Weekly Shots: China's Policies, Financial Inclusion in South Africa, U.S GDP, Africa's Commodities
Are China’s Policies Self-defeating?
Image by Hanny Naibaho- Shutterstock
The policies pursued by China’s government towards “common prosperity” appear to be working against its pursuit of victory in the trade war against the United States. This week, China’s President Xi Jinping emphasized the government’s intention to strengthen its actions towards achieving “moderate wealth for all”. This time, it aims to intervene in the health care market. This follows regulations in terms of price controls that have already been put in place in the technology, education and other sectors. These are the sectors that are argued to create a significant wealth effect in favour of the poor when prices are reduced. Although these have no direct link to the trade war between China and the US, they may result in negative implications for China’s pursuit of victory.
Possible ways in which this policy is self-defeating:
1. China’s government intervention in the market through price regulation acts as a deterrent for foreign investment. The latter plays a critical role in building up efficiencies for firms, driving innovation and improving the quality of products. Without foreign investment, China risks losing its competitiveness against the US, and globally, in the long run.
2. By lowering prices, the price margins for firms are reduced, and thus firms may end up exiting the market. This creates an opportunity for US countries to capture the market, where Chinese firms have exited.
The Need to Redefine Financial Inclusion.
Image by Markus Winkler- Unsplash
This week, the governor of the South African Reserve Bank, Mr Lesetja Kganyago, highlighted the predicament facing low-income earners when it comes to financial inclusion. According to the governor "People think financial inclusion is like shoving credit down the throats of the poor and that is not quite financial inclusion," the governor stated, emphasizing that while it is crucial for individuals to have access to credit, affordability tests must be thoroughly conducted.
Although providing credit to low-income earners helps boost their liquidity and enables them to participate in the economy, this is only a short-run solution, with dreary long-run consequences. “Banks need to innovate and create products that will address the consumers' needs to increase equity rather than just offering them more credit”- the central bank governor has said. At the basic level, this innovation will not only benefit consumers but will also help banks better manage the build-up of systemic risks that are due to credit defaults.
The end of the African Resource Curse?
The African Union Commission organised the Specialized Technical Committee (STC) on Trade Industry and Minerals this week under the theme “Deepening economic integration through interconnected and competitive product value chains based on local commodities”. Amongst the objectives of the STC is to consider the adoption of the draft African Commodity Strategy and its Action Plan. The Continent is home to 12% of the world’s oil reserves, 42% of its gold, 80-90% of the chromium and platinum, 60% arable land and vast timber resources (Africa Union, 2021). However, these resources have not yielded sustainable growth and development for most countries in Africa due to a lack of visionary, ethical leadership which has led to political instability and extractive institutions which facilitate corruption. The adoption of the commodity consolidated continental strategy, while increasing the Continent’s bargaining power through integration, promises to also effectively address challenges such as the Dutch Disease, volatile commodity prices and weak institutions so as to harness African resources for the benefit of the continent.
U.S Back to Pre-pandemic levels of Output
The U.S economy is the first G7 economy to return to a pre-pandemic level of output. This comes as no surprise due to the country’s strong economic policy response to the COVID-19 pandemic which was effective in bridging the economic damage caused by the pandemic. Trillions were directed towards economic stimulus payments made to households and businesses through the Coronavirus Response and Relief Supplemental Appropriations Act and the American Rescue Plan Act. The policy response played a huge role in encouraging spending by increasing the disposable income available to households and sustaining businesses operations. This resulted in decreased unemployment and a higher GDP thereby promoting economic recovery through the expenditure multiplier effect. In August, U.S household income rose rapidly by 1.1% as the government handed out enhanced tax breaks for parents, priming the economy for stronger growth once the Delta variant subsides. President Joe Biden and Federal Reserve Chair Jerome Powell vowed a rebound that’s equitable however, per Bloomberg recovery has been uneven as minority communities have seen unemployment fall below pre-pandemic levels in some areas such as Atlanta.