Foreign aid has been the preserve of a group of rich and high-income countries. The Paris Club or the OECD group of countries have dominated aid disbursement to different parts of the world. Barring Japan and South Korea, there are hardly any other Asian economies figuring among large donors. This scenario, however, might change remarkably over the next few decades. While the financial crisis has damaged the abilities of several OECD economies to extend aid, the rise of China and India as major donors has changed the geo-political composition of the global aid club. The club now not only has a larger Asian presence but also greater representation of developing and emerging markets.
How big are China?s and India?s aid programmes? Estimates by different agencies indicate China?s aid to low-income countries to be as much as $25 billion. There are conceptual issues regarding this aid though. The conventional OECD description of Official Development Assistance (ODA) classifies it as concessional financial flows to low-income and developing countries with at least 25% as grant. The ODA is targeted at reducing poverty or achieving specific development outcomes such as humanitarian or debt relief. A large part of Chinese aid does not classify as ODA in this respect. Similarly, several parts of India?s development assistance, which is currently estimated at more than $13 billion per year, will also not be ODA by these norms.
Due to measurement issues, Chinese aid has remained largely unexplained to Western donors and aid agencies. The estimated size of China?s aid programme, as mentioned earlier, is at best rough and not officially verified. The aid has three major features. First, it is heavily focused on infrastructure development and natural resource extraction activities in recipient countries.
Second, a lot of the flows are investments through state-owned Chinese firms in projects being managed by these firms. Third, the aid flows have close links with China?s economic interests.
Among all Paris Club donors, only Japan?s ODA programmes have some similarity with those of China?s in terms of emphasis on infrastructure and linkages to host country interests. But even then Chinese development assistance is distinct in terms of the role of state-sponsored investments. These investments are particularly noticeable in different Chinese projects in Latin America (eg, Chile, Venezuela, Columbia, Costa Rica) and Southeast Asia (eg, Vietnam and Myanmar). Examples are available from Africa as well (Congo, Ethiopia, Nigeria and Zambia) though the bulk of development assistance from China in Africa comprises concessional loans. The donor country interests in aid programmes are evident from emphasis on projects aiming to increase Chinese access to mineral and energy resources.
India?s foreign aid and development assistance also has a significant component that does not qualify as ODA in OECD terms. This is the credit lines that are extended by the government of India through the Exim Bank of India to different developing countries. There are 132 functional credit lines at present, covering a large number of countries in Latin America (Columbia, Ecuador, Peru, Venezuela) Africa (Ghana, Mozambique, Seychelles, Sudan, Zambia), Southeast Asia (Myanmar, Laos, Cambodia), South Asia (Afghanistan, Sri Lanka, Nepal) Middle East (Iran, Syria) and the CIS countries (Uzbekistan, Russia). India?s total credit lines to different parts of the world has increased to around $8 billion from just about $0.5 billion at the end of last decade. These credit lines are concessional loans extended to specific projects with a built-in grant element enabling import of goods and services from India on deferred payment terms. The donor country interests are preserved with the bulk of imports for the projects needing to be sourced from India.
As China and India become even larger economies and bigger strategic entities, aid will become an increasingly important instrument for enhancing both of their diplomatic and strategic leverages. The possibility of both countries competing with each other in this domain cannot be overruled. But notwithstanding such competition, Chinese and Indian development assistances are likely to alter conventional views and ideas of foreign aid substantively. Indeed, a new category of development assistance that would typically be the emerging market variety and considerably different from aid extended by the Paris Club is expected to become popular. This will be development assistance defined more closely by home-country interests and with a view to expanding strategic and economic interests. It is also noticeable that Chinese and Indian development assistances flow with much less conditionalities and wider end-use possibilities than Paris club aid. As the latter take hard looks at their ability to aid following the financial crisis, China and India, with more growth, surplus, and flexibilities, can fill up greater space in the global aid domain.
The author is a visiting senior research fellow at the Institute of South Asian Studies in the National University of Singapore. These are his personal views