Charity Begins at Home: Domestic Political Economy of Chinese Foreign Aid

Abstract

How does an authoritarian donor's domestic political economy shape its aid practices? We probe into the case of China, the largest authoritarian donor in the world, and contend that the regime survival imperative drives China's aid policies to prioritize commercial interests and sustain the state capitalism model. By leveraging multiple data sources, we employ a difference-in-differences design and conduct our analysis at the country, industry, firm, and product levels. We empirically document that Chinese aid projects lead to a substantial surge of Chinese exports to aid recipient countries, generating large revenues primarily for Chinese state-owned enterprises (SOEs). In particular, the aid-induced trade benefits are concentrated among SOEs with low performance and large employment. Our analysis also rules out decreased trade costs, favorable trade terms, and the product price difference between SOEs and private firms as alternative explanations.

Keywords: Foreign Aid, authoritarian regimes, state-owned enterprises, international trade