Tuesday, August 16, 2011

More Mistakes by The Economist: "Charity Begins Abroad"

Image credit: Michael Kirkham for The Economist
The Economist has a new feature on aid from developing countries (August 13th, 2011): "Charity Begins Abroad: Big Developing Countries are Shaking Up the World of Aid."

A lot of the article appears to be accurate. But with regard to China's aid, not surprisingly, it gets a few big things wrong or partly wrong. Here are three:

(1)  Dredging up the (awful) Wagner School "data" on China's "aid":
But second on the list, if reports monitored by New York University’s Wagner School are to be believed, would be China, which gave away $25 billion in 2007. (Statistics on aid from new donors are dodgy and the line between aid and trade is blurred; by another count China’s officially reported aid was only $1.9 billion in 2009.)
Sigh. As I have posted a number of times, this so-called monitoring by "the Wagner School" was actually a project done for the Congressional Research Service by students who collected rather indiscriminately all the media stories they could find on any aspect of Chinese state engagement in developing countries, defining this as "Chinese aid". By mentioning this thoroughly discredited statistic, even if with a hint of doubt, The Economist continues to give it credence.

The second statistic is the dollar translation of China's budget figure for external assistance in 2009. This is an accurate (and official) figure, but it does not include the face value of the concessional loans, only the direct subsidy required to make them concessional. As the loans are expected to be repaid, and thus are not a donation, this is a more accurate figure for the real budgetary outlays made by the Chinese government for (net, not gross; disbursed, not committed) official assistance.

(2) A few mistakes: mixing apples and lychees. 
At the same time, China has become a far bigger donor. Wen Jiabao, the prime minister, has promised that in 2010-13 China will provide $10 billion in low-interest loans to African countries, bolster the China-Africa Development Fund by $1 billion (bringing it to $5 billion) and cancel debt owed by highly indebted countries with which China has diplomatic relations. 
Yes, Wen Jiabao said that China would provide $10 billion in low-interest loans to African countries between 2010 and 2012 (not 2013). This pledge was made at the November 2009 FOCAC; these pledges go on three year cycles. Some of these loans will be "concessional" (you hui dai kuan) and some will be preferential export credits (you hui mai fan xin dai). Technically, only the former would qualify as official development assistance by the OECD's guidelines. Even if they all were to be counted as "aid", this would amount, on average, to $3.3 billion per year, divided among the 49 or so countries with which China has diplomatic ties, or an average of about $67 million per country, per year.

On the other hand, the China Africa Development Fund, which has been capitalized with $1 billion, and which is now scheduled to raise its second billion (it will only reach $5 billion at full maturity, at some distant point), is not aid, but investment: equity finance in support of FDI (foreign direct investment) by Chinese firms.

Finally, the debt to be canceled is not all debt, but, as stated by the Chinese, overdue debt from zero-interest loans, a modest portion of China's aid. It's important to get that right, as borrowers reading The Economist may believe that China is going to cancel all their debts, including concessional loans and commercial debts. No way. 

(3) Spinning Without Evidence: The article suggests, without any evidence, that some of the infrastructure projects financed by Chinese aid were done in support of China's resource extraction goals. And it states, falsely, that China has "modernized the port" of Dar es Salaam:
Many of its aid projects help build infrastructure that benefits Chinese investment. It has helped rebuild the Tanzam railway, for example, linking Zambia’s copper belt, where China has large projects, and Dar-es-Salaam, where it has modernised the port. The white paper seeks to counter Western views that much of its aid goes to feed its appetite for oil and minerals. It says only 8.9% of concessional loans have been used to support the extraction of such resources. But it gives no details. Much of the 61% of loans for transport, communications and power may also help mining efforts.
By not being transparent about their aid, the Chinese government leaves themselves open to this kind of accusation. However, my own database supports the claim that China's aid is not distributed in support of Chinese resource extraction projects (these are mainly financed directly by the companies, with a few exceptions as in the Congo Sicomines project, which is financed by non-concessional loans from China Eximbank).

So what about the two examples mentioned by The Economist?

The idea that the iconic Tanzam railway -- built as a Maoist project in the 1960s-1970s to allow Zambia's exports to bypass apartheid controlled South Africa -- was rebuilt to serve China's resource interests is probably not the case. The expensive railway has been continuously supported by Chinese aid (the World Bank has also financed some Tazara modernization) for the past 35 years during which it transported the region's resources to Europe. Now they are going to China. But using aid to support the Tanzam railway all these years has been far more about politics and China's soft power than it has been about resource extraction.

Furthermore, the statement that China has "modernized" Tanzania's port with its aid dollars in order to extract resources seems to be false. The bottom line is that China has not (yet) financed any construction at the port. The Tanzania Port Authority reported in June 2011 that it was still in discussions with the Chinese government in the hope that it would finance the $523 million cost of constructing two new container berths (#13 and #14), probably on a Build Operate Transfer (BOT) basis using a public private partnership (PPP) arrangement, as recommended by the World Bank.

If China does finance this construction, is it likely to use a concessional loan to do so? Possibly. In January 2010 the Chinese offered Tanzania a line of concessional credit for $180 million to be used in a number of projects over three years, with discussion ongoing on finance for other projects (including the port). Chinese companies are interested in getting the contract to build this project, but if it is to be financed by a Chinese bank -- no sure thing -- I predict it will be on commercial lines, BOT, and with a commercial profit in mind -- and not aid. 

The Economist suggests that the Chinese are blurring the boundaries between aid and investment. I don't see that, but what I do see is that they have a lot more instruments for promoting development than our governments do. We need to move away from the narrow pattern of thinking that our "help" for African development can only come in the form of aid.


David Zetland said...

Thanks for the fact checking. You should (if you haven't already) write a letter to the Economist. Next time, they will check with you before going to print (they HATE to be wrong :)

Jinghao Lu said...

Dr. Brautigam I really enjoy reading your blog articles!

Galwa said...

I literally laughed out loud after reading the economist article and came here immediately. They just keep recycling the same old propaganda narrative again and again no matter how many times Prof. Brautigam has pointed them out.

Raphael said...

Dear Prof Brautigam,
In your contribution for the African Bank of Development ("China, Africa, and the Global Aid Architecture"), you mentioned two facts that might seem contradictory: you say that credits for resources-backed infrastructures projects do not qualify as ODA in the chinese definition, and you say that loans for investments in joint ventures are part of chinese ODA. In the case of projects where chinese oil or mining companies form a joint-venture with a local african company to gain a preferential access to resources, you say that this cannot be part of chinese aid program either, because it does not involve concessional loans, but only commercial loans. But is it to say that the possibility of using ODA to form joint ventures is never used in that case?
Put in other words, I was wondering whether there couldn't be a few cases where chinese ODA used to foster joint ventures between chinese oil or mining companies and local african companies were used in a broader resources-backed infrastructure project (which by itself doesn't qualify as ODA as you mentioned in your paper, hence the contradiction). And if it is never the case, are there official guidelines excluding this practice? Are there publicly available documents expressing rules forbidding this practice?

Thank you very much

Deborah Brautigam said...

@Raphael -- The Chinese have a budget for external assistance, and they have specific instruments that are used to channel that external assistance money. I don't think there is an actual rule that says that a loan financed by the external assistance budget cannot be secured with resources -- I've seen some indication that in at least one case, for a concessional loan. However, the instrument used in places like the DRC or Angola for the large resource-infrastructure packages is not a foreign aid loan, i.e. it is not subsidized by the external assistance budget. As you put it, "These resources-backed infrastructures projects do not qualify as ODA in the chinese definition." However, the Chinese have since at least 1993 provided foreign aid for joint ventures. This was originally from a fund that was filled by receipts from repayments of zero-interest foreign aid loans. But this fund was very small. You ask about the case of a joint venture that obtains preferential access to oil or a mining concession. The DRC is a good example of this. However, because these projects are expected to be quite profitable (and the DRC project was guaranteed to return at least 19%), the Chinese generally wouldn't see any reason to use their limited foreign aid funds to subsidize them. That's not to say that they haven't used foreign aid loans for mining or oil projects, particularly in the past. They developed Kiwira coal mine for Tanzania with foreign aid in the 1980s but this wasn't a joint venture. They also financed some of the exploration of their oil joint venture in Sudan in the 1990s with a concessional loan($18 million).

Raphaël said...

Thank you for your reply. Your studies are really helpful in analyzing the facts and the methods to be employed in estimating chinese aid, a big thank you!

Liberty said...

Dear Deborah,

Thanks for all your excellent articles and The Dragon's Gift - my understanding of Chinese involvement in Africa has been significantly improved. However, regarding this article I wanted to question one comment on the Sicomines deal in DRC. You say "the Congo Sicomines project, which is financed by non-concessional loans from China Eximbank"

However, SAIIA Johanna Jansson's detailed paper on the Sicomines deal(http://www.saiia.org.za/occasional-papers/the-sicomines-agreement-change-and-continuity-in-the-democratic-republic-of-congo-s-international-relations.html) implies that the final version of the deal does comply with OECD-DAC ODA definitions:

pg. 12
The OECD–DAC classifies a loan to a developing country as official development assistance (ODA) if it is: provided by official agencies, including state and local governments, or by their executive agencies; ... is administered with the promotion of the economic development and welfare of developing countries as its main objective; and ... is concessional in character and conveys a grant element of at least 25 per cent. The loans extended by means of the Sicomines agreement are provided by China Exim Bank, which is owned by the Chinese government and thus to be seen as an official agency. The credit line’s main objective is to finance post-conflict reconstruction in the form of
infrastructure construction and refurbishment, which is to be considered promotion of economic development. The third and last element of OECD–DAC’s ODA definition is the grant element. This is a way to calculate that the cost for the loan is low enough – that it is concessional.38 The loan conditions provided in the original 2008 agreement did not meet the requirements for concessionality. However, in the revised 2009 version, the interest rate for the infrastructure loans was reduced from 6.6% to 4.4%.39 Currently, the grant element is estimated by the IMF and the World Bank to be at least 42%, which far exceeds the 25% minimum level required by OECD–DAC.40 This means that in its revised form, the loans extended under the Sicomines framework comply with the OECD–DAC’s
definition of ODA.

Could you comment further on this difference? I would be very interested to hear your thoughts.