Brad Parks on China’s Foreign Aid

Dr. Brad Parks is AidData's Executive Director and Research Faculty at the College of William and Mary’s Institute for the Theory and Practice of International Relations. He leads a team of 35 program evaluators, policy analysts, and media and communication professionals who are responsible for equipping policymakers and practitioners with better evidence to improve how sustainable development investments are targeted, monitored, and evaluated. His research on international development finance has been published in disciplinary and inter-disciplinary journals, including Science, World Development, the Journal of Development Studies, Global Environmental Politics, the Journal of Conflict Resolution, International Studies Quarterly, and China Economic Quarterly.  From 2005-2010, Brad was part of the initial team that set up the U.S. Government’s Millennium Challenge Corporation (MCC). He helped managed the agency's annual country selection process, and as Acting Director of Threshold Programs oversaw the implementation of a $35 million anti-corruption and judicial reform project in Indonesia and a $21 million customs and tax reform project in the Philippines. Brad holds a Ph.D. in International Relations and an M.Sc. in Development Management from the London School of Economics and Political Science. He is currently writing a book for Cambridge University Press on China’s overseas development program. He interviewed with Tobin Hansen CMC '20 in November 2017.

Could you give a brief summary of global patterns and trends in China's foreign aid program?

Until recently, it was not possible to say very much about patterns and trends because the Chinese government considers the details of its overseas development program to be a state secret. However, a team of more than 100 researchers at AidData has spent the last 5 years using a new methodology called Tracking Underreported Financial Flows (TUFF) to build the most comprehensive and detailed source of project-level data about China’s overseas development program ever assembled. The dataset captures nearly 4,400 Chinese government-funded projects (worth an estimated $354 billion) that were initiated or completed in 140 countries between 2000 and 2014. As a point of comparison, the United States spent roughly $400 billion around the globe over that same period of time. So, you could say that the US and China were overseas spending rivals during this 15-year period, but the color of the money that Washington and Beijing provided was very different. The U.S. devoted the lion’s share (93%) of its spending to Official Development Assistance (the strict definition of aid, also known as ODA), whereas only 23% of Chinese government funding was spent on ODA. Less concessional and more commercially-oriented financial flows, which the OECD refers to as Other Official Flows (OOF), make up the bulk of China’s overseas spending.

What is the “rogue donor" theory? Does your recent study, "Aid, China, and Growth" confirm or contradict this theory?

Policymakers and pundits often claim that China, in its zeal to help partner countries efficiently install the “hardware” of economic development (like roads, bridges, and electricity grids), has prioritized speed over quality. Beijing’s critics charge that it finances “white elephant” projects -- for example, roads that wash away because of sub-standard construction work, or hospitals that are built, but not staffed with qualified personnel or stocked with medicines. According to the “rogue donor” narrative, China funds economic and social infrastructure projects that yield few development benefits, while Western donors and lenders fund higher impact projects because they have learned to design and implement projects in careful and sustainable ways.

In our latest study “Aid, China, and Growth”, we put this “rogue donor” theory to the test. While it might be anecdotally true that China has built white elephant projects, if it is systematically true, one would expect to see fewer economic growth benefits from Chinese-funded projects than Western-funded projects. We find no empirical evidence to support this claim. What we do find is that Chinese aid projects yield very similar economic growth dividends as Western aid projects. We estimate that, for the average recipient country, a doubling of Chinese ODA leads to a 0.4% increase in economic growth. We also find that Western ODA yields similar economic growth dividends.

But there is an important caveat. We find no evidence that less concessional and more commercially-oriented types of financial support (OOF) improved economic growth. This is true, regardless of whether the source of the funding is China or a Western source. One reason why we think these findings are important is because only about 23% of China’s overseas spending qualifies as aid in the strict sense of the term (ODA). Therefore, only a small fraction of China’s overseas spending is delivering significant economic benefits for developing countries. The vast majority of its overseas spending (nearly 80%) has no detectable effect on economic growth in partner countries. One of the big policy implications from this study is that, if China were to reorient more of its overseas spending towards ODA (that is, grants and low interest loans that are focused on development objectives, low-income and middle-income countries would potentially be in a position to reap substantially larger economic growth dividends.

You mentioned that China could ratchet up ODA as a percentage of its total overseas spending to improve economic outcomes. But what would motivate China to make this shift away from a commercially-focused portfolio?

We have a study that will soon be published in International Studies Quarterly called “Apples and Dragon Fruits” that tries to disentangle Beijing’s motivations for providing two different types of financial flows: ODA and OOF. We find that Chinese ODA is largely guided by two sets of motivational factors. The first is level of need in the recipient country. Poor and highly populous countries receive a disproportionate amount of Chinese ODA. The second is foreign policy considerations. It's virtually automatic that if a country recognizes Taiwan diplomatically, it will be denied Chinese ODA. Likewise, the UN General Assembly is a venue in which countries have an opportunity to stake out foreign policy positions that are similar or dissimilar to those adopted by China, and we find that if countries align their votes with China in the UN General Assembly, they are richly rewarded. But China is not exceptional in this regard. The same basic set of set of motivations guide the cross-country distribution of Western ODA.

We also find in the “Apples and Dragon Fruits” study that the factors that motivate Chinese OOF are very different from those that motivate Chinese ODA. Chinese OOF tends to go to China’s trading partners, more creditworthy countries (that can repay Chinese loans), and countries that are rich in natural resources.

So, to return to your question, I think China would consider recalibrating its ODA-to-OOF ratio if it determined that doing so would help to safeguard or advance its own interests. Let me give you an example. Recall that in the “Apples and Dragon Fruits” study we find that China generally allocates OOF to more creditworthy countries. But there have also been a number of important exceptions where China has given some non-concessional or weakly concessional loans to countries with questionable repayment capacity. Venezuela is a good example of this and it may very well be the canary in the coal mine. China lent tens of billions of dollars to the Venezuelan authorities, and it now seems very unlikely that they will repay those loans given the country’s precarious economic circumstances. Therefore, if China decides in the future to make new loans to Venezuela and it wants those loans to be repaid, it doesn’t seem far-fetched that China will learn from its past mistakes and soften its lending terms – in other words, provide more ODA and less OOF.

When evaluating the efficacy of these two systems, should the value of foreign aid be measured in economic growth, institutional development, or some other indicator?

There is not one measure of impact that is equally appropriate for all types of foreign aid. It is reasonable to use economic growth as an effectiveness yardstick for infrastructure programs. But it does not make much sense to use that same yardstick for programs that are intended to respond to public health emergencies or protect biodiversity or provide emergency relief to internally displaced persons. Aid has many purposes, and therefore its effectiveness should be measured by what it is actually trying to accomplish. What we find in our latest study, “Aid, China, and Growth,” is that economic and social infrastructure programs increase economic growth, irrespective of whether the financier is Chinese or Western.

But for aid programs that are specifically designed to improve institutional development, I think it is more appropriate to judge their effectiveness according to the degree to which they help public sector institutions to discharge their core functions, like maintaining law and order, collecting taxes, and providing essential public services. In fact, one of the big unanswered questions in aid effectiveness research right now is how donors can best help poor countries build strong and durable institutions. China tends to make investments in the “hardware” of institutional development – for example, the construction of new government buildings or installation of CCTV systems to help the police monitor crime. The US and other Western donors tend to support the “software” of institutional development – for example, training public officials and equipping them with data, analysis and policy advice. But there still isn’t much evidence about the relative effectiveness of these two different approaches.

Could you briefly talk about the relative importance or unimportance of having "strings attached" to loans or aid for domestic development or the interests of nations that contribute foreign aid?

China attaches a variety of strings to its aid. As I mentioned earlier, the “One China” policy is a string that is attached to Chinese aid, which helps promotes the country’s foreign policy goals. There are also commercial strings attached to Chinese aid, like the requirement that Chinese-funded projects rely on the acquisition of Chinese goods and services.

However, it is also true China rarely ties its funding to the implementation of domestic policies in their counterpart countries, and its adherence to the principle of non-interference in domestic affairs of partner countries is consequential. There is a study that was just published in World Development by Diego Hernandez. He finds that, for every 1% increase in Chinese ODA, the average recipient country receives 15% fewer World Bank loan conditions. So, even if it is not China’s intent—and I don't believe it is—developing countries are parlaying their relationships with China into increased bargaining power vis-à-vis traditional donors and thereby eluding Western aid conditionality. Reasonable people can disagree over whether “good governance” conditions in World Bank loans are a good or bad thing, but the fact of the matter is that today’s aid recipients live in an “age of choice” and the Bretton Woods institutions simply do not have the same type of policy leverage that they once had.

Finally, it’s important to keep in mind that China administers a request-based aid system. Political leaders in low-income and middle-income countries have to request that China finance specific projects, which means that these very same political leaders are allowed to identify the projects that are most important to them and influence where projects are geographically located within their countries. In a new study called “Aid on Demand,” my coauthors and I provide evidence that this request-based aid system has distributional consequences: Chinese development projects are disproportionately allocated to the home regions of political leaders. If you pull together some of the different threads of research that we have discussed, we know that Chinese development projects are accelerating economic growth but and that they are altering patterns of spatial economic inequality within countries. We also know from past research that when you increase horizontal inequalities within a society there are heightened risks of social unrest, political polarization, and violent conflict. China’s hands-off approach to project site selection have major long-term social cohesion and political stability consequences in recipient countries that are not yet fully understood. It is also fair to say that the Chinese officials do not fully appreciate the implications of the aid-on-demand system that they’ve put in place.

What kind of real influence does China "purchase" for itself with its aid program in general, and its assistance in building infrastructure in particular?

We do not find that infrastructure financing specifically is what allows China to purchases policy influence. Concessional aid flows enable China to purchase foreign policy concessions from counterpart countries. But there are certainly infrastructure financing implications for countries that engage in aid-for-policy deals with China. Take for example the Philippines. After the President Duterte reversed his predecessor's stance on territorial claims in the South China Sea, China promised billions of dollars of infrastructure financing to his home region of Mindanao.

Tobin Hansen CMC '20Student Journalist

Featured Image by Danuta B. / fotopolska.eu [CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

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