UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ECONOMIC BENEFITS OF FOREIGN AID: AN ANALYSIS OF CHINA’S AID TO AFRICA A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYỄN QUỲNH ANH Academic Supervisor: DR. HOWARD NICHOLAS PROF. NGUYỄN TRỌNG HOÀI HO CHI MINH CITY, DECEMBER 2017 TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENT I express my sincere gratitude to my supervisor, Dr. His constant support and insightful feedbacks enabled me to expand my initial idea and develop it into a complete research paper.
During the process, I have been inspired by him and learned so much from him. I am also appreciative of my second reader, Professor Nguyễn Trọng Hoài. His valuable critiques encouraged me to be more analytical and more confident to finish the thesis on time. TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT This study considered the motives of Chinese aid to Africa with an emphasis being on the economic motives of aid.
The analysis undertaken concluded that Chinese aid, like OECD aid in general, serves the interests of the donor, specifically economic benefits. Using data on aid flows from 2010 to 2012, with a particular focus on the trade- aid linkages, the study found a strong correlation between Chinese aid flowing to infrastructure sectors and its imports of strategic materials from the aid recipient countries, with the former leading the latter. Simultaneously, Chinese aid, in general was found strongly correlated with exports of it manufacturing goods to the aid recipient countries, with the relationship being largely a contemporaneous one. TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENT CHAPTER 1: INTRODUCTION .1 CHAPTER 2: LITERATURE REVIEW .1 Aid in general .1 The purpose of aid .2 The trade-aid link .16 CHAPTER 3: BACKGROUND AND METHODOLOGY .1 China’s dependency on raw material .2 The importance of market for China’s growth dynamism .3 Trade between China and Africa.1 Estimate China’s aid .2 Chinese policy toward aid .35 CHAPTER 4: RESEARCH RESULTS .2 Trade-aid correlation .53 i TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 1.1: Shares of China’s imports of oil to the world, 2010-2012.1: China’s GDP per capita (current US$), 1978-2016 .2: Country contributors to real global growth, 1995 – 2015 .3: China energy consumption and production gap, 1980-2012 .5: Composition of Exports and Imports from China, 1992-2012.6: China- Africa trade by sector, 2010 .7: Sectoral distribution of China’s aid: 1949-2009 vs.8 Net ODA from leading donors and estimated foreign aid from China, 2001-2013 .1: China aid, imports from and exports to Africa ($bn), 2000-2012 .2: China’s aid to Africa by sector ($bn), 2000-2012 .3: China’s aid to Africa by sector (%), 2012 .4: China’s imports from Africa by sector (% of total), 2000-2012 .5 China’s exports to Africa by sector (% of total), 2000-2012 .6 Two-way scatter plot of Infrastructure Aid and imports of raw materials .7 Two-way scatter plot of aid and Chinese exports to aid recipients.
45 LIST OF TABLES Table 3.1: China-Africa exports and imports, 1992 - 2012 .1 Correlation coefficients for infrastructure aid and imports of raw materials from aid recipients .2 Correlation coefficients for Chinese aid and exports to aid recipients.45 ii TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 1: INTRODUCTION The notion of “emerging donors” has been an important one in the recent literature on foreign aid. With the rise of China as an emerging donor and Sub-Saharan Africa (SSA) as the main recipient of its growing aid, much attention has been focused on the nature of China’s aid relationship with developing countries, particularly in the SSA region. For its part Beijing has been stressing the reciprocal nature of its interactions with SSA and promising a new aid relationship; one of a partnership based on traditional friendship. However, academics express doubts about the latter and China’s real motives behind its aid to the SSA region.
The general agreement appears to be that although Chinese aid differs from that of traditional donors (OECD members), it still adheres to the basic principle of aid, which is to primarily serve the interests of the donor. In theory, the so called self-interest can extend from economic benefits to political interests of the donor. For China, it seems that economic interests are the main motives behind its aid program in Africa. Many African countries express gratitude for Beijing’s generous offers of aid, cancellations of debt and promises of trade and investment in exchange for energy and minerals.
The Chinese government also states its allocation of aid to Africa is for mutual benefit. However, China has been at the centre of criticism for its rapidly expanding role in the continent as an energy and resource extractor. Critics charge that China’s extractive behaviour in Africa is no less than neo-colonialism, as it attempts to secure oil and other resources. It is no secret that China’s interest in SSA is for the raw materials it requires to feed its industrial machine.
Indeed, China’s imports from the region are heavily concentrated in petroleum and mineral. Data also shows that China is one of the biggest importers of fuels in the world.1 below shows the share of fuels imported by China. There is a constant increase up to 2012, after which it falls reflecting a slowdown of the Chinese economy. 1 TIEU LUAN MOI download : skknchat@gmail.1: Shares of China’s imports of oil to the world, 2010-2012 Source: World Integrated Trade Solution (WITS) There is also a feeling that China’s aid policy also serves its export strategy, by making aid receivers more prone to importing from China.
In the context of the above, the paper attempts to investigate the motivations of Chinese foreign aid to SSA, with the emphasis being on the economic motivations and in particular the trade-aid linkages. The trade benefits refer to the imports of strategic raw materials to serve the production needs of the economy and exports of Chinese goods to the region. The research objective is to see the nature and extent of the aid trade relationship and in particular a) aid facilitates flows of raw materials from Africa to China and b) aid allows greater Chinese exports to countries in this continent. It needs stressing that the study does not look at the potential benefits of the recipients of Chinese aid, or compare Chinese aid to those of the OECD countries in this regard.
Rather, the sole focus is on whether Chinese aid as served the interests of China, particularly its economic interests. Also of note is the relative dearth of official data on Chinese aid, since this is often to be found under the guise of foreign investment. 2 TIEU LUAN MOI download : skknchat@gmail.com The study is organized as follows: Chapter 2 introduces some theories and empirical studies of motivation of aid with a focus on the trade gains from aid. Attention is also paid to China’s aid economic motives and the trade-aid link with Africa.
Chapter 3 provides background information about China’s economy and discussion the reasons behind China’s aid activities. More specifically, it explains the importance of raw material and markets for China’s growth dynamism. Background on China’s aid is also included together with Chinese policy toward aid. Chapter 4 presents an analysis of the aid-trade link, distinguishing between exports and imports.
The last chapter will then attempt to draw conclusions from the preceding study. 3 TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 2: LITERATURE REVIEW 2.1 Aid in general 2.1 The purpose of aid In this chapter, the paper considers arguments for and against economic motives of foreign aid. Based on a humanitarian concern about worldwide development, aid is claimed to contribute to the process of alleviating absolute poverty and global economic inequality and distress. The role of aid in promoting economic growth and human development in recipient countries has been the main focus in the literature recently.
Recent articles covering the literature on aid and growth include McGillivray et al. The effectiveness of aid in raising real GDP growth can be found in studies of Morrissey (2001), Hansen and Tarp (2001), Easterly (2003), Easterly et al. (2004), and Patella et al. The overall conclusion is that “recipient country growth would have been lower under the counterfactual of no aid”.
Related literature discusses the possibility of short-term ‘win-win’ effects of bilateral aid for both donors and recipients, where economic development in recipient countries is also believed to benefit donor countries in the long runs through enhanced trade opportunities and greater global economic and social stability. There are agreements that donor’s self-interest is the main motivation behind giving aid. They argue that foreign aid flows are mostly followed by donor’s advantageous strategies which are ranged from political and economic benefit. McKinlay and Little (1977) study the allocation of U.
aid over the years 1960-1970. They note that humanitarian model which considers economic assistant is the main rationale behind aid allocation has received criticisms from the literature. Meanwhile there is considerable evidence has supported the view that aid is strongly linked to donor’s foreign policy interest. They explicitly test the former model and question the validation of it in explaining U.
They later is motivated to build a systematic model so called “foreign policy model”. Guided by the wide range of literature, the model then is developed in to five substantial models that capture various 4 TIEU LUAN MOI download : skknchat@gmail.com interests of the U.S: “development interests”, “overseas economic interests”, “security interests”, “power political interests”, and “interest in political stability and democracy”. By doing so, the authors can isolate the effect of different types of interest of U. The results of the study support the foreign policy model.
There is also evidence indicates that “power political and security concerns are the central interests supported by and controlled through the U.S aid program” (McKinlay & Little, 1977, p. One important emphasis the authors made in their research is that “the best single indicators of relative need are population and per capita GDP” in the context of aid. They argue that as population grows and GDP per capita declines, the relative need for aid rises. If two countries receive identical amounts of aid (that is, identical absolute commitment), but one has a larger population and lower per capita GDP, then some preference is being shown toward the smaller, wealthier country in the sense that its relative needs for aid are lower.
Follow McKinley (1977), Maize’s and Naissance (1984) examine the balance of motivations between “recipient need’ and ‘donor interest’. They use two alternative models reflecting the need for aid of recipient countries and the donors’ gain from giving aid, respectively. The data covers bilateral and multilateral aid flows to 80 countries in 1969-1971 and 1978-1980. The first model is found to be inapplicable as an explanation of allocation of aid.
The second model of donor interest provides a good explanation of bilateral aid but poor explanation of multilateral aid. More specifically, political and security interests are found dominantly affect the results and its coefficients increase sharply from 1969-1971 period to 1978-1980 period. Aid for investment shows positive effect, but not significant. Trade interest represented by a dummy variable, which equal 1 if the recipient country exports more than 1% of world exports of any strategic materials such as bauxite cobalt, copper, nickel, etc.
shows positive coefficient in both periods, but again insignificant. And by comparing results from two periods, the analysis show that there is a shift from the domination of recipient need aid in the first period to the domination of donor interest aid in the second period. Maize’s and Nissanke (1984, p. 891) concludes “bilateral aid allocations are made largely or solely in support of donors’ perceived foreign economic, political and security interests”.
With regard to 5 TIEU LUAN MOI download : skknchat@gmail.com econometric technique, Maizels and Nissanke (1984) use cross-country linear multiple regressions for analysis.