How Poverty in Sub-Saharan Africa is Linked to China’s Transformation

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It’s hard to talk about China today without talking about its "transformation." In the next decades, China is expected to undergo two significant changes in the way its economy operates: a slowdown in growth and a rebalancing – a shift away from investments and towards consumption. China’s current economic model has been focused on increasing exports. But gradually, the Chinese economy is expected to shift more towards innovation and growth driven by consumption, or purchasing of final goods.

A significant question is how will this two-part transformation affect the world, and in particular countries in Sub-Saharan Africa. Since China’s WTO accession in 2001, trade between China and Sub-Saharan Africa has grown dramatically – to the point where China became Sub-Saharan Africa’s largest trading partner in 2009. Both benefit in different ways from this relationship: China gains access to growing markets for Chinese goods and services, a reliable source of raw materials and energy, a destination for foreign investment that makes use of lower local wages, and reinforced political support from African countries in international affairs. On the other hand, Africa benefits from China’s financial and technical assistance in infrastructure investment, transfer of technology and knowledge, and China’s relatively strong capacity to implement development and industrialization projects.

Will China’s changing economic strategy positively or negatively impact countries in Sub-Saharan Africa?

A new World Bank Group study set out to quantify these effects. The results indicate that if China’s transformation includes both rebalancing and slowed growth, there would be an overall positive impact on the global economy as a whole, as well as on Sub-Saharan Africa. Specifically, the world and Sub-Saharan Africa both stand to gain 4.8% and 4.7%, respectively, in GDP by 2030 if this scenario plays out as expected.

In addition to contributing to GDP growth, a Chinese transformation with both a growth slowdown and a rebalancing will likely have a positive impact on poverty levels in Sub-Saharan Africa. The extent varies by country, but on average, poverty is expected to decrease by approximately 4 million people, and the levels of extreme poverty are expected to decrease by half. However, a large proportion of people would still be living in vulnerable conditions - 64% of the population in Sub-Saharan Africa, or around 785 million people would be living with a daily income between $1.90 and $10.00 per day in 2030.

There is one caveat to these findings, however. The research suggests that should China’s transformation only include an economic slowdown and no rebalancing, there would be small losses in GDP for both the world and Sub-Saharan African countries. In this case, the world as a whole stands to lose 0.6% of GDP by 2030, while Sub-Saharan Africa’s GDP would decrease by 1.1%. This is because economic slowdown results in declines in productivity, output, investment and consumption.

However, the World Bank Group research found that the potential negative impact of the slowdown would be outweighed by the stronger positive changes of rebalancing. Combined, these two changes result in net overall benefits for China and the rest of the world.
 


Why are the potential negative effects of China’s slowdown canceled out by rebalancing? Here’s how it works:
  • Compared to economic slowdown alone, which results in losses for the rest of the world, rebalancing in China is expected to boost consumption as well as demand for imported products and services.
  • As Chinese production shifts towards services, the domestic production of agricultural, natural resources and manufacturing goods is replaced by increased imports of these products in order to satisfy domestic demand.
What can Sub-Saharan African countries do to ensure it benefits from China’s transformation?
The World Bank study makes several recommendations:
  • Diversify production and exports;
  • Resource-rich countries should increase the depth of their export processing;
  • Increase integration to global value chains;
  • Improve the business climate – including infrastructure and governance – in order to expand exports.
For details on how the methodology behind this research, please read the full study: China’s Slowdown and Rebalancing: Potential Growth and Poverty Impacts on Sub-Saharan Africa.

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