Chinese Aid and Local Corruption - Isaksson and Kotsadam (2018) Flashcards
how much leakage is there in foreign aid?
5-15% of world bank aid (average 7.5%) is diverted to financial havens (Andersen et. al 2022)
in the same quarter that the world bank disperses a large loan to a certain country, spikes of financial flows to tax havens
- no similar spikes to non-tax havens
represents the lower bound of how much is diverted
seems like the poorest countries tend to get the largest share of aid in terms of GDP so fewest checks in money flowing to tax havens
critical perspective of foreign aid conditionality
neo-colonialism?
foreign aid donors attach conditions to programs that are administratively onerous and put pressure on governments to implement far-reaching and unpopular economic reforms
world bank audits can improve project quality/safety and reduce funding leakage (corruption) but are also associated with extended project construction delays
- different tradeoffs
rise of Chinese foreign aid
emerged in the past two decades as a new source for African countries
in some ways, very similar to aid from traditional donors
- large-scale funding for infrastructure projects
major differences
- well-publicised lack of conditionality related to local democratic norms, environmental protections and anti-corruption policies
- non-interference in local affairs
- also less generous (market-rate loans as commercial funding as opposed to interest-free loans)
- secretive allocation
Chinese aid and corruption
if aid goes in unconditionally, does it lead to more corruption or exacerbate local governance measures?
can interaction with foreign firms and officials who are corrupt lower anti-corruption efforts by normalising them?
China ranks far lower than most other major donors on corruption perceptions
estimating aid impacts on corruption
estimating the effect of local foreign assistance projects on individual reports of bribe payments across 29 African countries in 2000-2012
use AidData databse to make up for the lack of official statistics to track Chinese foreign aid projects
- location of foreign aid projects tend to be scattered around SSA and even NA
measuring corruption in Afrobarometer
survey evidence indicates that a large proportion of Africans personally paid a bribe to a local official in the last year
- 13% to the police and 14% for a permit
wide range of bribes across countries (just to obtain public services sometimes)
- average of countries is about 20%
- rates of corruption and bribery are very high and variable across countries
presence of a foreign aid project and local corruption levels
28% of the sample is located either near an ongoing Chinese aid project or one that will start soon
- good share of the population coming into contact with projects
19% of respondents live within 50km of an active Chinese funded project
9% live in an inactive area which is a project that is being set up but hasn’t been launched yet
what econometric method do Isaksson and Kotsadam use?
DD analysis
main finding
people living near active Chinese foreign aid projects report paying more bribes to local government officials in the last year, with an average increase of 15 to 32%
strong statistical evidence that after these types of foreign aid projects go in, local corruption gets worse
- the longer the project goes on, the more corrosive it is for local corruption norms and the larger the negative effects
does this Chinese aid (even with associated corruption) still pay off in terms of greater local economic activity?
data limitation: no official local statistics in most African countries but use night lights as a proxy measure
difference is small and not significant
comparisons of findings with World Bank aid
small differences of maybe 1% in corruption similar to Chinese aid when World Bank projects go in
- not statistically significant
big difference for night lights
- big increase of illumination for the world bank (0.205 significant at 99% confidence)
traditional donors don’t do much to bribery but improve economic activity as opposed to Chinese aid donors where local economic activity isn’t really improved
differences in locations for funding in World Bank vs. Chinese aid
places where World Bank aid goes tend to have below average night lights
- go to areas with less economic growth and fund poorer areas
Chinese aid projects tend to go to areas that have more economic activity
- going to richer countries
- more like an FDI transaction
implications of findings for conditionality
might not be so bad
- constrain local corruption
- lead to projects that generate more positive effects on local economic activity
