China’s ‘unconditional foreign aid’ for African countries is a big myth

From left: China’s first lady Peng Liyuan, Tanzania’s first lady Salma Kikwete, Chinese president Xi Jinping, and Tanzanian president Jakaya Kikwete being entertained at Julius Nyerere International airport in Dar es Salaam on March 24, 2013. AFP

What you need to know:

  • A recent study found Chinese loans carry tougher conditions than World Bank’s.

The President of China, Xi Jinping, has promised Africa $20 billion in financial assistance with no strings attached. If you can believe that, you might as well believe that there are no labour violations in China and that China does not manipulate its currency.

There is no unconditional foreign aid. (By the way, what is often called aid is actually a low-interest loan.)

When President says that China will not interfere with the internal affairs of African countries, he is implicitly placing a condition that African leaders must not interfere with China’s internal affairs.

And “internal affairs” has broad interpretation. If you complain that China has an unfair advantage in exports due to child labour or other labour rights violations, you are interfering with internal affairs.

In other words, if African leaders accept China’s aid, they better be prepared not to criticise the Chinese government or its policies. Of course, Mr Xi was not only addressing African leaders. He was criticising the West and the World Bank and the International Monetary Fund (IMF) for tying economic aid to conditions.

Some of the conditions set by the World Bank and the IMF are indeed quite intrusive, but it would be naïve to think that China is above it all.

China will expect its contractors to be given priority for, if not the exclusive right to, projects financed by China’s loans, even if there are other contractors who can do a better job at a lower cost.

China will also try to bring a lot of its own people to do the work, including non-technical work. This is not to suggest that China will be doing anything different from other donors.

The point is that China’s aid is not as unconditional as President Xi is trying to make Africans believe. In 1994, China established an Export-Import Bank that functions more or less like the one in the United States. It is a government bank with the primary purpose of subsidising and promoting Chinese exports.

A common scenario is that a Chinese company would propose a project to a given country and then help that country secure a loan. Just as an example, China Harbour Engineering Company (CHEC) may propose expansion of an existing harbour or construction of a new one.

When that proposal is accepted, the host country applies to the Export-Import Bank for a low-interest loan with the understanding that the project, or at least a major part of it, would be implemented by CHEC.

A recent study, “The New Banks in Town: Chinese Finance in Latin America,” by a think tank (Inter-American Dialogue) based in Washington, D.C., concludes that although “Chinese banks impose no policy conditions on borrower governments, [they] do require equipment purchases and sometimes oil sale agreements [and that] China Development Bank (CDB) loans carry more stringent conditions than World Bank loans.”

While one can expect a certain bias, the study’s point still carries merit.

Another point to be made is that while policy conditionality can limit flexibility and policy space of the aid-receiving countries, some conditions by the donor countries and organisation are important. This is not necessarily to say that those donors know better than Africans themselves.

However, there is no denying that not all African countries have good governance and not all African leaders have the best interests of their own people at heart.

Therefore, notwithstanding the self-interest of the aid-giving countries, it is not necessarily wise to give aid with no conditions attached. Who, for example, in their right mind would have been willing to assist Zimbabwe in 2008 to restore macroeconomic stability without conditions on its monetary and exchange rate policies?

The President of South Africa, Mr Jacob Zuma, is quoted saying “we are particularly pleased that in our relationship with China we are equals and that agreements entered into are for mutual gain. This gathering indicates commitment to mutual respect and benefit. We certainly are convinced that China’s intention is different from that of Europe, which to date continues to attempt to influence African countries for their sole benefit.”

Well, Africans are rightfully known for their kindness and politeness to their guests, especially if those guests bring or promise to bring gifts. It’s not that Mr Zuma was hypnotised by President Xi’s promise of loans to Africa. President Zuma was just stretching the truth with very common diplomatic rhetoric, as any good host would do.

African countries, not the least of which is South Africa, have many economic and trade agreements with the West. If those agreements produced gains only for the West, why have African countries continued to nurture them?

Now, of course, from a practical point of view, countries are not equal to each other. From a political point of view (democracy, freedom of speech, freedom of religion), South Africa and a number of other African countries are more akin to the West than to China.

South Africa could teach China a thing or two about democracy if China was willing to listen. From an economic point of view, China is a power house compared to any African country.

As long as China is the donor (lender) and the African country is the aid-recipient (borrower), China will have leverage and will use it. In fact, China would be foolish not to use its leverage.

President Xi’s charm should not hypnotise Africans to think that China is so altruistic as to not have any conditions on its low-interest loans. Now, of course, if all African countries had the good governance Botswana has demonstrated over the years, conditionality would be inconsequential because Africa wouldn’t still be begging for aid.

According to a study by Carol Lancaster and Samuel Wangwe in 2000, “Managing a Smooth Transition from Aid Dependence in Africa,” Botswana “has gone from being one of the poorest, most aid-dependent countries to a middle-income country no longer in need of significant amounts of external assistance and where donors have begun to phase out aid.”

As long as Africa continues to be dependent on aid, whether from the West or China, it cannot escape conditions, no matter what the President of China may want us to believe.

The author is professor of Economics, La Salle University in the US. [email protected]

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