Asia

China’s Keynesian Foreign Policy


China’s impressive economic growth since the turn of the millennium has been accompanied by its expansion onto the international stage. A lot of attention has been given to China’s increased assertiveness within Asia, particularly as it relates to the traditional territorial disputes in the South China Sea. However, an equally important element of China’s increased assertiveness on the international stage comes through its provision of foreign aid to and investment in many countries. Although a developing country itself, China provided over $1.3 trillion in foreign aid and government-sponsored investment between 2004 and 2014. This aid has been used for a variety of projects, from funding soccer stadiums and infrastructure projects to military equipment and resource extraction. However, explanations of why China has chosen to so drastically increase the quantity of foreign aid and foreign investment provided vary. Most studies have looked at geopolitical explanations for why China has increased foreign aid expenditure, but domestic factors may be driving China to adopt a Keynesian foreign policy approach.

Growth of Chinese Foreign Aid and Government Sponsored Investment Activity

Source: Wolf, C., Wang, X., & Warner, E. (2013). China’s Foreign Aid and Government Sponsored Investment Activities: Scale, Content, Destinations, and Implications. Santa Monica, CA: RAND Corporation. Updated April 2015.

Scholars and practitioners have pointed to a number of reasons for the rise of Chinese aid around the world, including access to raw materials, challenging the United States and developing markets for Chinese products. However, it may be that the Chinese Government uses its foreign aid to achieve certain domestic objectives in addition to furthering its international goals. An important element of Chinese foreign aid is that the conditions China applies to its aid recipients is very different from that of other foreign donors. While other donors often provide aid with conditionalities related to good governance or environmental regulations, China frequently requires that the aid is used on Chinese products and to hire Chinese labor. While at first glance this may seem like a minor condition, it is important to note that it reduces the economic developmental potential as beneficiary countries’ labor forces are bit employed. Additionally, much of the foreign aid that China provides is not traditional foreign aid, often coming in the form of inter-governmental loans, or loans from the Chinese government to foreign governments. These conditions may allow the Chinese government to address domestic policy concerns while appearing to be an international benefactor.

Image courtesy of Zan’s World (c) 1980

 

However, China’s rise is tempered by a number of domestic concerns. Due to its one-child policy, China has an abundance of young men without opportunities for marriage. This, combined with a slowing economy, is a recipe for domestic social upheaval. Utilizing foreign aid to employ Chinese labor abroad can help to address these problems. Sending a large portion of the male population to work abroad generates job opportunities, removes people that may be unhappy with economic conditions in China, and provides opportunities for these young men to find foreign mates. Although the process of expanding government projects, increasing government spending, and creating government jobs during times of economic downturns is a principle Keynesian economic strategy, China has taken this model and expanded it into the international sphere. The conditionalities applied to Chinese development finance allows loans and aid to other countries to actually serve as a stimulus to the Chinese economy while simultaneously reducing social tensions at home. Furthermore, China’s use of inter-governmental loans allows China to stimulate their own economy while having other countries foot the bill. This strategy allows China to pursue domestic and foreign policy objectives at minimum costs and while boosting their own soft power.

Forecasters have made different predictions about the likelihood of China continuing the provision of foreign aid and investment given the impending slowdown of the Chinese economy. However, given that China’s economic slowdown is likely to exacerbate many of the domestic policy concerns previously mentioned, it is quite possible that China will continue to expand its international foreign aid and investment program despite these economic problems. Leveraging its currency reserves to provide foreign aid to other developing countries under the condition that the aid is used for hiring Chinese labor and buying Chinese products permits the Chinese government to pursue a variety of policies that simultaneously promote China’s global position and address challenges to the Chinese Communist Party.

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