The inclusiveness of China’s development finance: China’s hybrid approach to aid and poverty reduction in Africa

Abstract

Recent years have seen China emerging as a new donor outside of the West’s club of traditional donors, seeking to fill the financing gap for the Sustainable Development Goals (SDGs). The Chinese government has adopted a hybrid approach to international aid, in which it supplies trade credit and other types of loans to underdeveloped countries through its policy banks and state-owned enterprises in addition to traditional aid. As such a hybrid approach is considered more market-oriented than traditional donors, much of the literature on it has focused on its impact on economic growth rather than on social welfare and poverty reduction. It is critical to note, however, that in reality, the Chinese government has long-valued poverty reduction as a priority of the SDGs, regardless of the context of domestic governance or international aid. Therefore, this article used the panel data of African countries between 2000 and 2016 to test the relationship between China’s development finance and its corresponding poverty-reduction effect in Africa. Empirical results shown that China’s hybrid approach reduced poverty in Africa, particularly in poorer sub-Saharan countries and “heavily indebted poor countries.” Further, in a similar vein to China’s domestic inclusive-growth model, its poverty reduction in Africa tended to be achieved indirectly through production sectors rather than directly through the provision of social relief.