Economist's growth model has three sides

UK development chief calls for China and Europe to pitch in together in their approach to Africa

African countries need an economic model of development with Chinese characteristics but built on their own experiences, and Europe and China should work together to help make that happen, says Stefan Dercon, chief economist of the UK Department of International Development, which is in charge of spending the UK's international aid budget.

Dercon says that over the past few decades, the number of those who live in extreme poverty has shrunk, markedly in Asia, but less so in Africa.

Stefan Dercon, chief economist of the UK Department of International Development, thinks that Europe and China should work together to help African countries. Provided to China Daily

China's State Council Leading Group Office of Poverty Alleviation and Development says China has helped pull 660 million people out of poverty between 1978 to 2010, and that the country contributes to more than 90 percent of world poverty reduction.

"The strongest driver has not been aid, but an economic model of development that brought poor people into better jobs," Dercon says. "It was a development model with Chinese characteristics. No other country embodies this progress more than China, growing its economy while lifting the living standards of its poor."

Dercon says that it is becoming more widely accepted that encouraging economic activity that leads to growth of incomes and better jobs is superior to just giving aid. As has been the case in China, one way of achieving economic growth is to ensure labor is engaged in productive activities and in turn helps eliminate poverty.

"This kind of model is not just good for economic growth; it helps for people to have better jobs, better incomes and the ability to gain personal wealth in the process of that growth."

Poverty has continued to be a huge challenge for Africa even as its economies have surged ahead in recent years, and countries have largely failed to create productive jobs and higher incomes, he says.

Aid is not a panacea for Africa's poverty because it is often impossible to ensure that aid offers long-term benefits to people or the economy. Likewise, it is wrong to depend on extracting natural resources and on high commodity prices as an answer to poverty, he says.

"These sectors do not generate many jobs, and there is no guarantee that cash earned from minerals and oil will benefit the development of countries. It tells us something that China has known for a while now: Finance is important but financial resources alone will not bring development. What is done with them and how they are used to leverage other resources and unlock economic opportunities for people and firms is the key for growth and job creation."

Another feature of development he has observed across Asia is the key role in economic success of strong and well-functioning states, and political leadership that is committed to growth.

"Often in many poor countries we observe a political class that seeks only to enrich themselves and their allies, and not act for the greater good of the economy and society. This we observe unfortunately all too often in states that are rich in natural resources and where citizens are excluded from its benefits by the very few, with corrupt states that also prey on their citizens."

Dercon says Europe and China should work more closely together to bring prosperity to the poorest countries, working in concert with their governments, international organizations and companies.

"There's a joint interest both for Europe and for China that we are getting good opportunities to export from Africa. What we would like from a development point of view is that Africa can start taking a proper share in world trade, not just with natural resources, but also with other produced goods."

Britain has more than tripled its development aid budget in the past 10 years, but financial aid alone does not produce development, as China's economic model has shown, he says.

He applauds China for increasingly shepherding financial resources into global investment and trade, including with the poorest countries, through facilities such as the China Africa Development Fund.

"We must use scarce financial recourses - from aid, from economic cooperation, from taxes - and leverage them as much as possible to ensure we create real economic and social opportunities for people and firms. A financing framework that is largely based on aid from rich countries, without accounting for other means of bringing in resources for development, is a mistake."

As China has shown through its reform and opening up and foreign investment, he says, countries need to build up trade, attract foreign direct investment, encourage fair tax collection from multinational companies and fight corruption, something that is crucial for poor countries.

"China and Europe should work together to ensure that their actions help African countries achieve these things."

Political leadership that will champion development in Africa must also be promoted, he says. China and many other growing developing countries have shown that economic takeoff can be achieved in different political systems, but success always depends on political leaders' commitment to growth and reducing poverty.

"When working in these poorest countries, we may say that worrying about this is not our business, but our businesses tell us that it should be Without long-term stability and commitment to sensible economic policies that favor economic growth without growing inequality and theft by the elite, long-term investments are unlikely to materialize."

Africa also needs effective states and institutions to ensure that development takes place, with clear controls and monitoring what is done with the riches of the poorest countries, especially when they are in the form of natural resources.

If development fails, these countries will become more risky and, as Sudan and South Sudan have shown, investments may need to be written off at huge cost. It would also be wrong to conclude that any deal in a poor country is a good deal if it leads to weakened states and higher risks of conflict."

One deal alone may not cause this, but taken together with how outside interests act, that may be the result, he says.

"It is irresponsible for us as states to look idly on if our businesses or the recipients of our business were to engage in unscrupulous, corrupt, shady or predatory deals that enrich individuals and result in failing state institutions or weaken the overall business environment, so we ought to have shared agendas on fostering better state institutions and find ways to ensure our businesses behave responsibly and transparently, as it matters for future business."

One of the most important ways of getting faster development in the poorest countries would be through job creation, he says. African countries need foreign direct investment especially in manufacturing and processing of commodities to achieve this. With Chinese manufacturing gradually moving out of labor-intensive production and into higher productivity and skills-intensive industries, a huge opportunity for poor countries presents itself. So an important avenue for development is Asian companies, especially Chinese ones, setting up production sites in Africa.

"As European donors, we should welcome this strongly, and find ways to work with these investors to ensure jobs are created and value is added, and goods attain the right quality to replace some of the imports coming into Europe from by now better-off countries. The development benefits from this combination of growing labor intensive production in the poorest countries, not least in Africa, Asian FDI and trade with Europe may become one of the strongest sources of development cooperation to benefit all."

Much growth in Africa in recent years has come from the vast demand from China for energy and minerals, which is unlikely to abate in coming years, he says. However, for many countries in Africa, as South Sudan and the Democratic Republic of Congo show, what should be of huge benefit to them is persistently turning into a natural resources curse. North American, Chinese and European countries and companies are all active in these countries, and benefit hugely.

"We make deals but we are not doing enough to ensure that the benefits of these deals are used for long-term development. Moreover, this has long-term consequences for these countries, making it less likely that these will become countries that offer us the markets, trade and investment opportunities for the future. The failure to put natural resources rents to good use and overcome resource-control driven conflict will put the long-run energy and natural resources security for China and other countries at risk," Dercon says.

chenyingqun@chinadaily.com.cn