In this essay the
growth between both China and Sub-Saharan Africa (SSA) will be explained in
terms of their contrasting growth since the 1980s. The growth between the two will be explored from
the perspective of institutional theory. Key influences both internal
and external will be identified and will be evaluated in reference to how they
have shaped the economic and business landscape of the two emerging markets.

The growth
between China and SSA will be looked at from the perspective of institutional
theory. Institutions are an essential part of any society, they impose
structure on how individuals behave. Institutions and their rules definitively guide
what we do which is how they can impact on economic growth.

A few of the institutional models and
theories that will be applied and evaluated in relation to the growth of China
and SSA are the linear stages theory, the Lewis theory of development and the
neo-classical model, these theories attempt to explain the process of
development and what has happened up until now. To explore some potential
constraints on future growth then the key concepts of diminishing and
increasing returns can be explored, with technology playing a part in providing
a possible solution.

           

Growth and Institutional Theory

 

According to Rostow’s linear stages of growth
theory, development comes in 5 stages:

–       Traditional society

–       Pre Take off

–       The Take off

–       Drive to maturity

–       Age of mass consumption

The Harrod-Domar model suggests that a key
condition for take-off is the mobilisation of savings to help fund investment
and assumes that investment will lead to higher income. (See appendix for the Harrod-Domar models equation
for this model). The overall consensus of the Harrod-Domar model is that
growth is higher when savings are higher and when capital stock is low and that
as the capital stock rises growth becomes harder.

The Lewis theory of development is tries to
explain the growth of a developing country in terms of labour transition
between two sectors. The two sectors based around a dual economy where the
first sector is about agriculture, traditional etc. and the second sectors is
the manufacturing/ industrial sector. The models explanation for growth is that
when there is a shortage of land and an unlimited amount of labour to work the
land it results in surplus labour.  This
extra labour in the first sector would then shift over to the second sector, to
the industrial side.

The Rostow and Lewis models help us
comprehend the process of an economy growing but the Neo Classical Model shows
how a country might go about the process. The neo classical theory suggests
that elements such as lower taxes, privatisation and less state intervention
will help to grow an economy.

Diminishing returns are a potential
constraint of economic growth. In order to raise GDP growth percentages a
country needs to produce more. The problem that then arises is that countries
run out of space to work and everyone has jobs, in both ways the country
reaches it productivity limit. This is when diminishing returns would come into
effect. On the other hand, if something was increased and the return you got
back was worth the additional input then this would be referred to as
increasing returns. David Ricardo a classical British
economist from the late 18th and early 19th century
suggested there would be a limit to growth due to prices rising so high,
consumers would not be able to afford products. However, Ricardo was wrong as
he at that point in history would not have been able to predict the
technological advances that have occurred in more recent years. Technological
advances mean that production can be done more efficiently and can be done by
machines which therefore has lowered the prices of products as there are no
labour costs. Also, Ricardo though we would run out of land to grow food but he
did not foresee us going to other countries to source food. This example shows
how technological advances are key to increasing productivity and avoiding
diminishing returns.

 

Sub Saharan Africa

 

In an academic journal the Third World Quarterly an article called “Orientalism
and African Development Studies: the ‘reductive repetition’ motif in theories
of African underdevelopment”, Edward said that the images we see in the media
in regards to Africa and their under development are different to the reality.

An example of this would be

the issue of The Economist titled ‘The Hopeless Continent’ published
back in May 2000, which portrayed Africa as having war-torn weak states. Other
examples are Joseph Conrad’s book heart of darkness and films such as Hotel
Rwanda, The Last King of Scotland and Blood Diamond.

 

As a region SSA is made up of 48 countries, 32 of which are independent
and has over 910 million people. Only 37% is urbanised and the electricity
generation of all of SSA is equal to Spain. SSA has the lowest share of world
economic output is highly dependent on commodity exports such as gold, oil and
diamonds. The majority of the region is agricultural and many are aid
dependent. However, SSA has a collection of diversified economies in terms of
growth for example, Ethiopia, Mozambique and Tanzania were within the top 5
fastest growing countries in terms of annual average GDP growth with a
percentage of over 7% between 2010 and 2015. GDP growth rates in Chad in 2016
were -7% and in Equatorial Guinea -9.75% which shows the contrasting
development rates of the countries. However, this is GDP growth and a better
indicator of wealth may be GDP per Capita which shows total output which is
then divided by the population figures and that therefore gives us the average amount of money people make.

This is a better indicator to show the standard of living in these countries. Below is a graph indicating the
GDP per capita rates for these countries .

 

SSA has been the slowest growing economy, it is
now rising. Aid is shrinking and foreign direct investment (FDI) is growing. Conflicts
in countries such as Angola, Chad and Sierra Leone are causing less disruption
and Congo, Sudan and Somalia have been become less violent. In a report called
The Rise of African Consumer by Mckinsey and Company a global management
consultancy firm reported that their findings from the survey they had
conducted showed that “Africans are exceptionally optimistic about their
future. 84% say they will be better off in two years. Also, “African consumers
demand quality products and are brand conscious. African consumers want the
latest fashion and a modern shopping experience”. This supports the idea that
there is now a new African middle class where 300 million people are now in the
middle income scale. The Economist previously
mentioned before for their issue calling Africa “The Hopeless Continent” have
also supported the idea by published an article years later called Africa
Rising stating that ‘After decades of slow growth, Africa has a real chance to follow
in the footsteps of Asia’.

 

However, there are many arguments against this which support the
Lewis theory of development in terms of labour transition between two sectors.

In the well-known articles by Time Magazine and The Economist both articles do
not mention the absence of manufacturing within Africa. See below image to see
percentage of total exports for Africa.

 

 

 

 

 

 

 

 

 

 

 

Commodities
are natural resources and they are dead end activities. For the future Africa
will need to industrialize otherwise they run into the issue of diminishing
returns, they need the technology and machinery accessible to them in order to
provide increasing retuns. Although Solow saw technology as an extra and as
external is it now an essential part of the production process. According to
the Lewis theory of development growth comes more workers chose manufacturing
and the industrial sector because of more attractive wages, resulting in
surplus profit reinvestment helping to grow the economy and currently this is
not something that SSA are taking advantage of in order to emulate growth
success stories such as the East Asian Miracle.

 

The
East Asian Miracle is an example of how rapid economic growth can be achieved
with industrialisation. The East Asian Miracle is about the high performing
Asian economies such as Hong Kong, ‘the tigers’ e.g. Taiwan, Indonesia,
Thailand and Malaysia, who turned translated sustained growth rates into real
wealth gains. All of these countries started from a low base so growth was
rapid. They employed more resources by investing in more capital and
infrastructure and they used their existing resources more effectively. The
World Bank report in 1993 suggested that the reasons for the successful growth
was down to sensible stable macro-economic policy, there was low inflation
during growth periods which helped as if there was high inflation it would mean
that wages would rise and prices would not be competitive. But as inflation was
low prices stayed competitive for exporting. Also, there were small fiscal
deficits/ low government borrowing and low stable interest rates.  There were secure financial systems, trusts
were set up and firms were able to invest. The trade policy and exchange rates
were very important, there was an import substitution policy whereby the
government would stop the importation of products that they believed could be
manufactured themselves.  They had a pro
export regime and export credits and government incentives were offered to
businesses that export e.g. tax breaks for exports and targets were set. Also,
Asian countries have weak currency policies so that the weaker currency made
goods cheaper when exported to other countries which made the market more attractive
to foreign buyers.

 

The
institutional basis for growth in the East Asian Miracle was the basis of
shared growth and equality. From the late 1950s to 1990s Japan had the same
political party which shows the cohesiveness and the overall agreeing census
within their communities. There is a business friendly environment and even
deliberation councils where countries meet and discuss long term planning on
how to improve the economic state. Deals are made with government and business
in an effort to keep improving. When it came to accumulating human and physical
capital there were focuses on improvement in education, infrastructure and
savings. The Harrod Domar model of growth was that to improve the economy
people would need to have saving in order to fund the investment this model supports
Japans action to set up their post office which allowed people a place to keep
their savings to use as investment. The east Asian tigers have an openness to
foreign technology which also helped their growth for example they would copy
technology from other countries and they would promote specific industries by
the government picking the best industry to invest in. A combination of all of
this was important but there are is an argument made by Paul Krugman an
American economist who believed the east Asian miracle is similar to the Soviet
Union in the 1950s which then collapsed and that believes that diminishing
returns will soon set in.

 

The
development of the east Asian tigers is very impressive and is a model in which
other emerging markets could use however, for SSA this might not be achievable
due to the barriers to conducting business in the region. For example, the
tigers were very export led, there was a focus on keeping costs low,
manufacturing the good and making them attractive to foreign buyers. But due to
the location of SSA many countries are landlocked and shipping costs are two to
three times higher than for coastal countries according to World Bank. They
have weak chains of supply and do not have the advantage which the tigers had
as they do not have access to the seas. Without government institutions stepping in
to help build transportation links throughout SSA this these costs are not
going to get any lower.

 

Also
in an Afrobarometer
survey conducted for the region of SSA found that ‘1 in 5 still often lack
food, clean water or medical care and 1 out of 2 experience occasional
deprivation. More than 2 in 5 frequently lack cash income to meet basic needs
and 3 out of 4 report going without money at least once a year. Such ‘lived
poverty’ decreased in 5 countries Cape Verde, Ghana, Malawi, Zambia and
Zimbabwe but sadly increased in 5 others: Botswana, Mali, Senegal, South Africa
and Tanzania’. The survey shows that unlike the tigers they are unlikely to be
able follow the Harrod Domar model of growth as the economy cannot be
improved by people saving in order to fund the investment as there is low rate
of domestic savings which are very steady and very unlikely to change. Other
criticism of the Harrod Domar model is that countries such as the ones in SSA do
not have the cultural and institutional conditions in place to fully utilize
savings. Although a lot of African people do now have access to online banking
via mobile phone access it is not substantial enough to be the difference that
SSA needs.

 

There
is also not a lot of social cohesion within SSA, law and order is weak in
many African countries and firms in Africa pay higher bribes (as a percentage
of sales) than other emerging market regions.

 

China

 

China’s major economic growth and development came after 1976 the year
that Mao Zedong died. Mao Zedong who was referred to as Chairman Mao dominates
China’s 20th century history, he was head of the communist party and
was leader during the 1953 – 1978 isolationism. Prior to this was the civil war
in China where the nationalists were defeated by the communists and
nationalists were exiled to Taiwan. After the events Chairman Mao isolated
China from the rest of the world and China adopted a collectivism way of life.

Collectivism meant that nobody owned private property and everyone lived
together and were assigned jobs. Chairman Mao put into place his first five-year
plan. Chairman Mao’s first five-year plan focused on industrialisation soviet
style this meant the collectivisation of agriculture, political centralisation
and a census was carried out in 1953 which showed China as having a population
of over 503 million people and by 1958 there were around 750,000 agriculture
co-ops.

 

The result of Chairman Mao’s isolation in 1953 meant there was famine
within China with estimates of between 18-40 million deaths, which many Chinese
people refuse to believe to this day, economic regression and it was what
economist Perkins described as a “disaster”. Chairman Mao became marginalised
and responded in 1966 by launching the cultural revolution. All traditional
Chinese culture was removed, all elements of capitalism was removed and he put
into place the red guards who were a group made up of mostly students that would
actively and aggressively defend Mao. After Mao died, china was to do two
things. First was whatever policy originated from Mao they must continue to
support and whatever directions were given to the country by Mao they will
continue follow. Chairman Mao’s legacy left China a technologically backward
country with a huge peasant population. There were mass food shortages and mass
poverty.

 

After the power struggles in from 1976 to 1978, between the Chairman
Mao’s wife Jiang Qing, Zhang
Chunqiao, Yao Wenyuan, and Wang Hongwen who are referred to as the
Gang of Four Deng Xiaoping took over. Xiaoping was open minded to new policies,
the country would try new things whatever didn’t work they would change and go
in a different direction. Early reforms made under Xiaoping’s leadership were
the one child per family policy to help take control of the population. In
terms of agriculture families were given land although they did not own it,
they were able to farm it themselves. They were given certain amounts to produce
on their land by the government and anything over that amount could be kept for
themselves and sell to make profit. Xiaoping incentivised the system. The town
and village state owned enterprises were part of the reform but ended up not
working out too well due to the corruption and bribes that were made over
quotas with the government. Big industrial state owned enterprises were kept
and the smaller ones were eventually let go. In terms of banking and finance,
there became 6 major banks in China that were all state owned, they were
government controlled and mostly just lent money to the larger state owned
enterprises.

 

Trade and investment gradually
grew over a period of time after China de-isolated itself from the rest of the
world. They continue to control the exchange rates and are now a member of the
world trade organisation. Realistically the Chinese Yuan, the Chinese currency
should be higher than what it is but it is closely monitored and controlled so
that they remain good business in terms of exports. This similar to the East
Asian Miracle countries and their pro export regime and as well as
the east Asian countries having a weaker currency policy. Now it seems China
have overtaken the tigers in terms of this as they seem to be targeted and
criticized for this more often by countries such as the United States.

 

 

 

Conclusion

 

The Chinese growth and
development since the 1980s has been successful. Over half a billion people
have been lifted out of poverty in a matter of 30 years which is very
impressive in comparison to western Europe who took over 200 years to achieve
this. It shows that even for SSA and the vast amounts of people living in
poverty there that there is hope and it is possible. However, I believe that
SSA will not be able to reach this type of developmental success. The reason
for this is due to location, many different countries not ruled by the same
person, they need to come together stop bribery