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The Uncertainty of Chinese Aid
The global consequences of declining Chinese aid to the Global south
Can the decline of Chinese foreign assistance provide opportunities for US and EU-led development initiatives to compete with the Belt and Road Initiative and prevent vulnerable countries from being left behind?
China's two-decade stretch of blistering economic growth is losing steam, with profound implications for global development. External factors, such as the COVID-19 pandemic, Russian-Ukraine war, and weakening global demand due to surging inflation, have all slowed economic growth. Domestic challenges, including high local government debt and a cratering real estate sector, also weigh heavily on China's economy. Despite the expectations of some economists that China’s economy will recover momentum in 2023, even a moderate decline will have knock-on effects on the world's most vulnerable countries.
So how bad is China’s economic downturn? China’s annualized GDP growth fell to under 3 percent in 2022, well below government expectations. Despite swift efforts by the Chinese authorities to initiate reforms and accelerate domestic investment - including incentivizing infrastructure projects, borrowing conditions, and tax breaks - the economic outlook is uncertain. To be fair, Chinese authorities, the OECD and World Bank anticipate a modest recovery in 2023 after the country ended lock-downs. However, persistent structural factors such as climate stresses (China is among the most at risk countries in the world) and its shrinking population will affect everything from energy consumption to manufacturing and food consumption.
China's slowing economy will affect the countries foreign policy including decisions around aid policy
China’s slowing economy will affect the country’s foreign policy, including decisions around aid policy. Although China has provided development assistance for over seven decades, the country only recently stepped into the major leagues in the past ten years. Three separate white papers issued between 2011 and 2021 spell-out China’s particular approach to development assistance. And in 2018, the authorities created a dedicated aid agency - the China International Development Cooperation Agency (CIDCA) - to provide added focus and direction.
China’s strategic approach to development assistance is increasingly proactive. For years, China has been a major advocate of “south-south” cooperation and emphasized the autonomy and sovereignty of aid recipients. But in 2021, China’s 14th five year plan and newly minted Global Development Initiative (GDI), a personal initiative of President Xi, adopted a more activist posture to multilateral rule setting in contrast to transaction-based approaches that hitherto dominated. Priorities such as climate change, green development, population health, and good governance are prominent.
When it comes to development aid, China and the west do not see eye to eye. There are long-standing disagreements about China’s approach to development finance, good governance, the rule of law, and human rights. Western critics complain that China instrumentalizes aid to advance geo-political and economic goals rather than helping the world’s poor (though similar charges are routinely levied against Organization for Economic Cooperation and Development donors). Notwithstanding their reservations, there is some evidence that Chinese aid has generated positive dividends, including in Africa. An IMF review found that on average, Chinese assistance had a net positive impact on economic and social outcomes. The bad news, however, is that Chinese aid yielded the opposite effect on governance.
A slowdown in Chinese development financing, including the BRI and the GDI, could have destabilising effects in many low and middle income countries.
Though China is a top contributor to development financing worldwide, the scope and nature of its official aid portfolio is opaque. One of the reasons for this is that Chinese assistance is not regulated under OECD protocols for official development assistance. For example, China’s development aid budget appears at first sight to be modest: In 2021, for example, China committed $3.1 billion in traditional aid, most of it to countries in Africa and similar in size to Norway. Assuming total OECD aid amounted to $305 billion in 2021, that would mean China accounted for roughly 1 percent of all official aid (though this surged to 50 percent in 2016 during a peak year of Chinese giving). Yet, if all development financing including grants and concessional lending is included, China’s support rises to $85 billion to over 165 countries in 2021 (compared to $37 billion from the US).
Mega-projects are a key conduit for China's development financing efforts. A prime example of the country’s “major country” and “mega project” diplomacy is the Belt and Road Initiative (BRI) launched in 2013. Estimated in the trillions of dollars, the Initiative spans 149 low- and middle-income countries accounting for half the world’s population and a quarter of global GDP. At the same time, China spent over $240 billion bailing out debts of participating countries between 2008 and 2021, including to Argentina, Pakistan, Sri Lanka and Ukraine. The surge in emergency financing over the past decade coincides with declining Chinese lending or infrastructure - notably from the China Development Bank and the Export-Import Bank of China.
The Belt and Road Initiative's scale is breathtaking, with its activities spanning a remarkable 94 percent of Sub-Saharan African countries, 85 percent of the Middle Eastern and North African states, 75 percent of South Asia, 73 percent of East Asia and the Pacific, 64 percent of Europe and Central Asia, and 58 percent of Latin America and the Caribbean. Western analysts may grumble, but recent surveys indicate that the initiative has bolstered China's reputation in recipient countries with regards to infrastructure. The World Bank goes as far as to suggest that the initiative could lift trade flows in participating nations by more than 4 percent, while simultaneously reducing global trade costs by 1-2 percent.
The record of the Belt and Road Initiative on longer-term development outcomes is mixed. Reliable official statistics are difficult to come by and it is difficult to know the impacts of the initiative’s hundreds of projects ranging from ports, railway and roads to energy and telecommunications infrastructure. Multiple studies have highlighted so-called “debt-trap diplomacy” and the fact that investments are slowing, particularly in the wake of the COVID-19 pandemic. Concerns have also emerged over “data traps” linked to Chinese-backed information communication technologies related to the telco and internet sectors. Both kinds of traps occur when recipient countries are overly dependent on Chinese credit or platforms leading to a loss of sovereign control and associated security risks (including in cyberspace). The future of the Initiative is uncertain, particularly in the wake of the global economic slowdown and negative publicity. Intriguingly, President Xi has not publicly mentioned the BRI since 2022 and appears to be championing the GDI instead.
As Chinese development financing is scaled back, the PGII could lean in by positioning itself as a clear competitor to the BRI.
A slowdown in Chinese development financing, including the Belt and Road Initiative and the GDI, could have destabilizing effects in many low- and middle-income countries. Chinese-backed loans have already halved from a high of $80 billion in 2016 to just under $4 billion in 2021. Although China has announced billions in future aid commitments, its authorities are growing more cautious about lending in developing countries, particularly owing to shifts in the global economic environment and concerns with debt repayment. It is still unclear whether Chinese lending will increase even in the event that underlying global economic conditions improve. There are also risks that declining Chinese support could reduce funds available for development investment and declines in foreign currency cash flow.
The impacts of reduced Chinese aid will likely be hardest felt in Sub-Saharan Africa which is heavily dependent on foreign credit, especially from China. China dramatically increased lending in Africa since 2000 and initiated thousands of projects in virtually every country on the continent. Chinese lenders reportedly account for 12 percent of Africa’s private and external debt which surged fivefold to $696 billion between 2000 and 2020. The decline in lending in recent years will almost certainly undermine African governments abilities to raise finance. Recent studies suggest that certain forms of Chinese assistance - particularly infrastructure (as opposed to resource exploitation) - have generated impressive and positive impacts on economic development.
The repercussions of a slow-down in Chinese aid flows could be significant, not only for poor aid-dependent countries but also for the global economy. Coupled with global shock waves from the COVID pandemic and the war in Ukraine, an emerging risk for the BRI in particular is how countries that are mired in fiscal troubles will meet their contractual obligations. If countries are unable to repay their debts, it would lead to defaults and financial instability that would ripple across global markets.
A reduction in Chinese aid could also lead to the cancellation or delay of much-needed infrastructure projects such as roads, ports and airports, hampering long-term economic growth prospects in the global south. Of course, a decline in Chinese aid also creates opportunities for western countries and organizations to step in and provide alternative modes of assistance. This could include more transparent and accountable forms of aid that might provide a counter-narrative to the successful Chinese model.
The latest example of western efforts to counter Chinese influence in the aid sector is the Partnership for Global Infrastructure and Investment. The Partnership is a sprawling $600 billion global infrastructure program announced by the G7 in June 2022. Although it differs significantly from the Belt and Road Initiative in focus and approach, it shares similarities in that it offers sizable infrastructure-led development financing for low- and middle-income countries through a network of public financial institutions. The Partnership also targets “soft infrastructure” – conventional forms of overseas aid, including education, health, agriculture, and better governance - in contrast to the “hard infrastructure” such as transportation networks and urban development enabled by the Initiative.
Liberal democracies have an opportunity to ensure that vulnerable countries in the global south are not left behind in the wake of a likely slowdown in Chinese aid.
At the intersection of the soft and hard infrastructure advanced by the Partnership and Initiative is the question of “smart” infrastructure for development. Indeed, there is an international competition underway between western and Chinese actors in standing-up and managing internet-connectivity across the developing world. As Chinese development financing is scaled back, the Partnership for Global Infrastructure and Development and other initiatives such as the European Union’s Global Gateway strategy could lean in by positioning themselves as clear alternatives to the Belt and Road Initiative.
The Partnership Global Gateway could not only provide more conventional soft infrastructure support, but also rewire existing hard infrastructure that bypasses China’s data traps and cooperates where feasible, so that global infrastructure finance does not become a zero-sum game. The US and EU in particular recognize that countering Chinese influence - including the export of digital authoritarianism - is strongly linked to the export of alternative technologies.
The potential slow-down of Chinese aid provides an unexpected opportunity for liberal democracies to step up and provide alternative forms of assistance that are more transparent, accountable, and sustainable. In the Partnership for Global Infrastructure and Investment, western countries have a chance to ensure that vulnerable countries across the global south are not left behind. By offering soft infrastructure support and re-wiring existing hard infrastructure that bypasses China's debt and data traps, the Partnership can position itself as a legitimate competitor to the Belt and Road Initiative. While there are challenges to be faced in the aid sector, liberal democracies can work together to ensure that future development assistance has a positive impact on the lives of the people who need it most.
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