The Impact of Chinese Official Financing on Western Development Assistance

Sammanfattning: This thesis describes the aid allocation behaviors of the Development Assistance Committee (DAC) donors and their response to the emergence of China as a new donor in the aid landscape. My empirical strategy makes use of an interacted instrumental variable that relies on exogenous variation in the supply of Chinese aid over time resulting from changes in Chinese steel production. Variation across recipient countries stems from the probability of a country to receive aid. With the inclusion of year- and country-fixed effects, their interaction provides a suitable instrument. I find a robust positive relationship between the amount of Chinese foreign aid a country receives and the level of aid from DAC donors and their multilateral institutions. Results indicate that DAC donors use foreign aid to tackle the increasing influence of China by delivering more aid to countries which receive Chinese funding. The thesis also finds empirical evidence that the relationship is less strong for Western aid tied to economic infrastructure projects and that whether Western donors react stronger to competition authoritarian countries than in democracies.