By Cheng Cheng    Source: Global Times    Published: 2016-9-25

During its summit in Hangzhou earlier this month, the G20 announced its first Initiative on Supporting Industrialization in Africa and LDCs. The 20 biggest economies in the world showed their "collective support" for the industrialization of the global south, and endorsed it as the solution for development challenges in Africa.

For many years, Official Development Assistance (ODA) has been dominating the development dialogue, although its effectiveness has long been questioned. Dambisa Moyo, the author of best-selling book Dead Aid, calls it the "silent killer." The Zambia-born economist argues that the 1 trillion of ODA that was poured into the continent since the end of WWII has failed to create fast growing economies but only dependency on foreign assistance.

Classical economics believes that capital accumulation is necessary for long-term economic growth. While this condition may have worked in the West, it is really difficult to realize in developing countries. Weak institutions, social instability and defective legal systems limit corporate investment in these countries. Given that, ODA is almost the sole available capital resource for many under-developed countries.

But ODA hasn`t developed poor countries very well. After WWII, the Marshall Plan took modern bilateral ODA international, while the IMF and the International Bank for Reconstruction and Development started to provide multinational ODA. With the ultimate goal of defending Western values, ODA became a mix of values, norms and institutions during the Cold War, and was also the core tool for advanced powers to deal with North-South relations.

In 1960, the OECD assembled the Development Assistance Committee to coordinate aid policies. With "conditionality," which attached political requirements to aid, ODA became a way to control aid-dependent countries. In the 1990s, the ideology orientation of ODA did not diminish after the collapse of the Soviet Union, but put even more weight on certain criteria like "privatization," "democratic elections" and "good governance." Those liberal values were known as the Washington Consensus, which basically granted the World Bank Group and the IMF de facto control over many African countries.  

A World Bank report found out that only 15 percent of global aid has actually been used for its designated purpose, the other 85 percent either being wasted by bureaucracies or embezzled. Even the small portion of ODA which finally reaches poor countries has mostly been used for societal purposes like legal system reframing, public health or education reform, instead of the most needed economic infrastructure or industrial projects.

New Liberalism believes in the force of markets and that private investment is sufficient for infrastructure growth in developing countries. But as World Bank expert on infrastructure, David Dollar, pointed out, history has proven this false and it has cost the developing world a huge infrastructure deficit during the past decades. Donors are generally reluctant to help recipient countries to industrialize because they all have policies which forbid government funds to be used for any activities which could potentially cause harm to domestic production and employment. Given all this, China became the only one among major donors to push for industrialization and related infrastructure improvement in Africa and other LDCs.

This trend remained until the beginning of the 21st century, when China and other emerging donors started to expand their aid programs and economic cooperation projects in Africa and other LDCs. Among them, China alone believes that it is crucial for a developing country to lift its own development capacity by improving hard infrastructure which can lower transaction costs and building industries which can export and earn foreign currency.

In transportation and communication, Chinese enterprises have constructed most of the paved roads and railroads projects in Africa in the past two decades. In the power sector, Chinese have provided capacity or finance for projects in more than 3/4 of all the countries in Africa. Chinese finance in this sector amounted to $13 billion from 2010 to 2015. With the help of improved infrastructure, China not only encouraged thousands of enterprises to expand their business in Africa, but also introduced Special Economic Zones to the continent which attracted Chinese companies along the same value chain to settle down.

With Chinese investment, techniques and SEZs, African countries started to actively explore their own resource endowment and put earnings into national development, for instance, cotton farming and processing in Malawi and Mozambique, the garment industry in Ethiopia and the petroleum industry in Ghana. As the extracting and manufacturing industries grow, a few countries have achieved steady growth of government revenue and finances for public services.

The most important thing is that the aid-dependent development model prevailing in the region has gradually shifted into one which focuses on investment and cooperation. The China-Africa Development Fund (CADF) is the best example of this kind of shift.

Different from loan-based ODA, CADF provides equity investment for bilateral cooperation projects between China and African countries. Since its establishment in 2007, CADF has provided $3.5 billion of equity investment for 87 projects in 36 African countries. With the leading effect of public finance, CADF leveraged 17 billion of private investment for those projects, which generated 2 billion worth of export and 1 billion of revenue growth for Africa.

The author is research fellow and program manager, Chongyang Institute for Financial Studies, Renmin University of China.