The Case for Chinese Aid: Why It Complements, Not Displaces, Western Aid


 BY HAIYANG ZHANG

In China’s recent 19th Party Congress, President Xi Jinping spoke confidently about blazing “a new trail for other developing countries to achieve modernization” and providing “a new option for other countries and nations who want to speed up their development.”[1] China increasingly asserts itself as an important development partner to other developing countries and a formidable rival in the eyes of traditional donors.

China is often portrayed as a “rogue” donor, conducting shady dealings with local governments, with low labor and environmental standards. Critics also accuse China of imposing “creditor imperialism” through loans that recipient countries cannot repay, giving China excessive control over strategic assets in borrowing countries.[2] In reality, the picture is much more nuanced.

There are three major concerns about Chinese aid: the lack of safeguarding mechanisms, the potential to crowd out Western aid, and the secrecy of its non-interference approach. While the first claim of inadequate safeguarding is valid, little evidence supports the latter two claims. Chinese aid supplements, rather than crowds out, Western aid, and no empirical evidence supports the claim that China’s non-interference approach is less effective in promoting economic growth in recipient countries.

 

New Comer, Old World Order

International development has been the hallmark of a post–World War II liberal world order, spearheaded by the Bretton Woods institutions from which multilateral aid flows into developing countries. In parallel, bilateral aid programs from the national governments of industrialized countries play an important role in international development.

China is a long-time recipient of development aid. As of 2017, the World Bank has provided more than $60 billion in cumulative lending to China since 1980, the beginning of the Bank’s operations in China.[3] Multilateral and bilateral institutions have only recently started scaling back lending to China given the country’s stellar growth for nearly four decades.

China is a newcomer to the club of aid providers. While China continues to receive aid from institutions like the US Agency for International Development (USAID) and the World Bank, it is actively providing financial support to other developing countries. The International Development Association (IDA) is the World Bank’s credit provider to the world’s 75 poorest countries. In 2007, China became a contributor to IDA, after only graduating from the “poorest countries” list in 1999. This is a remarkable achievement, considering 9 of the 44 graduates slipped back into the category.[4]

China is reshaping the landscape of international development. In terms of bilateral assistance, Chinese aid is similar in scale and scope to that of the United States. Between 2000 and 2014, Chinese bilateral aid amounted to approximately $350 billion, while the United States contributed approximately $390 billion over the same period.[5] Admittedly, Chinese aid is often dispersed together with investment. And its composition is different. Chinese aid usually comes in less concessional terms, compared to that of its Western counterparts. Yet Chinese aid is becoming increasingly visible and vital in the development community.

“China is a newcomer to the club of aid providers. While China continues to receive aid from institutions like the US Agency for International Development (USAID) and the World Bank, it is actively providing financial support to other developing countries.”

Meanwhile, China has set up new multilateral institutions like the Asia Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB), each with an initial capital commitment of $100 billion. Given that the AIIB is authorized to lend up to 2.5 times its capital of $100 billion, it rivals the World Bank in lending capacity.[6]

 

Mixed Results, Mixed Feelings

Chinese aid has seen mixed results both in assisting recipient countries and in boosting China’s influence abroad. Observers worry about the quality of Chinese aid. For example, while 93 percent of US aid between 2000 and 2014 was in the form of official development assistance (ODA), only 23 percent of Chinese financial support was in the same category.[7] Recipient countries are anxious about debt repayment, given less than a quarter of Chinese aid qualifies as ODA by the strict OECD definition.[8] Traditional donors and lenders also worry that Chinese aid does not generate the economic prospects China promised to these recipient countries and that Chinese aid might displace Western aid.

In reality, Chinese aid has seen both success and failures in recipient countries. In Sri Lanka, Chinese aid upgraded infrastructure but failed to deliver the goodwill that China had hoped for. In Venezuela, China arguably supported a rogue regime via lending to its state-owned oil company. Meanwhile, in Myanmar, Chinese aid achieved greater success, forging economic ties that China can leverage to broker peace amid Myanmar’s domestic conflicts.

 

Sri Lanka

In Sri Lanka’s Hambantota District stand a port, an airport, and a cricket stadium. Curiously, they are all named after Mahinda Rajapaksa, Sri Lanka’s former president.

The port, airport, and cricket stadium were all financed and built with China’s assistance. Yet the under-utilization of these infrastructure projects dampens their recent grand openings. The port constantly operates below capacity. The airport won the infamous title as the world’s emptiest airport, designed to handle one million passengers per year but currently transporting only about a dozen passengers per day.[9] And the cricket stadium hosts more wedding ceremonies than cricket matches.[10]

The three projects are financially unsustainable and beg the question: why would China foot the bill? Not coincidentally, Hambantota is also the birthplace of the former president Rajapaksa, whose government won the 26-year civil war yet registered multiple complaints at the United Nations Human Rights Council.[11] China’s association with Rajapaksa harms its relationship with Sri Lanka’s current administration, which is upset with China for helping the former president stay in power by spending on the “Chinese credit card.”

If the airport and the stadium fail to earn China good publicity, the port project profoundly damages China’s carefully cultivated image as an equal partner for other developing countries. The port’s financial failure forced Sri Lanka to sign a 99-year ownership transfer via a debt-equity swap. It is hardly a good bargain for China, unless the port is used for military purposes, which China has long denied. The transaction also alarms India, which sees the port as a precursor to China’s military ambition into the Indian Ocean.[12] Some critics accuse China of “creditor imperialism,” arguing that China’s 99-year lease of the Hambantota port resembles Britain’s 99-year lease of Hong Kong.[13]

The resemblance, however, is a stretch. In the late 19th century, Great Britain “leased” Hong Kong via a series of treaties forced upon China with guns and warships. It is far-fetched to equate China’s economic prowess today to Victorian Britain’s unjust wars. China’s approach to the Hambantota port is largely a market-based transaction rather than a calculated strategy. China could not predict in 2008 that the port would be a financial failure and that the new administration, after the Rajapaksa’s unexpected defeat in the election, would sell the port via a debt-equity swap. China simply made a bad financial decision.

China’s success in building physical infrastructure does not exonerate it from all responsibilities. The mixed feelings in Sri Lanka point to two problems: First, Chinese aid falls short of international best practices to limit the burden on the recipient country’s public finances. Second, China’s non-interference approach of aid-giving is never that simple in practice. Despite its reluctance to get involved in Sri Lanka’s domestic politics, China inevitably became the center of political debate. For the current administration, China was the irresponsible lender to the Rajapaksa government. For former president Rajapaksa, attacking China for “impinging on Sri Lanka’s sovereign rights” is his ticket to a return to politics.[14] The Sri Lanka case demonstrates that grand infrastructure projects do not always lead to good publicity.

Venezuela

Venezuela, on the verge of a default, desperately needs fresh financing. Recently, the country began publishing its oil price in Chinese yuan and announced plans to issue its own cryptocurrency, the Petro, backed by its oil reserves. On the surface, these efforts sound like financial innovations. In reality, these measures expose Chinese finance to a strong default risk.

China is an important financier for Venezuela’s fragile economy. Between 2007 and 2016, Chinese aid and investment to Venezuela totaled $62 billion, as estimated by Inter-American Dialogue, a Washington, DC-based think tank.[15] Chinese aid and investment helped the Venezuelan government stay afloat. Yet cash-strapped Venezuela has struggled to repay its debt. Venezuela’s largest state-owned oil company, PDVSA, is paying back Chinese loans in oil barrels.

Many critics use Venezuela’s financial woes as a culminating example of China’s failure to protect the recipient country’s public finances. Some even argue China is cornering Venezuela to take advantage of its vast oil reserves.

To be a premeditated move, however, China would have needed to predict persistently low oil prices, which have defied many analysts’ expectations. In reality, even China is getting impatient. In December 2017, Sinopec, China’s largest state-owned oil company, took PDVSA to court in the United States. The $23.7 million-plus punitive damages sought by the Chinese conglomerate is just the tip of the iceberg—an insolvent Venezuela will be costly for China.[16]

The Venezuela case demonstrates the reputational risk of lending to commodity-rich countries. The pro-cyclical tendency of fiscal spending in commodity-rich countries often leads to macroeconomic crises later. In the case of a debt default, China has a right to these commodities. However, this profitable business comes with a reputational risk—given current low oil prices, oil shipments to China make China look the part of a villain, robbing a country at its weakest moment and propping up a rogue regime. Once again, China’s non-interference approach came under close scrutiny.

Myanmar

Despite these failures, Chinese aid and investment have succeeded elsewhere in using economic influence to create positive impact in a recipient country. In Myanmar, China has proposed a three-stage plan to solve the Rohingya crisis. The plan has won support from both Myanmar and neighboring Bangladesh, to which more than half a million Rohingya refugees have fled.[17] China’s strong ties to Myanmar via aid and investment afford China unparalleled influence in the country, while the rest of the international community watches from afar and condemns Aung San Suu Kyi’s silence.

Until recently, China strenuously avoided playing a high-profile role in ameliorating the Rohingya crisis, consistent with its long-held principle of non-interference. But that sentiment is changing. The Chinese Embassy in Bangladesh hosted a public ceremony transferring China’s humanitarian relief supplies to Rohingya refugees and expressed China’s concerns about the Rohingya crisis.[18]

In Myanmar’s other less publicized crisis, China is effectively brokering a ceasefire between the Myanmar government and its ethnic rebels, the Kachin Independence Army—another case of a positive spillover from China’s economic influence.[19],[20]

China’s influence in Myanmar stems from its economic ties via aid and investment. The economic link naturally extends greater political influence from Beijing to Naypyidaw. While the United States considers imposing economic sanctions on Myanmar that diminish its influence in the country, China is channeling its economic influence into political clout.[21] Admittedly, China’s active role in Myanmar primarily aims to create a stable environment for commerce, but the positive spillover effects are helping resolve Myanmar’s ethnic conflicts.

 

Past Lessons, Future Vision

Chinese aid in Sri Lanka, Venezuela, and Myanmar points to three major concerns: the lack of safeguarding mechanisms, the potential to crowd out Western aid, and the lack of conditionality associated with China’s non-interference approach.

The first criticism is valid. Chinese aid often falls short of international best practices. As the Sri Lanka and Venezuela examples demonstrated, Chinese aid failed to protect the recipient countries’ public finances. These failures arise from two underlying problems. First, Chinese aid rushes into recipient countries without adequate due diligence on public finance consequences. Second, Chinese aid is often based on political ties rather than economic fundamentals. In the cases of the Sri Lankan port and Venezuelan oil, the lack of safeguarding mechanisms created reputational risks for China’s image abroad as an equal development partner.

China needs to establish safeguarding mechanisms for aid-giving practices. Traditional donors and lenders should increase their coordination with China. For example, the OECD’s Development Assistance Committee (DAC) has well-established mechanisms for coordination in the field but does not include China. Coordination would help propagate international best practices and increase transparency. Bringing China into “the club” can help China adopt at least some of the safeguarding practices and reduce its aid opacity. China’s Belt and Road Initiative aims to create a global trade network across countries where traditional donors operate. Thus, it is crucial to increase policy coordination that could help China improve its safeguarding mechanisms.

The second criticism of China’s potential crowding out effect on Western aid, however, is misplaced. There is no evidence that top recipients of Chinese aid receive less support from traditional Western aid institutions. Traditional Western donors did not shy away from Sri Lanka and Myanmar when these countries saw a massive influx of Chinese aid. Furthermore, research shows that Chinese aid is just as effective at promoting economic growth vis-à-vis Western aid in recipient countries.[22]

The last criticism—the lack of conditionality due to China’s non-interference approach to development—has little theoretical basis for three reasons. First, conditionality as a development concept is on the decline. Development economists have increasingly criticized the “Washington Consensus,” which called for conditionality tied to traditional aid. The conditionality assumption—that recipient countries either lack the capability to spend the money effectively or are simply too corrupt to handle money—is at best misleading and at worst condescending. Second, information failure is prevalent in the development field, and only local governments in recipient countries can bridge the information gap. In response to this new insight, the United States established the Millennium Challenge Corporation in 2004 to give recipient countries maximum ownership of aid projects. The world is increasingly moving in the same direction as China’s no-strings-attached approach. Third, conditionality in the past has failed to generate broad-based prosperity. For instance, in post-Soviet Russia, the prevailing ideas of the “Washington Consensus” encouraged wholesale privatization, which enriched oligarchs following the sudden exit of the state from strategic industries. In Latin America, the record of the “Washington Consensus” was abysmal. Growth in the 1990s, the decade when Latin America implemented “Washington Consensus” policies, was just half of that in the 1960s and 1970s.[23] Meanwhile, China’s no-strings-attached approach offers an effective alternative for policy experimentation at the very least. It would be unfair to blame Chinese aid for its lack of conditionality when there is no consensus on the “Washington Consensus” itself.

 

New Trail, Old Wisdom

With the success in its own development experience, China is becoming increasingly assertive about its infrastructure-heavy, non-interference approach to international development. Whether China’s development model is sustainable and replicable is still unclear. Improved safeguarding mechanisms are clearly critical to Chinese aid’s future success. In the late 1970s, former Chinese leader Deng Xiaoping asserted the principle that “practice is the sole criterion for examining the truth.”[24] This brought success to China’s own economic development. The principle remains true today for policy experimentation in aid-giving and international development.

China will remain at the center of the international development debate for the foreseeable future. With the world’s largest bilateral donor, the United States, scaling back its aid commitments, Chinese aid is increasingly vital in the field of development. Perhaps China’s approach to aid-giving will not become the new norm, but it offers an intriguing alternative to the traditional sources of development finance. And that creates healthy competition.

 

Haiyang Zhang is a master in public administration/international development student at the John F. Kennedy School of Government at Harvard University. He is a managing editor for the Kennedy School Review and frequently contributes to its op-ed section. His interests include economic development, public–private partnerships, and China-US relations.

 

 

Photo: Former President of Sri Lanka Mahinda Rajapaksa and Chinese President Xi Jinping / Credit: Mahinda Rajapaska on Flickr

 


[1] Bonnie S. Glaser and Matthew P. Funaiole, “Xi Jinping’s 19th Party Congress Speech Heralds Greater Assertiveness in Chinese Foreign Policy,” CSIS, 26 October 2017, https://www.csis.org/analysis/xi-jinpings-19th-party-congress-speech-heralds-greater-assertiveness-chinese-foreign-policy.

[2] Brahma Chellaney, “China’s Creditor Imperialism,” Project Syndicate, 20 December 2017, https://www.project-syndicate.org/commentary/china-sri-lanka-hambantota-port-debt-by-brahma-chellaney-2017-12.

[3] “Overview, The World Bank in China” The World Bank, accessed 9 February 2018, http://www.worldbank.org/en/country/china/overview#2.

[4] “IDA Graduates,” IDA, The World Bank Group, accessed 9 February 2018, http://ida.worldbank.org/about/ida-graduates.

[5] Axel Dreher et al., “Aid, China, and Growth: Evidence from a New Global Development Finance Dataset,” (working paper, AidData, 2017).

[6] “AIIB chief unveils aim to rival lenders such as ADB and World Bank,” Financial Times, 3 May 2017, https://www.ft.com/content/3a938ee4-0288-11e7-aa5b-6bb07f5c8e12.

[7] Dreher et al. “Aid, China, and Growth.”

[8] “Official development assistance – definition and coverage,” OECD, accessed 9 February 2018, http://www.oecd.org/dac/stats/officialdevelopmentassistancedefinitionandcoverage.htm.

[9] Brook Larmer, “What the World’s Emptiest International Airport Says About China’s Influence,” The New York Times, 13 September 2017, https://www.nytimes.com/2017/09/13/magazine/what-the-worlds-emptiest-international-airport-says-about-chinas-influence.html.

[10] Jessica Meyers, “Sri Lankans who once embraced Chinese investment are now wary of Chinese domination,” Los Angeles Times, 25 February 2017, http://www.latimes.com/world/asia/la-fg-sri-lanka-port-2017-story.html.

[11] “OHCHR Investigation on Sri Lanka,” United Nations Human Rights Council, accessed 9 February 2018, http://www.ohchr.org/EN/HRBodies/HRC/Pages/OISL.aspx.

[12] “China-owned port in Sri Lanka could alter trade routes,” Financial Times, 25 September 2017, https://www.ft.com/content/f0d88070-9f99-11e7-9a86-4d5a475ba4c5.

[13] Chellaney, “China’s Creditor Imperialism.”

[14] Shihar Aneez, “China’s ‘Silk Road’ push stirs resentment and protest in Sri Lanka,” Reuters, 1 February 2017, https://www.reuters.com/article/us-sri-lanka-china-insight/chinas-silk-road-push-stirs-resentment-and-protest-in-sri-lanka-idUSKBN15G5UT.

[15] “Lawsuit shows China losing patience with Venezuela,” Financial Times, 6 December 2017, https://www.ft.com/content/d627460a-da8e-11e7-a039-c64b1c09b482.

[16] “Lawsuit shows China losing patience with Venezuela.”

[17] Reuters Staff, “China proposed three-phase plan for Rohingya issue,” Reuters, 19 November 2017, https://uk.reuters.com/article/uk-china-myanmar-rohingya/china-proposed-three-phase-plan-for-rohingya-issue-idUKKBN1DK024.

[18] “Chinese government provides emergent humanitarian relief supplies to recent refugees in Bangladesh,” Chinese Embassy in Bangladesh, 28 September 2017, accessed 26 February 2018, http://bd.chineseembassy.org/chn/zmjw/t1498005.htm.

[19] “China helps broker Myanmar peace talks,” Financial Times, 4 February 2013, https://www.ft.com/content/64cc3d54-6ec2-11e2-8189-00144feab49a.

[20] Reuters Staff, “China calls for ceasefire after Myanmar border region clashes,” Reuters, 7 March 2017, https://www.reuters.com/article/us-myanmar-insurgency-china/china-calls-for-ceasefire-after-myanmar-border-region-clashes-idUSKBN16E0YL.

[21] Patricia Zengerle, “U.S. lawmakers target Myanmar military with new sanctions,” Reuters, 2 November 2017, https://www.reuters.com/article/us-myanmar-rohingya-usa-congress/u-s-lawmakers-target-myanmar-military-with-new-sanctions-idUSKBN1D22DX.

[22] Dreher et al., “Aid, China, and Growth.”

[23] Joseph E. Stiglitz, “The Post Washington Consensus Consensus,” (working paper, Initiative for Policy Dialogue, 2007).

[24] “Notes”, Peoples Daily, accessed 10 February 2018, http://en.people.cn/dengxp/vol3/note/C0100.html.

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