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«      Working Paper Series            #2011-005 Assessment of Effectiveness of China Aid in Financing Development in Sudan  ...»

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Sudan. Another justification is the increase of China involvement in oil sector in Sudan, China is the largest foreign investor in Sudan’s oil sector accounts for 48% of total investment in Sudan oil sector, it is Sudan's main trade partner, as 86% of total Sudan oil export is exported to China and this accounts for 10% of China oil imports, this implies that Sudan is major oil supplier to China. On the other hand, the declining trend in 2006 is probably due to the policy of China government to reduce loans and grants to developing countries such as Sudan. The great decline over the period (2007-2009) is probably related to the global economic and financial crisis that leads to drop in the inflow of foreign resources from foreign donors. We find that despite the global financial and economic crisis but China has reaffirmed its commitment to fulfill earlier commitments and to maintain further loans, aid and development assistance to Sudan, China is expected to continue commitment to a win-win policy and is likely to continue offering tied aid to Sudan to maintain strategic economic opportunities and interests of its engagement in Sudan and its access to oil.

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The robust and increasing intensification of China and Sudan economic relations appears from the trend and distribution of the large Chinese total financial aid, loans and grants that amounted to US$ 2488.6 million over the period (1970-2008). For instance, we observe the rapid increasing trend of China financial aid, loans and grants to Sudan from US$ 22.5 million to US$

66.8 million and finally US$ 2399.3 million over the periods (1970-1979), (1980-1989) and (1990-2008) respectively. Moreover, of total financial aid, loans and grants that amounted to US$2488.6 million the distribution is 1%, 3% and 96% for the periods (1970-1979), (1980-1989) and (1990-2008) respectively. This implies a rapid increasing trend of China financial aid, loans and grants to Sudan over the past 18 years, since the incidence of majority of financial aid, loans and grants to Sudan occurred over the period (1990-2008)- see Table 2 below. The composition of China total aid, loans and grants to Sudan over the period (1990-2008) implies that of total Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 5 _______________________________________________________________________________________________________

Chinese aid, loans and grants the share of grants, technical and commodity aid, loans without interest rates, preferential loans and commercial loans are as follows 2%, 3%, 5%, 3% and 87% respectively. This composition indicates that the commercial loans (87%) represent the majority of total Chinese funds offered to Sudan in the forms of aid, loans and grants over the period (1990-2008). These findings probably indicate that the composition of China- Sudan economic relations is by nature motivated by or based on mutual economic and commercial benefits and interests- see Table 3 below. For instance, until the end of 2008, China government offered Sudan commercial loans of total value equivalent to US$ 1649.1 million for financing implementation of several strategic projects such as petroleum, electricity, and irrigation.

Chinese policy implies that China government offers Sudan government commercial loans upon satisfaction of specific conditionality requirements. First, the projects should be implemented by the Chinese companies; second, the repayment period of the loans lasts for 4-10 years, determined according to the cost of finance that prevalent in the market, with the grace period last between one to five years, third the payment of insurance or guarantee fees that may reach 5% from the value of the loan, fourth, payment of advancement money that equal between 10%of the total loan value, and finally, for obtaining these loans Sudan government pay insurance or give guarantees from the Central Bank of Sudan and petroleum guarantees. We find that the sectoral distribution implies that over the period (1997-2008) China aid, development assistance, loans and grants are biased towards specific sectors, notably, electricity (43%), water and irrigation (26%), Merowe dam (15%), Khartoum refinery (9%), agriculture (3%), others sectors (3%) and roads and bridges (1%)- see Table 4 below. Direct allocation of Chinese aid to training and education sector is very limited, for instance, in addition to direct internal and external training to improve capacity building in Merowe dam, Chinese company "Harbin-Jilin" offered a grant equivalent to US$ 10 million to support Merowe technological faculty in June

2008. Moreover, China offers Sudan with four different kinds of technical assistance in the form of scholarship. For instance, the numbers of Chinese scholarships offered to post graduate Sudanese students to study in China are 42 and 76 in (1999-2004) and (1999-2009) respectively.

The distribution of these scholarships implies that over the period (1999-2004) the majority was offered for Ph.D. degree students (81%) and few was offered for M.Sc. degree students (19%).

Notably, the majority (93%) was offered for specialization fields of Engineering (40%), Science and related fields (53%) and finally few was offered for fields of specialization in Arts, Social Science and related fields (7%)- see Table 5 below.2 Table 2- China Government Total Financial Aid, Loans and Grants to Sudan Government (1970-2008 in million US$) Period (1970-2008) China Total Financial Aid, Loans and Grants Distribution of the share in total (%) 1970-1979 22.5 1% 1980-1989 66.8 3% 1990-2008 2.399.3 96% Total 1970-2008 2.488.6 100% Source: Sudan Ministry of Finance and National Economy (2008) - Unpublished Report (2008).

See unpublished information from Sudan Ministry of Higher Education and Scientific Research (2009) Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 6 _______________________________________________________________________________________________________

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We find that from the perspective of the new approaches to financing development the main criticisms of China aid policy are based on several stylised facts. First China aid policy towards Sudan includes little programme aid except for humanitarian aid and debt relief through China’s contribution to international organizations. China aid policy towards Sudan includes cancellation of China’s debts for Sudan, for instance, China exempted 62% of its loans without interest rates and some commercial loans on Sudan government until December 2000 and indicated exemption of 80% of Sudan's debt to China in 2007 protocol.4 This implies that China aid to Sudan mainly gives project aid although some of the aid is utilized for technical assistance and training and that China does not give assistance in the form of programme or budget support as prescribed in the Paris Declaration on Aid Effectiveness (Paris High-Level Forum, 2005). Second, China aid policy towards Sudan is based on giving aids with little political conditionality and without interference in allocation of aid this implies giving freedom to Sudan government to decide on allocation of China aid. Third China aid to Sudan has revealed preference for grandiose and prestigious projects and buildings (e.g. friendship hall and presidential palaces) that are perceived as unproductive investment that few traditional donors would be willing to finance.

Fourth, the lack of well defined and organized systematic monitoring framework to monitor performance of China aid policy in addition to weak institutional arrangements that mainly based on governmental institutions in Sudan and China without involvement of NGOs.

Science and related fields include Science, Geophysics, Math, Physics, System, Geography, Chemistry, Botany, Genetic, Agriculture, Geochemistry, Animal Production, Geology and Public health. Arts, social science and related fields include, Chinese Language, Economics- African and Asian Studies.

See Sudan Ministry of Finance and National Economy, Sudan Ministry of National Cooperation-Unpublished Report (2008).

Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 7 _______________________________________________________________________________________________________

3. Conceptual Framework and Literature Review Based on the above background on the importance of foreign aid to Sudan, this section first explains the conceptual framework and motives of foreign aid and then explains the literature on the impacts and effectiveness of foreign aid.

The concept Official Development Assistance (ODA) deals with the nature, and philosophy, of international financial and technical cooperation for development. The topic raises controversial issues pertaining to the commitment of donor countries to honor their obligations regarding agreed upon ODA/GDP percentages; the effectiveness, and quality, of ODA in promoting long-term growth; the appropriate restructuring of ODA conditionality to suit domestic conditions of recipient countries; the effectiveness of international, and regional, development finance institutions; and, south-south cooperation. According to the UNDP, the concept of foreign aid is often defined in relation to the concept of Official Development Assistance (ODA). 5 The substantial inflow of foreign aid has occurred in the period following the end of the Second World War (WWII) (Ali et. al., 1999).

The motivation or rationale for donors to give foreign aid to different recipient countries can be interpreted from different developmental, economic (commercial) and political perspectives. The literature discusses many reasons or motives behind giving aid. The first conventional motive is altruistic motives for giving foreign aid, the definition of ODA implies that the donor’s sole purpose to help improvement of economic development and welfare in the recipient country, but this definition does not prevent a mutual benefit for both aid donors and aid recipients.

The second conventional motive is that foreign aid is offered to enhance the economic relations, commercial interests and mutual benefits for both aid donors and recipients. This implies that the motive of donors in offering foreign aid is importantly tied to support and promote their own economic and commercial interests. For instance, since long, Western donors, the U.S., Arab aid donors and emerging active donors such as China have been pursuing tied aid and giving more aid to recipient countries to which these donors' countries export their goods.

More recently, Western donors have reduced the promotion of their own economic interests in aid-giving through the reduction of the costly tying of aid to purchases from the donors’ countries, for instance, the OECD-DAC has made a successful effort to eliminate tied aid to the According to OECD (2004) definition the words "aid" and "assistance" refer to flows which qualify as Official Development Assistance or Official Aid, aid activities include projects and programmes, cash transfers, deliveries of goods, training courses, research projects, debt relief operations and contributions to non-governmental organizations. According to UNDP, the concept of foreign aid is often defined in relation to the concept of Official Development Assistance. According to UNDP (2007/2008) definition official development assistance, net disbursements of loans made on concessional terms (net of repayments of principal) and grants by official agencies of the members of the Development Assistance Committee (DAC), by multilateral institutions and by non-DAC countries to promote economic development and welfare in countries and territories in part I of the DAC list of aid recipients. It includes loans with a grant element of at least 25% (calculated at a discount rate of 10%). Official development assistance includes untied bilateral ODA for which the associated goods and services may be fully and freely procured in substantially all countries and that is given by one country to another. Official aid grants or loans that meet the same standards as for official development assistance except that recipient countries do not qualify as recipients of ODA. These countries are identified in Assessment of Effectiveness of China Aid in Financing Development in Sudan Page 8 _______________________________________________________________________________________________________

least developed countries, as 92% of DAC countries’ aid was untied by 2005 and only the U.S. is now presumed to keep the bulk of its aid tied (OECD 2007).6 Neumayer (2003) indicates that the pattern of untying aid does not imply, however, that Western countries refrain from using ODA to support their own commercial interests.

The third conventional motive is the interference motive, i.e. the conditionality or meeting specific domestic policy requirements. For instance, since long Western donors have been developing aid policies that aim to influence the recipient country’s domestic policies more or less separated from the actual main motive for giving aid. For example, the US usually demands democratic reform in the country receiving US aid at the same time that the aid may be used to promote US firms in the country, for example, through giving American grain as food aid. Different from U.S. and Western donors, both Arab donors and China are less interested in conditionality-interference motive as they perceive that recipient countries should be allowed to choose their own development path and not be hindered by interference policies from donor countries.

The fourth conventional motive is the political motive for giving aid with the purposes to reward or create allies on political issues and strategic considerations rather than the economic needs or policy performance of the recipients, such as the voting in the UN General Assembly.

For instance, Alesina and Dollar (2000) indicate that France, Great Britain, Japan, the US and Germany allocate more aid to recipients that vote in tandem with them in the UN. In addition, Neumayer (2003) and Villanger (2007) indicate a similar pattern for Arab aid donors.

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