China: Shock-absorber for the developing world?

Coinciding with the China Development Forum in Beijing, the Insights blog is focusing on China this week. In this posting, Andrew Mold of the OECD Development Centre looks at how China’s booming economy has eased the impact of the global recession on developing countries.

Number One, actually. Photo courtesy of Jacques Bron

Over the past decade China has attracted an enormous amount of attention principally because of the sheer resilience of its economic ascent. This has come to the fore during the financial crisis, as Chinese growth has continued to soar (at around 8%) while OECD countries have languished in the most serious economic recession since the 1930s. Harvard professor Niall Ferguson talks about the symbiosis of Chimerica, alluding to the deep mutual economic dependence that has evolved between the United States and China over the last decade. Put simply, to a large extent the macroeconomic stability of the global economy hinges on the way in which the imbalances between these two economic giants play out.

As fascinating and crucial these as issues are, they hide the truly remarkable impact of China on the developing world. By its economic resilience, China is having a tremendously positive effect, cushioning many developing countries from the worst of the fallout from the financial crisis. And its growth engine has become exceedingly important for many low-income countries through its trade and investment links. Calculations by the OECD Development Centre suggest that every percentage point of growth in China helps lift 16 million people in the developing world out of poverty.

The trading links are revealing. In early 2010, China bypassed Germany as the world’s No. 1 trading nation. What was less commented upon was the fact that over the last year China has also become the No. 1 trading partner of India, South Africa and Brazil. A full 56% of China’s exports now go not to United States but rather other developing countries.

To be sure, some of these exports put industries in other developing countries under severe competitive pressures. Textiles is a case in point: Competition from low-cost Chinese operators has led to job losses in a number of African and Asian countries. But this is not the whole story. With its enormous productive capacity, China has been driving down the prices of consumer goods, which benefits many poor people in developing countries who would not otherwise be able to afford even simple items like radios and televisions. Also – and this is less widely acknowledged – China has been driving down the cost of capital goods, which allows low-income countries to benefit through cheaper infrastructure and equipment for their productive sectors.

At the same time, China draws in raw materials and intermediate inputs from developing (and other high income countries) countries and transforms these into finished goods for the United States and other OECD markets. In effect China has become a funnel for inputs from other Asian countries, including low-income ones like Vietnam, Cambodia, and Bangladesh.

But it is not just developing countries in Asia that are benefiting. For instance, Chinese imports of oil, soy beans and copper were about 30 times higher in 2008 than they were in 1995. As a consequence, Latin American commodity exporters have been riding China’s coat-tails to unprecedented trade surpluses. Africa, too, has reaped benefits. For example, while many Western companies suspended or delayed investments due to the uncertainty created by the financial crisis Chinese investments continued to surge ahead.

There is, of course, a million dollar question: Is all this is sustainable? Only time will tell, but for now one thing is certain: As long as the Chinese growth “engine” does not stall, the prospects for the rest of the developing world will be rosier than might otherwise have been the case.

Useful links

China at the OECD Development Centre

OECD work on China

OECD Insights: From Crisis to Recovery

网站(中文) The OECD’s Chinese-language site

Jacques Bron’s photos

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