African leaders should proceed with caution when considering Chinese offers of aid and loans.
In September, President Xi Jingping promised $60 billion in aid and loans to more than 50 African leaders participating in the Seventh Forum on China-Africa Cooperation “without any political conditions attached.” This is an enticing offer for countries who have difficulties fulfilling requirements such as increasing accountability and reducing corruption. However, African countries should proceed with caution as unbridled borrowing from China can actually threaten state sovereignty, both financially and politically.
Nowhere is this more evident than in Zambia. In 2010, China offered more than $1 billion in aid to Zambia in order to rehabilitate and strengthen the Kariba Dam, build and staff fifty rural health clinics that offer free treatment to local citizens, and restore the TAZARA railway, which connects eastern Zambia with Dar Es Salaam. Under the conditions of the aid package, the loan is to be repaid over 60 years with an interest rate of 5%. Today Zambia is negotiating an IMF bailout and is reportedly brokering a new loan from China, this time, with the national electricity company Zesco as a guarantee. A closer look into the issues surrounding the 2010 aid package could help to explain Zambia’s burgeoning crisis and can could serve a cautionary tale to African countries currently considering China’s enticing aid and loans package.
To start off, the conditions of the 2010 loan were not concessional. There was no grace period for the repayment of the loan. Moreover, the interest rate was relatively high given the prevailing low interest rates in international financial markets. Typically, aid packages include a grant element that will lower the interest rate below market rates. A higher grant element means that the amount of pure debt financing subject to interest will be much lower and Zambia will receive part of the amount as aid, not as a loan. Zambia is a low-income country and needs to borrow on concessional terms for its debt to remain sustainable. With a GNI of $67.07 billion this loan will be nearly impossible to repay within the next 60 years.
Secondly, there are problems with transparency, governance and accountability. A study conducted by AFRODAD, CSTNZ, JCTR and CSPR found problems with the transparency of the deal. Information regarding the exact sum of the loan and the precise details of how the money will be spent was withheld. Therefore, it is difficult to track down how the loan was invested, making Zambian leaders less accountable for how they spend the money. Additionally, the deal involved a very narrow circle of Zambian state official agencies. It was formally announced that the Zambia Development Agency (ZDA), The Ministry of Commerce, Trade and Industry, the Ministry of Finance and National Planning, the Ministry of Mines and Minerals Development and the Ministry of Works and Supply would all participate in the deal but there was little evidence of coordination between these institutions. Reducing the circle of people involved further limits the accountability of Zambian officials and enables them to embezzle some of the loan proceeds. In her book, Dead Aid, Dambisa Moyo argues against the use of aid and foreign investment in Sub-Saharan Africa. The author points to the lack of accountability that enables African governments to embezzle large sums of foreign aid. Diverting large amounts from the loan will limit the success of the aid because it will reduce the amount of funding available to finance the projects.
Third, the projects need to be effectively maintained, which is challenging for a country like Zambia, especially given widespread corruption. Although improving a developing country’s infrastructure is commonly regarded as a catalyst for FDI and international trade, maintaining the new Kariba Dam, TAZARA railway, and health clinics created another financial challenge for the Zambian government. In July, for example, Zambia had to begin a costly project to repair the plunge pool and cracks in the dam wall. Building large “hard aid” projects and infrastructure is a common practice in modernization theory that has been generally unsuccessful and unsustainable. MDCs often build large and expensive factories and hydroelectric power plants that involve advanced technology. Many LDCs in Sub-Saharan Africa are struggling with the maintenance of such projects and become heavily indebted to the country providing aid because of high borrowing costs. If there is a lack of accountability on part of the Zambian government for effectively maintaining the projects and little accountability on the part of the Chinese government for making these projects sustainable, the projects will inevitably fail. Amidst recent trials for public corruption, which have blemished Zambia’s democracy, it is reasonable to expect that the Zambian institutions have poor governance and accountability. Although Zambia has seen high economic growth over the past six years, many Zambians still live in crippling poverty that has been difficult to reduce without tackling government corruption.
Moreover, the projects included in the aid package are not beneficial to the local economy. The dam was redesigned by a Chinese construction firm and much of the labor for the project was provided by Chinese workers. In this way, local supply companies are losing out to large Chinese supply firms and Zambian workers are losing jobs in their own country to Chinese workers. As Zambia already has a tight labor market, this further perpetuates the poverty of local communities. China’s investment in Zambia included conditions for creating business opportunities for Chinese service contractors, including construction companies. China’s aid for the Zambian health clinics included the condition of staffing the new hospitals with Chinese doctors and nurses. Although, this option could be effective in the short term, as Zambia does not have a sufficient number of trained medical staff, it limits opportunities for Zambian doctors in the future. Such conditions stifle Zambia’s service sector and perpetuate the lack of Zambian medical staff as more and more medical students become discouraged from a shrinking labor market.
Finally, China’s investment in the TAZARA railway perpetuates Zambia’s commodity dependency. The TAZARA railway is used to transport raw materials from Zambia’s Copperbelt to the seaport in Dar Es Salaam. Although growth of Zambia’s copper industry could be economically beneficial in the short term, it would slow Zambia’s sectoral transformation. In fact, Africa is China’s number two supplier of service contracts, therefore China’s aid to Zambia is not altruistic. China is more concerned with its own economic interests as opposed to the development of Zambia. Creating job opportunities for Chinese workers does not stimulate the local economy or support the economic interests of Zambian workers. A key principle of the theory of sustainable economic development is a bottom up approach to aid. According to this approach, offering “soft” aid that transfers skills and know-how to developing countries is a better way of achieving sustainable and long lasting improvements in economic development.
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