China’s no-strings, easy-access development loans are giving developing countries an alternative to Western aid, but at what price?
A CENTURY ago, they were part of the Red Menace. Political winds have since shifted and now China is welcomed by the developing world for doing the same thing that she has claimed to be doing since the Cold War: helping the world’s poor nations become prosperous.
China has been providing some form of foreign aid since the mid-1950s. Communist Party of China Chairman Mao Zedong believed that as poor as China was, she “should take the responsibility of helping those in need, those smaller and powerless nations.”
On its face, the International Development Research Center says in a 2007 report, foreign aid was a way for China to help other post-colonial nations become self-reliant and was usually given in the form of technical assistance and agricultural aid programs. But giving foreign aid also served political ends. Foreign aid gave China a way to promote communism and maneuver for political recognition against the Kuomintang government in Taiwan.
The Cold War has been over for decades and most of the world meaning Beijing when they say China. So, where does that put Chinese foreign aid? At the forefront of global development, it turns out.
A paper released in 2009 by the US Congressional Research Service (CRS) shows Chinese aid to Africa, Latin America, and Southeast Asia grew from US$1.5 billion in 2000 to US$25 billion in 2007.
Africa has received the largest year-on-year increase of development aid but the CRS says China is now one of the biggest bilateral donors in Southeast Asia, dwarfing traditional aid agencies like the World Bank and Asian Development Bank.
Where the WB and ADB could only offer loans of US$200 million each for infrastructure projects in the Philippines, China promised US$2 billion a year from 2007 to 2009. This made even Japan—historically the biggest source of aid to the Philippine—with its offer to lend US$1 billion seem stingy.
Aside from the large amounts that China is willing to invest in developing countries, what makes Chinese aid so appealing is the ease with which it can be had. According to non-government organization Official Development Assistance Watch-Philippines (ODA Watch), Chinese aid does not come with the strings that IMF and ADB loans do.
Recipient nations often have to lobby and show funding agencies that they have the social and political institutions in place to put the loan to good use. Loans also usually comes with recommendations to tinker with a recipient nation’s economic and social policies. From curbing corruption to rethinking economic laws considered protectionist, the strings that come with loans from traditional sources.
Chinese aid projects simply have to conform with the Eight Principles set by China Premier Zhou Enlai in 1964, one of which expressly states that China “never attaches any conditions or asks for any privileges.” Projects must require low investments and high returns, and must lead towards the beneficiary country’s self reliance, and Chinese advisors who come over should be able to live according to the local standard of the recipient country.
For borrowing countries with weak institutions and struggling with issues like corruption and instability, China’s stated policy of non-interference in internal affairs is good news. China is helping countries like Myanmar (Burma), Cambodia,and Laos on infrastructure and energy projects. North Korea and Iran, states that the Western world has been treating as pariahs, also have development agreements with China.
The Philippines has also been getting a lot of help from Beijing. ODA Watch says China President Hu Jintao came to Manila in 2005 to pledge an investment of US$1.1 billion in the country, US$950 million of which would go into a nickel mining plant. Projects like the North Luzon Railway Project (Northrail) and the scuttled National Broadband Network (NBN) were paid for with Chinese development aid.
With Japanese ODA to the Philippines dwindling, ODA Watch says China will soon become the country’s primary source of development aid. The stalled Northrail project is reportedly the biggest Chinese project in Southeast Asia and with two-way trade with China expected to hit US$30 billion this year, it is no wonder that the Arroyo Administration repeatedly hailed China as our big brother in the region.
The bulk of Chinese aid, the IDRC says, goes to infrastructure projects like railroads, power plants, and power lines. This not only means development for borrowing countries like the Philippines but also jobs and money to the communities near the project site. Military aid will also contribute to security and stability, making the Philippines more attractive to investors and tourists.
No Free Lunch
Although Beijing does not require recipient countries to embrace Chinese socialism, the aid packages that China has been giving out do carry conditions that affect how these countries operate.
One vital and non-negotiable requirement is keeping the ‘One China Policy.’ ODA Watch says China will not give aid to countries that officially recognize Taiwan, all 23 of them. Many countries have been able to skirt this by maintaining Taipei Economic Cooperation Offices as a back door link to Taiwan but a rise in foreign aid from Beijing especially to Africa could mean Taipei will have to keep lobbying for a seat at the United Nations. China is also courting votes to deny Japan a seat on the UN Security Council, the ODA Watch report says.
A condition that hits closer to home is a requirement at least half of the materials and equipment used in projects that China pays for comes from China and that the contractor for the project should be a Chinese company. As a safeguard against graft and to keep money within the Chinese economy, China could even pay the Chinese contractor directly,leaving the recipient country out of the loop.
The requirement that China-funded projects should be awarded to Chinese contractors could also wreak havoc on the Philippine government’s bidding process. The NBN project awarded to Chinese telecommunications firm ZTE was eventually abandoned in 2007 after a Filipino bidder who submitted a lower price for the project alleged ZTE got the project through bribery. Allegations of overpricing and other irregularities have also been hurled at Northrail and the US$1-billion Laiban dam project.
Chinese foreign aid is part of China’s “Go Out” development policy. That is, go out and develop investments and markets overseas. That means it’s in China’s interests to make the Philippines grow as a market. That also means it’s in China’s interests to develop investments that will take advantage of Philippine natural resources. Chinese joint ventures in mining, the exploration for, and the extraction of oil and natural gas have given environmental and nationalist groups reason to worry.
In 2008, a Philippine-China joint venture in the disputed Spratly islands raised concerns that the Philippines was selling off its sovereignty. A charge that lawyer Harry Roque has also raised in 2008 over a Memorandum of Understanding that China’s ZTE allegedly signed with the Philippine government on mining in Mt. Diwalwal in Compostela Valley. Roque said the agreement promised ZTE 90 percent of any gold mined there. Then Trade secretary Peter Favila, who signed on behalf of the Philippine government, said the MOU was non-binding and was still subject to negotiations.
ODA Watch also reports that some agricultural deals that the Philippines has signed with China sets aside 1.24 million ha of farmland to the Chinese. In a country that has agrarian reform enshrined in its constitution, giving land to foreigners could cause problems with landless peasants. The agreements also require the government to help Chinese investors reach a deal with local landowners and investors on future projects and joint ventures.
Aid from China has also been criticized for increasing the debt burden for Filipinos on projects of “questionable benefit.” ODA Watch cites the example of a US$465.5-million loan for a cyber-education project by the RP Department of Education. The project would have used satellite technology to beam learning materials to Philippine schools but critics said the government should focus on meeting a shortage of classrooms, school buildings, and teachers first.
It is inevitable that trade and aid between China and the other developing countries that she identifies with will increase in coming years. The West is caught up in its own problems, with the US struggling with the repercussions of a recession and the European Union trying to stave off a regional one, somebody has to step in where traditional sources of aid cannot. China’s projected rise to the world’s second-largest economy and its emphasis on soft power makes it the perfect candidate, flush with money and eager to help.
But although Chinese aid brings development and opportunity, borrowing countries like the Philippines have to consider whether the price of a free lunch is worth it.
(Published in the October 2010 issue of China Business Philippines)