Chinese lending to African countries has surged over the past 15 years, primarily aimed at financing infrastructure projects. This column shows that by lowering trade costs, Chinese infrastructure loans are linked to increased participation in global value chains, particularly in downstream sectors. As a result, Chinese lending may contribute to export growth and enhanced productivity in African countries.
Over the years, China has become one of the world’s largest lenders, particularly to African countries (Reinhart et al. 2020, Mihalyi and Trebesch 2023). Following a slowdown that began in 2017, Chinese loans to Africa increased again in 2023 (Engel et al. 2024). Driven largely by the Belt and Road Initiative, China’s official overseas loans primarily target large infrastructure projects in areas such as transportation and energy (McBride et al. 2023). Between 2007 and 2020, Chinese development banks provided 2.5 times more funding for public–private infrastructure projects in sub-Saharan Africa than the combined total from the development banks of the US, Germany, France, and Japan, significantly outpacing multilateral development banks in this sector (Lee and Gonzales 2022).
Infrastructure lending has the potential to reduce trade costs (Ruta et al. 2018) and enhance trade integration and participation in global value chains (GVCs). In a recent paper (Amendolagine et al. 2024), we investigate this hypothesis by examining whether Chinese infrastructure loans can help African countries engage more effectively in GVCs.
Chinese infrastructure lending
The nature and motivations behind Chinese lending for infrastructure projects in Africa have sparked considerable debate, illustrated by notable cases such as the Standard Gauge Railway project in Kenya, which connects Nairobi and Mombasa. This project raised speculations that Kenya might have used the port of Mombasa as collateral for the loan (Brautigam 2022). In a well-known article, Naim (2009) described Chinese financial flows as “rogue aid,” claiming they are primarily driven by self-interest. However, subsequent studies have examined this hypothesis and deemed it unjustified (e.g. Dreher et al. 2021).
While Chinese lending often involves unusual confidentiality clauses and collateral arrangements (Gelpern et al. 2023), it is essential to recognise that Chinese infrastructure investments across Africa are diverse and should not be automatically categorised as predatory or problematic. For instance, Vines et al. (2022) discuss a more recent Chinese loan for constructing an expressway in Nairobi, which aligns more closely with public-private partnership models seen in other parts of the world and is of a more manageable scale.
A first look at the data suggests that the specific focus of Chinese lending to infrastructure may drive stronger trade integration. By combining loan-level data from the China-Africa Research Initiative (CARI), which cover loans from China to 37 African countries, with similar loan-level data on World Bank’s projects and operations, we can observe stark differences in the allocation of Chinese and World Bank lending across sectors (Figure 1). Over one-third of Chinese lending is directed toward transport and communications infrastructure, whereas only about 10% of World Bank lending is allocated to this sector. Instead, the World Bank primarily focuses its loans on social projects in education, health, and food security, areas that receive minimal investment from Chinese lenders.
Figure 1 Chinese and World Bank lending to Africa: Sectoral allocation
Source: The Chinese Loans to Africa (CLA) Database and the World Bank Projects and Operations data.
Chinese infrastructure lending enhances Africa’s role in global value chains
To assess whether Chinese and World Bank lending is associated with GVC participation, we match the loan-level data with measures of GVC participation from the UNCTAD-Eora Global Value Chain database, distinguishing between the upstream and downstream GVC participation. 1 The data reveal that, while Africa’s GVC participation is mostly upstream – largely based on exports of natural resources – most countries have experienced an increase in the downstream component. This shift indicates a specialisation in the phases of production closer to final demand.
Our analysis reveals that Chinese infrastructure lending is an important factor contributing to increased GVC participation, while this is not the case for World Bank lending, possibly because of the smaller scale and different type of infrastructures financed. Loans targeted at the transport and communication sectors, which are more effective in reducing trade costs and facilitating GVC participation, drive this result. In economic terms, a one standard deviation increase in Chinese infrastructure lending is associated with a 0.11 standard deviation increase in GVC participation after four years (Figure 2, panel A).
Figure 2 Chinese infrastructure lending and GVC participation
A) GVC participation
B) Downstream vs upstream GVC participation
Notes: The charts plot the coefficients of Chinese infrastructure lending (measured in $ millions) – and the associated 90% confidence bands – from three separate regressions in which the dependent variables are: the forward change in the percentage share of foreign and domestic intermediates in gross exports (GVC participation, panel A); the forward change in the percentage share of foreign intermediates in gross exports (GVC downstream participation, panel B); and the forward change in the percentage share of domestic intermediates in gross exports (GVC upstream participation, panel B). All these changes are calculated as the difference between year t and year t+n (with n= 1,..,5). All regressions include a set of control variables (including Chinese non-infrastructure lending and World Bank lending) and country and year fixed effects. See Amendolagine et al. (2024) for details.
The positive association between Chinese infrastructure lending and GVC participation is concentrated in the downstream component of GVCs, which involves using imported goods to produce final products for export (Figure 2, panel B). This focus can potentially enhance exports and productivity. Focusing more on downstream industries – those that add value to products – resource-rich countries that lack technology sophistication can produce more advanced goods. By improving their participation in the later stages of GVCs, African countries could better benefit from global trade and integration.
A potential support to industrialisation and job creation in Africa
China’s increasing influence in Africa raises important questions regarding its lending policies and their impact on economic growth in the region. Our analysis explores a key aspect of this issue: the role of Chinese loans in facilitating African countries’ GVC participation through significant infrastructure investments that lower trade costs.
African nations face a pressing need for new infrastructure. If Chinese loans can facilitate involvement in GVCs and enhance participation in downstream value chains, they could significantly contribute to industrialisation and job creation across the continent. However, to ensure fiscal sustainability, it should be borne in mind that policies should be targeted at creating a conducive business environment. This will enable African countries to fully leverage the positive impact of improved and new infrastructure, ultimately upgrading their participation in GVCs.
Source : VOXeu
