The Impact of China's Official Development Finance on Other Developing Countries

Abstract

The paper uses a fixed effect model to detect the impact of China’s official development finance program. It shows that China’s official development finance has a positive effect on bilateral trade. Further, China’s official development finance has stronger effect on bilateral trade in democratic recipient countries than in autocratic ones. Likewise, it has stronger effect on bilateral trade in the least developed countries (LDCs) than in middle-income countries (MICs). The results of the paper make the argument for China to direct more official development finance to recipient countries with democratic attributes and at a low level of per capita income, assuming promoting bilateral trade is one of China’s policy objectives. The results of the paper have significant policy implications in international development, because assisting the least developed members with democratic attributes is both in China’s own interest and is broadly consistent with the view held by traditional donors and lenders.