Monday, 5 February 2018

China´s Development Finance – A Boon for Africa

Large emerging countries have become important development partners in recent decades. They are outside the old donor cartel of countries in the Development Assistance Committee (DAC) at the OECD. Countries that provide development partnerships but do not belong to the DAC are Brazil, China, the Gulf States, India, Malaysia, the Russian Federation and Thailand. These countries now spend billions of dollars throughout the developing world to build roads, dams, bridges, railways, airports, seaports, and electricity grids. These projects, often in countries left orphan by Western donors because of alleged governance problems (which is little reason of concern when the country is a Western ally), have been greeted with suspicion (´rogue aid´): Sour grapes for Western donors - who from the 1980s tended to spend money more on conferences, consultants and governance rhetoric – to see new emerging partners in their former ´chasse gardée´. The rise of emerging partners could also explain the increasing support of the DAC for blended finance, in order to lever meagre ODA resources with private finance, which won´t work for low-income Africa[1].

Western donors and lenders are generally skeptical about China’s efforts to assume a leadership role in providing global infrastructure, and point to the benefits international competitive bidding rules and environmental and social safeguards provide to ensure responsible and sustainable implementation of infrastructure projects. And Western politicians and media have warned African counterparts that China may be motivated not by a desire to improve the lives of ordinary Africans but more by a desire to gain access to the continent’s natural resources.


Table 1. Recipients of Chinese Official Finance, 2000 - 2014
World Region
Total, $bn
 ODA Terms, %

No. of Projects

Africa
118.1
58

2345

Eastern Europe
56.7
3

171

Latin America
53.4
12

317

South Asia
48.8
10

423

Southeast Asia
39.2
7

507

Other Asia
28.5
6

183

Middle East
3.1
1

93

Pacific
2.8
3

265

Total/Average
350.6
24.5

4304

Source: Aid Data (Dreher et al., 2017); my calculations.

China, in particular, has positioned itself as a leading global financier of the “hardware” of economic development. Unfortunately, China does not disclose comprehensive or detailed information about its international development finance activities. However, Aid Data (Dreher et al., 2017)[2] have recently constructed a dataset with a new methodology for tracking underreported financial flows. This paper introduces a new dataset of official financing—including foreign aid and other forms of concessional and non-concessional state financing—from China to 138 countries between 2000 and 2014.
According to these new data, the scale and scope of China´s overseas infrastructure activities now rival or exceed that of other major donors and lenders. Between 2000 and 2014, the Chinese government committed more than $350 billion in official finance to countries and territories in Africa, Asia and the Pacific, Latin America and the Caribbean, the Middle East, and Central and Eastern Europe. Transport and power generation are the two main sectors financed. Chinese cooperation also invests significantly in health, education, water and sanitation, agriculture, and other social and productive sectors.
Chinese official finance consists of Official Development Assistance (ODA), which is the strictest definition of aid used by OECD-DAC members, and Other Official Flows (OOF). China provides relatively little aid in the strictest sense of the term (development projects with a grant element of 25 percent or higher). A large proportion of the financial support that China provides to other countries comes in the form of export credits and market or close-to-market rate loans. Table 1 provides a calculation of the weighted average of China´s development finance that was extended at concessional ODA terms: 24.5 percent for the period 2000 – 2014.
Table 1 shows that Africa received most from Chinese development finance during the period 2000-14 – in terms of amounts, degree of concessionality (percentage share at ODA terms) and number of projects. More than a third of overall Chinese official finance went to Africa during 2000 and 2014. Zimbabwe, Angola, Sudan, Tanzania, Ghana, Kenya and Ethiopia headed the ranking of Africa´s recipients in number of projects. Africa has received more Chinese ODA-like finance than all other developing regions in the world combined, almost 80% of Chinese aid.
But did Africa benefit from Chinese aid? Dreher & Co. show that Chinese official development assistance (ODA) boosts economic growth in recipient countries. The popular claim that significant financial support from China impairs the effectiveness of grants and loans from Western donors and lenders is clearly rejected. The Aid data paper also benchmarks the effectiveness of Chinese aid vis-á-vis the World Bank, the United States, and all members of the OECD’s Development Assistance Committee (DAC). The results indicate that Chinese, U.S., and OECD-DAC ODA have positive effects on economic growth, but no robust evidence is found that World Bank aid promotes growth. The Aid Data research suggests that ODA compatible aid helps growth, despite the many (populist?) claims to the contrary from the likes of Dambisa Moyo.

By contrast, it is found that, irrespective of the funding source, less concessional and more commercially-oriented types of official finance do not boost economic growth. Too bad DAC donors are becoming so stingy. DAC Country Programmable Aid (CPA), the (most valuable) portion of aid that recipients´ budgets can really count on (because it excludes OECD-based spending for conferences, consultants, migrants, etc), has declined from 2014[3].


[1] Kappel, R. & H. Reisen (2017), The G20 »Compact with Africa«: Unsuitable for African Low-Income Countries, Friedrich-Ebert-Stiftung, Berlin.
[2] Dreher, A. et al (2017),  Aid, China, and Growth: Evidence from a New Global Development Finance Dataset, Aid Data Working Paper No. 46, William & Mary, October.
[3] https://stats.oecd.org/Index.aspx?DataSetCode=CPA

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