New research shows China’s “rogue aid” actually promotes growth

GUEST COLUMN

New research shows China’s “rogue aid” actually promotes growth

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By Pippa Morgan 

Sometimes dubbed “rogue aid” and even “toxic” by portions of the Western media, but heralded by some researchers and recipients as “a new model of international development” and “win-win partnerships”, China’s foreign aid program has aroused a hugely polarized, heated debate. Which side, if either, is correct?

Beijing’s opaque approach (it does not release detailed official data) makes this question tricky to answer. To have any hope of assessing the impact of aid objectively, solid numbers are required, and a recently-released data set from US-based AidData, a lab at the College of William and Mary, helps to plug this critical gap.

Who gets Chinese funding, and how much?

The research tracked a vast number of sources, from media reports to Chinese embassy activities, to deliver the first-ever detailed global picture of China’s development finance. The publicly available data set covers over 5,000 projects across Africa, Asia, Latin America, the Middle East and Central and Eastern Europe.

The conclusion from this analysis is that the scale of China’s official finance now rivals that of the United States, with more than US$350 billion disbursed across almost 140 countries between 2000 and 2014.

What do these numbers show about the effects of Chinese finance? A new paper released alongside the data set reaches a surprising conclusion: Chinese aid is actually good for development.

The authors calculatesd that Chinese assistance (measured in the same way that the OECD measures aid) has had a positive effect on Gross Domestic Product (GDP) per capita growth in recipient countries. In fact, the payoffs of Chinese aid are similar to those of Western donors such as the United States (and better than the World Bank).

The authors speculate that the key lies in China’s focus on the hard infrastructure vital to modern, job-creating industries. Through funding of the roads, railways and power stations that companies need to operate, Chinese aid attracts other investment in recipient countries and helps local businesses grow. This in turn delivers jobs for local populations and kick-starts development.

Traditional aid vs. commercial finance

But another key conclusion is that China’s traditional aid is gradually being edged out by commercial finance that makes money for Chinese funders.

The new data set tracks two kinds of finance. First, assistance that conforms to the OECD’s definition of aid (Official Development Assistance, or ODA). This includes grants, technical help, and interest free or low interest loans. Second, official finance on commercial or near commercial terms, such as loans at market rates (Other Official Finance, or OOF).

In 2000, the totals for these two types were broadly similar: just over 1 billion dollars each. But, by 2014, the amount of commercial OOF skyrocketed to over 24 billion dollars, around 3.5 times more than the total for traditional ODA-like aid.

Some caution is required in interpreting these numbers. Much traditional aid is in social sectors, such as medical teams, where it is difficult to find reliable financial values, making underestimates possible. In addition, a large proportion of projects are recorded as “vague”, meaning there is not enough information to work out whether the money is ODA-like or OOF.

Nevertheless, the general trend – from traditional aid to a new hybrid approach – is clear, and is reflected in China’s flagship Belt and Road Initiative (BRI). The stated aim of the BRI is to combine contrubutions from aid organizations, state investment and the private sector to deliver multi-billion dollar schemes for connecting Asia with Europe that has been dubbed China's Marshall Plan.

For recipients, it is a mixed picture. Combining commercial finance with traditional aid allows China to offer funding at a much larger scale, which is welcomed by those who desperately need new infrastructure. Well-managed governments can leverage Chinese funds to fuel industrial development, which in turn allows them to raise the tax revenue they need to pay the money back.

Ethiopia’s self-styled “developmental state”, for example, plans to use its flagship Chinese-funded railroad from Addis-Ababa to the port of Djibouti to make exporting cheaper and easier. In turn, this will allow the country to capitalize on its low cost labor to win investment in light manufacturing, following a similar development path to China.

But if debt is not well-managed, or if development doesn’t happen as hoped, there are knock-on costs for both sides of the deal. This might be why the researchers who uncovered the positive link between China’s aid and growth do not find the same result for OOF.

What’s next?

The debate over Chinese aid has in part been fuelled by a lack of hard, global evidence. These new numbers suggest that far from being “rogue”, Chinese aid is good for growth. China’s focus on infrastructure can complement Western targeting of soft sectors such as health, education, and capacity building.

Pippa Morgan is a Doctoral Candidate at the School of International Relations and Public Affairs, Fudan University (Shanghai)