China tops new donor list as poorer countries enter 'age of choice' in development finance

In a rapidly growing donor environment, China has become the biggest nontraditional donor at the country level to some of the world's poorest countries over the last few years, according to a report released by the Overseas Development Institute. Photo by: SW1994

China is now the biggest nontraditional donor at the country level to some of the world’s poorest states, according to a recent report by the Overseas Development Institute that studied nine countries of low and middle income.

The East Asian nation accounted for more than half of the nontraditional financing, or what the report dubs “beyond ODA flows,” in countries including Laos, Ethiopia and Zambia. China also accounted for 70 percent of BOF — which includes grants and concessional loans, other official flows from bilateral and multilateral donors, and sovereign bonds, among others — in Cambodia and Ghana.

“We found that China accounted for an overwhelming share of new development finance load at the country level.” Romilly Greenhill, team leader for development finance at ODI, told Devex.  “The landscape is indeed changing quite dramatically.”

This growth in new development finance spearheaded by China has opened up a series of new monetary options for developing countries to finance their development strategies — especially following the adoption of the Sustainable Development Goals in September 2015. From 2003 to 2012 alone, global external development finance levels have more than doubled, from $122 billion to $269 billion. BOFs accounted for around 45 percent ($120 billion) of this, according to the report.

The report authors dubbed this new environment the “age of choice” for development finance for developing countries. “The new development landscape is actually changing the negotiating power of developing countries,” Greenhill said. “[They] are now in a stronger position when it comes to engaging some of the traditional as well as the newer aid donors.”

Chinese flows

China has emerged as a major donor over the last decade. In Africa, China’s ODA-like aid has grown almost four times, from $628 million in 2002 to $3.1 billion in 2012, according to ODI. Other official flows from China to Africa grew by more than 700 percent, from $349 million in 2003 to $2.9 billion in 2012.

Greenhill said China’s rise as a donor traces to the country’s “strong interest in building economic and also political links with a large number of countries.”

“What we found very interesting about China is that context seems to heavily determine the amount of support that you get from China … political relationships with China becomes very important,” she said, citing the example of Vietnam, which has had a difficult historical relationship with the East Asian nation. The Southeast Asian country got the lowest inflow of  development finance from China among the countries in the study. Senegal offers another case study, as the country didn’t recognize the One-China Policy until 2005.

Developing countries’ demands have also changed, Greenhill said. “[Countries] wanted sources of finance that are aligned with their strategies, but they also wanted finance that was fast and they wanted providers of finance to act quickly and to get the money quickly. China scored very well on those metrics.”

But that speed raises some red flags in the development community. China tends not to adhere to the same aid protocols and procedures used by traditional donors, and the quality of assistance may be lower as a result. Greenhill said the ODI survey, which she co-authored, observed that “traditional aid effectiveness processes … are really reducing.”

“There’s not much interest in those processes so I think there’s a real danger that the dialogue about aid effectiveness is no longer so current, and there really needs to be a kind of rejuvenation of that dialogue at the country level,” she said.

Capitalizing on the new ‘age of choice’

Clarity by both donors and recipient countries will be key in the “age of choice,” Greenhill said. The report argues that it is important for developing countries to know what they want and understand where their priorities lie. Some countries in the survey didn’t have a full understanding of their development finance flows, including where they were coming from and where they go.

“[There is a need for] much better understanding by countries of what they are receiving but also more transparency on the part of providers in terms of what they’re providing,” she said.

The report urges developing countries to take advantage of the age of choice with better data monitoring. They could also improve negotiating tactics in order to leverage the opportunity of having more options among donors, the report said.

Donors also need to adapt, the report argues. ODI suggests five pointers: remember that ODA still matters; support countries’ own strategies and policies and do it quickly; respond to developing country priorities; understand smaller flows of philanthropic finance; and remember to consider debt management.

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About the author

  • Lean 2

    Lean Alfred Santos

    Lean Alfred Santos is a former Devex development reporter focusing on the development community in Asia-Pacific, including major players such as the Asian Development Bank and the Asian Infrastructure Investment Bank. He previously covered Philippine and international business and economic news, sports and politics.