MDB chief economists weigh in on China's slowdown and the poor

There was a time when China’s growth trajectory seemed unstoppable. The country’s massive appetite for raw materials, such as oil, metals — iron ore, aluminum, copper, steel — and grain, pushed commodity prices to record highs. At one point, China purchased approximately 40 percent of all natural resources in the world. Private investment poured into commodity producers and exporting countries bent over backwards to service China’s demand.

That demand is now in decline and it has triggered what some economists are calling the end of the commodities supercycle. Commodity exporters from Brazil to Australia to many countries in Africa are feeling the effects. Worse, China’s adjustment has sent ripples across the global economy, exacerbating market weaknesses in developed and developing economies alike.

While the consequences of China’s economic slowdown may dominate business news, there is limited talk about how it will affect global development and poverty alleviation.

Hitting major global development targets, such as ending poverty by 2030, will require a stable and growing global economy. Progressing on the new Sustainable Development Goals, too, will demand that developing country governments maintain the budgets to adequately fund and implement development programs. Not to mention the tremendous pressure that would likely be placed on international donors to fill the financing void left behind by a global economic recession.

Without China, the natural question becomes: where are the drivers of economic growth?

No cause for panic

During the World Bank and International Monetary Fund annual meetings, both IMF Managing Director Christine Lagarde and World Bank President Jim Yong Kim expressed concern over rising risks in the global economy and, more specifically, how dipping commodity prices will affect some of the poorest countries in the world.

But according to the chief economists at the world’s four largest multilateral development banks, China’s major drop in commodity purchasing does not spell doom and gloom for the world’s poor. In fact, there’s consensus that low commodity prices can be positive for the world’s economies and the poor if government leaders manage the situation effectively.

“The Chinese slowdown is not causing the panic that we saw in previous decades,” African Development Bank Chief Economist Steve Kayizzi-Mugerwa told Devex, stressing that Chinese growth was not the only factor in Africa's growth picture. “There will not be a separate impact on the poor linked explicitly to the China factor,” he predicted.

There are nuances depending on whether countries are commodity importers or exporters, particularly in terms of the monetary policies that counteract falling commodity prices.

The IMF has said that economies most vulnerable to an investment slowdown in China are regional supply chain economies and commodity exporters with relatively less diversified economies. It points to five African countries — Angola, South Africa, the Democratic Republic of the Congo, the Republic of Congo, and Equatorial Guinea — which account for roughly 75 percent of sub-Saharan Africa’s exports to China and are, subsequently, most at risk.

In Asia, net exporters having deep trade links with China, such as Azerbaijan, Brunei Darussalam, Indonesia, Kazakhstan and Mongolia are also susceptible to China’s deceleration, according to the Asian Development Bank.

Brazil and Turkey are other commonly cited examples of countries that are hampered by declining commodity prices and lack the macroeconomic options and fiscal flexibility to adjust.

“Emerging and frontier market economies may hope for the best during the upcoming tightening cycle but, given the substantial risks involved, they need to prepare for the worst,” said the World Bank’s Office of the Chief Economist in an email to Devex. “In oil-exporting economies, low oil prices reinforce the need to redouble efforts to diversify activity.”

Appropriate government responses

That diversification can take many forms, but as China buys fewer raw materials from countries that have pursued export-led growth strategies during the supercycle, the most common tactic is to try to reorient exports to other destinations. In East Africa, said AfDB’s Kayizzi-Mugerwa, many countries countered the effects of external shocks by boosting regional and domestic demand.

Still, more than 70 percent of the world’s poor live in oil-importing countries where different, and potentially more favorable, dynamics are at play.

To the extent that lower oil prices lift growth in oil-importing economies, the poor in these countries could benefit. Economists point out that the poor are likely to be affected by commodity price weakness through their consumption of energy and consumption and production of food.

There are potential costs and benefits under this scenario. For instance, lower energy prices can mean household savings, even though the poor consume less energy than the middle classes. Depressed oil costs could benefit the poor by lowering food costs, but net food producers, such as small-scale farmers or small food retailers, could see their incomes and wages decline.

“Together, a softening of food and energy prices can be expected to benefit the poor, pushing some of them above the poverty line,” said Shang-Jin Wei, chief economist at the Asian Development Bank, contending it is “very unlikely” that China’s economic slowdown will have a significant adverse effect on prospects for poverty alleviation in the Asia-Pacific region.

Wei highlighted a 2011 ADB study that estimated the relationship between food prices and poverty incidence, concluding that a 10 percent decline in food prices could lead to a 1.9 percentage point decline in poverty rates.

The economists align on the fact that there will be significantly less fiscal space in which governments can operate over the next few years, therefore requiring smarter policies, planning and implementation.

José Juan Ruiz Gómez, chief economist at the Inter-American Development Bank, stressed that countries will need to be much more careful in their spending. He suggested that countries in Latin America and the Caribbean monitor and evaluate development programs and prioritize those that are most effective.

“The Chinese slowdown does not inevitably mean throwing overboard all the social advances of recent years,” said Ruiz citing an 8.2 percent jump in social spending from 2003 to 2015 that lifted many people in the Latin America region out of poverty and improved health and nutrition indicators.

“Countries need to do a much better job at educating and training their future citizens, something that does not always mean more money, but better allocation of current resources and better program designs. All this depends on the degree of consensus leaders can garner to implement smarter social adjustments,” he emphasized.

The World Bank said fiscal resources released by lower fuel subsidies could either be saved to rebuild fiscal space lost during the slowdown, or reallocated towards better-targeted programs to assist poor households and support critical infrastructure and human capital investments.

Irrespective of the severity of this latest global economic downturn, economists agree that the commodities supercycle has permanently altered the emerging markets landscape and now the global economy must adapt to a slowing growth outlook for China.

“It is indeed a much-changed world that the discussions on poverty reduction will partly be based on understanding how China will perform,” clarified Kayizzi-Mugerwa. “It is wrong to pin all our hopes on China's return to double digit growth.”

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