The West’s aid dilemma and the Chinese solution?

Abstract

There are currently two contrasting approaches towards aid policy in Africa: that followed by the West is well known for its conditionality and selectivity and focus on direct financial support, while the approach adopted by China eschews conditionality and concentrates on infrastructure building. The Chinese approach has been criticized for its failure to create direct employment and because, it is argued, its unconditionality hampers good governance in Africa. However, this paper argues that the West faces a dilemma in that governance and its improvements are endogenous to the economic development of a country. Making aid conditional upon governance therefore unduly penalizes countries at the bottom. The Chinese approach, in contrast, avoids this dilemma by directly targeting constraints to development; it may therefore be more effective in generating long-run growth, which may in turn foster good governance.

Keywords:

• aid policy
• growth
• development
• Africa
• China

JEL Classification:

• F35
• O43
• O55

Acknowledgement

The authors thank the editor of this journal, Xiaming Liu, the anonymous referees, Sam Hickey, Paul Mosley, Fred Nixson, Peter O’Flynn, Maria Quattri, Dagmar Schaefer, Bernard Walters, the participants at the ‘Ten Years of “War Against Poverty”’ conference and the seminar participants at a number of universities for useful comments and suggestions.

Notes

1. This paper focuses on developmental Western aid, led by the World Bank and the IMF, not on humanitarian or emergency aid, led by the United Nations.

2. It should be noted that the characterization of aid into two camps is a broad generalization. Western donors are not homogenous, nor is China itself, either internally or as compared to other new ‘rising power’ donors. Nor are the two comparable given that China delivers aid differently to ‘traditional donors’.

3. According to World Bank (2000, 251), by 2000, almost 80% of World Bank and IMF quick-disbursing co-finance to Africa went to what they judged to be ‘good performers’. However, finding by other researchers have been somewhat different. Alesina and Weder (2002) found that US aid exhibits a democratic bias, with democracies getting relatively more funding regardless of the level of corruption present. Alesina and Dollar (2000) demonstrated that there is a causal link between the amount of aid provided and cultural and historic ties between countries, rather than to actual economic performance in recipient countries. Easterly and Pfutze (2008) found that as much as 80% of aid from OECD donors went to the most corrupt countries. Brautigam and Knack (2004) found that there is a robust relationship between high levels of western aid and deterioration in governance.

4. See Mosley (1987), Burnside and Dollar (2000, 2004) and Easterly, Levine and Roodman (2004).

5. To Tan-Mullins, Mohan, and Power (2010), the wider debate on aid effectiveness and conditionalities is to a large extent the result of confrontations between global players seeking to delegitimize each other whilst at the same time asserting the (moral) superiority of their own approach.

6. See, for example, World Bank (2000).

7. Indeed, there is not a single country in the world which is extremely poor and is recognized as having effective institutions and governance.

8. Empirical evidence also shows that measures of the quality of governance and per capita income levels are strongly correlated (see, for example, Kaufmann and Kraay 2002). Limited space prohibits a full discussion here of the relationship between ‘good governance’ and development in all its complexities. However see, for example, Khan and Jomo (2000), Hyden, Court, and Mease (2004).

9. It is noted that, first, economic transformation is not just growth, and second, there is a significant variation of performance regarding governance within late industrializing countries, which suggests that GDP performance in and of itself cannot explain everything here.

10. That is, there is not only a principal-agent problem, but also an agent incapability problem.

11. Temple (2009) provides an excellent discussion of aid and conditionality.

12. We thank an anonymous referee for this point.

13. Rodrik (2006) provides an excellent explanation of the effectiveness of aid conditionality and the importance of diagnosing the factors that constrain growth in particular countries and contexts.

14. Brautigam (2009) provides a comprehensive survey of China’s involvement in Africa.

15. Brookes and Shin (2006), for example, claim that, China’s rapidly expanding influence in Africa is endangering Western, especially US, goals and visions for the region, is supporting African dictatorships, hindering economic development, and exacerbating existing conflicts and human rights abuses in troubled countries. See also Naim (2007), who describes Chinese aid as ‘rogue aid’.

16. According to Lancaster (2007), it is said that China’s approach ‘burdens poor countries with debt – a burden from which many have only just escaped with the debt cancellation policies adopted by many aid agencies’.

17. Tan-Mullins, Mohan, and Power (2010) claim that much criticism of Chinese aid arises from the double standards maintained by Western donors.

18. Kaplinsky and Morris (2008) also argue that infrastructure development and debt relief are the most widely useful, but also the most controversial, of these forms of aid. Infrastructure aid is useful to almost every African country because of Africa’s general need for rehabilitation, expansion and updating of infrastructure.

19. For a more detailed analysis and discussion of the opposing views regarding China’s involvement in Africa, see Raine (2009).

20. In other words, the fundamental problem in African countries has been their inability to establish the capitalist mode of production, which is responsible for their underdevelopment.

21. See Wang and Piesse (2013) for a theoretical treatment of these issues.

22. Caselli and Feyer (2007) argue that injecting capital to developing counties is not going to work by itself, as developing countries are not starved of capital because of credit-market frictions. Rather, the proximate causes of low capital-labour ratios in developing countries are that these countries have low levels of complementary factors.

23. We are not arguing that all Chinese aid projects are as effective or corruption-free as one would like.

24. Perter O’Flynn and Xiaobing Wang conducted an empirical study on Chinese aid from a compiled comprehensive panel data for all 54 African countries from 2000 to 2012, but found that it is impossible to show that either Chinese aid or Western aid has led to an increase in a range of development indicators in Africa. We argue that this is likely due to the fact that the local impact of aid projects may not be reflected by national level indicators, and the long-run implication of aid may not be captured in the shortrun using yearly data.

25. It should be noted that we are not arguing that the West would like to copy China’s approach.

26. Zheng, Bigsten, and Angang (2009) provides an excellent discussion of the extensive growth path of China, which resulted partly from high levels of investment in infrastructure. This shows that the infrastructure focused approach was successful in China, and suggests that it may also work in Africa.

27. The West may not be interested in replicating what China is doing, because China has followed a state-led path to development, in contrast to that envisaged by the Washington consensus; therefore, the example it offers to Africa is seen by many in the West as a threat to its own free market approach to development.