November 17, 2012

Understanding China's Foreign Aid

Since China’s emergence as a significant player in international donor community, there has been a myriad of speculation over its foreign aid and what it is used for. Although the data is limited, we try to examine the structure and geographical allocation of China’s aid and the possible motivations behind them. 

The People’s Republic of China neither reports its foreign aid activities to the Development Assistance Committee (DAC) of OECD (which could be deemed as the main source for foreign aid data) nor regularly publishes them by itself. Scarcity of data originates from this secrecy.

The government of China intentionally conceals the financial magnitude of its foreign aid as well as the modalities used by its aid agencies. Chinese officials often suggest that discretion is necessary in order to avert misperceptions on the recipient’s side.

 

They claim that some recipient countries could wrongly feel discriminated and demand more aid for the following year. This preception could get worse if there is a significant aid gap between two neighbouring countries. 

Is It True?

This argument is weak at best. Recipients may request additional aid whether other countries receive more aid or not. Furthermore, recipients rather than donors deal with misperceptions and biases originating from the colonial past of donors all the time. So, this can not be an excuse for hiding statistics.

This blog believes that the main deterrence for China over announcing its foreign aid statistics is what is requested from recipients in return. In other words, conditionality requirements. (for more info on the conditionality in foreign aid see here) Most of the foreign aid provided by China is either tiedconditional or both. According to OECD DAC guidelines, “tied aid is official or officially supported loans, credits or associated financing packages where procurement of the goods or services involved is limited to the donor country or to a group of countries which does not include substantially all developing countries.” 

This simply means that a recipient country can only use aid funds under the condition  of purchasing commodities and services provided by the donor country only. So you have to buy Chinese products and services to get Chinese foreign aid. Chinese officials argue that tied aid helps lower the risk of financial mismanagement and misappropriation of funds. Although, tied aid is not used only by China, (29 percent of total foreign aid given by the DAC members are tied- see here), it is not employed at the magnitude that China does. Here’s why we think that tied and/or conditional aid is problematic.

First, tied aid allows donors to inflate costs. For instance, donor country service providers tend to raise prices redundantly in order to maximize their profit by government revenues. They often rationalize this infilation over the “high operational risks existed in recipient countries.” Recipient countries usually do not actually receive funds when the aid is tied or conditional. Secondly, commmodities and services provided by donor countries might be obsolete and/or archaic. Donors tend to use old-fashioned goods and modalities when there is no competition in terms of giving recipients what they need. Last but not least, tied aid lead to an artifical increase on foreign aid statistics. This increase basically is the result of inflated costs by the government and/or providers resident in donor countries.
  
We further think that Chinese authorities avoids the declaration of foreign aid stats because of their low grant percentage within total Chinese aid. As it is seen in the table above, only 3 percent (2.5 Bn USD) of China’s foreign aid between 2002-2007 is grant in nature. According to recent trends, international community tends to promote grants in foreign aid. For instance, DAC members, are obliged to allocate at least 25 percent of their aid as grants. 

On the contrary, foreign aid of China almost entirely consists of government supported investments and concessional loans. Government supported investments 53 percent of total Chinese aid. Chinese state owned enterprises invested almost 40 Billion USD between 2002-2007. Concessional loans too have a large share. They constitute more than 45 percent of total foreign aid received by Southeast Asia and 60 percent of total foreign aid received by Africa. 

Geographical Allocation

Available Chinese foreign aid data is mostly on the regional basis. Nevertheless, it is still possible to make several assumptions. For instance, it can be seen from the statistics that China’s foreign aid is concentrated on Africa and Southeast Asia. Therefore, by looking at this fact, it is plausible to say that China’s main area of interest is the Least-Developed Countries (LDCs). To be more specifically, the top seven recipients of Chinese foreign aid are LDCs.

These seven recipients (the figure on the left) represent the 67 percent of total Chinese aid. Except Myanmar, these are all African LDCs. Despite we do not comprehensively scrutinize the reasons behind China’s aid concentration on Africa, we should emphasize that almost all of the top recipients have strong ties with China particularly through energy trade.    
 
Details on the geographical distribution of Chinese aid between 2002-2007 are also illustrated in the figure below. As it is seen, data for 2009 (which was officially announced by the Chinese government) exist only as percantages of the total aid. Actual size of the Chinese aid in 2009 is not known. 

Unstability in Chinese foreign aid during the respective period is noteworthy. The aid has increased particularly after 2003 and concentrated on Latin America in 2004. In 2006 Latin America is still the top recipient, however this has changed in 2007 and aid to Latin America has been dramatically diminished. While aid received by Latin America shrank by 975 percent between 2006-2007, aid to African continent has risen after 2005. Chinese foreign aid to Africa has increased from 2.9 Bn USD in 2005 to 9 Bn USD in 2006 and 17.9 Bn USD in 2007.   
  
Aid to Southeast Asia is also unstable. Throughout years, region’s share in total Chinese aid, which was largest in 2002, decreased annually. Although it received 6.7 Bn USD in 2007, this amount is relatively low considering aid allocated to other regions (Africa and Latin America).

The 2009 data, which was the first and only statistical information announced by the Chinese government, covers more regions than data for the 2002-2007 period. As between 2002-2007, Africa is the top recipient of Chinese aid in 2009. (45.7%) Asia follows Africa with 32.8 percent of the total aid and Latin America is the last with receiving 4 percent of total Chinese aid. 

This blog neither against nor for Chinese aid efforts around the world. However, we still would like to emphasize a couple of things.

First of all, between 2002-2009, Chinese aid has been volatile and unstable in terms of geographical distribution. Aid allocated for regions has often changed drastically. One exception to this trend is Africa. Africa became the top recipient after 2006 and its share increased constantly afterwards.  

Secondly, aid to Africa is mostly allocated for LDCs. Six of the top seven recipients between 2002-2007 period are African LDCs. If we take Myanmar (also an LDC but from southeast asia) into the account, aid to LDCs constitutes at least 68 percent of total foreign aid of China. Moreover, 203 projects out of 503, implemented by Chinese public institutions between 1990-2005, were taken place in LDCs. (see the yearbook and almanac

In final words, it is appropriate to say that making conclusive statements over Chinese foreign aid at this point would be very difficult since it does not regularly report its aid activities.. Furthermore, how much its aid can be considered as Official Development Assistance (in line with DAC definition) is also not clear. So we think that in the medium term (a decade or so) hopefully there will be a brighter picture for Chinese aid and real motivations behind them.







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