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Focus

Germany’s DC: a foot in the door of crucial partners

World Bank: in search of strategy

Cooperation challenges

Economic development needs capacity building

What China’s success means for other countries


10/2005 		 

China’s impact

For other developing countries, the spectacular growth of the Chinese economy is a mixed blessing. While it is true that commodity exporters benefit from China’s increasing demand, industrialisation becomes more difficult given the tough competition from the People’s Republic. The Chinese miracle also has impacts on income distribution within countries and does not necessarily contribute to alleviating poverty elsewhere.


[ By Rhys Jenkins ]

China’s rapid growth and increased openness over the past quarter century has turned it into a key player in the global economy in the early twenty-first century. GDP has grown at over 9% per annum since 1980 making China the world’s sixth largest economy at market exchange rates. It has been predicted that China will become the third largest economy, overtaking Germany during the next five years and going on to replace Japan as number two during the next decade.

The economic reforms introduced in China from the late 1970s on led to it becoming much more integrated with the global economy. Its share of world trade has risen from less than 1% in 1980 to almost 6% in 2003, making it the fourth largest trading economy. In many ways, China’s growth and export performance resembles that of Japan and other Asian countries’ at similar stages of their development. But the sheer size of its economy means that China is likely to have a much stronger impact on the world economy.

Alarm bells are already ringing in the developed countries as a result of the massive inflow of cheap Chinese goods after the People’s Republic joined the World Trade Organisation (WTO) in 2001. This is particularly so since the Multi-Fibre Agreement (MFA) ended at the start of 2005. The USA has already imposed restrictions on certain textile and garment imports from China and is now considering a comprehensive agreement to control the surge of Chinese imports. Europe’s attempts to limit Chinese imports created chaos with millions of garments held up in ports as quotas were exceeded within weeks of being agreed. China’s rapid growth also has major global environmental consequences. For instance, it has made the country the world’s second largest emitter of carbon dioxide after the US.

China’s global expansion also has a major effect on other developing economies. In countries as far apart as Mexico, Bangladesh and Lesotho, concern is being expressed about the consequences of Chinese competition for their exports. At the same time many primary commodity exporters are finding new markets in China and, as a result, enjoy better terms of trade. Elsewhere, domestic manufacturers are finding it hard to compete with low priced Chinese imports.

There are four different ways in which China’s growth is affecting other developing countries. These are
– growth of developing country exports to China,
competition from China for developing country exports to third markets,
– competition from China in the home markets of developing countries, as well as
– competition for foreign direct investment (FDI).

The overall impact that China’s growth has on a developing country depends on how these dynamics interact for the country.


Exports to China

China’s economic boom and increased openness has led to a massive increase in imports, which are now running at around $500 billion a year, making China the world’s third largest market for exporters. Chinese imports from other developing countries increased more than eight-fold between 1990 and 2003.

What do these imports consist of? First there are energy and minerals which have been required to fuel the booming Chinese industrial sector. China is resource-poor. Economic growth has outstripped domestic supplies leading to an urgent demand for imports. Minerals and fuel account for more than two-thirds of China’s imports from Africa and over a third of its imports from Latin America. China is now an important market for African oil exporters such as Angola and Sudan. China also operates oil fields in Venezuela and recently signed an agreement with the government there for further oil and gas exploration. China has been involved in refurbishing Zambian copper mines and developing closer relations with Zimbabwe, also a reflection of its interest in that country’s mineral resources.

China’s growth has led to a rise in the standard of living of its population and an increase in consumer demand. One reflection of this has been increased imports of agricultural products. Consumption patterns change as people become richer and, in particular, there is an increased demand for meat products. The growing consumption of meat in China in recent years has led to a surge in imports of feedstuffs such as soy and fish meal. The soy boom in Latin America has found a ready market in China, which last year took over a third of Brazil’s crop. Exports of fish meal to China have become an important source of foreign exchange for Peru.

China’s export boom has also contributed to the increased demand for imports because much of the export activity involves assembly of parts and components. Some of the more advanced developing countries in Asia have thus become important exporters of manufactured goods to China. Taiwan and South Korea are the third and fourth largest exporters to China, but some of the ASEAN countries have also benefited from the growth of Chinese imports.


Competition in third markets

Developed countries worry about the increased penetration of their markets by imports from China. In fact this is often more of a problem for other developing country exporters than it is for producers in developed countries. This is highlighted by the fact that US retailers have argued against restrictions on imports of textiles and garments from China on the grounds that they have increased mainly at the expense of other countries’ exports to the US. These other exporters face a “double whammy” from Chinese competition as they both lose market share and face lower returns as a result of downward pressure on prices from cheap Chinese goods.
The countries which are particularly affected by the growth of China’s exports to North America and Europe are those which export goods in which China is particularly competitive. These include countries such as Bangladesh, Cambodia and Thailand in Asia, Lesotho in Sub-Saharan Africa and Mexico and some Central American countries.

The problems are particularly acute for countries which developed significant textile and garment exports under the MFA’s quota system. With the end of the MFA they are exposed to direct competition from China, which they may be poorly placed to meet. Reports are already coming in of plant closures in many countries including Bangladesh, El Salvador and Lesotho. Nor are the problems confined to countries which have specialised in low-tech manufactures. As Chinese industry becomes more technologically sophisticated its range of exports is broadening and also posing a threat to middle income exporters of more capital or skill-intensive products such as Mexico and Malaysia. Chinese exports of some agricultural products are also on the rise for example with Chinese apples affecting markets for countries such as Chile and South Africa.


Competition in domestic markets

Chinese goods are not only flooding into the developed countries but also expanding rapidly across the developing world. This has two consequences. On the one hand consumers benefit from the availability of cheap Chinese products. On the other hand producers may find that they cannot compete and have to cut back production or even go out of business.

In the least developed countries with very low levels of industrialisation, Chinese goods compete mainly with imports from other countries, so that the benefits to consumers are not counter-balanced by significant negative effects on producers. In the longer term, however, the domination of the market for labour-intensive goods by cheap Chinese imports may make it more difficult for a country to get industrialisation started. Countries at a somewhat higher level of income, which have already established an industrial sector face a much greater threat to producers, especially those producing less technologically sophisticated goods. More technologically advanced developing countries may be less threatened at present but become more so as Chinese industry upgrades.

While textbook economics assumes that the gains to consumers will outweigh the losses to producers when trade expands in all cases, this is only true in the long run. In the short run, there may be significant adjustment costs when resources do not switch to alternative uses. Moreover, increased trade with China may have significant distributional impacts.


Effects on foreign
direct investment

In regard to foreign direct investment (FDI), China is considered important for two reasons. First, there is a concern that the massive growth of FDI flows to China has diverted investment from other developing countries. FDI flows to China increased more than fifteen fold between 1990 and 2003, and China received 10% of world FDI. Nonetheless, there is as yet very little evidence that inflows to China were at the expense of other developing countries. Most commentators have concluded that FDI is driven by factors such as market size, growth and economic policies and that diversion to China has not been an important factor affecting flows to other developing countries.

Second, China itself has begun to invest overseas and this aspect of Chinese economic growth might have a positive effect on growth and poverty reduction in host countries. FDI outflows averaged $3 billion dollars a year between 2000 and 2003 but this is still very small in terms of global flows.

However this is likely to increase in the future as the Chinese government has relaxed restrictions on outward investment. Some commentators predict that China could be one of the top three investors in Africa within five years, while President Hu Jintao’s visit to Latin America last year also led to promises of a big increase in Chinese investment in the region. Although China is investing in manufacturing in developed countries, in developing countries the focus is still largely on oil and minerals.


Effects on the poor

The Millennium Development Goals have set a target of reducing the proportion of the world’s population living on less than $1 a day by half by 2015. China’s remarkable economic growth has made a major contribution to meeting this target by reducing the proportion of the Chinese population who are poor from 64% in 1981 to 17% by 2001. However poverty reduction in the rest of the developing world has not progressed at anything like the same rate. Indeed the World Bank’s estimate of a reduction of 200 million in the global total of people living on less than $1 a day since1980, is less than the reduction achieved in China over the same period.

This raises the question of whether China’s global expansion and poverty reduction has contributed to poverty reduction elsewhere, or been an obstacle to it. Indeed, China’s boom does not have an overall favourable impact on the poor in other countries. The types of goods China imports are not generally produced by the poor. On the other hand, they are the ones to suffer if expanded mining or logging creates environmental spillovers or threatens the livelihoods of neighbouring communities. Even the growth of agricultural exports such as soy can have negative environmental and social repercussions as a result of the expansion of commercial cultivation and increased pressures on peasants.

An even more serious negative impact arises where increased Chinese competition leads to a loss of export markets for other developing countries. These often involve industries based on unskilled labour (such as garments and footwear), which employ large numbers of low paid, often female, workers. Therefore, the loss of these jobs to China can have a devastating effect on household incomes. A recent Christian Aid report on Bangladesh sums up the plight of women workers in the country’s ready made garment industries in terms of “rags to riches to rags”. It is precisely those who have recently been lifted out of poverty by the growth of exports who are most vulnerable to Chinese competition.

While there may be benefits to consumers from imports of cheap Chinese goods, the extent to which these reach the poor is unclear. Imported goods tend generally to be consumed mainly by people in urban areas and particularly the better off. How far the poor benefit depends on whether they have access to these imported goods and whether lower border prices are passed through to the consumer.


Conclusion

In recent years, China’s growth has been an important factor in maintaining the dynamic of the world economy. A major slowdown in China would surely have a negative effect on growth in other developing countries. But the impact that China has had elsewhere is variable both between countries and within countries.

Countries whose economies are complementary with China’s have benefited. These include some of its East Asian neighbours who have used China as a base in which to assemble their exports, and some commodity producing developing countries that have taken advantage of the growth of the Chinese market to increase their exports and obtain improved terms of trade. On the other hand, countries which compete directly with China in export markets are likely to suffer serious dislocation.

Within countries, different groups are affected differently by the growth of China. As shown above, the poor do not benefit directly in most cases and may even be negatively affected. However these outcomes are not inevitable. For example, increased mineral or timber exports can be used to generate additional government revenues through royalties and taxation. Where there is a political will, these can be channelled into programmes aimed at reducing poverty.


Rhys Jenkins, PhD
is an economics professor at the University of East Anglia’s School of Development
Studies in Norwich.
r.o.jenkins@uea.ac.uk