The Negative Externalities of China’s Development Finance: How

National Governance Capacity of Recipient Countries Made

a Difference in Aid Results

Yanxing Zhou

Duke Kunshan University, Suzhou, Jiangsu, China

Keywords: Global South, Development Finance, International Relations, Foreign Aid, China’s Aid Method.

Abstract: As China has been engaged in deeper international cooperation, it advocates its preposition on globalization

and multilateralism, providing aid to developing countries. With the deepening of international cooperation,

China’s aid programs are also questioned by the international society, which seems to be the mainstream in

academic discussion. This research compares how Tanzania and Sri Lanka respond differently to exploit

China’s development finance. Tanzania took some more effective measures to deal with risks during the

cooperation. However, Sri Lanka didn’t well exploit the freedom of China’s aid method. It takes less effective

measures. China’s aid method is like an amplifier expanding the effect of recipient countries’ governance

capacity. To some extent, it exposes some issues of recipient countries’ dependence on debt and misjudgment

in decision-making. China should not be mainly responsible for some less-than-ideal international aid. The

conditions of the recipient countries also make differences in the final result.

1 INTRODUCTION

Since the establishment of the People’s Republic of

China, China, as one of the most powerful emerging

donor countries, has played a role in foreign aid

careers, even during its hardest times. Traditional

ways of aid are regarded as ways to promote the

democratization of recipient countries, so the aid is

usually through certain conditionality. However,

China’s aid method seems more attractive and

accessible to recipient countries because it doesn’t

have a lot of attached political limits (Li, 2017).

What’s more, many recipient countries think the aid

offered by emerging donors like China is more useful

and appropriate to their needs than the aid offered by

established donors (Woods, 2008). During the

process of aid, one principle that China’s aid follows

is non-interference (Ahmed, 2022). China doesn’t

advocate that democracy should be forced to take

place with “conditional aid”. The international

community should give more time for recipient

countries to carry out their problems. The recipient

countries need to realize the internal balance of

reform, stability, and development. It provides

opportunities to many countries that are rejected or

brushed off by established donors. The main form of

development finance that China offers to the recipient

countries is through debt. China’s assistance has had

positive effects on the local development of the

recipient countries. For example, the finish of the

TAZARA railway “formed the backbone of a new

spatial orientation for agrarian production and rural

commerce. (Dreher et al., 2022)” However, due to the

unbalanced results after getting the aid, some Western

countries came up with their questioning about the

reasonability of China’s aid mechanism. They argue

that China’s aid program “creates new options for

dictators who were previously dependent on those

who insisted on human rights progress (Brautigam,

2011)”. In addition, they argue that China’s aid

through flexible loans is likely to entrap the recipient

countries with a debt trap so that China can get

strategic benefits, decreasing the recipient countries’

agency. It is undeniable that China’s aid program has

generated some controversial results while bringing

local development to host countries, but that doesn’t

mean that China should be treated as the dominant

force in an aid program. For some recipient countries,

China’s aid method is relatively successful, and many

African countries have started to embrace the

“Beijing consensus.” Even though many experts and

scholars have pointed out that China’s aid method

might need a process to adapt to the local situation

(Li, 2017). It can show that the local condition plays

438

Zhou, Y.

The Negative Externalities of China’s Development Finance: How National Governance Capacity of Recipient Countries Made a Difference in Aid Results.

DOI: 10.5220/0013998900004912

Paper published under CC license (CC BY-NC-ND 4.0)

In Proceedings of the 1st International Conference on Innovative Education and Social Development (IESD 2025), pages 438-442

ISBN: 978-989-758-779-5

a role in affecting the final results. If the local

condition can be organically combined with China’s

aid method, the result can be good. Many researchers

emphasize the systemic shortcomings of China’s aid

mechanism but ignore the effect of different

capacities of governance in different recipient

countries on the aid results, shaping China an image

of selfishness and irresponsibility. China’s aid

method works like an “amplifier.” It amplifies the

good. The article aims to discuss the different

outcomes of China’s foreign aid from the aspect of

recipient countries’ governance capacities, which can

help the public to have a more rational view of

China’s aid mechanism.

2 SAMPLE SELECTION

This research takes the cases of Tanzania and Sri

Lanka to analyze how the aid results of these

countries are different.

Tanzania, as the most important country for China

to deepen the international cooperation in the East

Africa area, has great political, economic, and

diplomatic significance. Its relationship with China

the strongest and longest-running on the African

continent (Lammich, 2024).

Sri Lanka is a typical failed case of debt

diplomacy. Its percentage of external debt to GDP is

generally getting higher over 10 years. In addition, it

is located at a key location of the geopolitical

competition which is mainly dominated by China, the

United States, and India, in the Indian Ocean Region.

Under the context of international powers competing

with each other and fighting against each other,

international public opinion deliberately downplays

the fact that Sri Lanka owes many agents but can’t

make ends meet, and the main debtors are Western

private creditors. According to the report launched by

Sri Lanka in 2024, it shows that Sri Lanka owes

almost twice as much to Western private creditors

than it does to China (Ministry of Finance, Economic

Stabilization, and National Policies, 2024). The data

shows that the general argument regarding China as

its biggest creditor is worth discussing.

Finally, the two cases are exactly aligned with the

research topic. Tanzania’s governance method is

more fit for its national needs and it is national-

benefit-oriented. Sri Lanka’s method is more aligned

with the president’s interest instead of the country’s.

Scholars used to discuss how African countries’

agency plays a role in shaping Sino-African

relationships. It reveals that the agency of every

African country should not be ignored or denied even

if the agency appears to be regionally uneven and the

relations can be shaped by the purpose of the agency

(Mohan & Lampert, 2013). The conclusion inspires

the research that different levels and purposes of

agency can have an impact on the inter-engagement

of the activities between China and recipient

countries. The distinctions between their national

orientation determine that the measures the two

countries are taking are different.

3 TANZANIA

Tanzania has always set a national development plan

since it declared its dependence in 1961, for which

nature is to boost national development. The Julius

Nyerere administration hoped the donor community

could finance an ambitious project, which is a key

part of its five-year national development plan: a

1,860-kilometer railway (the TAZARA railway)

running from Kapiri Mposhi in Zambia to the port of

Tanzania’s largest city, Dar es Salaam (Dreher et al.,

2022). However, the economic viability is questioned

by many countries and multilateral institutions. China

stepped out and offered to finance the construction of

415 million dollars. After 3-year construction, the

TAZARA railway was finally finished, and this

railroad played a significant role in promoting the

economic development along the railway. It brought

a large-scale population redistribution along the rail

line and strengthened the connections between rural

and urban areas, improving the employment and

industrial development alongside the railway (Dreher

el al., 2022).

Tanzanian government intentionally takes

measures to decrease the negative effect of the

shortcomings of China’s aid mechanism. After the

first cooperation with China in the 1970s, China and

Tanzania agreed to their second cooperation in the

2010s. China’s reputation for getting things done

quickly is an attractive factor to the Tanzanian

government during this period. However, reasons for

getting things done quickly is that (1) Beijing’s policy

bank could approve the loan with the Tanzanian

government without a competitive bidding process

for the contractor sector, which aroused suspicions of

corruption; (2) China’s policy banks is that they did

not insist that the contractors or Tanzanian

government counterparts follow the environmental

standards of Western aid agencies and multilateral

institutions, but follow the rules set up by the host

countries, which could result in different outcomes

due to the differences among regional environmental

policies (Dreher et al., 2022). However, the

The Negative Externalities of China’s Development Finance: How National Governance Capacity of Recipient Countries Made a Difference

in Aid Results

439

investigation conducted by the public prosecutors has

shown that the Tanzanian government took measures

to prevent the irregulated cooperation between

Chinese state-owned enterprises and local

collaborators. In addition, Tanzania set up its own

environmental policies, so China’s high-risk behavior

to the forest had little or no effect on deforestation.

4 SRI LANKA

The aid program in Sri Lanka focuses more on

unnecessary “White Elephant” project construction,

which is for building up the Rajapaksa family’s image

but barely has any positive effect on local

development. Hambantota, as the hometown of

President Rajapaksa, has been favored, and he wanted

to make it the “second capital” of Sri Lanka (Dreher

et al., 2022). The Rajapaksa administration proposed

to construct a deep seaport in Hambantota with 1.5

million dollars, a nearby airport with 200 million

dollars, a road from the seaport to the airport with 412

million dollars, an expressway connecting

Hambantota and Colombo, the capital city, with 180

million dollars, and in addition, some constructions

like an international convention center, cricket stadi

(Dreher et al., 2022). It’s undeniable that China-

financed projects have driven the rapid economic

growth of Sri Lanka in the short term, especially

Hambantota, during the first seven years of the

Rajapaksa administration (Dreher et al., 2022).

However, a scary fact was that the Mattala Rajapaksa

International Airport was the “world’s emptiest

international airport,” which only earned 123 dollars

in revenue in a single month in 2014 (Dreher et al.,

2022). The revenue it earned is apparently barely able

to cover the loan it borrowed from China. Improving

transportation and construction is definitely

important to economic growth, however, in

Hambantota, these projects and constructions might

not fit its true need.

The cost overrun and corruption issue attracted

some attention. A former chair of the country’s

National Transport Commission noticed that the cost

of the road was 55% higher than those bid

competitively; What’s worse, the most expensive

projects were financed with loans priced at market or

close-to-market rates instead of grants. As the loan is

much higher than the market price, it means that there

will be a great amount of profit. Whether the profit is

really got by the country or the profit goes to private

wallets of Sri Lanka officials can definitely arouse the

public’s concern and suspicion. In addition, at the end

of the Rajapaksa administration, a debt of 8 billion

dollars was accumulated in China. To avoid severe

debt burden, they granted China “a major ownership

stake in and a 99-year-old lease to operate

Hambantota’s deep water port in exchange for 1.1

billion dollars of debt forgiveness (Dreher et al.,

2022). However, looking back to the case of

Tanzania, under the same vulnerability of China’s aid

mechanism, Tanzania avoided and prevented the

occurrence of exceeding cooperation between

national officials and China’s enterprises to the

greatest extent (Dreher et al., 2022). The nature of

Rajapaksa’s request for aid is different from the

Tanzania government’s. Sri Lanka’s goal is based on

the wish of the government (or the president) instead

of what the country really needs.

5 ISSUES

The research finds that the undeveloped governance

capacity might entrap recipient countries into the

following challenges (1) dependence on debt, (2)

misjudgment about the national need.

5.1 Dependence on Debt

Over the past decades, Sri Lanka has increasingly

depended on external debt to support its infrastructure

construction. Long-lasting debt made Sri Lanka

involved in the fiscal deficit. A dataset collected by

CEIC reported that, in Sri Lanka, the tax revenue

percentage of GDP was 12.9% in Jun 2024, and the

average value from Mar 2014 to Jun 2024 was 10.6%

(CEIC, 2024). The Central Bank of Sri Lanka’s

annual report for 2022 shows that the foreign debt to

the central government is 51.6% of GDP. The overall

fiscal balance has been negative since 2016 (Central

Bank of Sri Lanka, 2023). The heavy debt burden has

brought a great economic burden to the government

of Sri Lanka. Its state revenue can not support normal

national development, let alone clearing all the debt.

The proportion of Sri Lanka’s external debt is

increasing, and the country is almost running on an

accumulation of debt, entrapping itself in a vicious

cycle.

Sri Lanka doesn’t establish a sustainable

economic development method. Sri Lanka’s

continued loan has brought it short-term and visible

economic benefits, but its internal economic growth

momentum is inadequate. It doesn’t have a well-

established industry to generate and sustain revenue,

and it doesn’t have a stable and adequate national tax

revenue.

IESD 2025 - International Conference on Innovative Education and Social Development

440

5.2 Misjudgment About The National

Need

One reason for the failure of China’s development

finance in Sri Lanka is that the Rajapaksa

administration failed to make reasonable goals for Sri

Lanka. The proposed projects mainly aimed at

winning the support from Rajapaksa’s hometown,

Hambantota. It prioritized some large-scale and

costly projects but failed to balance the short-term

economic increase and long-term development

sustainability. Developing transportation and urban

construction is definitely one important way to

promote local development, but it is not what

Hambantota needs. Sri Lanka’s government

borrowed about 800 million dollars from China to

support its white elephant projects. Low commercial

activities result in that there is not enough revenue to

cover Sri Lanka’s cost to finish the construction. As a

result, the revenue can not cover the debt. By contrast,

Tanzania’s decision seems to be more reasonable and

feasible.

Additionally, the government ignored the

importance of developing domestic production

capacity, like domestic industries, national

taxation…The national taxation is always at a low

level, limiting the development of public sectors like

healthcare, and infrastructure. Instead, all social

resources are used to pursue short-term economic

benefits, worsening the economic vulnerabilities of

Sri Lanka.

6 SOLUTIONS

To decrease the harm of the challenges, recipient

countries are encouraged to enhance debt

management, fiscal transparency, and sustainable

development.

First, it’s very important to enhance the debt

management, and the supervision of the fiscal policy.

A transparent and supervised borrowing can

guarantee the reasonability and sustainability of

borrowing. Additionally, negotiation with creditors

and diversifying financing sources are also important.

Negotiation with creditors can help recipient

countries to have less debt burden. Diversifying the

financing resources can improve the situation in

which is trapped in debt.

Second, the countries should re-evaluate what are

the highly efficient projects that can long-term benefit

the countries. The recipient countries should spare

more effort on enhancing some public welfare careers

like public health, education, employment, and so on,

instead of some potentially impractical projects. The

government should be cautious in particular in

avoiding unnecessary exceeding investment.

Improving economic resilience is also important. The

government can promote resilience by developing

different industries, and diversifying the economic

sources, decreasing the dependence on external

financing. Debt exceeding national capacity can

involve countries in debt traps. Debt is one way to get

the financing but it should not be the main way to

support development projects. When debt

accumulates to a certain extent, it will become a

heavy burden for a country.

Third, improving governance capacity is

necessary. With a stronger governance capacity, it is

more likely to make decisions that are best for

national development. Reasonable development

loans can provide opportunities to recipient countries

to work on constructions that are beneficial to

national development and match what the citizens are

asking for, but the government must have a clear

acknowledgment of the country’s capacity. A sound

governance system is able to guarantee the efficient

and fair use of funds. In addition, citizens have the

rights to supervise and know the process of decision-

making.

Finally, promoting international cooperation can

help the recipient countries utilize the governance

system with professional and advanced social

resources and knowledge, realizing long-term

sustainable development. Only when the national

governance capacity is comprehensively improved

can every aspect of national decision-making can run

well and supervised.

7 CONCLUSION

The research found that the governance capacity of

the host country is significant for the result of aid.

Through reading different literature, the research

finds that many researchers criticize and question

China’s aid method, shaping the recipient countries

as complete victims. China’s aid method emphasizes

non-interference. It can explain China’s position in

international aid. China might be criticized for

cooperating with countries with not good

humanitarian records but that is not what China

means to. The “no interference” lowers the condition

to get aid, so some countries get the chance. China’s

method is more like an amplifier of existing issues,

the effect of host countries’ governance capacity itself

is unignorable. China’s method offers opportunities

for good leadership to develop the country but also

The Negative Externalities of China’s Development Finance: How National Governance Capacity of Recipient Countries Made a Difference

in Aid Results

441

lets the bad leadership have the chance to realize their

individual desire. At the end of the research, it found

some issues that the recipient countries are facing.

One is the dependence on debt, the other is the

misjudgment about the national need. The research

suggests recipient countries realize long-term

sustainability by enhancing debt management, project

re-evaluation, governance capacity, and international

cooperation. The research analyzes how the

governance capacity of the host countries can have an

effect on the ultimate result of Chinese development

finance aid. It can help the researchers and the public

to have a more comprehensive and objective view of

China’s aid method. The research can be improved if

more perspectives are accessible to the researchers.

Because the research cases are mainly accessed from

Western research articles. The research may be

limited by the research aspect from one side, and the

observation from multiple sides is good for the

research’s objectivity.

REFERENCES

Ahmed, S. 2022. China’s official finance in the Global

South: Whatʼs the literature telling us? Review of Eco-

nomics 73(3): 223-252.

Brautigam, D. 2011. The dragon's gift: the real story of

China in Africa. Oxford: Oxford University Press.

CEIC. Sri Lanka Tax Revenue as % of GDP. n.d. Accessed

January 10, 2025. https://www.ceicdata.com/en/indica-

tor/sri-lanka/tax-revenue--of-gdp

Central Bank of Sri Lanka. 2023. Annual report of the mon-

etary board 2022 https://www.cbsl.gov.lk/sites/de-

fault/files/cbslweb_documents/publications/annual_re-

port/2022/en/3_KEI.pdf

Dreher, A. et al. 2022. Banking on Beijing: The aims and

impacts of China’s overseas development program.

Cambridge: Cambridge University Press.

Giles M., & Lampert, B. 2013. Negotiating China: Rein-

serting African agency into China–Africa relations. Af-

rican Affairs 112 (446): 92–110.

Lammich, G. 2024. Lost in Transfer – Tracing policy diffu-

sion and norm-shaping in Tanzania-China relations.

Global Policy 15 (5): 886-900.

Li, X. 2017. Does conditionality still work? China’s devel-

opment assistance and democracy in Africa. Chinese

Political Science Review 2: 201–20.

Ministry of Finance, Economic Stabilization, and National

Policies. 2024. The Quarterly Debt Bulletin: 2024 First

Quarter. Sri Lanka: Ministry of Finance, Economic Sta-

bilization, and National Policies. https://www.treas-

ury.gov.lk/api/file/54a19fda-b219-4dd4-91a7-b3e74b9

cd683.

Woods, N. 2008. Whose aid? Whose influence? China,

emerging donors and the silent revolution in develop-

ment assistance.” International Affairs (Royal Institute

of International Affairs 1944-) 84 (6): 1205–1221.

IESD 2025 - International Conference on Innovative Education and Social Development

442