Does the Giver Matter? The Human Development Impact of Chinese Aid

Whereas OECD nations have scaled back their support for the so-called "productive sectors" in recent years, China has stepped up as a major financier of schools, hospitals, roads, ports, dams, and power lines.

September 19, 2013

Alex Miller, Charles Perla

China delivers assistance to developing countries in a manner that reflects its own development experience as well as the model of state-led capitalism it has followed. This is evident in the types of development projects that the Chinese government has prioritized in Africa, including: Special Economic Zones to attract foreign investment, large infrastructure projects, and various agricultural development activities. It is also evident in what China does not fund in Africa—namely, environmental protection activities. Whereas OECD nations have scaled back their support for the so-called "productive sectors" in recent years, China has stepped up as a major financier of schools, hospitals, roads, ports, dams, and power lines. In this post, we address the question of how Chinese development finance influences human development outcomes in democratic and non-democratic countries using AidData’s new 12-year dataseton Chinese development finance to Africa. 

We drew inspiration for our analysis from an articlethat Stephen Kosack published in World Development in 2003.  Kosack tested the efficacy of Western aid by measuring changes in the human development index (HDI) over time in relation to the recipient country’s level of democracy. Applying an interaction effect between aid and democracy, he discovered that democratic countries enjoy a positive relationship between aid and human development gains, such that higher levels of aid were associated with faster increases in human development. By contrast, he found a negative relationship between these two indicators in autocracies, leading Kosack to conclude that non-democracies use aid to cement their hold on power.

We too used democracy to try to disentangle the complicated relationship between aid and development.Like Kosack, we face a causal inference problem: as a country receives aid, it is likely to experience development; however, if a country develops quickly, donors may become more reluctant to provide aid. To separate out these two effects, we generated an instrumental variableusing factors that influence aid allocation but not economic growth. Drawing upon the work of Dreher and Fuchs, we created a variable to represent diplomatic recognition of Taiwan, the recipient’s willingness to agree with China in the UN General Assembly, the log of Chinese exports to a recipient, and the recipient’s population as a proxy for Chinese official finance. We employed Polity IV to categorize regime type.

In our extension of Kosack's model, we estimate the relationship between Chinese development finance and human development in democratic and autocratic recipient countries. Our results show a negative relationship between Chinese development finance and human development in democratic countries. Interestingly, these results also suggest that Chinese development finance can successfully promote HDI growth for autocratic recipients. Kosack found the opposite pattern in his study of Western aid.

Our preliminary findings beg an important question: why might Chinese and Western development finance have such widely varying results in different institutional settings? This question merits closer scrutiny and we hope that our initial work on this topic will inspire others to help shed light on this puzzling pattern.