Funding for African Countries from the US and China Has Different Impact on Trade Flows

17:25, September 13, 2020

GSEM UrFU researchers studied the financial flows, as well as export and import data for the period of 14 years

A team of researchers from UrFU and the University of Turin found out how official funding (development aid and other financial flows) coming to Africa from its biggest donors affects trade relations between these countries. The researchers analysed the data on financial flows, export and import for the period from 2000 to 2014 for 53 African countries (excluding South Sudan), as well as the US, China, Europe (the UK, Germany and France). The research findings were published in the journal  Structural Change and Economic Dynamics.

«It is expected that financial aid of the donors will help economic development of Africa. This goal is documented in the UN 2030 Agenda for Sustainable Development. However, the donors are interested in their own economic development, so there is the question: do they distribute financial aid in accordance with the recipients’ needs or their own commercial interests, for example, to support their own export?», — explains Marina Sutormina, one of the article co-authors.

The researchers modified a popular economic model – the gravity model of international trade to apply it to every donor and trade flow type (manufactured goods and raw materials). Moreover, they divided the types of official funding, which allowed for identifying similarities and differences in financial aid, as well as revealing the donors’ national interests in Africa.

The researchers found out that financial aid flows from all donors stimulate export into Africa, which is to be expected as they are interested in developing their own economies. Along with that, China and Europe simulate trade flows in the other direction (from Africa), but there is no such effect to be seen for the USA.

«We can see that China exports more machines and transport equipment to Africa, while importing low value-added products. This illustrates the strategy of mutual benefit that finds a market for Chinese products while also helping African countries to strengthen their industry and diversify their export. We find that Europe presents a similar picture, though with less value for money», — commented Ivan Savin, a co-author of the research.

African countries are rich with natural resources but poor in terms of capital and technologies, thus they have advantages in raw materials export. While manufactured products and consumer goods of the donors are just driving local producers out, imported equipment and technologies facilitate increase in production capacity of importer countries with long-term consequences. It is extremely important for African countries that industrial products export grows, as it allows for diversification of the economies and decreasing their dependency on fluctuating prices for raw materials.

«Despite some claims that China’s aid is really aimed at facilitating natural resources import, we find evidence that countries that receive Chinese aid are actually increasing the volume of bilateral export of manufactured products, and not raw materials. We found a positive relation between the flows similar to official aid for development purposes from China and the import of manufactured goods from Africa, — says Marina Sutormina. — Finally, while Europe and the US mainly use financial aid flows that are not aimed specifically at poor countries’ development for trade stimulation, China uses more favourable and development-oriented financial aid tools».

The research is conducted in the framework the Master thesis by Marina Sutormina (GSEM UrFU graduate with a Master’s in Applied Economics) with the support of the Russian Science Foundation grant (№ 19-18-00262). Supervisors and co-authors of the research are GSEM UrFU Professor Ivan Savin and the University of Turin Researcher Marta Marson.