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Vipada Nantasupanon (14030685)
Word court: 3099
From the perspective of institution theory, explain the contrasting growth and
development experience of China and sub- Saharan Africa since 1980
Introduction:
For over a century, output growth has been raising world widely. However, crosscountry income differences on average have been widened. Economists use the word
“growth miracles” and “growth disaster” to illustrate output growth differs in individual
countries. The scenarios of ‘four tigers’ increased more than fourfold from 1960 to 1990. On
the other side, scenarios in many Sub-Saharan African countries at the same time are
regards as “growth disasters”. During the time from 1965 to 1990, the growth rate of
income per capita of Sub-Saharan Africa is 0.5 percent, while the figure of other less
developed countries is 1.7 percent (Collier and Gunning, 1999, p.6). The objective of this
essay is to is to an understanding of ‘Institution theory’. As indicated by Scott (2008) that “A
widely accepted theoretical posture that emphasises rational myths, isomorphism, and
legitimacy” Researchers building in this perspective emphasises that a critical insight of
institutional theory is a limitation. Rather than necessarily optimising their decisions,
practices, and structures, organisations look their peers for cues to appropriate behaviour.
On the other hand, Institutions are humanly devised constraints, comprised of formal rules
and informal; Informal restrictions such as sanctions, taboos, customs, tradition, and code
of conduct. Formal constraints are such as constitutions, laws, property right etc. It
incentive systems that structure human interaction. So, this should be mean that they
provide incentives and disincentive for people to behave in specific ways and if they are
useful, the structure and provide incentives and also structure economic, economic
development, political and social activity. In this case, this essay will be a focus on
contextualised the growth and development experience of China and Sub Saharan Africa
using appropriate indicators.
Discussion
The Neoclassical growth model or the growth theory that developed by Solow (1956)
is built on production function with constant returns to scale in its two arguments such as
capital and labour. The relationship between trade openness and economic growth has
been theoretically controversial. While conventional wisdom predicts a growth-enhancing
effect of trade, recent developments suggest that trade openness is not always beneficial to
economic growth. Increased international trade can generate economic growth by
facilitating the diffusion of knowledge and technology from the direct import of high-tech
goods. This growth model predicts that the long run improvement of a living standard
depends on the economy’s fundamental characteristics including the population growth
rate, the saving rate, the price of technical progress and the rate of capital depreciation.
Therefore, the structural policy implication for traditional Solow models are the following;
reducing the growth rate of population, encouraging saving, promoting technology and
reducing the depreciation rate of capital (Dave L., 2007)
The Economic development is progress in an economy, usually refers to the adoption
of new technologies. The technology is a crucial point to increasing productivity and leading
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to increasing returns and falling prices. In the 1950’s, Solow observed the importance of
technology with the difference in the pace of technological change between countries. The
development that after a certain point capital infusions yield diminishing returns in output.
The finding that technical change is most responsible for growth, technology-broadly
defined as the application of new knowledge to the production process is chiefly
accountable for expanding an economy in the long term, even more than increases in
capital or labour. ‘Neo-classical environment believe that to raise the trend rate of growth
requires an increase in the labour supply plus a higher level of productivity of labour and
capital (Robert M. Solow,1956) Solow develop the neo-classical theory that made a massive
contribution to the understanding of the factor that determines the rate of economic
growth. Because the term of development may mean different things to different people,
unusual activity and different way of progress, without such a perspective and some argued
measurement criteria. So we would be unable to determine which country was developing
and which was not. Therefore, to more understanding of the perspective, institutional
theory this article will be focusing on the contrasting growth and development experience
of China and sub-Saharan Africa since 1980s.
Firstly, we need to get to know both countries. Starting with ‘Sub-Saharan Africa’, it
is the area of the continent of Africa that lies south of the Saharan. Included 57 regions had
a combined population more than 574 million. Sub-Saharan Africa is the poorest region that
was still suffering from the legacies of colonialism, slavery, native corruption, socialist
economic policies, and interethnic conflict. Many regions contain had least developed
countries in the world; many governments face difficulties in implementing policies aimed
such as at mitigating the effects of the AIDS-pandemic, such as the explosion in the number
of orphans. The economies of many African counties are heavily dependent on the export of
one or two commodities. As a result, ‘they are more susceptible to the vagaries of world
price change and other external shocks than more diversified economies’ (Mkandawire and
Soludo,1999). Many African countries enjoyed a consistent GDP growth rate of around 6% a
year between 1967 and 1980, some of them ranking at a time with the best performing East
Asian economies. After the fall of the Soviet Union and Eastern bloc in the late 1980s to
early 1990s with their support for client states during the cold war. It resulted in a renewed
appreciation of the value of free markets in bringing prosperity, a government that had
been following the socialist model instituted reforms to liberalise their economies. When
the growth collapsed in many countries in SSA as a result of the external shocks of oil price
increases, declining terms of trade and increased real rates of interest; as showed on figure
1 by annual GDP growth of 2.1 percent (World Bank figures, 2012).
Figure 1: 1980-2000 annual % GDP growth
Vipada Nantasupanon (14030685)
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Source 1: World Bank national accounts data, and OECD National Accounts data files.
Since the 1980s, Sub-Saharan Africa was ‘an overwhelmingly land-abundant region
characterised by a shortage of labour and capital’(Austin,2010). This shortage of labour was
overwhelmingly due to the slave trade. As seen in Figure 1 above, since begin 1980 showed
the decrease- annual GDP growth of -0.1 percent (World Bank figure, 2012). The rapid
increase in world interest rates in the early 1980s, on top of the oil prices rises, tipped a
world economy already suffering declining profit rates into recession. As a result, most
developing countries faced a reduced demand for their exports while having to pay much
higher interest rates on their debts. The outcome of low growth in many sub-Saharan Africa
countries, sometimes reflecting the failure to sustain growth for long, suggest what it would
call a ‘weak-institutions trap’. Africa’s poor long-run growth record or limited poverty
reduction may be the weakness of its “institutions”, including its institutions of the state.
The state in many African countries fails to protect the property rights that sustain
productive private investment and risk-taking; indeed, in the worst cases, the state abuses
the property rights of citizens. The idea of ‘poverty trap’ supports an emphasis on increasing
the quality of aid as the key to sustained growth. The ideas of a weak-institution trap
support an emphasis on the equality of aid, including the nature of aid programs and their
impact on local institutions, especially local political institutions. The problem is that
‘institution’ covers many rules, habits, customs, constraints, cultural and social factors and
more; the state of a country’s institution is harder to describe let alone measure that is the
extent of its poverty (Nancy B,2007).
The challenge in sub-Saharan Africa, in short, that seems to be not how to ignite a
period of growth but how to sustain it. While a resilient demand environment supported
increase during 2009, the recovery in 2010 was bolstered by the external sector, through
stronger export volumes, rising commodity prices, higher foreign direct investment and
improvement in tourism. Foreign direct investment is the most critical source of private
capital flow to SSA. After declining by 12.3 percent in 2009, FDI recovered by 6 percent to
$32bn in 2010.However, developed countries are the primary source of foreign direct
investment to the region, developing countries (including from elsewhere within Africa) are
increasing their share of foreign direct investment within Africa. Their finances are providing
critically needed capital, upgrading technologies, creating jobs and contributing to SubSaharan Africa’s growth (World Bank, 2011).
Secondly, get to know about ‘China’ or ‘People’s Republic of China’ one of the
world’s most populous countries with a population of around 1.4 billion. China an ancient,
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mysterious and beautiful land, is always appealing to adventurous foreign visitors. A wide
variety is terrain and its numerous natural attractions. Abundant in a variety of resource,
plants, animals, and minerals, the land has nurtured countless generations of Chinese
people. After stagnating for decades under the rigid authoritarian socialism of founder Mao
Zedong. At that time in the intervening years, by it been transformed in China and its
relation with the international community. During on that years, policies embodying
pragmatic acceptance of a large role for domestic and international market exchange were
in a continual contest with the Maoist commitments to local and national autarchy, central
planning, the state-owned enterprise in the cities and people’s communes in the
countryside (Ross G,2012). After that China’s economy has expanded by five times, and its
foreign trade by twelve. Then an isolated, autarchic economy, China through the mid and
late 1990s absorbed about half of the direct foreign investment flows to developing
economies. Before that reform, the reformist leaders were aware of China’s military
vulnerability, as an economically weak and technologically backward society. But it can’t
stop them; essential steps were taken to lay a base for future growth in the period of
indecisive policy such as the first denial of formal education during the Cultural Revolution
ended, State enterprises experimented with the purchase of exotic new technologies from
abroad etc.
China had reformed its economy along partly capitalist lines to make it one of the
world’s fastest-growing that become its leading exporter. China is now a major overseas
investor and is pursuing an increasingly assertive foreign but economic change not been
matched by political reform, and the Communist Party retains a tight grip on political life
and much of broader society. Even more exceptional has been the transformation of the
Chinese mind. Tens of millions of Chinese are now part of an international community of
ideas and information. Personal security is provided significantly by the value of people’s
labour and production in the marketplace. In the stead of an intrusive and overwhelming
state, with the expanded role of the market has come a substantial widening in the sphere
of personal freedom to travel and communicate with others (Ross G., 2012) This change of
this dimension and this extraordinary speed are unsettling and potentially destabilising. But
many new problems that it has generated, most Chinese welcome the transformation.
Indeed, the massive increase in living standards and the expanded sphere of personal
freedom are appreciated enough to provide a base for continuity in political leadership and
institutions despite the immense stress and dislocation. Reform in China has not could never
have been a smooth or a painless process. There have been challenges at every step; reform
faced its greatest danger in the traumatic aftermath of the Beijing massacre in May 1989
which compounded the risks of an inflationary boom and a significant effort to bring it
under control. The financial and economic crisis in neighboring East Asian economies since
1997 is the considerable challenge of the late 1990s.
The institutions of China’s economy under socialism were utterly distinctive. China
was an outlier among developing countries because of its socialist organisations. But China
was also an outlier among socialist states because it had adapted socialist institution to the
problems of poor, predominantly rural economy. Because China was big and relatively
isolated, it developed its vocabulary and terms of reference for many economic issues. For
example, if we use standard economic indicators to examine China’s economy on the eve of
reform, in 1978, we observe many paradoxical features. Overall, China was still quite weak,
with a per capita GDP estimated by the World Bank to be the equivalent of $674 in
constant-price (the year 2000) purchasing-power-parity (PPP) U.S. dollar equivalents. This
Vipada Nantasupanon (14030685)
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figure means that China’s income level was fairly typical of a low income developing country
at that time. However, according to prices of that time, 44% of China’s GDP was produced in
industry, which was much more than other low-income countries (Barry G.,2007).
Contrasting two regions: Sub-Saharan vs China
Economic growth put only, is “an increase in the number of goods and services
produced per head of the population over a period”; Development is inextricably linked
with this economic growth by utilising theories of economic growth and development we
can see how the Chinese and Sub-Saharan African economies have emerged. But more
notably, we can use these to look at patterns from past and present to show their
experience and the implications of this growth for the future. The future of economic
development and poverty reduction is far from assured, many people who have come out of
poverty remain vulnerable, the natural environment is deteriorating, and national economic
growth remains uncertain. Economic development is a process that used many decades.
After the 2011 media celebration of the “BRIC” economic growth, there were reminders
that the process remains uneven and uncertain. In China, economic growth fell from over
10% in 2010 to below 8% in 2012 with projections of a permanently slower pace of perhaps
7%. In contrast, same time in Sub-Saharan Africa was little more than 3%. Growth per
person was slower as populations continued to grow. When financial markets unsettled
during in 2013, many investors started withdrawing money from these.
Meanwhile, many in the development community were dismayed by a 2013 report
showing the number of people living in poverty in SSA had yet to decline, and the average
income of those remaining poor had still not risen above its long-term of just $0.70 per day.
As indicated by Leftwich that ‘An alternative way to define the problem is not as a lack of
saving and investment due to low average income, but the absence of a ‘development
state’. A developmental state can be thought of as the non-market mechanism that
maintains incentives for saving and investment. It does so via predictable, credible and clear
rules of the game and active management of its resource. So in a way to actively encourage
in a market to operate; the result increases in investment, invention, efficiency and thus
economic growth. In another way, John Saul and Colin Leys said the structural weakness of
Africa’s economic position was generally recognised, and it assumed on all sides that active
state intervention would be necessary to overcome them. Although Africa would still be
exporter, the ‘developmental state’ was to accumulate surpluses from the agricultural
sector and apply them to the infrastructural and other requirements of import-substitution
driven industrialism (Saul and Leys, 1999). But while optimism that other countries could
soon match China’s historically high growth rates dimmed, nonetheless the potential for
dramatic catch up remained as bright as ever. China’s economic ascendancy over the past
two decades has generated ripple effects in the world economy. A combination of sound
economic management, policy reforms, and hard work has led to burgeoning economic
growth of more than 8 percent a year for the last decade, thrusting China to its current
position as the world’s fastest-growing economy. The Chinese firm has launched a
worldwide quest for access to raw materials and markets in Sub-Saharan Africa. Through a
gradual approach to reform, a carefully managed exchange rate, and variety of
interventionist policies. Chinese policymakers have helped reduce the role of the state
sector and lay the foundations for a more dynamic and export-oriented private industry (Ali
Zafar, 2007).
Vipada Nantasupanon (14030685)
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Conclusion
In conclusion, we discussed the growth and development experience of China and
Sub-Saharan Africa to find that in which contrasting for both regions in term of institution
theory. In China invests a high proportion of national income annually, and a healthy share
of investment is devoted to necessary physical infrastructure with public-goods properties.
This convergence to ‘normal’ institutions and patterns of development in most respects
makes China easier to understand. Certain features stand out more clearly, as China
becomes more open and easier to analyse. Chinese economic growth is rapid and unusually
persistent; investment rates are very high; the contribution of manufacturing to GDP and
growth is very high, and the increase in China’s participation in the world economy is
dramatic. More broadly, the rapid upgrading of Chinese capabilities in a wide range of fields
is extremely impressive. Of course, China’s size, diversity, and rapid of growth, as well as the
complex legacy of its past, continue to pose a challenge to our ability to understand its
unique institutions, economic strategies, and current challenges. Despite the dramatic
improvement in openness, China’s economy retains distinctive institutions and sometimes
report contradictory or implausible information, which makes it difficult to analyse. In the
other hand, many countries in Africa that are highly dependent on aid have the symptoms
of a weak-institution trap. Strengthening their local institutions, particularly the institutions
of the state, is key to their sustaining growth. Proposals for reform of aid to make aid
compatible with institution building exist. But even in the case of capacity development- the
first and often last resort of donors, caution is warranted given the failure of the past. In the
end, experience suggest that the institution building process is a local task; it is not
particularly amenable to outside help. The first step for donor should reduce the risk that
aid from outside undermines existing and incipient institutions. Broad reform of aid practice
would help harmonisation would reduce poaching, and greater predictability would avoid
the volatility that discourages domestic investment. After all, in the advanced economies
and in developing countries that have sustained growth for several decades, it is the …
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