China & World Economy / 1–27, Vol. 30, No. 2, 2022

Does Horizontal-Paradigm Aid Weaken the Governance of Recipient Countries? Evidence from China

Luhao Liu, Xudong Hu, Zhongxiu Zhao

Abstract

China’s aid has always been an interesting topic in the field of development economics, and the effectiveness of aid is also a controversial subject in the literature. This paper explores the relationship between China’s aid and the governance of its recipient countries from 2000 to 2014. We found that, compared with the “vertical paradigm” of traditional donors, China’s “horizontal paradigm” has unique features, promoting the governance of recipient countries. We employed a cross-sectional estimation and panel analysis with several regression methods. While our cross-sectional findings did not yield robust evidence to support a relationship between Chinese aid and its recipients’ governance, our panel data regressions found a significant and positive relationship. The results were robust in a dynamic panel, even after correcting for endogeneity. Thus, China’s aid has a positive influence on governance with the inclusion of time series. The relationship was found to vary according to aid types.