China's Foreign Aid: Political Determinants and Economic Effects

Can foreign aid foster economic development, even if it is given to satisfy objectives of the donor country? I study this highly debated question in the context of Chinese infrastructure aid, which has received much attention from policymakers. I link project-level aid data with administrative firm-level data from China to identify political determinants of Chinese aid and its economic consequences for recipient countries. I document that when there is local labor unrest in a Chinese prefecture, contracts for Chinese aid projects are allocated to large state-owned firms in the prefecture, 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 recipient 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 a novel instrument for identifying the causal effects of Chinese aid on recipients. I find large positive effects on GDP, trade, consumption and employment.