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17 May 2014

Lessons from China: How Africa can create jobs and reduce poverty levels.

 
Since China launched the Reform and Opening-up Policy some 30 years ago, its rapid economic growth (averaging 9.5 per cent or more annually) has substantially cut the country’s unemployment and poverty rates, especially in rural areas.
China’s rural poverty rate dropped from 18.5 per cent in 1981 to 2.8 per cent in 2004, and the number of poor people dropped from 152 million to 26 million.
China’s development is built on an effective economic system. Its Special Economic Zones (SEZs) were an integral element of the shift from the planned to the market economy in the pursuit of development progress.
SEZs, as the pioneer instrument of the Reform and Opening up Policy, have made great contributions towards absorbing the rural labour force.
They have absorbed capital and technology, especially from Hong Kong, which helped in the establishment of China’s first SEZ — Shenzhen — in the early 1980s.
Soon after, other SEZs like Zhuhai, Shantou and Xiamen were established. In the 1990s, Pudong New Area in Shanghai and the Binhai New Area in Tianjin became new economic growth poles.
The key elements for economic take-off in developing countries are access to capital and to markets. With these two ingredients, SEZs are able to attract substantial foreign investment, and to access markets through export trade.
The resulting industry base, with its significant demand for labour, attracts migrant workers, thereby bringing employment to the surplus rural labour force.
How can African governments follow suit?
In three ways. First, by encouraging foreign investment in the value-added processing of materials and goods, in order to create employment opportunities for the unskilled workforce.
The capital-intensive single manufacturing structure common in most African countries is not conducive to reducing poverty and creating employment.
African governments should direct foreign investment into the labour-intensive industries through preferential trade and tax policies, such as tax exemptions for manufacturing companies and export tax rebates.
Governments should use the foreign capital to develop domestic industries and absorb the low-skilled non-agricultural workforce into the manufacturing sector.
Absorbing low-skilled workers in these labour-intensive industries has a multiplier effect in the economy as these people, now regular wage earners, see their consumer patterns change to demand more products and services. As industries respond to this increase in aggregate demand, the economy grows.
Even so, the poverty reduction effect, which is significant at first, will gradually weaken, as the partially foreign-owned enterprise develops to become wholly foreign-owned.

At this time, to mitigate this weakening effect, African governments should encourage foreign capital enterprise to develop high-tech industries through policy guarantees.
They should also promote competition between foreign and local enterprises, in order to diversify the industrial structure with labour-intensive, capital-intensive and technology-intensive enterprises. Once this happens, the demand for labour will, once again, increase.
Second, by prioritising primary processing industries over capital- and technology-intensive industries.
African governments should guide foreign capital to the key manufacturing sectors through targeted strategies and policies to increase domestic demand and diversify economic growth.
China’s SEZs have already shown that manufacturing, trade and retail industries can absorb low-skilled workers, for instance, in the clothing, electronics, chemicals and machinery sectors.
The manufacturing of consumer goods in Africa accounts for just around 10 per cent of GDP. Foreign capital can play a key role here by helping to scale up this component of GDP to become a major player in the economy.
When foreign capital moves from labour-intensive to capital-intensive enterprises, the poverty reduction effect of FDI in the manufacturing sector weakens.
Governments should then encourage foreign investment in the service sector, such as the commercial and financial industries. They should also strengthen the links between the manufacturing and service sectors in order to reduce production and transaction costs, and strengthen product competitiveness.
Third, by promoting exports. African governments should encourage the export of manufactured goods, while continuing to fight trade exploitation, especially in the export of natural resources.
As Shenzhen’s exports increased, excess domestic production was also being sold through export trade. Whether poor people can benefit from export trade depends largely on the added value of the products being sold abroad, and whether they themselves can be part of the production process.
The gross value of exported goods and services in sub-Saharan African accounted for some 40 per cent of GDP in 2008, with natural resources as the main export product.
Since natural resource industries tend to be highly monopolised, it is difficult for poor people to benefit from trade exports, let alone improve their living conditions from them.
However, poor people can forge a role for themselves in the export of value-added goods through new and specialised industries. If the right incentives are provided and a sound business environment prevails, these industries will create jobs and keep the economy and its people going.
Prof Yiming Yuan is based at the China Centre for Special Economic Zone Research, Shenzhen University, China

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