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The effect of China and India's growth and trade liberalisation on poverty in Africa

Rhys Jenkins, Chris Edwards

IDS / Enterplan

May 2005

Posted with permission of Ms Helena McLeod (DFIDSA).
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Executive Summary

  1. In recent years the two largest countries in Asia, China and India have become increasingly important players in the global economy. Their rapid growth and increased openness since 1990 has led to concerns in both developed and developing countries, but up to now relatively little attention has been paid to their impact on the countries of Sub-Saharan Africa, despite the fact that trade between the Asian Drivers and Africa has grown significantly since 1990 and that in the last few years China and India have also emerged as sources of Foreign Direct Investment (FDI).

  2. This paper considers the implications of these growing links between Africa and China and India for twenty-one Sub-Saharan African countries. The particular focus of the study is on the impacts that these links are having on poverty in the region. However given the lack of previous detailed research on the trade and investment impacts of China and India on Africa, a significant part of the report is devoted to analysing these impacts in order to provide the context in which to look at the poverty implications.

  3. The study combines a disaggregated approach to examining the impact of China and India on the trade of third countries at the 3-digit SITC level with an analysis of trade-poverty linkages based on the framework developed by Winters. Growth in Asia has implications for other countries through its impact on their exports to the Asian Drivers themselves (positive) and to third countries (negative), and through their imports from China and India. It may also have implications for FDI flows either through the diversion of FDI from other countries to China or India, or through the growth of outward investment from the Asian countries. There may also be indirect impacts through the effects of China’s growth on global economic growth and on world prices of primary commodities

  4. Trade and FDI can impact on poverty through their effects on production and factor markets, or through changes in the prices of consumer goods, or via effects on government revenues and expenditure. They may also affect the vulnerability and exclusion of the poor from economic activity and create conflict with marginal groups. The likely impact of trade changes on the poor will depend in part on the types of goods that are involved and the conditions under which they are produced. The study therefore distinguishes between a number of different types of products: labour-intensive agricultural products; other agricultural products; forestry; mining and petroleum; labour-intensive manufactures; and other manufactures.

  5. Exports from the African countries to China particularly have been predominantly of extractive products, minerals, petroleum and timber. They are not therefore likely to have had a significant positive impact on the poor, who may even have been negatively affected as a result of the growth of natural resource based exports. Exports to India have been more diversified but considerably less dynamic than those to China. There are some types of exports which do offer potential for pro-poor impacts such as fruit and cotton.

  6. Competition from China in third markets is less of a challenge to the countries of the region than to those of South and South-east Asia which have specialised in exporting labour-intensive manufactures, particularly textiles and garments. The major exception to this is Lesotho, which over the last few years developed a significant garment industry which is threatened by the ending of the MFA. India is much less of a competitive threat in third markets than China.

  7. Imports from China and India have a double effect on the African countries. On the one hand they provide cheaper goods which benefits consumers. On the other hand if they compete with domestic producers, rather than imports from other countries, then they may have negative effects on employment. The impacts on poverty depend on whether the poor consume the goods that are imported from Asia, and on whether there is a negative effect on employment opportunities for unskilled workers. Some countries which import a relatively high proportion of basic consumer goods from China and India such as Ghana, Uganda and Tanzania are likely to find that the real income of the poor may increase as a result of the growth of cheap imports. In these countries it also seems that the growth of imports from China (and to a lesser extent from India) is primarily at the expense of other exporters rather than domestic producers. In the case of Ethiopia and Nigeria however there may have been negative effects on domestic output and employment as a result of increased import competition.

  8. Disaggregated data is not available for FDI in the same way as for trade, so it has not been possible to carry out a detailed analysis in this area. However it seems highly unlikely that there has been any significant diversion of FDI from Africa to either China or Asia. On the other hand, outflows of FDI from China and India have been rising in recent years and some of this has been directed towards developing extractive industries and associated infrastructure in Africa. However, given the types of sectors in which FDI has been concentrated, it is unlikely to have had a positive impact on the poor and may even have had some negative impacts.

  9. There are both challenges and opportunities for poverty reduction facing the African countries as a result of China and India’s growth. The country which faces the greatest challenges is Lesotho because it exports labour-intensive manufactures to third country markets. However there are also opportunities, for example for some countries to increase exports of labour-intensive agricultural products to China and India as incomes there increase. This analysis suggests that other countries should look for market opportunities in China to expand labourintensive agricultural exports. They could also seek to utilize increased tax revenues from primary product exports to fund pro-poor initiatives. In terms of challenges, governments should seek to ensure that smallholders are able to participate in new export markets and are not displaced by large, less labour-intensive farms. More generally, the government should monitor the impact of expansion of primary product exports on the poor and local communities which may be negatively affected.

  10. It is also important to consider whether existing policies aimed at reducing poverty need to be changed in the light of China and India’s expansion. Some policies such as education or redistributive measures such as land reform, remain just as relevant irrespective of China’s growth and may even become more so. However some other policies, such as emphasising the expansion of labourintensive manufactured exports as a means of poverty reduction, may need to be qualified, in light of the increasing competition and falling prices for many such products.

  11. There is ample scope for further research in this field. Priority areas would be:
    • identification of labour-intensive products which are likely to have a pro-poor impact;
    • studies of individual value chains; and
    • more in-depth studies of specific countries.

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