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PEGNet conference

African lions and Asian tigers

by Hans Dembowski

In brief

A Chinese investor in Dakar in 2009

A Chinese investor in Dakar in 2009

While scholars ponder what least developed countries can learn from emerging markets, one thing is ob­vious: African governments must draft policies to make the best of cooperation with rising powers like China.

Edward Brown of the Accra-based African Center for Economic Transformation finds fault with China’s engagement in his world region. His criticism includes the following points:
– China does not subscribe to any good-­governance policy; its action in Africa is
almost entirely non-transparent. For instance, China does not take part in the EITI.
– China does not grant budget support to African countries.
– Chinese aid is overwhelmingly tied, and in most cases, contracts are given to
Chinese companies.
– Since only few Africans work for the big infrastructure projects that China funds south of the Sahara there is little scope for technology transfer and capacity development.
– China is primarily interested in access to commodities, so it mostly focuses on resource-rich countries.

Helmut Reisen of the OECD sees China’s engagement in Africa more favourably. He insists that it is impossible to disentangle Chinese aid from trade, investment and economic activity in general. Reisen considers China’s focus on infrastructure and the expansion of access to natural resources good for Africa and, indeed, the world because commodity prices would rise even faster if China procured raw materials only on spot markets.

Chinese demand, moreover, is driving African manufacturing too, according to Reisen. He quotes OECD data that show that African exports to China doubled in this sector from 2004 to 2009, whereas exports to the OECD stagnated.

Reisen is critical of the established OECD donors, saying their rhetoric tends to be better than their action. As an ex­ample, he mentions the EITI. He says it is not working since corruption indicators tend to rise in countries that sign up to the initiative. By contrast, governance indicators, according to Reisen, tend to improve for African countries with a strong Chinese presence. Budget support, in his view, invites corruption, whereas project money is linked to specific purposes and cannot be misused easily.

Brown and Reisen argued their cases at the annual conference of the Poverty Reduction, Equity and Growth Network (PEGNet) in Hamburg in early September. They share a lot of common ground, however. For instance, Brown acknow­ledges that many Chinese projects in Africa make sense. Nonetheless, he argues it could be playing an even better role. Reisen, on the other hand, agrees that China should provide more information to the public.

Important insight

Their most important point of consensus, however, is that African countries must draft strategies for engaging with China and other emerging powers that are increasingly becoming active in aid matters. So far, African governments basically make ad-hoc decisions, which is not a promising way to make the most of co­operation with aspiring partners.

Germany’s Ministry of Economic Co­operation and Development (BMZ) is aware of this challenge. Opening the PEGNet conference in Hamburg, BMZ State Secretary Hans-Jürgen Beerfeltz spoke of the need to cooperate with emerging market governments in global development affairs. He emphasised the BMZ’s interest in joining forces to tackle issues like biodiversity, climate change, water and natural resources. He pointed out that education at all levels – from elementary schools to universities – is the prerequisite for equal opportunities and that international dialogue can bring about innovations needed to fight poverty. “African lions want to follow Asian tigers,” he said alluding to the next PEGNet conference which will be held in Dakar in September 2012 and deal with the growth and development potential of African countries.

Facilitating state

According to Justin Yifu Lin, the Chinese scholar who became the World Bank’s first chief economist from a developing country in 2008, economic thinking itself needs innovation. The Washington Consensus was based on free markets, solid macroeconomic management and global liberalisation, but it only had mixed results, Lin says, because it did not understand the role of the state. ­Development, Lin argues, depends on market dynamism as well as on a facilitating state.

A core tenet of Lin’s approach, which he calls “new structural economics”, is that developing countries should focus on sectors where they have similar endowments as a nation that is twice as rich, and consciously remove all obstacles that hamper that sector’s growth. In this context, the economist says, governments should support promising companies with temporary subsidies to compensate for disadvantages they face in the specific national context. At the same time, governments should look out for spontaneous innovation in the private sector. This kind of industrial policy, according to Lin, allows poor countries to catch up.

Comparing countries and regions leads to relevant insights – relating to social policy (see box) or trade. India and Africa, for instance, share a lot, from highly diverse populations to weak in­frastructure. India, however, has a gigantic market of more than one billion ­people, whereas African markets tend to be rather small. John Page of the Brookings Institution therefore proposes more regional integration. Too often, he says, African policymakers promise grand schemes that do not materialise. To improve matters, Page does not propose following the example of an emerging market. His model is the EU, which achieved integration in a long history of pragmatic steps.

Hans Dembowski