Chinese Development Finance and Labor Productivity Growth in Developing Countries

Abstract

We unpack the allocative efficiency channels through which Chinese development finance affects aggregate labor productivity growth in recipient countries. We test whether the effect of Chinese finance on labor productivity growth is channeled through the intrasectoral component or the intersectoral component.  We combine data on Chinese concessional and commercial projects with sectoral data for 128 developing countries from 2000 to 2016. We use changes in China’s materials production and foreign reserves, interacted with countries’ historical receipt of Chinese projects, to identify the exogenous component of changes in Chinese finance. We find that the productivity growth effect of Chinese finance works mainly through the within-sector component, implying that Chinese finance is associated with intrasectoral allocation but has not enhanced a productive relocation of labor across sectors. Concessional finance productivity gains are higher in countries with poor governance quality, while commercial loans have higher productivity gains in countries with good governance quality.

Keywords: Chinese Development Finance, Productivity Growth, Developing Countries