CHAPTER 2 : THE PERILS OF CHINESE FOREIGN AID
Ding-Yi Lai (National Chung Cheng University)
Wen-Cheng Lin (National Chengchi University)
Wen-Chin Wu (Academia Sinica)
Abstract
As China has become a major donor of foreign aid to developing and underdeveloped countries, concerns have been raised about the political and economic consequences for recipient countries. Traditionally, OECD countries offer aid to other countries in the form of official development assistance (ODA), which is usually concessional and conditional. Recipient countries are required to adopt policy reforms or adjustments to ensure continued aid. However, China advocates the principle of “non-interference” and often gives aid without hard conditionalities on political or economic reforms. Sometimes China also uses its aid to fulfill its political goal of isolating Taiwan, by demanding that recipient countries sever formal diplomatic relations with Taiwan. In this chapter, we argue that non-conditional Chinese aid leads to detrimental political and social consequences in recipient countries. These include the deterioration of democratic development, and an erosion of the rule of law, freedom of expression and gender equality. Poorer quality education can also result and corruption increase. Our arguments are supported by empirical data collected in 117 countries between 2000 and 2017 and by robust to alternative models addressing the issue of reversed causality. This chapter contributes to the literature on the perils of Chinese foreign aid.
The economic growth of China in the 21st century has made it a rising global power and inspired a burgeoning literature on how China is reshaping the landscape of international relations (Beckley, 2012; Brooks & Wohlforth, 2016). For instance, China launched the Belt and Road Initiative (BRI) and the Asian Infrastructure Investment Bank (AIIB) in the mid-2010s to expand and deepen its economic engagement with other countries (Yu, 2017). The participants in these initiatives include countries that are unsatisfied with the US-led international economic order (Broz et al., 2020). As of the end of 2021 China was the leading trade partner of more than 120 countries and an important aid provider for over 93 emerging-market countries. China also increasingly asserts itself on the international stage (Chang-Liao, 2016; Johnston, 2013), a process that accelerated after the outbreak of the COVID-19 pandemic in 2020 (Martin, 2021).
China’s tremendous economic growth since the 1980s has transformed it from an aid recipient to a major donor. Dreher et al. (2021, p. 139) report that China had officially “committed, implemented, or completed” foreign development projects worth US$354 billion between 2000 and 2014. The US provided $394 billion of official financing to foreign countries during the same period. As a result, scholars have paid special attention 2 to the motives behind China’s foreign aid programs and their consequences (Bräutigam, 2011b; Dreher et al., 2021; Strange et al., 2017).
China allocates its aid strategically to fulfill various political goals (Dreher et al., 2018), one of which is the luring of Taiwan’s diplomatic partners to switch diplomatic recognition to Beijing. (Rich, 2009). It has a policy of not offering foreign aid to countries that maintain formal diplomatic relations with Taiwan, and it uses foreign aid to convince countries, especially less developed ones, to sever official diplomatic ties with Taiwan (Rich, 2009). Recent examples include the break-off of formal diplomatic relations between Taiwan and seven countries between December 2016 and September 2019, including São Tomé and Príncipe (2016), Panama (2017), the Dominican Republic (2018), Burkina Faso (2018), El Salvador (2018), the Solomon Islands (2019), and Panama (2019). ANNEX 2.1 illustrates that many former diplomatic partners of Taiwan began to receive aid from China after they made the switch.
China’s use of foreign aid to fulfill its strategic and political goals has raised a number of questions for scholars and policymakers. OECD countries offer official development assistance (ODA) with the stated aim of promoting the economic development and welfare of developing or underdeveloped countries. Donor countries usually set conditionalities that require recipient countries to implement economic or political reforms. These often address macroeconomic mismanagement, human rights violations and corruption (Molenaers et al., 2015; Svensson, 2000). If the recipient countries fail to meet the requirements, they risk cuts in aid. However, Chinese foreign aid is usually unconditional. (Li, 2017). Some scholars claim that this gives more flexibility to recipient countries to use the aid in more efficient ways (Lagerkvist, 2009). Furthermore, Chinese aid may benefit recipient countries in certain respects, such as short-term economic growth and the reduction of economic inequality (Bluhm et al., 2020; Dreher et al., 2021). Nevertheless, there is evidence that Chinese aid worsens social and political outcomes because it does not meet the real needs of recipients and is designed to serve only China’s strategic goals (Naim, 2007). More importantly, the lack of conditions means no accountability (Ping et al., 2022), so political leaders in recipient countries have inadequate incentives to use the aid effectively. It is against this backdrop that we aim to investigate the political consequences of China’s foreign aid with the latest “time-series-cross-national” datasets developed by several international teams.
Before proceeding, we would like to note that China has also become a major lender as well as donor. A growing share of Chinese financing comes in the form of commercially oriented debt-based financing rather than foreign aid. There is no substantive evidence that the China-led AIIB, an international financial institution that follows international standards, issues loans with conditions attached (Chen, 2020). However, it is less clear whether projects under the Belt and Road Initiative (BRI), whose loan packages are not 3 transparent, are offered without conditions. Hurley et al. (2019) have reported that some BRI projects may include conditionalities that can result in “debt traps” or “debt for equity” swaps when borrowers face insolvency. To comprehensively evaluate how China’s financial outflows influence foreign countries we focus on China’s overall development finance portfolio, including aid projects, export credits and debt (Dreher et al., 2022).
In the next section, we discuss the political and social perils of Chinese aid in recipient countries and consider related hypotheses. In the empirical section, we describe our research design and test our hypotheses with empirical data. The final section discusses the implications of our findings and offers concluding remarks.
Introduction
