There has been much speculation on the motives behind the large sums of foreign aid some countries provide to other countries. I address this question in the context of China, which is arguably the largest, most controversial, and most poorly understood donor. Using unique micro data, I find that the Chinese state’s goal of domestic political stability drives a significant share of its aid allocation. I first document that in response to labor unrest in China, infrastructure aid contracts are allocated to state-owned firms in the affected areas, resulting in increased employment and future stability. Through existing connections between recipient countries and these firms, local unrest in China also significantly affects the allocation of Chinese aid to recipients. Finally, I exploit this granular variation to develop a novel shift-share instrument for identifying the causal effects of Chinese aid on recipients. I find large positive short-term effects on GDP but few signs of economic growth, household consumption or employment resulting from Chinese aid in the long term.
Media coverage: Project Syndicate, US-China Today, [VoxDev][pdf]