Will Foreign Aid Foster Economic Development? Grid Panel Data Evidence from China’s Aid to Africa

Abstract

The fast growth and unique model of Chinese aid provide new perspectives and empirical evidence for the study of aid effectiveness. This paper employs GIS technology to match Chinese aid projects in Africa with satellite-measured nighttime lights – a proxy of economic development and converts them into 0.5° (longitude) x 0.5° (latitude) panel data. First, we find that Chinese aid projects are positively correlated to Africa’s economic development. Second, we gain a deep understanding of the mechanisms and find that the aid-growth relationship is mostly attributed to economic infrastructure aid rather than social welfare projects, direct aid as well as production and other types of projects. Spatial panel regression further validates the robustness of the empirical results and sheds light on the spillover effects of Chinese aid. Moreover, our results also suggest that Chinese aid brings some side effects on the recipient countries, as it may intensify the spatial economic inequalities.