The issues of Chinese Aid The issues of Chinese Aid to Africato Africa

Delhi August 13, 20082Delhi August 13, 20082

Jean Raphaël ChaponniereJean Raphaël Chaponniere

Agence Française de DéveloppementAgence Française de Développement

Asian DepartmentAsian Department

CUTS – FICCI ConferenceGlobal Partnership for Development

« Where do we stand and where to go ? »

A broader perspectiveA broader perspective

• While economist While economist discuss on the issue discuss on the issue of « decoupling » of « decoupling » between US and between US and emerging emerging economieseconomies

• The « coupling » The « coupling » between Asia and between Asia and Africa intensifiesAfrica intensifies

• Bilateral trade in US billions Bilateral trade in US billions with Africa (North Africa incl)with Africa (North Africa incl)

0

10

20

30

40

50

60

2000 2006

China Africa

India Africa

Japan Africa

US billions

China and AfricaChina and Africa

Bilateral TradeBilateral Trade Africa’share of Chinese and Africa’share of Chinese and World TradeWorld Trade

The growth of China Africa trade halted the marginalisation of Africa in world trade. African share of Chinese trade is now larger than in the seventies

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

China Africa % China

Africa % World trade

China % World Trade

-

10

20

30

40

50

60

1995 1997 1999 2001 2003 2005 2007

Chinese exports

Chinese Imports

US Billions

An emerging donor ?An emerging donor ?

• Chinese aid began in Chinese aid began in the late 1950’s (Egypt, the late 1950’s (Egypt, Algeria) and accelerated Algeria) and accelerated after Chou En Lai visit in after Chou En Lai visit in Africa in the 1960’s.Africa in the 1960’s.

• Large scale projects Large scale projects such as Tanzam built such as Tanzam built between 1973 and 1976 between 1973 and 1976 (US $400 millions) have (US $400 millions) have been the exception as been the exception as Chinese aid financed Chinese aid financed small projects as well as small projects as well as technical and medical technical and medical assistance.assistance.

Number of cooperation Number of cooperation agreements between agreements between China and African China and African statesstates

0

5

10

15

20

25

30

1950s 1960s 1970s 1980s 1990s

A minor or major donor ?A minor or major donor ?

• The lack of statistics leads The lack of statistics leads either to either to inflate inflate or to or to under under estimateestimate Chinese Aid to Chinese Aid to Africa.Africa.

• Various estimates conclude Various estimates conclude that China that China is not yetis not yet a major a major donor in Africa. donor in Africa.

• While OECD countries may While OECD countries may not meet their Gleenagles not meet their Gleenagles objective, China will probably objective, China will probably double its aid by 2009 and double its aid by 2009 and will be a major donor in Africa will be a major donor in Africa during the next decade during the next decade

Esimates of Chine Aid to Esimates of Chine Aid to Africa in US$ Billions in 2006Africa in US$ Billions in 2006

Competition or Competition or complementarity ?complementarity ?

While the lack of infrastructure is While the lack of infrastructure is one of the critical constraint to one of the critical constraint to African development, OECD’aid African development, OECD’aid shied away from infrastructure shied away from infrastructure projects. projects.

Among the reasons there is the Among the reasons there is the CAD’s Helsinki Arrangement CAD’s Helsinki Arrangement that that forbad forbad interest rate interest rate subsidies to commercially subsidies to commercially viable projects. As the private viable projects. As the private sector did not engage in those sector did not engage in those projects, this “market failure” projects, this “market failure” opened the way to Chinese opened the way to Chinese ODA.ODA.

Aid to infrastructures in dollars Aid to infrastructures in dollars and % of OECD’s ODA to Africaand % of OECD’s ODA to Africa

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1973 1977 1981 1985 1989 1993 1997 2001 2005 0

200

400

600

800

1000

1200

1400

1600

1800

2000 amount (r-h scale) %

$ million % of ODA

In current dollars, OECD aid to infrastructures in Africa is equal to its level in the 1970’s

Is China a free Rider ?Is China a free Rider ?

• The The Heavliy Indebted Poor Heavliy Indebted Poor Countries initiativeCountries initiative ( (HIPC) HIPC) has reduced African has reduced African external debt to GDP ratio external debt to GDP ratio to 35%. To avoid a new debt to 35%. To avoid a new debt crisis, OECD countries crisis, OECD countries agreed to respect a debt agreed to respect a debt sustainibility framework and sustainibility framework and monitor new credits.monitor new credits.

If China does not cooperate to If China does not cooperate to this scheme, this collective this scheme, this collective effort may not be effective. effort may not be effective. This could eventualy lead to This could eventualy lead to a new debt crisisa new debt crisis

• Sub saharan African debt Sub saharan African debt (% of GDP and exports)(% of GDP and exports)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970 1975 1980 1985 1990 1995 2000 2005

0%

50%

100%

150%

200%

250%

300%

Debt GDP

Debt /export

The issue of tied aidThe issue of tied aidChinese firms based in Africa won Chinese firms based in Africa won

half of the market for major civil half of the market for major civil engineering projects. Their engineering projects. Their competitiveness is explained bycompetitiveness is explained by : : – (i) their extensive presence in (i) their extensive presence in

Africa that reduces their cost Africa that reduces their cost – (ii) good financial conditions (ii) good financial conditions – (iii) and, not systematically, (iii) and, not systematically,

the use of Chinese labour. the use of Chinese labour. Chinese aid is tied as it finances Chinese aid is tied as it finances

Chinese (as well as foreign Chinese (as well as foreign subsidiaries) exports.subsidiaries) exports.

• The fact that Chinese firms won The fact that Chinese firms won contracts financed by bilateral contracts financed by bilateral donors while Chinese aid is tied, donors while Chinese aid is tied, has led to discuss the relevance has led to discuss the relevance of untied aid in OECD countriesof untied aid in OECD countries..

Knowing the Knowing the competitiveness of competitiveness of Chinese contractors, the Chinese contractors, the untying of Chinese aid untying of Chinese aid and the use of and the use of international calls for international calls for tender by China would tender by China would probably have little probably have little impact on Chinese firms.impact on Chinese firms.

• However, China may be However, China may be reluctant to untie her aid reluctant to untie her aid as open tender may as open tender may create transparency create transparency problem within China. problem within China.

The issue of aid The issue of aid effectiveness : different effectiveness : different definitiondefinition

• Chinese claim that their aid is more Chinese claim that their aid is more effective than OECD’s as their projects effective than OECD’s as their projects cost less and their implementation is cost less and their implementation is shorter (no conditionality). They shorter (no conditionality). They sometimes acknowledge that their sometimes acknowledge that their projects meet with problems once the projects meet with problems once the Chinese experts leave.Chinese experts leave.

• Among the criteria used by OECD to Among the criteria used by OECD to assess Aid effectiveness there is its assess Aid effectiveness there is its appropriation by the host country.appropriation by the host country.

Conclusion : Divergence or Conclusion : Divergence or Convergence ?Convergence ?• Chinese aid is considered as an alternative to Chinese aid is considered as an alternative to

OECD’s aid which is critized as having too OECD’s aid which is critized as having too many conditionalities (Beijing consensus vs many conditionalities (Beijing consensus vs Washington consensus ). Washington consensus ).

• As China is now financing large projects, As China is now financing large projects, Chinese may have to change their view on Chinese may have to change their view on effectiveness. This may lead to some effectiveness. This may lead to some convergence with established donors that convergence with established donors that could take into account the Social and could take into account the Social and Environmental Responsablility. Environmental Responsablility.

OECD donors have started to negociate with OECD donors have started to negociate with the Chinese ExIm Bankthe Chinese ExIm Bank. Cooperation with . Cooperation with China in Africa could lead to an effective China in Africa could lead to an effective Trilateral CooperationTrilateral Cooperation..