Saturday, August 28, 2010

Chinese aid policy in perspective

Ironically enough, the sub-prime crisis and the Great Recession may have raised questions about the need for self-professed flag bearers of capitalism to take lessons from China about many of the features of capitalism itself. In any case, there is one area where they should surely learn from China - pursuit of mutually beneficial, self-interest driven foreign aid policy.

With a mix of quasi-barter and long-term capital investment projects, China has been negotiating complex overseas aid cum investment programs, which while providing invaluable good quality infrastructure for impoverished African countries also benefits the Chinese economy.

China has successfully managed to leverage its comparative advantage in construction and engineering (achieved by undertaking massive similar infrastructure projects at home) - roads, ports, railways, power plants, and buildings of all kinds - to secure access to mineral inputs and agricultural products, with generous use of the massive domestic savings (touching 50% of GDP) and trade surpluses, channeled through its Export-Import Bank.

The story goes something like this. Identify a remote mining or farming area in interior Africa. Propose to construct and maintain rail and/or road infrastructure, even sell rail rolling stock and trucks, all with mostly its own firms and labor, in return for a share of the produce from the mined or the farms for an extended period of time.

The direct benefits would be good quality infrastructure (with its maintenance) without any upfront capital investments for the locals and commodity resources for the gluttonous Chinese economy. The indirect benefits for China are even more substantial - excellent long-term investment opportunity for its savings, remunerative and relatively safe platform to deploy the large foreign exchange surpluses, enormous goodwill generated in the host country with its attendant geo-political benefits, and a firm foothold into one of the last remaining untapped markets. The maintenance contracts also enables China to exercise some informal political control over the mining areas.

Currently, China finances large-scale infrastructure projects, focused mainly on railways and power projects, in atleast 35 African countries, the biggest recipients being Nigeria, Angola, Ethiopia, and Sudan, through marginally concessional loans channeled through China Export-Import Bank. Though a large part of China’s development assistance is in non-concessional loans and export credits, which does not officially count as "aid", the manner in which it is structured (their upfront nature, salience, presence of large Chinese workforce, continuing involvement through maintenance etc), contrasted with the utter incompetence and lack of commitment of the host governments, creates the impression, atleast in the local popular perception, of these investments being an example of some Chinese beneficence.

In many respects, as Ronald McKinnon writes, China's aid policy bears striking resemblances with the British and American colonial and post-colonial interventions in many developing countries. Britain's comparative advantage with engineering skills and need for minerals led it to making investments in railways sytems in India and Argentina in the 19th century, while US made similar investments, through its large private corporations, in large dams and power plants in many countries of Asia, Africa and Latin America.

Update 1 (8/4/2012)

Times has a nice article on China's aggressive aid-driven strategic diplomacy in the Caribbean.
China announced late last year that it would lend $6.3 billion to Caribbean governments, adding considerably to the hundreds of millions of dollars in loans, grants and other forms of economic assistance it has already channeled there in the past decade.

It has provided a flurry of loans from state banks, investments by companies and outright gifts from the government in the form of new stadiums, roads, official buildings, ports and resorts in a region where the United States has long been a prime benefactor. Chinese construction companies and workers have been working hard to quickly establish these promised assets. In some places, Chinese contractors or workers have stayed on, beginning to build communities and businesses.

While some of these gifts have been to buyover these countries from recognizing Taiwan, the greater long-term intent is to surely to gain a foothold in America's "near abroad".

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