Emulate or differentiate? : Chinese development finance, competition, and world bank infrastructure funding

Abstract

Foreign aid relationships are valuable to donors as a means of improving development outcomes and influencing recipient country policy. The emergence of new donors can lead to competition as donors vie for influence over recipient government policy and attention. How does such competition affect the behavior of traditional donors? : I draw attention to how the rise of China as a provider of development finance is changing the type of development that traditional donors support. Chinese development finance is particularly targeted at large infrastructure projects, and this focus can exert pressure on traditional donors. I suggest traditional donors can either emulate China's approach to development, i.e. offer projects in infrastructure-intensive sectors, or differentiate themselves and specialize in alternative approaches to development, e.g. focus on governance and social sector interventions. I test this using data on the terms of World Bank and Chinese development finance in over 100 countries. I find the World Bank responds to competitive pressure from China by emulating the Chinese emphasis on infrastructure, allocating a greater share of its development projects in infrastructure-intensive sectors when recipient countries receive more Chinese development finance. Furthermore, subnational data shows that the World Bank also emulates China's approach to development in response to competition at the regional level. China's growing role as a provider of development finance affects traditional donor behavior, shaping the type of development donors support by introducing bottom-up competitive pressure.