China’s faltering economy: implications for Nigeria’s next president

When the political dust settles after the inauguration of Nigeria’s next president on May 29, the capacity of Nigeria’s development partners, particularly China, will be critical to forging the new government’s development goals.

China, a major investor in Nigeria, has been an alternative to other sources of development finance such as the International Monetary Fund (IMF), the World Bank, and other bilateral lenders; it has become the largest bilateral lender in Nigeria.

Beyond trade and investment, China is financing big projects and its companies are contracted to build them, including railways, highway projects and the rehabilitation of Nigeria’s four airports in Abuja, Lagos, Kano and Port Harcourt. All of this makes China central to Nigeria’s development goals. In addition to these projects, China has sold millions of dollars worth of tanks and artillery to the Nigerian military.

Among others, the president-elect, Bola Tinubu, had insisted during the campaign on the provision of infrastructure to build Nigeria’s economy if he were elected president. But there is no denying the fact that China must be in the mix to build Nigeria’s infrastructure. However, China’s participation in the mix will depend on its ability to do so.

According to data from the Debt Management Office, Nigeria’s debt to China accounts for 83.57% of its total bilateral debt as of June 30, 2022, totaling $3.9 billion, an increase of 12.7 % compared to 3.5 billion dollars in the same period of the previous year.

But Bloomberg reported in October 2022 that China, Africa’s biggest bilateral creditor, has been cutting lending in the region amid its growing growth woes.

Charles Robertson, the global chief economist at Renaissance Capital Ltd, was quoted by Bloomberg as saying that the reduction in China would slow growth in the region and “may not be welcomed by most debt investors.

Over the last three decades, China has developed the ability to extend development finance to other developing countries like Nigeria due to its impressive growth: double digits for years. But China may be on the brink of a natural slowdown that will take the breath away from many economies that depend on it.

The Chinese government set its growth target for its economy for 2023 at around 5%, down from last year’s target of 5.5%, according to China’s Bureau of Statistics, as the world’s second-largest economy began to slow down. emerge from three years of severe COVID-19. 19 restrictions. The Chinese economy grew 3% last year, significantly missing the 2022 target and marking one of the slowest growth rates in nearly half a century. A 2023 government budget deficit target of 3.0% of GDP has been set, according to the report, expanding from last year’s deficit target of around 2.8%.

Although Covid-19 had hit the Chinese economy hard, the slowdown in the country’s growth was already beginning to manifest as a normal stage common to emerging economies.

The academic literature says that in the early stages of development, emerging nations can narrow their income gap with rich nations relatively easily by borrowing or copying the technology and management tools of more advanced nations. However, at a certain point, emerging nations have borrowed everything they can and need to start innovating and inventing on their own, and many fail in this challenge. Their economies suddenly stop growing faster and slow down to catch up. Economists refer to it as the “middle income trap.”

China has fallen into the middle income trap. The median income trap is generally said to jump at an income level equal to 10 to 30 percent of the income level in the world’s leading nation, the United States. It is the stage at which a developing nation stops catching up or slows its pace of recovery.

The bigger a country is, the harder it is to grow faster. For example, it is easier for a $10 billion economy to expand by 10% by achieving growth of $1 billion than it is for a $100 billion economy to achieve 10% growth by adding 10% to its GDP. It happens with all economies. China cannot sustain unlimited growth to infinity.

Also, over the past decade, the size of China’s labor force has been declining. Consequently, China has been experiencing wage-driven inflation – core inflation. With China’s impressive growth over the past half century, there has been a great demand for workers, skilled and unskilled. Over time, workers have demanded higher wages.

A sudden increase in factory wages was the most important warning sign that, at the height of their boom decades, economic growth in Korea, Japan, and Taiwan was about to slow sharply. China has reached that point.

The sharply rising wages put into serious question the future of a Chinese economy that relies on cheap labor and exports. Rising wages are forcing manufacturers to relocate plants to cheaper labor markets in countries like Indonesia and Bangladesh, so the export manufacturing boom may have reached its cap and may start moving in the opposite direction.

Furthermore, China’s one-child policy has led the country into a demographic impasse. China’s working-age population is declining, putting more pressure on the labor force. The smaller the country’s labor force, the greater the demand for higher wages, a phenomenon that is reducing China’s advantage as an economy of cheap labor and cheap exports.

Furthermore, it is generally difficult for any nation to expand the manufacturing share of its labor force much beyond 20%. According to the Multidisciplinary Digital Publishing Institute (MDPI), in 2020, the number of industrial enterprises above the scale of China’s labor-intensive manufacturing sector accounted for 27.39% of the total number of manufacturing enterprises, and employment represented 52.06% of the total. employment in the manufacturing sector.

These challenges are with China to stay and will determine growth, at least for the foreseeable future. By implication, they will determine how viable China will be as a development partner for Nigeria.

The implication is that the next Nigerian president will need to look inward to grow the economy. That may mean making smarter decisions to reduce the cost of governance, fix leaks in public finances, and build the country’s infrastructure through public-private partnerships.

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