A Study of China's Foreign Aid

An Asian Perspective

Y. Shimomura, H. Ohashi, Y. Shimomura, H. Ohashi

• Publisher: Palgrave Macmillan
• Year: 2013
• Print ISBN: 9781137323767
• eBook ISBN: 9781137323774
• Topic: Economics
• Subtopic: Business General
• Index: Economics

This book provides a new perspective of China's controversial foreign aid strategy. The chapters offer a thorough examination of data to show how China has created knowledge in its long experiences of aid and how this accumulated knowledge could contribute to other developing countries. The book also examines China's aid philosophy and strategy through an Asian perspective, instead of the Western perspective that is postulated in existing academic literature. This is important as China shares a number of common features with other Asian donors, including India and Japan. Finally, the book explores how to utilize the potential effect of this rising major donor for worldwide development and poverty reduction.

Part I

Introduction

Why China’s Foreign Aid Matters?

Yasutami Shimomura and Hideo Ohashi

1 The objective of the book

China’s foreign aid is rapidly gaining momentum. While the term ‘foreign aid’ does not correspond in China to the OECD’s notion of ODA (official development assistance), the two concepts share certain similar basic elements, as Chapter 3 in this book illustrates. Although China is usually labelled an ‘emerging donor’, it has a long history of aid-giving, as assistance to Vietnam and the Democratic People’s Republic of Korea was started in 1950. After a period of stagnation, China began to accelerate its foreign aid in the 1990s; it established the Export-Import (EXIM) Bank of China in 1994 and introduced concessional loans in 1995. Since then, China has rapidly expanded its activities in the developing world under its strategy of zouchuqu (going out).

It has to be admitted, however, that the rise of China’s foreign aid is an internationally controversial issue. On the one hand, China is under criticism from mainstream scholars and the international aid community, the nexus of the OECD’s Development Assistance Committee (DAC) and the World Bank (Brautigam, 2009, p. 277). On the other hand, many Africans view China’s active engagement (known as ‘south-south cooperation’ in China’s own terms) in the developing world as providing new opportunities, as Moyo notes (2009, pp.103, 109–10).

This book attempts an assessment of China’s foreign aid, with particular reference to the divergent views of international society, and to base our analysis as much as possible on stylized facts and actual data. Existing evaluations of China’s foreign aid tend to be ‘anecdotal’ and have relied on piecemeal cases. In contrast, this book gives priority to facts and available information. Needless to say, this is not an easy task due to insufficient availability of authorized data. Fortunately, a ‘White Paper’ on foreign aid entitled China’s Foreign Aid was published in April 2011. This was unique in terms of quality and availability of data and information. However, it should also be remembered that relevant information becomes obsolete quickly due to rapid changes in China’s foreign aid strategy.

Furthermore, it needs to be noted that current appraisals of China’s foreign aid, which include a number of controversial comments, have basically been made through the lens of the mainstream views of traditional donors (primarily Western donors). Any assessment based on a single viewpoint is fundamentally weak whenever the object of analysis is complicated, as in the case of China’s foreign aid. For a balanced assessment, it is crucial that the analysis be conducted from various angles. With this objective in mind, this book introduces an alternative perspective of aid: the Asian perspective. Specifically, we focus on the perspectives of China and Japan, Asia’s two major donors. There are notable similarities between the aid strategies of these two countries, and many Chinese policymakers have shown a keen interest in Japan’s aid experiences, as is discussed in Chapters 6 and 7.

In order to examine China’s foreign aid in depth, a team of scholars/experts from East Asian countries was brought together for this book. Several policy and research issues will be discussed by these scholars/experts so as to attain an integrated landscape of China’s foreign aid.

2 The perspective of the book

2.1 China as an ‘Asian donor’

China is often cited as an ‘emerging donor’, but this is not an entirely appropriate classification because the country has a history of aid-giving that dates back to 1950. In fact, the National Work Conference on Foreign Aid, held in August 2011, was to commemorate the 60th anniversary of China’s foreign aid. More importantly, as a recent OECD working paper points out, China’s aid is significantly different from that of other major emerging donors, such as Brazil and the Arab countries, yet it shares basic similarities with other Asian donors, Japan and India included (Saidi and Wolf, 2011) (Shimomura, 2013, pp. 179–80). In order to understand the essence of foreign aid from China, it is more fruitful in our view to consider the country as an Asian donor instead of an emerging donor. With a focus on Asian donors, this book concentrates on the two largest – China and Japan – and examines the similarities between the two. There are three particularly notable similarities.

First, both donors have persistently maintained a negative or cautious attitude to the idea of ‘political conditionality’, which, according to Stokke (1995, p. 11), is that political ‘conditions [are] to be met by the recipient as a prerequisite for entering into an aid agreement or for keeping up aid’. China’s foreign aid policy, referring to the longstanding ‘Five Principles of Peaceful Coexistence’ (Information Office of the State Council, 2011), has advocated the principle of ‘non-interference’ and ‘imposing no political conditions’. Japan has also been known for its cautious attitude toward political conditionality. In the early 1990s, Susan Pharr (1994, p. 168) studied the international voice criticizing Japan’s ‘“political neutrality,” that is, a belief that political litmus tests should not be applied’. In 2011 the basic situation was the same, as observed by Nissanke and Soderberg (2011, p. 15) who report ‘a policy of trying to stay away from domestic policy issues in the recipient countries’. An OECD article by Saidi and Wolf (2011, p. 13) labels the similarities between China and Japan in this area as ‘politically untied development cooperation’.

Second, perhaps because of their historical backgrounds, both countries emphasize ‘self-reliance’ as an objective of aid. Self-reliance, the linchpin of China’s foreign aid policy, has its roots in the philosophy of zìlì gēng sheng (self-reliance) that was launched by the Communist Party of China in the pre-1949 era and further enhanced by the country’s experience as an aid recipient. The Soviet Union cancelled its aid to China in 1960 due to ideology disputes, with damaging results for the economy as at that time the Soviet Union was China’s largest donor. As a result, China’s leaders became acutely aware of the risks of relying on external assistance and, reminded of their own pre-1949 experience of mass mobilization, reconfirmed the principle of self-reliance.

In Japan, the policy of self-reliance as a goal of aid is firmly rooted in the country’s traditional perceptions of ‘diligence, austerity, and thrift’ (Nishigaki and Shimomura, 1997, pp. 153–5). Throughout the period of accelerating economic development after the Meiji Restoration (1868), Japan’s dependence on external capital was exceptionally low (Minami, 1992, p. 141), and capital formation was largely financed through domestic savings (Ohkawa and Rosovsky, 1973, p. 20). From a macroeconomic viewpoint, the Japanese regarded sufficient foreign currency earning capacity or export growth as the key to self-financing capacity, thus they sought to achieve sufficient capacity of self-financing economic development. They also recognized that modern infrastructure was crucial for nurturing competitive industries and export promotion. Guided by its experiences, Japan focused its aid on infrastructure construction so as to assist export-oriented industrialization and to ultimately realize self-reliance. This shared belief in self-reliance leads to the third similarity.

Third, both China and Japan prefer to prioritize economic infrastructure construction and the linkage among aid, direct investments, and trade (export from aid recipients) because aid-supported infrastructure networks can attract direct investment from abroad. In addition to the creation of jobs, foreign investors introduce modern technology to a recipient economy, thus strengthening its international competitiveness. The resulting increase in exports contributes to the developing country’s efforts to cast off the status of aid recipient and achieve self-reliance. In other words, China and Japan understand the importance of the close link between the public sector (in charge of aid) and the private sector (in charge of direct investment and trade). Part Three of this book scrutinizes this issue of aid, investment, and trade syntheses.

2.2 China as a long-time aid recipient

Another objective of this book is to give due attention to ‘the connection between the experience of receiving aid and the policy of giving aid’ (Sato, 2013, p. 2). This perspective is important because the features of China’s aid are closely related to its experience as “an aid recipient”. According to Shambaugh (2008, p. 5), China’s Communist Party is ‘showing itself capable of significant adaptation and reform in a number of key areas’, and foreign aid is no exception.

During the early days of its nation-building, China, through the receipt of Soviet aid, aggressively absorbed the Soviet system of planning and control, developing it further in their own way. Later, as Japan became China’s largest donor, a number of Chinese scholars/experts in the late 1990s began to intensively study Japan’s aid practices. These scholars/experts noted that Japan’s aid, despite various negative aspects, could provide valuable hints for China (Jin, 2002, pp. 253–4). Most importantly, for China as an aid recipient, the substantial investment in its infrastructure and heavy industry played a major role in promoting exports and in attracting foreign direct investment (Ma, 2007, pp. 347–35). What was particularly attractive for the Chinese was the concept of ‘trinity development cooperation’ that was launched by the Japanese Ministry of International Trade and Industry in the mid-1980s, under the title of ‘the New AID Plan’. The essence of the concept (Chapter 7) was a ‘comprehensive economic cooperation package with the trinity of aid, investment, and import (from developing countries) to assist the export-oriented industries of Asian countries’. The Chinese government currently endorses an effective linkage between aid and non-aid activities or jingji hezuo (economic cooperation). Policymakers in China also recognize that the trinity of aid, investment, and trade could simultaneously be advantageous to both recipient and donor (Zhou, 2010) because private sectors of the donor country also benefit from the expansion of aid-related business opportunities. The win-win principle of mutual benefit has been promoted by China’s leaders from the mid-1990s onwards.

It should be stressed that China did not simply borrow the trinity concept from Japan. As early as 1994, Wu Yi, the Chinese Minister of Foreign Trade and Economic Cooperation, launched Da Jingmao (Grand Plan of Trade and Economic Cooperation) that embodied linking aid, investment, and trade. This endogenous idea was further developed in conjunction with an intensive study of Japan’s aid practices, resulting in China’s present aid approach – a mixture of local policy thinking, learning from abroad, and high adaptation capacity.

3 The momentum of china’s foreign aid

China’s rapidly increasing momentum in the international aid community is mainly attributed to two elements: its size and high growth rate, and its aid philosophy and aid modality – distinctly different from the mainstream. These two aspects can provide challenges and opportunities for the developing countries as well as to the established donors.

3.1 China as a new leading donor

China is emerging as a leading donor as a result of its expanding operations, particularly in Sub-Saharan Africa.

It is not easy, however, to estimate the size of China’s foreign aid precisely. Although China’s Foreign Aid, published by the government in 2011, contains a lot of valuable data, only the total amount of foreign aid is given – annual figures are not available. In addition, we should be careful with regard to the difference in definition between China’s foreign aid and DAC’s ODA. Thus, in estimating China’s annual foreign aid amounts, we need to eliminate the difference between the two concepts as much as possible (Chapter 2). According to Chapter 2, these facts withstanding, China’s annual bilateral foreign aid in 2009 was estimated to exceed five billion US dollars in terms of gross disbursement of bilateral aid,¹ making it the seventh largest donor in the world². Assuming that China’s foreign aid grows at an annual rate of 20 per cent,³ it will catch up with Japan – the second largest donor in terms of gross disbursements – before 2015. The impact of China’s foreign aid is highly visible in Africa, where the traditional donors have had an overwhelming influence. Chinese and African governments established the Forum on China-Africa Cooperation (FOCAC), a cabinet minister level meeting, in 2000. At the FOCAC, China pledged to double its development cooperation to Africa in three-year stages, in 2006, 2009, and 2012; the first two pledges have been honoured. At the recent FOCAC meeting, attended by cabinet ministers from 50 African countries, President Hu Jintao made a commitment of concessional loans for 20 billion US dollars for the period 2012–14, doubling the previous commitment given in 2009.

The fact China is going to assume a leading role in the area of non-military international contribution has significant implications for international society.

3.2 China as an assertive and different donor

In the initial stages of providing assistance to other developing countries, China launched its own aid philosophy and policy. The declaration of ‘The Eight Principles for Economic Aid and Technical Assistance to Other Countries’, announced by Premier Zhou Enlai in 1964, still forms the basis for the country’s aid policy. As has already been mentioned, the three distinct features of China’s aid policy are: the principle of non-interference, the promotion of self-reliance as a goal of aid, and high priority to infrastructure construction. These aid elements highlight the fact that the Chinese way of thinking is fundamentally different from the ‘international development regime’ – the norm in the international aid community – which is composed of ‘policy conditionality to control the process that translates aid input into desired outcomes’, reduction of poverty as a goal, and focus on social sectors such as education and health, as Saidi and Wolf (2011, pp. 7–8, 12) articulate.

In an attempt to strengthen its influence, the international aid community has pursued aid harmonization, with the main objective of reducing transaction costs and improving aid effectiveness by eliminating duplication. Based on this viewpoint, a series of DAC High Level Forums have stressed harmonization, coordination, convergence, and consensus. Donors have also been urged to shift from traditional project aid (supporting specific projects)...

Table of contents

• Cover
• Title
• Part I Introduction
• Part II Basic Facts of a Rising Donor
• Part III Emphasis on’Aid, Investment, Trade Synthesis’: Evolution of an Asian Aid Model?
• Part IV Impacts of China’s Foreign Aid
• Part V Conclusion and Policy Implication
• Index