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

• Published date: 01 March 2022
• Author: Luhao Liu,Xudong Hu,Zhongxiu Zhao
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/cwe.12408

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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

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 fi eld 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 signifi cant and positive relationship.

The results were robust in a dynamic panel, even after correcting for endogeneity. Thus,

China’s aid has a positive infl uence on governance with the inclusion of time series. The

relationship was found to vary according to aid types.

Keywords: aid effectiveness, China’s aid, horizontal paradigm, quality of governance

JEL codes: C33, F35, O19, O43

I. Introduction

There is an ongoing debate over the effectiveness of aid. Although the vast amount of

literature dedicated to the topic exhibits a variety of research approaches, no consensus

has been reached, either theoretically or empirically. Many scholars argue that aid has a

*Luhao Liu, Associate Professor, School of International Trade and Economics, Shandong University of

Finance and Economics, China. Email: llhlsw@163.com; Xudong Hu (corresponding author), PhD, School

of International Trade and Economics, University of International Business and Economics, China. Email:

kellyhu4004@hotmail.com; Zhongxiu Zhao, Professor, School of International Trade and Economics,

Shandong University of Finance and Economics, China. Email: zhxzhao@sdufe.edu.cn. The authors thank

Jiong Gong for instructive advice and useful suggestions. This work is supported by the National Social

Science Foundation of China (No. 18CGJ034) and the Social Science Foundation of Shandong Province (No.

19CQXJ40).

Luhao Liu et al. / 1–27, Vol. 30, No. 2, 2022

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

2

conditional positive impact on economic growth (Burnside and Dollar, 2000). Empirical

studies show that aid effectiveness may depend on favorable geographical environments

or good policies in, for instance, the fi scal, monetary, and trade areas. In certain cases,

aid effectiveness could be sensitive to the choice of estimators (Hansen and Tarp, 2001).

Some researchers found no evidence for the positive infl uence of aid on growth (Rajan

and Subramanian, 2008); others discovered that aid had a negative effect and could

reduce or hinder growth (Young and Sheehan, 2014).

What if we narrow down the scope of research on aid effectiveness from economic

growth to the quality of governance? The conservative viewpoint holds that foreign aid

always fails to achieve the expected results and even harms the quality of governance;

this tallies with the reality of poor governance found in most recipient countries. It

does seem that countries that receive aid are affl icted by poor governance, but is there

an actual relationship between aid and governance? Neither theoretical nor empirical

studies appear to share any common view. Bräutigam and Knack (2004) believed that

there was a robust statistical relationship between high levels of aid and deterioration in

governance in African countries. Busse and Gröning (2009) found that aid had a robust

and negative influence on governance in different models. On the other hand, some

scholars argued that aid helped improve the recipient countries’ governance with regard

to political stability, public management, and education (Asongu and Nnanna, 2019),

while Jones and Tarp (2016) found no support for aid having a negative effect on

institutions.

To better analyze the influence of aid on the economic growth and governance

of recipient countries, some scholars divided aid into “vertical” and “horizontal”

paradigms (Pang, 2013). The vertical paradigm refers to the traditional form of aid,

especially that provided by developed countries, whereas the horizontal paradigm

refers to that provided by emerging countries. The vertical and horizontal paradigm

forms of aid differ in their objectives, principles, features, management, and

performance. Some scholars believed that vertical-paradigm aid had a relatively

integrated framework; they viewed the practice of attaching political and economic

conditions to foreign aid as being more conducive to helping its recipient countries

to change or adjust their backward systems and to establish Western democratic

governance and market economy systems (Naim, 2007). In the horizontal paradigm,

emerging donors attach more importance to the sustainability of micro-level

individual projects and seldom associate foreign aid with their recipient countries’

economic policies, systems, and mechanisms (Pang, 2013), making it hard to ensure

the desired effect of specifi c foreign aid projects and to boost their recipient countries’

governance.