Evidences on Donors Competition in Africa: Traditional Donors versus China

Abstract

This paper describes the aid allocation behaviours of the Development Assistance Committee (DAC) donors and their response to the emergence of China in the aid landscape. Our analysis presents evidences of donors' competition in Africa. We investigate whether African countries with the Chinese influence expanding receive favourable aid modalities from G7 donors over the period 2000–2011. We find a robust positive relationship between the level of aid and the number of China projects a country receives and the level of bilateral aid from G7 donors, even after accounting for standard economic and political factors. Results indicate that DAC donors use bilateral aid to tackle the increasing influence of China in Africa, by delivering more aid to countries with natural resources or strategic political interest. The paper also assesses empirically whether strategic interests and economic competition between DAC donors and China have influenced the composition of aid flows received by African countries. Our empirical strategy is sharpened by the use of a spatial‐X model and a difference‐in‐difference estimation that leverages a ‘natural’ experiment in DAC aid flows in the aftermath of the financial crisis, with China increasing his sphere of influence in Africa. Copyright © 2015 John Wiley & Sons, Ltd.

China in Africa: Competition for traditional development finance institutions?

“…This is at first glance a rather surprising finding: despite the influx of over $70 billion in new Chinese resources to these countries in only 15 years, the main traditional development financiers appear to have not reacted by adjusting their funding levels. The finding also seems to contradict Kilama's (2016) prior evidence with respect to DAC bilateral aid.…”

“…Two papers closely aligned with the interests of the present study are Kilama (2016) To hypothesize how China's activities might affect these MDBs, it is first necessary to consider theoretical approaches attempting to explain the activities of MDBs. The theoretical traditions seeking to explain the actions of international organizations in general and MDBs in particular is vast, but one strand that has gained substantial traction and support is realism: the view that MDBs are driven mainly by the selfinterested considerations of a one or a few powerful nations (mainly the United States) that are seen to control these organizations.…”

“…As a consequence, they should try to keep the share of their funding at least at par with Chinese funding, implying an increase in absolute volumes. This is what Kilama's (2016) Along with reactions in terms of overall lending volumes, there may also be changes in the sectoral allocation of funds. It is primarily the infrastructure sector that is the main area for MDB safeguards, e.g., to prevent negative consequences for people living in areas that are flooded in the context of major hydropower projects or the like.…”

“…Despite the heated rhetoric, relatively little systematic academic work exists investigating whether and how China's influence has changed the way traditional development financiers operate in Africa. Two notable exceptions are Kilama (2016) and Swedlund (2017), both of which are discussed in more detail below. In contrast to these studies, we focus specifically on MDBs, and additionally compare these results to results for DAC donors as a whole.…”

“…While much of the extant literature on DAC development assistance led us to believe that this may be the case, the non-result we obtain for DAC donors questions the very basics of this argument. A more in-depth reading ofKilama (2016) reveals that his emphasis on the competitive behavior of DAC donors relies merely on the specific cases of strategically important recipients, rather than the average recipient of Chinese funding, for which he does not find any significantly positive effect on DAC development finance either. In essence, despite numerous differences in the econometric set-up and the dataset used, his results are hence in line with ours and do not generally suggest a competitive reaction of DAC donors to Chinese lending.As DAC donors face less bureaucratic obstacles to changing aid allocation than MDBs, nothing would stop them if they really wanted to react.…”