result of the stimulus package and the investment-driven development path of the last decade. Different visions, hopes and interests led to the common expectation that the new Party leadership under Xi Jinping would initiate substantial changes in economic policies. In this context, China’s need for a new growth path again was linked to the idea of a consumption-led growth model. Triggering consumption at home would lessen export dependence, stabilize GDP growth etc.

Most recently the March session of the National People’s Congress has confirmed this line of thinking. For example, the recently propagated “2014-2020 new urbanization plan” states that “domestic demand is the basic force of our economic development and the largest potential for expansion of domestic demand lies in urbanization”.

So, it seems as if China’s future growth path is expected to be urbanization driven and therefore demand driven. Does this mean that the early experts who called for a new growth path can be happy because their warnings are finally understood? Can the US exult because finally the trade balance will tilt to their favour? And can the Chinese government look forward to a new growth impetus that helps overcome the problematic legacy of the stimulus package? I think it is too early to be that optimistic.

First, the remedy is not new. Last time the Chinese government grasped to an urbanization strategy for solving economic problems was at the end of the 1990s when the introduction of private ownership of housing led to a surge in urbanization, real-estate investment and – for about three years – an increase in the consumption to GDP ratio. While this indicates that the new industrialization strategy may indeed contribute to domestic consumption, the recipe as such would not be new and the impact may not last long.

Second, past experience is that public investment tends to increase in the years after a leadership change. Against this background, the urbanization programme can also be interpreted as an invitation to local government to invest in real estate programs, city and infrastructure development etc. It would still be a development path driven by investment. This may not be the intention of the central government but it is a likely outcome.

Third, the challenge remains to find occupation for the new urbanites. Where will they work? In the service sector or in labour-intensive production? We do not know, yet. Whatever the development will be, it will influence the growth path. Last but least, the vision of consumption-led growth still implies that the products for consumption have to be produced somewhere. This could be in China, it could be abroad. In any case, the problem of the environmental impact of global consumption pattern that has led to China’s environmental problems, will not be solved by China following a US like consumption-led growth model.

 

 

 

 

 

 

Doris Fischer
Professor, University of Würzburg, China Business and Economics

 

 

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China’s New Consumption-driven Growth Model – Inconsistencies, Impediments and Indebtedness

Doris Fischer’s article above is illuminating. She points at different inconsistencies and impediments in China’s new consumption-driven growth model which she also calls an “urbanization model”. I agree with her doubts – but would like to argue partly with some additional points.

Doris Fischer singles out a number of questions and conclusions that have been neglected or simply not been recognized so far. One is the possible strength of the planned urbanization process with its effects on private consumption (furniture, clothes, food, cars, etc,). Another one could be the ever increasing population in the metropolitan and other city areas which per se should strengthen the demand for consumption goods, supported in my view also by the planned deregulation of the – so far – very impeding urban registration process (“hukou”). Fischer also raises the question whether the massive plans of urbanization via local investments rather should be regarded as a local investment issue than primarily a plan for sustained higher growth of private consumption. Here we can find an obvious inconsistency in the official Chinese plans.

In Doris Fischer’s eyes, the new generation of Chinese leaders is creating more private consumption and – at the same time – also more public investment. I wonder how such plans can be brought in line with partly already existing high local indebtedness? She also raises very correctly the very important question where all these new jobs in the urban areas should be created. I wonder also how these migrating people can be integrated in the intended process of improved and new technology (see the corresponding decisions from the Third Plenum). Furthermore, one should get confused when thinking more deeply about the environmental consequences of the prioritized urbanization process. How can the huge challenges from air pollution, poor water quality and waste be handled in real life? Where are the decisive government attacks against all the existing impediments to a clearly improved environment (which the whole globe and the Chinese people want to see)? They cannot be watched yet on a wider scale.

However, I’m sure that the Chinese policymakers are familiar with all the environmental threats that rapidly accelerating urbanization may cause. I got this impression when I visited China two months ago. Thus, we come back to the conflicts of goals in the China’s marketization and deregulation process – conflicts of goals which I will take up in a paper at the SNEE conference in Mölle/Sweden in May 2014. These conflicts of goals may also be a main motivation for the dampened estimate for China’s potential GDP-growth somewhere in the neighborhood of 5 ½ -5 ¾% in 2020, according to LNU’s recent China Survey Panel.

All in all, indications remain strong that China’s economy will be downsizing (somewhat) in the next few years, probably also structurally by moving to the intended consumption-driven growth. This structural change of growth model will be more complicated to handle than the (previous) export-/investment-driven model. But it would not be a bad development by definition if major improvements of the environment were allowed to happen and simultaneously reasonable growth rates still could be achieved in line with the predicted potential rate of growth.

One big question, however, has not yet been considered by markets and most economists very seriously:  Could it happen that Chinese private households will become more visibly interested in an acceleration of their financial investments five to ten years from now instead of markedly more rapidly increasing consumption – i.e. at a time when the supply of reasonable financial investment products finally has been widened and modernized?

At least theoretically, it could. What could happen in such a case, will be another story to elaborate on at some point in the future.

 

Hubert Fromlet
Visiting Professor of International Economics, Linnaeus University
Editorial board

 

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