China's Foreign Aid: Political Determinants, Economic Effects

The efficacy of foreign aid, especially when given to satisfy the objectives of the donor country, is highly controversial. I study this question in the context of Chinese infrastructure aid, which has received much attention from policymakers. I build a novel project and firm-level dataset to identify political determinants of Chinese aid and its economic consequences for recipient countries. I document that when there is local labor unrest in China, contracts for Chinese aid projects are allocated to large state-owned firms in the area, and employment by these firms increases. Connections between these firms and other countries mean that China's response to domestic unrest affects the allocation of Chinese aid projects to other countries. I exploit the variation in countries' receipt of aid caused by the timing and spatial variation in local labor unrest in China, together with these connections, to develop an instrument for identifying the causal effects of Chinese aid on recipients. I find large positive effects on GDP, capital formation, consumption, and employment.