Transcript Rogue Aid? The Determinants of China’s Aid Allocation Axel Dreher (University of Heidelberg) Andreas Fuchs (Universities of Goettingen and Heidelberg) New Directions in Welfare.

Rogue Aid?
The Determinants of China’s Aid Allocation
Axel Dreher (University of Heidelberg)
Andreas Fuchs (Universities of Goettingen and Heidelberg)
New Directions in Welfare 2011 Congress
OECD Paris, France, 6-8 July 2011
Motivation
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Only recently, economists started analyzing the allocation of
aid from emerging donors (see Neumayer 2003, 2004, Dreher
et al. 2011)
Omission of the major new donor, China
Naím (2007) characterizes development aid from China as
‘rogue aid’
–
–
–
•
Access to natural resources
International alliances
Support of countries with bad governance
No empirical study exists confronting the various claims about
Chinese ‘rogue aid’ with data
Motivation
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Why? Data on the allocation of China’s development aid are
difficult to obtain
• Berthélemy (2009:2): “Data are simply not available.” (?!?)
• We make use of four types of aid indicators, covering the 19562006 period
1. We test whether China’s allocation decisions are guided by need
in the recipient countries and/or by China’s national interests
2. We compare China’s aid allocation decisions with traditional and
other emerging donors
Outline
1. Measuring Chinese aid
2. Need, merit and self-interest – Is China different?
3. Empirical analysis
4. Conclusion
1. Measuring Chinese aid
(1) Aid commitments in US$ (1956-1987)
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Source 1: Bartke (1989): “The Economic Aid of the PR”
Source 2: OECD (1987): “The Aid Programme of China”
Source 3: Various intelligence reports of the CIA (1975-1984)
(2) Number of medical teams dispatched (1983-1994)
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Source: China Commerce Yearbook
(3) Food aid in tons of grain equivalent (1988-2006)
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Source: International Food Aid Information System
(4) Number of completed aid projects (1956-2005)
1. Measuring Chinese aid | Number of aid projects
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Source 1: Bartke (1989): “The Economic Aid of the PR China to
Developing and Socialist Countries” (1956-1987)
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2,500 news items on China’s foreign aid
535 completed aid projects
Source 2: China Commerce Yearbook and the Almanac of
China’s Foreign Economic Relations & Trade (1990-2005)
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
Collected by Hawkins et al. (2010) (AidData)
504 completed aid projects
1. Measuring Chinese aid | Number of aid projects
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First completed aid project: Textile mill built in Thamaing
(Burma) in 1956
Last completed aid project recorded in our dataset: Teaching
appliances, medical apparatus and agricultural machines
provided to Colombia in 2005
Tanzania is the single most important recipient of China’s
project aid
The single most outstanding project was the construction of the
Tanzania-Zambia railway line
Number of aid projects completed (1956-1969)
Number of aid projects completed (1970-1978)
Number of aid projects completed (1979-1987)
Number of aid projects completed (1990-1995)
Number of aid projects completed (1996-2005)
Outline
1. Measuring Chinese aid
2. Need, merit and self-interest – Is China different?
3. Empirical results
4. Conclusion
2. Need, merit and self-interest – Is China different?
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Development aid from China is exposed to the criticism that it
is driven to a higher extent by domestic economic and political
interests than development aid by traditional DAC donors
Principle of “equality and mutual benefit”
Motives for the allocation of aid can be broadly grouped in four
categories:
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–
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Recipient need (humanitarian motives)
Quality of policies and institution in the recipient country (merit)
Political self-interest of the donor country
Commercial self-interest of the donor country
2. Need, merit and self-interest | Recipient need
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
Ministry of Commerce (1985): aid projects play “a positive role
in expanding the national economies of the recipient countries
and improving the material and cultural life of the people in
these countries”
In the 1980s, even the CIA (1980) confirmed that the Chinese
aid program “fits the needs of the poorest LDCs.”
Hypothesis: Chinese aid follows humanitarian motives, i.e.,
China provides more aid to less developed countries and to
countries suffering from natural disasters
2. Need, merit and self-interest | Policies & Institutions
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Chinese aid is not linked to conditions typically imposed by
Western donors such as good policies, democracy or the
respect of human rights
• Principle of non-interference in country’s internal affairs and
respect for sovereignty
 Hypothesis: Chinese aid is unaffected by policies and
institutions in the recipient countries
 China could even concentrate on recipient countries with rather
bad governance (comparative advantage) (Halper 2010)
2. Need, merit and self-interest | Political interests
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China uses aid to realize its “One-China policy,” rewarding
countries that do not recognize Taiwan as independent country
(Taylor 1998, Brautigam 2008)
Hypothesis: Chinese aid is linked to diplomatic relations with
(the People’s Republic of) China
China tries “to build coalitions to shield Beijing from Western
criticism” (Tull 2006)
Hypothesis: Chinese aid increases with a recipient country’s
voting alignment in the UN General Assembly
2. Need, merit and self-interest | Commercial interests
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Facilitating the export of natural resources to China is seen as
a central aim of Chinese aid (Alden 2005; Tull 2006; Evans and
Downs 2006; Davies 2007; Halper 2010)
Hypothesis: Chinese aid is concentrated on countries rich in
natural resources
The fact that the Chinese Ministry of Commerce is the lead
agency in the provision of bilateral Chinese aid indicates the
overriding importance of commercial motives (Lammers 2007)
Hypothesis: Chinese aid is linked to the pattern of China’s
exports
Setup of China‘s aid program in the 1950s
1st phase: 1956-1969
9th Party Congress in 1969
2nd phase: 1970-1978
Deng Xiaoping takes power in 1978
3rd phase: 1979-1989
Tiananmen Square massacre in 1989
4th phase: 1990-1995
Political
and
ideological
considerations dominate in the
early years
Mao Zedong’s claim to assume
political leadership in the Third
World
Economic Reforms and Openness:
Economic considerations became
more influential
China seeks actively for diplomatic
support and increased its aid
substantially
5th phase: 1996-2005
Introduction of market-oriented
principles and emphasis of linkages
between aid, trade and investment
China-Africa Forum in 2006
“New strategic partnership”
Aid reform of 1995
Outline
1. Measuring Chinese aid
2. Need, merit and self-interest – Is China different?
3. Empirical analysis
4. Conclusion
3. Empirical analysis | Estimation techniques
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We estimate the models using Poisson Pseudo Maximum
Likelihood (PPML)
As Santos Silva and Tenreyro (2004) argue, PPML
outperforms simple OLS and Tobit approaches with
heteroskedasticity and many zero observations in the data
The variables that we employ can hardly be assumed to
explain yearly volatility  5 cross-sections
We run nested regressions to increase to statistically test for
differences between donors / time periods
Standard errors are clustered by recipient country
3. Empirical analysis | Explanatory variables
RECIPIENT
POLICIES
POLITICAL
COMMERCIAL
CONTROLS
NEIGHBORHOOD
&NEED
INTERESTS
INSTITUTIONS
INTERESTS
Variable
Distance
Population
GDP per capita
Disaster
Democracy
Taiwan recognition
UNGA voting
Exports
Oil production
Description
(log) bilateral distance between major cities
(log) total population
(log) GDP per capita (constant 2005 I$)
(log) number of people affected by disasters
1 if the regime qualifies as democratic
1 if recipient country recognizes Taiwan
UNGA voting alignment between donor and recipient
(log) exports to recipient country (constant 2000 US$)
(log) Oil production in millions of barrels per day
Source
CEPII
Penn World Tables
Penn World Tables
EM-DAT (2010)
Cheibub et al. (2009)
Rich (2009)
Kilby (2009)
COW
Humphreys (2005), BP (2010)
3. Empirical analysis | Phases of China’s aid program
1st research question: Are there differences in China’s allocation
decisions between the five phases of China’s aid program?
• In contrast to other emerging donors, China does not favor
neighboring countries (anymore)
• China’s aid shows some need orientation
• China’s aid is independent of institutional characteristics (with
the exception of phase 3)
• China’s allocation decisions are shaped by politics in all five
phases
• Chinese aid allocation is related to its export pattern in phase 3
and phase 5
3. Empirical analysis | Comparison with other donors
2nd question: Is China’s foreign aid different from other donors?
(5th phase of China’s aid program: 1996-2005)
Traditional DAC donors:
• USA
• EU-3 (Germany, France and United Kingdom)
• ‘Good donors’ (Denmark, Netherlands, Norway and Sweden)
• Japan
Emerging donors:
• Korea
• Arab donors (Kuwait and Saudi Arabia)
3. Empirical analysis | Comparison with other donors
RECIPIENT
POLICIES
POLITICAL
COMMERCIAL
CONTROLS
NEIGHBORHOOD
&NEED
INTERESTS
INSTITUTIONS
INTERESTS
China
Distance
-0.009
(0.06)
Population
-0.308***
(3.72)
GDP p. c.
-0.528***
(4.65)
Disaster
0.048
(1.54)
Democracy
-0.059
(0.38)
Taiwan rec. UNGA voting
-4.750***
0.665
(3.80)
(0.67)
Exports
0.157**
(2.33)
Oil prod.
-0.018
(0.97)
USA
-0.166
(1.35)
[0.387]
0.152**
(2.44)
[0.000]
-0.150**
(2.18)
[0.002]
0.013
(0.44)
[0.349]
-0.039
(0.35)
[0.905]
0.013
(0.10)
[0.000]
1.256*
(1.95)
[0.628]
0.112***
(2.60)
[0.515]
-0.024**
(2.21)
[0.755]
EU-3
0.114**
(1.99)
[0.406]
0.076**
(2.40)
[0.000]
-0.119**
(2.56)
[0.000]
0.027**
(2.08)
[0.487]
0.005
(0.08)
[0.693]
0.000
(0.00)
[0.000]
-0.017
(0.03)
[0.539]
0.151***
(5.32)
[0.926]
-0.026***
(4.37)
[0.637]
'Good donors'
0.321**
(2.49)
[0.051]
0.135**
(2.18)
[0.000]
-0.139**
(2.19)
[0.002]
0.058
(1.64)
[0.831]
-0.260*
(1.66)
[0.324]
0.058
(0.41)
[0.000]
1.853**
(2.14)
[0.347]
0.088***
(3.11)
[0.330]
-0.039***
(2.65)
[0.364]
Japan
-0.305***
(4.83)
[0.051]
0.030
(0.86)
[0.000]
-0.060
(1.21)
[0.000]
0.031**
(2.08)
[0.601]
-0.011
(0.19)
[0.761]
0.156***
(2.69)
[0.000]
1.508***
(2.64)
[0.459]
0.085***
(3.23)
[0.301]
-0.010
(1.50)
[0.670]
Korea
-0.479***
(5.84)
[0.002]
0.022
(0.71)
[0.000]
-0.058
(1.07)
[0.000]
0.001
(0.11)
[0.155]
-0.065
(0.87)
[0.974]
0.165
(1.46)
[0.000]
1.249
(1.21)
[0.653]
0.044
(1.43)
[0.108]
0.010
(0.90)
[0.158]
Arab donors
-0.356***
(4.49)
[0.030]
0.040
(0.90)
[0.000]
-0.096
(1.64)
[0.000]
-0.046**
(2.39)
[0.004]
-0.043
(0.28)
[0.937]
0.326***
(3.13)
[0.000]
3.476***
(3.70)
[0.033]
0.012
(1.41)
[0.032]
-0.030*
(1.65)
[0.597]
# observations
# clusters
Log pseudo L
Wald chi2 (p)
RESET test (p)
1686
132
-1491.759
0.000
0.851
3. Empirical analysis | Governance matters?
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As a robustness check, we make use of 7 alternative measures
of policies and institutions:
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Five indicators of governance provided by Kaufmann et al. (2009)
China’s project aid seems to follow
Index of economic freedom provided by Gwartney et al. (2009)
themilitary
principle
of non-intrusion
into
Dummy indicating
dictatorships
taken from Hsu
(2008)
internal
affairs
China does not take account
of institutional
quality when
deciding on its allocation of aid
Compared to China, aid from traditional DAC donors is biased
towards countries with good institutions
In turn, some evidence that Korea’s and Arab aid allocation
decisions are biased towards recipients with bad governance
3. Empirical analysis | Natural resources
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As a robustness check, we make use of 15 alternative
measures of natural resource extraction:
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Production and availability of oil, gas, coal, and diamonds
At best
weak
evidence
China’s
Trade with fuel,
ore, and
agricultural
rawthat
materials
aid isquantities
driven by
Unit resourceproject
rents and
of natural
energy and minerals
extracted
resources
Natural capital
With only one exception (bilateral imports of agricultural raw
materials), there is no evidence that China provides on average
more aid to countries that are more abundant in natural
resources
Compared to Korea in particular, it even seems that China
pays less attention to those resources, rather than more
Outline
1. Measuring Chinese aid
2. Need, merit and self-interest – Is China different?
3. Empirical analysis
4. Conclusion
4. Conclusion
• China’s aid is need-oriented
• China’s aid is independent of institutional characteristics
• China’s aid allocation decisions are shaped by politics and
commercial interests (as it is the case for many DAC donors)
• However, the verdict that China’s foreign aid is ‘rogue aid’ is
unjustified
• Major drawback of the study is the omission of aid provided by
the China Exim Bank and the China Development Bank
• China should publish its aid statistics since transparency might
reduce fears about its aid program
Thank you!
[email protected]