UNCONDITIONAL AID AND ACCOUNTABILITY:
REASSESSING CHINESE UNCONDITIONAL ENGAGEMENT IN AFRICA
Keywords: China, Africa, aid conditionality,democracy, human rights, pro market reforms
The last fifty years have seen the transfer of more than US$ 2 trillion from rich countries to the developing world, mainly Africa. In the cold war era, aid was given to Africa mainly for political reasons, and was relatively successful in delivering the desired results. Only after aid flows from other sources (e.g. Soviet Union) increased, was political direction changed.
Through a combination of political, economic and moral reasons, the West found itself in a position where it had to continue to lend, although it was aware of the widespread corruption. From the 1980s on, the idea was born that only countries of good governance should receive further loans. The definition of good governance revolved around democracy, pro-market reforms and human rights. Conditionality of loans made sense – at least on paper. Not only did they serve the donor’s interest by making the countries more likely to be able to repay, they should also bring real development to the country by encouraging pro- developmental reforms. The fact however is that even where conditionalities were ignored, aid kept flowing, leading to an incentive of further ignoring them. In a study, Svensson (2000) found no link between a countries reform efforts and the disbursement rate of aid funds.
Instead of stopping aid when conditionalities were not met, a new interpretation why aid does not work to develop the country came up: That the amount of aid provided was too little. This was manifested when in the year 2000, 189 countries signed the Millennium Development Goals (MDG) which stated that an additional US$ 130 billion were needed to achieve certain targets in health, education, environment and poverty reduction.
Zambian economist Dambisa Moyo however argues, as well intentioned as the MDGs are, they simply ignore the very fundamental of aid: That money set aside for a certain purpose is easily diverted (Moyo, 2008). Besides, any kind of conditionality is rendered pointless, when the recipient country knows that the aid will keep flowing even if the conditionalities are not met. And by promising US$ 130 billion a year this is the case. This link has been confirmed by many studies: Clemens et al. (2004) state no long term impact of aid on economic growth; Hadjimichael (1995) and Reichel (1995) find negative relationship between savings and aid. Boone (1996) finds that aid boosts consumption rather than investment. Over the past 30 years the most aid dependent countries had average growth of minus 0.2 percent. China who had never depended on large amounts of aid on the other hand has developed economically extremely successful in the same period.
Nevertheless Western critics today prefer to blame Chinese unconditional investments in Africa for undermining their conditionalities.
Aid or investment?
Aid and investment are in their structure very similar, but have one fundamental difference: Accountability. In both cases a capital owner (donor or investor) provides money to realize a project. (e.g. build a road) The difference however is that the two want something different in return. The investor wants a tangible benefit (e.g. toll for the use of the road or repayment of his loan) whereas the donor wants either nothing or something intangible in return (e.g. human rights, democracy). In any case something that is unrelated to whether the initial investment (road) has actually been built and is maintained.
The investor has a very simple tool to measure whether the investment has been successful or not, namely whether he receives his financial returns out of it. The feedback loop to the original investor is what adds accountability to the project. Based on this he will decide whether to continue investments in similar projects or not.
A donor however does not have this tool available. He has to rely on complicated reports, written by people with vested interest just to find out whether the project has been completed and
whether it is maintained years after. The decision to continue with similar investments does not depend on whether the first investment works (e.g. returns economic benefits) but on the conditionalities (good governance). Besides, as described above, because of an obligation of the donor to continue lending, in many cases not meeting the conditionalities does not stop further aid, rendering conditionalities pointless.
Aid is an unaccountable way of raising money
Western donors believe in aid conditionality. They believe in two interrelated factors:
A look at the second point first. As shown above, aid in its nature is an unaccountable way of raising money. There is no market based mechanism available to the donor to know whether the funds provided are used in the way intended or not. But what is more, the donor might actually be more interested in whether the conditions attached to the loan have been met. Of course, this system requires a scarcity of loans. As long as there is one donor willing to provide a loan unconditionally, the country will turn there, rendering the other donor’s conditionalities pointless.
As China, based on its principle of non-interference has started to provide loans to African countries without asking for any political conditions or demands for reforms, Western donors feel deprived of their tool of influencing the development policies of the African countries. A loud outcry condemning Chinese involvement in Africa is the result.
The problem with this argument however is not that the Chinese are not undermining the Western effort of influencing policies – they surely are – but that the system of conditional aid as such is an unaccountable one, whereas market based investments, such as promoted by China are more accountable, and should therefore be preferred. If everything that is needed to receive further loans is the fulfillment of the political conditionalities, this does not mean the loans are in any way spent in the way they would develop
the country (e.g. end up in the corrupt bureaucracy). The conditionalities and the way the loans are spent are totally unrelated.
A common pattern of Chinese investment is to provide the infrastructure (e.g. roads, electricity, a port) for say a mining site, in exchange for which it receives preferential access to the resources. This is known as “package deals.” As this infrastructure is dual-use, it will further promote economic development (e.g. farmers using the road to go to the next market to sell their products). This process is accountable, because the provider of the loans has an economic interest that the infrastructure is working. If it was provided by a donor who has no actual economic interest in the infrastructure, but uses it as a way of achieving certain policies in the country, the process is unaccountable. Not demanding any political conditions (as China does), but rather an interest in the proper functioning of the investment makes the process more accountable and corruption less likely.
Rightfulness for conditionalities
So if unconditional investments are more accountable than conditional aid, why do Western countries still condemn Chinese unconditionallity? The answer is simple: Because they believe in the rightfulness of the conditions. In fact they take up the risk that parts of the money end up in corruption, (as aid as such is an unaccountable process) because they believe it is still the best way to influence policies.
So what are these policies? The most central one is something that is described with the term “good governance”. In short, this is a euphemism for a mixture of democracy, pro-market reforms and human rights. It is however questionable and subject to a huge amount of literature how far these factors are positively correlated to developing the economy of a country and improving its citizens lives.
The effect of democracy on development is a favorite subject of academic dispute.
This is however not to say, that Chinese investment in Africa has no effects on democracy building. This link does not work through conditionalities but economic growth. In the early stages of development, a country should utilize whatever resources it has to offer to start to climb up the economic ladder of development. In many African cases, these are still natural resources such as minerals and oil. Lacking the know-how and capital to extract these, China is a partner who is willing and able. Once the export of primary commodities creates a certain wealth in the country, a process of democratization will set in from inside, rather than being enforced through conditionalities. The most compelling proof for this link has been made by Przeworski et al. in their study “What makes Democracies endure?” They find that a democracy can expect to last 8.5 years in a country with a per capita income of less than US$ 1,000; 16 years in one with an income between US$1,000 and 2,000; 33 years between US$2,000 and 4,000; and 100 years between
US$4,000 and 6,000. With income over US$6,000 the country can expect the democracy to last forever (Przeworski et al. 1996). If Western observers want to see democracy in Africa, the best way is to strive for economic development first, and the Chinese involvement which does not have democracy as a condition, is currently the best bet on that.
Much has been written on the effects of pro-market (e.g. neoliberal) reforms on economic performance. It is beyond the scope of this paper to deliver a comprehensive summary of this discussion. In short, the neo liberal view is that pro market reforms will attract foreign investments, make it possible for developing countries to become rich through trade and raise cash on the international capital markets. Opponents state that the unlevel playing field (e.g. agricultural subsidies by developed countries, taxes and tariffs etc.) make it difficult for developing countries to compete globally and argue for state protection of infant industries.
When the academic findings of the absence of correlation between democracy and pro-market reforms, on the one hand, and economic growth, on the other, are accepted, the debate often enters moral grounds. Critics of Chinese unconditional aid to Africa often raise the argument that China, with a poor human rights record at home, does not ask African countries to conform to human rights in exchange for investments and aid. Not only do Chinese not mind bad human rights track record in the recipient countries of their investments, they even enforce it by exporting these lax standards (e.g. safety of labour, low environmental standards).
Equally the common and justified criticism that China brings in its own labor to Africa, denying African workers the opportunity to benefit economically from the investments, can be answered in the same way: it is up to African governments to pass laws that set quotas on how much labor must be sourced locally. To state that African governments have no interest to provide these laws is hypocritical. More interesting but still wrong is the assumption that they are not in a position to do so. This is based on the idea of the “Delaware Effect” which is to say that (Chinese) investors will move to wherever standards and therefore production costs are lowest. This is however unlikely if standards are raised gradually and coordinatedly. The pressure towards better standards will also increase with the population experiencing economic growth.
Not only do Western imposed policy reforms have questionable results, the way in which they are imposed (namely through conditionality of aid) is even more questionable because of its unaccountability which fosters corruption.
Boone, P. (1996). Politics and the effectiveness of forein aid. Eoropean Economic Review 40
Clemens, M. (2004). The short term effect of aid on growth. ideas.repec.org
Hadjimichael, G. M. (2005). Sub Saharan Africa: growth, savings, investment 1986-93. IMF occasional paperNo 118
Moyo, D. (2009). Dead aid. Why Aid is not working and how there is a better way for Africa. London: Allen Lane, Penguin Books.
Przeworski, Cheibub, Papaterra, Limongi, Neto and Alvarez (1996). What makes Democracies endure? Journal of Democracy. pp39-55
Rodrik, D. (2003). In search of prosperity: analytic narratives on economic growth, Princeton:Princeton University Press
Svensson, J. (2000). When is foreign aid policy credible? aid dependence and conditionality. Journal of Development Economics. 2000/ 61. pp 61-48
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