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Working Paper Series
Assessment of Effectiveness of China Aid in Financing Development in Sudan
By Samia Satti Osman Mohamed Nour
United Nations University – Maastricht Economic and social Research and training centre on Innovation and Technology
Keizer Karelplein 19, 6211 TC Maastricht, The Netherlands
Tel: (31) (43) 388 4400, Fax: (31) (43) 388 4499, email: firstname.lastname@example.org, URL: http://www.merit.unu.edu UNU-MERIT Working Papers ISSN 1871-9872 Maastricht Economic and social Research and training centre on Innovation and Technology, UNU-MERIT UNU-MERIT Working Papers intend to disseminate preliminary results of research carried out at the Centre to stimulate discussion on the issues raised.
Assessment of Effectiveness of China Aid in Financing Development in Sudan By Dr. Samai Satti Osman Mohamed Nour1 (January 2011) Abstract This paper fills the gap in the Sudanese literature and discusses the effectiveness of Chinese aid for financing development in Sudan using new primary data at the micro level. We find that the share of China in total loans and grants offered to Sudan greatly increased from 17% in 1999 to 73% in 2007 out of total loans and grants offered to Sudan. We find that Chinese aid and loans to Sudan caused mixed positive-negative impacts. The positive impact is providing alternative complementary sources of finance to complement domestic capital and financing development projects. The negative impact is increasing Sudan debts to China from 0.9% in 1999 to 13.45% in 2007 out of Sudan total debts. We find that the effectiveness of Chinese aid to Sudan is undermined by offering aid tied to trade, FDI and importance of oil to Chinese economy. We explain that despite the recent global economic crisis China has maintained offering tied aid to maintain its access to oil in Sudan. We find that despite a long period of economic sanctions, Sudan was able to grow thanks to the robust and increasing intensification of special economic relations with China which relaxed the development finance constraint. From the perspective of the new approaches to financing development our findings imply that even when a country is facing binding political and economic sanctions, it can still be able to finance a high growth strategy if it is endowed with natural resources and a partner that is in need for such resources.
Keywords: Financing Development, aid effectiveness, China, Sudan.
JEL classification: F30, F34, F35, O10 Corresponding Author: Dr. Samia Satti Osman Mohamed Nour, Visiting Research Fellow – University of Maastricht, School of Business and Economics, UNU-MERIT, Keizer Karelplein 19, 6211 TC Maastricht the Netherlands; and Assistant Professor of
Economics- Economics Department, Faculty of Economic and Social Studies, Khartoum University, Khartoum, Sudan. E-mail:
email@example.com, firstname.lastname@example.org. This paper is based on the Author’s research project in cooperation with AERC Collaborative Research Project on China–Africa Aid Relation. The first draft of this paper was originally prepared for the Arab Planning Institute (API) Tenth International Conference on “Recent Trends in Financing Development” April 11-13, 2011, Beirut, Lebanon. The author gratefully acknowledges AERC for research grant. The author gratefully thanks Prof. Ali Abdel Gadir Ali and anonymous referee(s) for good comments on earlier draft of this paper. All the usual disclaimers apply.
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Following the declaration of the United Nations Millennium Development Goals (MDGs) in September 2000, there is increasing interest in the international community to enhance the old and new means for financing for development. For instance, both the United Nations International Conference on Financing for Development (Monterrey, Mexico, 2002) and the follow-up International Conference to "review the implementation of the Monterrey Consensus" (Doha, Qatar, 2008) confirm the main concern of the international community to issues of financing for development. In particular, the Doha Declaration on Financing for Development reaffirmed that "mobilizing financial resources for development and the effective use of all these resources are central" to the achievement of internationally agreed development goals, including the MDGs. It confirms the importance of both domestic resources and development strategies and also foreign resources flows, both private and public, in financing development in developing countries. In the context of national development strategies aiming at effecting development the most important topics regarding sources for financing development in developing countries include for example, Mobilization of Domestic Resources, Foreign Direct Investment (FDI), and other private flows, Financial Markets, Official Development Assistance and External Debts. The importance of financing development is also confirmed with the new challenges including the effect of the 2008 international financial crisis on the development finance sources, the additional costs imposed by the increasing concerns about climate change, the increased volatility in the prices of primary commodities, the additional resource needs of countries emerging out of conflict, and the increasingly recognized special needs of middleincome countries.
In the Arab region, the Arab leaders in the Kuwait Declaration (2009) confirm a high priority accorded to development finance issues. Financing development in the Arab countries depend on foreign direct investment, official development assistance and aid. Notably, Sudan's economy has relied heavily on a large influx of foreign aid.
This paper is motivated by the recent debate in the international literature on recent increasing challenges confronting financing development and also by the observation that the extremely rapid and sustained expansion of the giant economy of China has been associated with a robust and increasing intensification of its economic relations with Sudan, and that these relationships are in turn imply both opportunities and challenges for financing development in Sudan. In particular, despite a long period of economic sanctions, but Sudan was able to grow thanks to special economic relations with China which relaxed the development finance constraint in Sudan.
Starting with the general overview of Sudan economy, one stylised fact on Sudan economy is that since long Sudan has been among the least developed, poor, low income and Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 2 _______________________________________________________________________________________________________
highly indebted countries according to World Bank classification. The implementation of economic reform policies in the late 1990s and the exportation of oil since 1999 together lead to significant improvements in most macroeconomic indicators and impressive real economic growth and rapid increase in per capita income. According to the World Bank (2008) Sudan is one of the newest significant oil producing countries in the World; Sudan is the third largest oil producers in Sub Saharan Africa (SSA) behind Nigeria and Angola. In recent years, the structure of Sudan economy has shifted over time, from predominantly reliant on agriculture for growth and exports, to its current reliance on the oil sector (WB, 2008), Sudan's real economic growth averaged about 9% during (2005-2006), putting Sudan among the fastest growing economies in Africa (WB, 2008). Consequently, following the improvement in the economic performance, Sudan turned from a low income economy into a lower medium income economy according to the World Bank classification.
Despite the increasing dependence on the wealth from oil but like most other poor developing countries, Sudan has relied heavily on a large influx of foreign aid from different sources, Sudan is among the top ten recipients of gross Official Development Assistance (ODA) over the period (1990-2007)- see Figures 1-2 below. Since long, there is a significant amount of foreign aid to Sudan from different sources including U.S., EU (e.g. the Netherlands, Italy and Germany), Arab countries (e.g. Saudi Arabia, Kuwait and United Arab Emirates), China, the World Bank, International Monetary Fund, United Nations, Arab Fund for Economic and Social Development and Organization of Petroleum Exporting Countries. Since 1970s, China also started to offer aid and development assistance to Sudan. During the late 1970s and 1980s the large inflow of foreign aid to Sudan was mainly offered by the International Monetary Fund and the World Bank. Since the mid- 1990s, following the large drop in the inflow of foreign aid from the traditional western donors, Sudan looked for other alternative sources of foreign aid and development assistance from the emerging donors, mainly China. This policy is incidentally consistent with China's increasing economic interests in Sudan as a new resources - oil -rich economy. Consequently, in the last two decades, China has increased foreign aid and development assistance to Sudan and some other resources-rich developing countries. China aid to Sudan as in many other resource-rich developing countries is essentially motivated and intended to accomplish broader strategic objectives and achieve mutual interests. In Sudan, for example, China accounted for 58% of total contracted loans and grants over the period (2005see Table 1 below.
Figure 1- Top Ten Recipients of Gross Official Figure 2- Official development assistance (ODA) and Development Assistance (ODA) (USD Million) (2006) official aid offered to Sudan (1990-2007) (current in US$) Source: Adapted from OECD, DAC 2006, Source: Adapted from the World Bank-World www.oecd.org/dac Development Indicators Database WDI) (April 2009 Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 3 _______________________________________________________________________________________________________
Based on the above the aims of this paper is two-folds first to examine the importance of Chinese aid, development assistance, loans and grants offered to support financing development in Sudan over the period (1997-2007). And second to assess the impacts and effectiveness of China aid, development assistance, loans and grants in financing development in Sudan over the period (1997-2007). This paper aims to examine two stylised facts: first the importance of Chinese aid, development assistance, loans and grants in financing development in Sudan (1997-2007), second the mixed positive-negative impacts of Chinese aid, loan and grant to Sudan (1997-2007) as China aid to Sudan is tied to trade, FDI and importance of oil to Chinese economy. For the case of Sudan, it is interesting to note that Sudan was under economic and political sanctions for a fairly long period, yet it was able to grow thanks to special economic relations with China which relaxed the development finance constraint.
Based on the above, the rest of this paper is organized in the following way: section 1 presents introduction, objectives and structure; section 2 gives background and context of the paper; section 3 provides the conceptual framework and literature review; section 4 shows research methodology; section 5 discusses the results; and finally section 6 provides the conclusion and policy recommendations.
2. Background and Context of the Research Based on the above and before assessing the impacts of Chinese aid to Sudan it will be useful to explain the trend, distribution and composition of Chinese aid to Sudan.
We find that over the period (1999-2007) loans and grants were offered by several international institutions and donor countries including China. According to the Central Bank of Sudan annual reports (2003-2005) the share of China constituted 8.75%, 6.1%, and 75.9% out of the total loans contracted in 2003, 2004 and 2005 respectively. The significant investment of China in oil sector in Sudan motivated China to increase its involvement in financing development to Sudan economy over the period (1997-2009). For instance, we notice the significant and rising share of China in total loans and grants to Sudan from 33% to 45% and 58% during the periods (2002-2007), (2004-2007) and (2005-2007) respectively. Notably, the share of China in total foreign loans and grants offered to Sudan shows a declining trend over the period (1999-2004) from 17% in 1999 to 7%, 8% and 7% in 2002, 2003 and 2004 respectively, but it is rapidly increased to 76% in 2005, it is declined to 24% in 2006 but it is increased to 73% in 2007 and it is declined to 3.35% in 2008 and increased to 27.44% in 2009- see Table 1 below.
One possible interpretation of this changing trend is that the rapid increase in the share of China in total foreign loans and grants to Sudan in 2005 and 2007 is probably attributed to China’s consistent policy to increase international involvement by increasing aid, investment and trade with developing countries such as Sudan. Another explanation is that the implementation of peace agreement accord in 2005 probably encouraged China to offer more loans and grants to Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 4 _______________________________________________________________________________________________________