Aid Curse With Chinese Characteristics? Chinese Development Flows and Economic Reforms

The emergence of China as a major development partner requires a reassessment of traditional donor-recipient dynamics. In addition to using new rhetoric like “South-South cooperation” or “Win-Win”, China has also eschewed classifications and practices of the traditional donors of the Organization for Economic Cooperation and Development's (OECD) Donor Assistance Committee (DAC). Yet this “new approach” and willful ignorance is unlikely to spare China from the same issues confronted by traditional donors. In this paper, we consider the extent to which Chinese development efforts may disincentivize difficult economic reforms by providing recipient governments with a budgetary cushion. Using panel data covering 122 countries during 2000-2014 period, we find that the presence and persistence of Chinese development aid inhibits broader economic policy reforms, after addressing endogeneity concerns using instrumental variable approach. These findings are robust to a number of alternative specifications, data, instruments and approaches and are suggestive of an institutional aid curse “with Chinese characteristics” as insidious as that which has plagued some traditional donor-recipient relationships