After China’s rapid growth, why not Kenya?

Saturday January 11 2014

Containers are transported in a port in Qingdao, east China's Shandong province on January 10, 2014. Experts who not long ago considered China’s economy to be unstoppable now warn of banking and real estate bubbles on a magnitude that in the 1980s abruptly ended decades of boom growth in Japan and, more recently, laid low the Eurozone. AFP PHOTO

Containers are transported in a port in Qingdao, east China's Shandong province on January 10, 2014. Experts who not long ago considered China’s economy to be unstoppable now warn of banking and real estate bubbles on a magnitude that in the 1980s abruptly ended decades of boom growth in Japan and, more recently, laid low the Eurozone. AFP PHOTO 

By MICHAEL MEYER
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Scarcely a week passes, these days, without a news commentary on China’s make-or-break moment.

The image is of an oddly frail colossus, eaten from within by what critics call the 3-Ds: debt, disease and demographics.

Either the country surmounts these challenges to become the world’s largest economy, or the Chinese miracle begins to fade.

The consequences are enormous, for the world generally and Kenya in particular.

Begin with China’s troubles.

Kicking off the new year on an ominous note, national audit authorities announced that local government borrowing soared 70 per cent to nearly $3 trillion over the last three years.

That brings the country’s total public and private debt to more than 200 per cent of GDP —unprecedented for a developing country and what Morgan Stanley economist Ruchir Sharma calls a ‘’flashing red zone.’’

Experts who not long ago considered China’s economy to be unstoppable now warn of banking and real estate bubbles on a magnitude that in the 1980s abruptly ended decades of boom growth in Japan and, more recently, laid low the Eurozone.

And China cannot turn off the spigot.

For the past decade, the country’s communist leaders have financed growth and a rising standard of living by borrowing and spending.

Much of that easy money went into infrastructure. But Keynesian largesse was also the response to the 2008 global economic crisis.

To keep growth rates high, Beijing opened the floodgates of cheap credit — and it has kept them open.

The question is how much longer it can continue before touching off a raging inflation and, in the view of more dramatic doomsayers, a subsequent bust and social explosion.

China faces other troubles. Labour costs are rising, dulling its competitive edge.

Demographic trends are against it. According the United Nations, China’s population will peak at 1.5 billion in 20 years and then stop growing.

A new book by Timothy Beardson, Stumbling Giant, reports that there are currently four Chinese for every American.

By the end of this century, he predicts, this will drop to between 1.9 and 1.25. “No society in history has combined a declining population with sustained high economic growth rates.’’

Meanwhile, industrial pollution is taking an infamous toll.

Diseases associated with environmental degradation are rising sharply.

For growing numbers of Chinese, clean air and water are distant memories. Factoring in these so-called social “externalities,’’ some economists discount Chinese growth rates into the low single digits.

Betting against China has never been good policy.

It has overcome larger challenges in the past than it faces today, raising hundreds of millions of people from poverty and creating a capitalist showcase along the way.

Still, the troubles are real and must be managed.

Doing so will force adjustments at home — and abroad.

Trading partners should look to the future and beware too great a dependence on Chinese markets and investment.

A Chinese slow-down will inevitably affect global growth and financial markets.

Yet China’s pain could also be others’ gain.

George Friedman, chairman of the Stratfor consulting firm, has long predicted tough times for the Chinese economy.

Countries outside East Asia, long the cradle of emerging market growth, boast wage rates 50 to 75 per cent below China’s, Friedman recently told Barron’s.

Many lack China’s ultra-modern infrastructure; corruption runs deep in most, and rule of law and business regulation can be painfully variable.

But given their young populations and growing advantage in labour costs, Friedman says, the nations comprising what Stratfor calls the Indian Ocean Basin are poised for take-off — Bangladesh, Sri Lanka, Ethiopia, Tanzania, Uganda and, of course, Kenya.

Kenya consistently boasts growth rates of 5 per cent.

Riding the post-China wave, that could easily double — with the right policies.

It all begins with good governance: keeping corruption in check, as China is belatedly struggling to do; building on a legacy of rule of law and streamlining business regulations so that rising foreign investment grows even faster; investing in infrastructure and human capital with known multiplier effects.

This last must include a new emphasis on modern, professional education that promotes equitable growth and creates more high-quality jobs. As my colleague Alex Awiti at Aga Khan University points out, less than 7 per cent of the nearly 800,000 young Kenyans entering the job market each year can find decent wage-paying jobs.

They deserve better.

China built its future on such advantages. Now it’s Kenya’s turn.

The writer, former communications director for UN secretary-general Ban Ki-moon, is dean of the Graduate School of Media and Communications at Aga Khan University in Nairobi.