China, Africa, and Poverty Alleviation through Economic Growth

According to an Economist article published last June, nearly 1 billion people were taken out extreme poverty between 1990 and 2010.  In developing countries, the percentage of people living under the $1.25 dollar per day line (the international delineation of extreme poverty) dropped from 43% to 21%.  Much of the decrease in extreme poverty was on account of China’s rapid growth, which helped raise 600 million people over the line.

These are incredible and encouraging statistics, but more can be done.  1.1 billion people still live in extreme poverty and an additional 1.3 billion people subsist on between $1.25 and $2.00 per day.

The Economist notes that capitalism is the primary cause of the reduction in extreme poverty over the last two decades:

Most of the credit, however, must go to capitalism and free trade, for they enable economies to grow—and it was growth, principally, that has eased destitution.

Poverty rates started to collapse towards the end of the 20th century largely because developing-country growth accelerated, from an average annual rate of 4.3% in 1960-2000 to 6% in 2000-10. Around two-thirds of poverty reduction within a country comes from growth. Greater equality also helps, contributing the other third.

A separate Economist article says that growth is likely to continue to spur poverty reduction, though there are potential areas for concern:

To keep poverty reduction going, growth would have to be maintained at something like its current rate. Most forecasters do expect that to happen, though problems in Europe could spill over and damage the global economy. Such long-range forecasts are inevitably unreliable but two broad trends make an optimistic account somewhat plausible. One is that fast-growing developing countries are trading more with each other, making them more resilient than they used to be to shocks from the rich world. The other trend is that the two parts of the world with the largest numbers of poor people, India and Africa, are seeing an expansion of their working-age populations relative to the numbers of dependent children and old people. Even so, countries potentially face a problem of diminishing returns which could make progress at the second stage slower than at the first.

There is no sign so far that returns are in fact diminishing. The poverty rate has fallen at a robust one percentage point a year over the past 30 years—and there has been no tailing off since 2005. But diminishing returns could occur for two reasons. When poverty within a country falls to very low levels, the few remaining poor are the hardest to reach. And, globally, as more people in countries such as China become middle class, poverty will become concentrated in fragile or failing states which have seen little poverty reduction to date.

Going forward, further reduction in both poverty and extreme poverty will be more difficult but still very much attainable, especially if consistent growth is seen across the developing world.  The United States can do its part by promoting free trade with these countries and supplying aid, when warranted, to serve as temporary alleviation.

An additional viable option for the United States is increased investment in and trade with African economies, a strategy that is already paying dividends for China.  In 2012, China had a trade volume of $198.5 billion with Africa against a U.S. volume of $108.9 billion.  Sino-African trade is expected to jump to $385 billion by 2015.   Fortune reports that China’s investment does include engagement in some autocratic regimes the U.S. won’t engage, but the fact that seven of the world’s ten fastest growing economies are in Africa suggest increased investment and trade would be highly profitable for U.S. companies.  Increased economic growth in Africa should subsequently reduce levels of poverty once these monetary infusions begin to spread.

Howard French, a longtime journalist in Africa who has been traveling the continent for the last three years, agrees.  “Return on investment in Africa is among the highest in the world,” he says, also noting that companies like IBM and Walmart have made significant investments in recent years.  French argues that the problem is that Western media attention and attitudes towards Africa fail to take into account these promising prospects:

I have spent the last few years working on a book about China’s relationship with the continent, and could not have been more struck by the differences in attitude in the United States and China toward Africa. More than a million Chinese have moved to Africa in the last decade, largely because they see the continent as an arena of almost limitless opportunity. This holds true from big company executives to mom and pop entrepreneurs from China’s inland, second tier cities.

Americans, meanwhile, despite their far deeper historical associations with the continent, including 13 percent of the population that traces its ancestry to Africa, cling to deeply engrained attitudes toward this part of the world, as a place of war, of misery, of strife, etc. For this reason, and because we cannot get over a long-running sense of Africa as a place to be aided, we are ill equipped to see or appreciate the opportunities that Africa offers.

This isn’t to say that every country in Africa affords an identical risk-free atmosphere for the conduction of business.  It’s understandable that American companies would be hesitant to invest in countries where corruption, the threat of instability, poor infrastructure, or other risk factors could undermine their prospects for growth.  But French makes it clear that the opportunities for profitability are only going to increase as the continent continues to develop.  He implores the Obama administration to promote trade and investment in African countries:

The administration needs to be much more energetic and resourceful in encouraging American businesses to seek out opportunities in Africa. The profit motive is the best cure for the deep-seated strain of paternalism that runs through our relations with the continent. During my book research travels, I was surprised to learn in country after country that construction projects, worth as much as $200 million that are American financed through the Millennium Development Corporation, drew no bids from American companies. China was gobbling up this work until Congress passed a law saying that funding from the MDC could not be given to state owned companies.

If economic growth is indeed the fastest way to reduce poverty, investment in African countries (and other countries with high poverty rates) effectively kills two birds with one stone: it’s a promising economic opportunity that benefits American business interests, and it eventually helps improve the standard of living across the board.  If the goal is to eradicate extreme poverty by 2030, as the Economist proposes, increased investment seems like a very good place to start.