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Executive Summary
China has experienced rapid economic growth in recent years and this looks set to continue with predictions that it will become the world’s largest exporter by 2010 and the second largest economy by 2020. While there has been extensive discussion of the impact of China’s growth on the world economy, very little attention has been given to the implications of this for poverty reduction in other developing countries and the achievement of the Millennium Development Goals. This study is a first attempt to fill this gap.
The main contribution of the paper is to provide a framework within which the impacts of China’s economic expansion on poverty in other developing countries can be analysed. It then applies this framework to eighteen countries, six in Asia (Bangladesh, Cambodia, India, Indonesia, Pakistan and Vietnam), six in Africa (Cameroon, Ethiopia, Mozambique, Nigeria, South Africa and Uganda) and six in Latin America (Bolivia, Brazil, Honduras, Mexico, Nicaragua and Peru), which between them account for a major share of poor people, defined as those living on less than US$2 a day, in their respective
regions.
The study combines a disaggregated approach to examining the impact of China 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. The growth of China has implications for other countries through its impact on their exports to China itself (positive) and to third countries (negative), and through their imports from China. It may also have implications for foreign direct investment (FDI) flows either through the diversion of FDI from other countries to China, or through the growth of outward investment from China. There may also be indirect impacts through the effects of China’s growth on global economic growth and on world prices of primary commodities.
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; labourintensive
manufactures; other manufactures.
Indonesia and Vietnam in Asia, Brazil and Peru in Latin America and Cameroon and South Africa in Sub-Saharan Africa are the countries which have been most successful in exporting to China. However their exports have mainly been non labour-intensive agricultural products and extractive products (timber, minerals and petroleum). 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.
Imports from China are not surprisingly more significant for the Asian countries than for Latin America and Africa (apart from Nigeria). However there are no great grounds for concern that this has led to displacement of poor producers in the Asian countries, partly because imports of labour-intensive products from China have often been incorporated into exports, rather than competing with domestic production. Although Chinese imports are lower in Latin America, they may have been more competitive with domestic production than in Asia, particularly in countries such as Bolivia and Nicaragua with weak domestic industries. Nigeria, Ethiopia and South Africa are the countries in Africa most affected by Chinese competition in their domestic markets.
The Asian countries are much more likely to face competition from China in third markets than the Latin American and African countries. Bangladesh, Cambodia and Pakistan, and to a lesser extent Vietnam, see their labour-intensive manufactured exports facing increased Chinese competition. In Africa only Ethiopia has any labour-intensive exports that might be threatened by China. In Latin America, competition from China may be a serious problem for Honduras and possibly to a lesser extent Mexico and Nicaragua. A key factor in determining future trends in labour-intensive products is what happens with the ending of the MFA in 2005. Although there is no agreement amongst commentators on the most likely outcome, a brief study of this issue is included in
Appendix II of this report.
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 there is little real evidence that China has diverted FDI from other countries in Latin America or Asia. Up to now, outflows of FDI from China have been relatively low, although this may change in the future, so there is no evidence that this has made any contribution to poverty reduction in our eighteen countries.
There are both challenges and opportunities for poverty reduction facing the Asian and Latin American countries as a result of China’s growth. The challenges which need to be addressed arise most notably for those countries which face Chinese competition in exporting 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 as incomes there increase. In the future Chinese FDI in labour-intensive industries may also provide an escape from poverty for some.
This analysis suggests that other countries should look for market opportunities in China to expand labour-intensive 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.
It is also important to consider whether existing policies aimed at reducing poverty need to be changed in the light of China’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 labour-intensive 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.
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
- More detailed analysis on the likely effects of Chinese competition on exports of labour-intensive products to third markets
- Studies of individual value chains
- More in-depth studies of specific countries
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