China to the rescue?

China’s $570bn expansion package has been welcomed by World Bank President Robert Zoellick, particularly as it was announced in advance of this weekend’s top-level meeting of the G20 group of nations to discuss the growing global economic crisis.

The package announcement also followed a flurry of regional and inter-regional meetings on the crisis by top bankers and officials which brought to the fore the eclipse of the traditional economic domination of the USA and the other OECD countries; the rise of the new Asian and ‘Southern’ powers; and the uncertain implications for the poorer developing countries, especially in Africa.

On October 24 and 25 Asian and European leaders gathered in Beijing for their regular ASEM meeting Chinese Premier Wen Jiabao confirmed that China would ‘actively participate’ in next weekend’s Washington meeting and echoed the call by European Commission President Barroso that ‘we swim together or we sink together’.

One idea floated by Asian countries at the ASEM meeting was for an $80bn Asian fund to help countries in the region deal with liquidity problems. But there is scepticism about whether the participating nations will be able to agree on the details. Meanwhile, though there have been calls in the Chinese press for the US to give up its control over the IMF in return for Chinese assistance. Official statements have been more cautious, referring tactfully to the need to ‘diversify’ the global currency system.

The call for reform was echoed by African officials at the African Development Bank’s meeting of finance ministers and central bank heads in Tunis this week. The ADB reduced its forecast for economic growth in expectation of a slowdown in aid, exports and remittances from overseas as the global crisis begins to bite.

In particular, as Jean Ping, head of the AU’s Executive Commission pointed out, Africa had not been invited to this weekend’s Washington summit except for South Africa, which will be present as an emerging country on a par with Brazil or China.

"Africa ... was not associated even slightly with the preparation when it's a question of deciding the future of the world to which this continent belongs, in fact and by right," he protested.

Fears about the impact on Africa were confirmed in a new survey of the impact of the global crisis on the ‘global south’ conducted by the Institute of Development Studies [IDS"> at Sussex University. IDS asked 21 experts from 14 developing countries - including Ethiopia, Ghana, Kenya and South Africa - to present ‘snapshots’ on how the crisis is impacting their countries, and on the policy debate on how to respond.

An overview of the likely impact on African economies, by three researchers from the African Economic Research Consortium in Nairobi, predicts a slowdown in Africa’s recent growth as the global slowdown hits raw material prices, with a resulting blow to tax revenues.

Aid flows and FDI will also be hit, as will tourism earnings. While the few African countries with direct exposure to the global financial system, such as Nigeria and South Africa, have already experienced the impact through their stock markets, the other will not be spared.

Africa’s response, they argue, should start from ‘the need for pragmatism instead of the mistake of the 1980s where dogmatic reliance on market mechanisms
was actively promoted by the Bretton Woods institutions’.

In particular, they argue, African leaders should call for an urgent special summit of AU Finance Ministers and Heads of State to design a common African response. ‘This time, Africa should not ask what the developed world can do for them. Instead, they should articulate what they need from the developed world in support of their own efforts. Similarly, Africa should not wait to be told how to address the impending challenges. Instead, they should embark on their own remedial actions and seek assistance of the development partners without dogmatic
preconditions’.

But what sort of hearing would Africa’s case receive - even assuming Africa’s leaders could get their act together sufficiently to present it? Here China’s role could be crucial. It is the purchase of US Treasury Bonds by China and other Asian countries which has financed the USA’s chronic deficits, and thus enabled the inflated and now burst speculative credit bubble. And China’s $3trillion reserves have a crucial role to play in coming to the rescue - for which China will have every justification for insisting on a price, hiowever restrained the language in which it does so.

Senior Chinese Economist Professor Lan Xue of Beijing’s Tsinghua University summarises the range of Chinese opinion in his contribution to the IDS round-up;

‘In the popular media and the Internet, there are various interpretations of the root cause and the long term consequences of the crisis. Many have blamed the American economy over-leveraging its economic power at the cost of the global community and questioned the fairness and the usefulness of current global financial institutions. Some believe that American financial institutions have used financial tools to transfer about one third of their losses to the global financial market. Others see this financial crisis as evidence of the fundamental flaws of global capitalism and the need to rethink the spread of capitalism as we know it in developing countries’.

Some, he says, have argued that ‘China should take this opportunity to play a leadership role in reforming the current global financial order’. Others, mindful of China’s own domestic problems, are more cautious. But these problems themselves could and should be a spur to global reform.

However, if the ‘emerging powers’ of China, together with India, Brazil and South Africa, do succeed in gaining places at the top table of the World Bank and IMF, and in influencing the shape of a reformed global economic order, how far will their interests and demands coincide with the needs of the rest of Africa, and of other poorer countries? If Africa does not develop its common voice, there is no guarantee that any new framework will meet its needs much better than the old.

∗ Stephen Marks is a research associate with Fahamu’s China in Africa programme.