Aid, China, and Growth: Evidence from a New Global Development Finance Dataset
TL;DR: In this article, a new dataset of official financing from China to 138 countries between 2000 and 2014 was introduced to investigate whether and to what extent Chinese aid affects economic growth in recipient countries.
Abstract: 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. We use these data to investigate whether and to what extent Chinese aid affects economic growth in recipient countries. To account for the endogeneity of aid, we employ an instrumental-variables strategy that relies on exogenous variation in the supply of Chinese aid over time resulting from changes in Chinese steel production. Variation across recipient countries results from a country’s probability of receiving aid. Controlling for year- and recipient-fixed effects that capture the levels of these variables, their interaction provides a powerful and excludable instrument. Our results show that Chinese official development assistance (ODA) boosts economic growth in recipient countries. For the average recipient country, we estimate that one additional Chinese ODA project produces a 0.7 percentage point increase in economic growth two years after the project is committed. We also benchmark the effectiveness of Chinese aid vis-a-vis the World Bank, the United States, and all members of the OECD’s Development Assistance Committee (DAC). Our results indicate that Chinese, U.S., and OECD-DAC ODA have positive effects on economic growth, but we find no robust evidence that World Bank aid promotes growth. We also find that, irrespective of the funding source, less concessional and more commercially-oriented types of official finance do not boost economic growth. Finally, we test the popular claim that significant financial support from China impairs the effectiveness of grants and loans from Western donors and lenders. Our results do not support this claim.
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TL;DR: The authors found that the allocation of Chinese official development assistance to Africa was driven primarily by foreign policy considerations, while economic interests better explain the distribution of less concessional flows, highlighting the need for better measures of an increasingly diverse set of non-Western financial activities.
Abstract: Chinese “aid” is a lightning rod for criticism. Policymakers, journalists, and public intellectuals claim that Beijing is using its largesse to cement alliances with political leaders, secure access to natural resources, and create exclusive commercial opportunities for Chinese
firms—all at the expense of citizens living in developing countries. We argue that much of the controversy about Chinese “aid” stems from a failure to distinguish between China’s Official Development Assistance (ODA) and more commercially-oriented sources and types of state financing. Using a new database on China’s official financing commitments to Africa from 2000-2013, we find the allocation of Chinese ODA to be driven primarily by foreign policy considerations, while economic interests better explain the distribution of less concessional flows. These results highlight the need for better measures of an increasingly diverse set of non-Western financial activities.
166 citations
TL;DR: This article found that the allocation of Chinese ODA to Africa was driven primarily by foreign policy considerations, while economic interests better explain the distribution of less concessional forms of Chinese official financing.
Abstract: Chinese “aid” is a lightning rod for criticism. Policymakers, journalists, and public intellectuals claim that Beijing is using its largesse to cement alliances with political leaders, secure access to natural resources, and create exclusive commercial opportunities for Chinese firms — all at the expense of citizens living in developing countries. We argue that much of the controversy about Chinese “aid” results from a failure to distinguish between China’s Official Development Assistance (ODA) and more commercially-oriented sources and types of state financing. Using a new database on China’s official financing commitments to Africa from 2000-2013, we find the allocation of Chinese ODA to be driven primarily by foreign policy considerations, while economic interests better explain the distribution of less concessional forms of Chinese official financing. Our results suggest Beijing’s motives may not be substantially different from those shaping the allocation of Western official finance. Our data and findings also address the need for better measures of an increasingly diverse set of non-Western financial activities that are neither well understood nor systematically tracked by the Western-led regime for international development finance.
107 citations
TL;DR: This paper used an excludable instrument to test the effect of foreign aid on economic growth in a sample of 96 recipient countries over the 1974-2009 period and found no significant effect of aid on growth in the overall sample.
Abstract: We use an excludable instrument to test the effect of foreign aid on economic growth in a sample of 96 recipient countries over the 1974-2009 period. We interact donor government fractionalization with a recipient country’s probability of receiving aid. The results show that fractionalization increases donors’ aid budgets, representing the over-time variation of our instrument, while the probability of receiving aid introduces variation across recipient countries. Controlling for country- and period-specific effects that capture the levels of the interacted variables, the interaction provides a powerful and excludable instrument. Making use of the instrument, our results show no significant effect of aid on growth in the overall sample. We also investigate the effect of aid on consumption, savings, and investments, and split the sample according to the quality of economic policy, democracy, and the Cold War period. With the exception of the post-Cold War period (where abundant aid reduces growth), we find no significant effect of aid on growth in any of these sub-samples. None of the other outcomes are affected by aid.
97 citations
Cites methods from "Aid, China, and Growth: Evidence fr..."
...4 Variants of our instrument have also been used to instrument International Monetary Fund loans (Lang 2016, Gehring and Lang 2020, Stubbs et al. 2020) and World Bank lending (Dreher et al. 2017, Jensen et al. 2019, Gehring et al. 2019)....
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TL;DR: In this article, the authors present the first comprehensive long-run dataset of official international lending, covering 230,000 loans, grants and guarantees extended by governments, central banks, and multilateral institutions in the period 1790-2015.
Abstract: Official (government-to-government) lending is much larger than commonly known, often surpassing total private cross-border capital flows, especially during disasters such as wars, financial crises and natural catastrophes. We assemble the first comprehensive long-run dataset of official international lending, covering 230,000 loans, grants and guarantees extended by governments, central banks, and multilateral institutions in the period 1790-2015. Historically, wars have been the main catalyst of government-to-government transfers. The scale of official credits granted in and around WW1 and WW2 was particularly large, easily surpassing the scale of total international bailout lending after the 2008 crash. During peacetime, development finance and financial crises are the main drivers of official cross-border finance, with official flows often stepping in when private flows retrench. In line with the predictions of recent theoretical contributions, we find that official lending increases with the degree of economic integration. In crises and disasters, governments help those countries to which they have greater trade and banking exposure, hoping to reduce the collateral damage to their own economies. Since the 2000s, official finance has made a sharp comeback, largely due to the rise of China as an international creditor and the return of central bank cross-border lending in times of stress, this time in the form of swap lines.
Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
65 citations
TL;DR: The authors examines the emergence of Chinese development finance on the global stage and evaluates the extent to which it differs from, complements and/or competes with the Western-backed development finance institutions.
Abstract: This article examines the emergence of Chinese development finance on the global stage and evaluates the extent to which it differs from, complements and/or competes with the Western‐backed development finance institutions. Whereas the new, China‐backed multilaterals are closer to the Western model, especially the Asian Infrastructure Investment Bank, this analysis finds that China's national development finance is significantly distinct along three parameters — the scale and business model of Chinese finance relative to its Western counterparts, the composition and approach of China's lending portfolio, and the governance of China's development finance institutions. These differences can be seen as complements to the Western‐backed system, given that much of Chinese development finance has flowed into countries and sectors in which Western development finance institutions have ventured to a lesser extent. However, the globalization of Chinese development finance, patterned on the international diffusion of what is coined in this article as the ‘coordinated credit space model’, contrasts with Western development finance, governance and business models, and has triggered a competitive stance from Western actors. Either contestation or convergence are possible trajectories for the future, and the outcome will be determined by whichever can produce conditions akin to the ‘politics of productivity’.
65 citations
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TL;DR: Burnside and Dollar as mentioned in this paper used a new database on foreign aid to examine the relationships among foreign aid, economic policies, and growth of per capita GDP and found that aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies.
Abstract: Aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies. Aid appears not to affect policies systematically either for good or for ill. Any tendency for aid to reward good policies has been overwhelmed by donorse pursuit of their own strategic interests. Burnside and Dollar use a new database on foreign aid to examine the relationships among foreign aid, economic policies, and growth of per capita GDP. In panel growth regressions for 56 developing countries and six four-year periods (1970-93), they find that the policies that have a great effect on growth are those related to fiscal surplus, inflation, and trade openness. They construct an index for those three policies and have that index interact with foreign aid. They have instruments for both aid and aid interacting with policies. They find that aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies. In the presence of poor policies, aid has no positive effect on growth. This result is robust in a variety of specifications, which include or exclude middle-income countries, include or exclude outliers, and treat policies as exogenous or endogenous. They examine the determinants of policy and find no evidence that aid has systematically affected policies, either for good or for ill. They estimate an aid allocation equation and show that any tendency for aid to reward good policies has been overwhelmed by donors' pursuit of their own strategic interests. In a counterfactual, they reallocate aid, reducing the role of donor interests and increasing the importance of policy. Such a reallocation would have a large positive effect on developing countries' growth rates. This paper - a product of the Macroeconomics and Growth Division, Policy Research Department - is part of a larger effort in the department to study the effectiveness of foreign aid. The study was funded by the Bank's Research Support Budget under research project Economic Policies and the Effectiveness of Foreign Aid (RPO 681-70).
3,696 citations
Posted Content•
TL;DR: The authors provides a comprehensive account of China's aid and economic cooperation overseas, explaining what the Chinese are doing, how they do it, how much aid they give, and how it all fits into their "going global" strategy.
Abstract: Is China a rogue donor, as some media pundits suggest? Or is China helping the developing world pave a pathway out of poverty, as the Chinese claim? In the last few years, China's aid program has leapt out of the shadows. Media reports about huge aid packages, support for pariah regimes, regiments of Chinese labor, and the ruthless exploitation of workers and natural resources in some of the poorest countries in the world sparked fierce debates. These debates, however, took place with very few hard facts. China's tradition of secrecy about its aid fueled rumors and speculation, making it difficult to gauge the risks and opportunities provided by China's growing embrace. This well-timed book, by one of the world's leading experts, provides the first comprehensive account of China's aid and economic cooperation overseas. Deborah Brautigam tackles the myths and realities, explaining what the Chinese are doing, how they do it, how much aid they give, and how it all fits into their "going global" strategy. Drawing on three decades of experience in China and Africa, and hundreds of interviews in Africa, China, Europe and the US, Brautigam shines new light on a topic of great interest. China has ended poverty for hundreds of millions of its own citizens. Will Chinese engagement benefit Africa? Using hard data and a series of vivid stories ranging across agriculture, industry, natural resources, and governance, Brautigam's fascinating book provides an answer. It is essential reading for anyone concerned with China's rise, and what it might mean for the challenge of ending poverty in Africa.
834 citations
Posted Content•
TL;DR: This article examined the effects of aid on growth in cross-sectional and panel data after correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance, and found little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth.
Abstract: We examine the effects of aid on growth--in cross-sectional and panel data--after correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance. Even after this correction, we find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Our findings, which relate to the past, do not imply that aid cannot be beneficial in the future. But they do suggest that for aid to be effective in the future, the aid apparatus will have to be rethought. Our findings raise the question: what aspects of aid offset what ought to be the indisputable growth enhancing effects of resource transfers? Thus, our findings support efforts under way at national and international levels to understand and improve aid effectiveness.
772 citations
Additional excerpts
...Others detect null effects (Rajan and Subramanian 2008; Doucouliagos and Paldam 2009; Dreher and Langlotz 2017)....
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TL;DR: The authors studied the effect of US food aid on conflict in recipient countries and found that an increase in food aid increases the incidence and duration of civil conflicts, but has no robust effect on interstate conflicts or the onset of civil conflict.
Abstract: We study the effect of US food aid on conflict in recipient countries. Our analysis exploits time variation in food aid shipments due to changes in US wheat production and cross-sectional variation in a country’s tendency to receive any US food aid. According to our estimates, an increase in US food aid increases the incidence and duration of civil conflicts, but has no robust effect on interstate conflicts or the onset of civil conflicts. We also provide suggestive evidence that the effects are most pronounced in countries with a recent history of civil conflict. (JEL D74, F35, O17, O19, Q11, Q18) We are unable to determine whether our aid helps or hinders one or more parties to the conflict … it is clear that the losses—particularly looted assets—constitutes a serious barrier to the efficient and effective provision of assistance, and can contribute to the war economy. This raises a serious challenge for the humanitarian community: can humanitarians be accused of fueling or prolonging the conflict in these two countries? — Medecins Sans Frontieres, Amsterdam 1
723 citations
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...24 This directly follows the analyses in Nunn and Qian (2014) and Dreher and Langlotz (2017)....
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