China’s Foreign Aid and Sustainable Growth of Recipient Countries: Mechanism and Evaluation

Abstract

Since the beginning of the 21st century, emerging donors have developed a suite of aid innovations that play a significant role in the international financing arrangements of recipient countries. Using the OECD Creditor Reporting System (CRS) aid classification to categorize China’s foreign aid by sector, this paper examines the impact of China’s foreign aid on the economic growth of 121 recipient countries from 2000 to 2017. Our findings indicate that (1) the relationship between China’s foreign aid and recipient countries’ economic growth is “U-shaped”, with a threshold effect and primarily due to growth aid; (2) the relationship between recipient countries’ economic growth and their dependence on China’s foreign aid is “inverted U-shaped”, in both growth aid and welfare aid; (3) there is discernible regional heterogeneity in the economic impact of China’s foreign aid, and the impact may be underestimated if the endogeneity problem is not taken into account; and (4) China’s foreign aid, especially growth aid, promotes the economic growth of recipient countries through factor mobility, foreign direct investment (FDI), and international trade.