G8 should tell Africa to follow China model

Blurb: While sub-Saharan Africa remains mired in poverty, by freeing up its economy China has registered stunning long-term growth

Poverty will once again top the agenda at next week's G8 summit meeting in Gleneagles Scotland. Much of the focus will be on debt reduction, particularly for sub-Saharan African nations, where the number of people classified as "extreme poor," rose by an astonishing 80 million during the 1990s.

But debt reduction can at best be a short-term fix. To cut poverty and stimulate long term economic growth, more drastic action will be needed. One country that provides a dramatic example of how both can be achieved within a relatively short period of time is China.

Twenty-five years ago China was a basket case. The country was inward-looking, private property was discouraged and most farming was done on organized collectives. As recently as 1980, between 600 and 700 million Chinese lived on less than $1 a day.

But in 1979, the Chinese government initiated the first in a series of dramatic reforms, leading to unprecedented sustained GDP growth. Today China is the world's largest producer of coal, steel and cement. And exports to the U.S. have risen by 1,600 percent during the past 15 years. Starbucks CEO Howard Schultz even recently predicted on CNBC that within three years the company would likely have more outlets in China than the U.S.

Most impressive of all: China's growth has lifted more than 200 million people out of the ranks of the poor. Meanwhile much of sub-Saharan Africa stagnates, with many countries actually moving backwards. A recent statistical analysis from the United Nations Development Program projects that 28 million Africans will die needlessly during the coming decade if the continent continues on its current path.

A comparison of the diverging paths taken by Africa and China during the past 30 years is highly instructive. When African nations began breaking away from the great European empires during the 1960s their futures looked bright.

Africa has vast natural resources and lots of farmable land. Asia, on the other hand, --with its growing population,-- seemed headed for catastrophe. As recently as thirty years ago, the average income in sub-Saharan Africa was twice that of both South and East Asia . Today the positions are more than reversed, and Africa is the region of the world, which has the highest proportion of its people living in extreme poverty .

So how did China achieve such success? By opening its economy to foreign trade and investment, and gradually making legal and regulatory reforms that have enabled the nation's private sector to become the main engine of growth.

Ironically the effects of these changes are well-known to economic development officials. Yet conventional wisdom, among the general public, activists and many politicians, --as evidenced by everything from UNICEF contribution boxes that kids shuffle around at Halloween, to efforts by celebrities to draw attention to the cause, -- give the impression that more foreign aid is the only answer.

In a sense this is not surprising. The Foundation for the Teaching of Economics has been involved in a project called "Is Capitalism Good for the Poor?" which is designed to educate high school teachers about the importance of free market solutions in improving the lot of the developing world. Surprisingly teachers often emerge from our workshops surprised that implementing free market solutions may be one of the best hopes for the poor.

Yet history shows that poverty reduction is a long-term incremental process. True, there are many steps that richer countries can take to help. These include removing trade barriers such as farming subsidies and mobility restrictions that limit developing nations' competitive advantages.

Other measures such as debt reduction and foreign aid are also crucial. But as the recent U.K. report by the Commission for Africa points out, many of the most important steps, --such as improving the investment climate, fostering small business development and freeing up trade, --will have to come from within the nations affected.

China remains far from an ideal free-market economy. Yet the Chinese model provides an excellent example of how taking even small steps to make markets freer, improve governance and ease restrictions on private enterprise can make a big difference in generating economic growth and reducing poverty. African nations, as well as developing economies in other continents, could learn a lot by studying it.

 

Jim Klauder is vice-president of the Foundation for the Teaching of Economics, a non-profit group dedicated improving economic education.

peter@peterdiekmeyer.com

 

 

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