The Roles of Aid in Politics Putting China in Perspective

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Goldstein, Andrea, Pinaud, Nicoloas, Reisen, Helmut and Chen, Xiaobao (2006), “China and India: What’s in it for Africa ?” Paris: OECD Development Centre Studies.

China and India have fuelled the demand for African natural resources. Through their high rates of growth, export surpluses and reserve accumulation reinvested in US treasury bonds, they have contributed to dampen world inflation pressures, lower global interest rates, raise raw material prices and improve Africa’s terms of trade. This is however no reason to remain complacent. With the proceeds of that demand, the future of labour-rich and skill-friendly activities may be compromised, inequalities deepened and rent-seeking get more pervasive. Governments should also avoid policies that crowd out other industrial activities, particularly policies that support an appreciating currency. They should also seek to utilise increased tax revenues from primary product exports to fund pro-poor initiatives.

There are a number of potential conduits through which African growth prospects might be affected by the rise of the Asian Drivers. One conduit of change lies in trading relationships. China and India are markets for African goods as well as competitors, especially in the export-oriented clothing and textile markets in which quotas to protect African exporters were removed in January 2005. On the other hand, African consumers gain from cheap consumer goods sourced from the Asian Drivers and African investors from cheap and appropriate capital goods. Another conduit is investment. China and Indian firms are increasingly outward-oriented and resource-hungry. Authorities will have to use the opportunity of higher Asian corporate presence in Africa to turn them into a source of technology, skill formation and world market access, apart from foreign finance that come with the investment. African countries will have to define how to fit into China/India-centred global value chains that are taking shape and not be confined to the role of primary products suppliers.

Resource rich Africa will have to balance the need to match the promotion of job-creating sectors (agro-business, textile, tradable services, etc.) with the desire to capitalise on a windfall gain generated by higher commodity prices. Monetary authorities might have to pursue a monetary policy that guards against the appreciation of the currency to the detriment of industries competing with imports and exporters outside the resource sector. Fiscal authorities are required to limit public spending on services and construction in order to limit real exchange rate appreciation. Prudent investment of windfall gains from exhaustible raw materials will also be needed, either to close financing gaps in reaching national Millennium Development Goals, through investment abroad or the reduction of domestic public debt. Increasing net assets will ensure higher consumption levels beyond the windfall period.

While a range of industries will face a real fight for survival over the next decades partly due to unit labour cost competition from China and India, there is a list of industries that are either complementary to the rise of Asian Drivers or relatively secure from competition, such as food production. Catering for the demand originating from China and India requires that Africa generate investment, technical skills and capacity in the field of agriculture, a tremendous task which in turn needs assistance from donors. Governments should also seek to ensure that smallholders are able to participate in new export markets.

Donors need to consider whether to adapt existing policies (e.g. market preferential access) aimed at reducing poverty and diversifying local economies in the light of China and India’s expansion. Policies, such as emphasising the expansion of labour-intensive manufactured exports as a means of poverty reduction, may need to be fine tuned, in light of the increasing competition and falling prices for many such products (e.g. textile in a post-MFAcontext), while vertical integration in resource-based industries will have to be supported increasingly. China’s and India’s competition also make it imperative for donors to stem the process of trade preference erosion, improve the effectiveness of existing trade preference schemes targeted at Africa, and thereby uphold African preferential access to developed countries’ markets.

Goldstein, Morris and Lardy, Nicholas, R. (2005), “China’s Role in the Revived Bretton Woods System: A Case of Mistaken Identity,” Institute for International Economics Working Paper Number WP 05-2, Washington D.C.

BW2 has attracted considerable attention because it offers a relatively parsimonious explanation both for recent exchange rate policy in a number of Asian countries and for recent exchange rate and interest rate behavior in the United States.

However, the BW2 model is at variance with Chinese reality at many important points.

  • It suggests that China should focus exclusively on undervaluing its exchange rate vis-à-vis the dollar, but more than half of China’s exports go to markets other than the United States or to countries with currencies not pegged to the dollar.

  • The exchange rate that matters most for China’s competitiveness and for employment in the export sector—namely the real trade-weighted exchange rate—exhibited a nearly 30 percent appreciation between 1994 and early 2002. That is not consistent with the view that keeping the real trade-weighted exchange rate undervalued has been an integral part of China’s development strategy.

  • BW2 implies that China’s currency has been significantly undervalued for about a decade whereas significant undervaluation of the renminbi is, in our judgment, a phenomenon that dates from early 2002.

  • BW2’s argument that an important benefit of undervaluation is a large, efficient FDI-financed capital stock ignores the fact that foreign investment in China has financed under 5 percent of fixed asset investment over the past few years—far too small a share to offset the misallocation of investment financed through China’s weak domestic banking system.

  • China also appears not to conform to the DFG hypothesis that undervaluation will bias domestic indigenous investment strongly in favor of tradable goods, thus adding further to the superior foreign-financed capital stock. Goods that are exported from China, and thus meet what DFG call the acid test of efficiency, are produced with only about 6 percent of the stock of fixed assets, of which only about half is purely indigenously owned. Without the capital stock argument, BW2 is just another employment-oriented case for exchange rate undervaluation.

  • BW2 underestimates the costs of sterilization, particularly those associated with financial repression. Focusing on the low interest rate for central bank paper is misleading because such instruments are placed primarily with the four largest state-owned banks—not sold on a competitive, auction market. Also, rates of interest on sterilization bonds and bills should include potentially large capital losses on China’s reserves associated with a revaluation of the renminbi against reserve currencies. And everything suggests that in the absence of exchange rate action, sterilization costs would rise appreciably if, as seems likely, both US current account deficit and China’s reserve accumulation became much larger in the future.

  • The argument that supranormal profits generated by foreign firms exporting from China will provide them with both the incentive and the resources to lobby to maintain trade openness in the United States appears to misunderstand several dimensions of reality in China. The profits of direct investors in China are modest, at best. And US firms investing in China for the most part are interested in selling on the domestic market and do little exporting back to the United States and thus have no direct stake in maintaining the openness of the US market. In contrast, Taiwanese and Hong Kong firms producing in China, which do earn somewhat higher profits, are most dependent on the US market. But they appear to make no attempt to influence US trade policy.

  • Finally, BW2 sets out a faulty development strategy for China over the coming decade. Rather than seeking to promote an enclave economy based on a significantly undervalued exchange rate and on domestic financial repression, China needs to accelerate the pace of financial—particularly banking—reform; liberalize interest rates and reduce reliance on administrative controls and window guidance; and move toward greater flexibility in the exchange rate over the medium terms, including an immediate 15 to 25 percent appreciation of the renminbi relative to a currency basket (Lardy 1998, Goldstein 2004). This is what we have called a “two-stage currency reform” (Goldstein and Lardy 2003a, 2003b). These policies will promote domestic financial stability, improve the allocation of China’s savings to their most productive use, provide the policy instruments necessary to manage the macroeconomy, enhance employment growth in the tradable and nontradable sectors, and are most likely to continue good access for China’s exports in world markets.

Hardus, Sarah (2009), China in Africa: Consequences for Traditional Donor Aid. A Case Study of the Possible Influence of Chinese Economic Aid on Traditional Donor Conditionality in Zambia, Master’s Thesis, University of Amsterdam.

Since the end of the Cold War, traditional donors have had a dominant position in Africa and conditional, traditional donor aid has been Africa’s main source of foreign finance. However, over the last years China has re-emerged as a donor in the continent, offering a different type of aid that consists of a combination of grants, loans and investments. In this thesis, I looked at the possible consequences of the availability of Chinese aid for traditional donor aid and more specifically the conditions attached to it.

Outline of the research

In the first part of this thesis, I discussed my theoretical framework, the context in which my research was conducted and the way in which it was operationalized. The theory behind my research is based upon the different factors that influence aid conditionality: the negotiating power of the recipient country, donor country interests and the composition of the donor community, which is the focal point of this thesis. Several scholars argue that the diversification of the donor community increases donor competition and the bargaining power of the recipient government, resulting in a decrease in conditionality. In this thesis, I assessed the extent to which this theory applies to the case of Zambia and tried to answer the following research question: ‘To what extent is traditional donor conditionality towards Zambia changing or expected to change because of Chinese economic aid to Zambia?’.

The empirical data that were outlined in this thesis, were gathered during fieldwork in Zambia’s capital, Lusaka between February and May 2009. Zambia is one of the poorest countries in Africa and has historically been highly dependent on donor aid. Moreover, China and Zambia have a long-standing relationship that goes back to the 1960s. Because Zambia has recently been receiving substantial amounts of Chinese aid again, it provided a good case to investigate the possible impact of Chinese aid on traditional donor conditionality in Africa.

Most of my research data were collected through unstructured and semi-structured interviews with Zambian government institutions, traditional donor agencies and Chinese organizations. Moreover, I spoke to different Western and Zambian organizations and several academics and consultants with knowledge on my research topic. Through my interviews, I tried to grasp my informant’s perceptions of Chinese and traditional donor aid, the possible diversification of Zambia’s donor community, and the changes that might result from it. Another research method that I used was discourse analysis. By looking at different policy documents and two of Zambia’s popular newspapers, I tried to collect additional information that could be contrasted with the data that were gathered during my interviews.

Analysis of the findings

I presented my empirical data in five chapters, which looked at different parts of my analytical framework. In chapter four, I discussed my informant’s perceptions of traditional donor aid to Zambia. I found that the current perceptions of my Zambian informants are still influenced by their negative experiences, induced by SAPs and the withdrawal of traditional donor aid in the past. Although they value recent changes in traditional donor aid, they argue that too much aid goes to the social sector, compared to infrastructure, and that traditional donor aid is still insufficiently harmonized. My informant’s perceptions of traditional donor conditionality vary to a great extent. While most Zambian informants argue that there is still a lot of ‘old-style’ conditionality attached to traditional donor aid, several people within the MoFNP and the donors themselves, claim that there is no ‘real’ conditionality anymore. According to them, donor requests that are aligned with Zambia’s national priorities, address a good cause or are inevitable, cannot be considered as conditionality.

In chapter five, I looked at Chinese economic aid. In contrast to the history of the traditional donors, China’s history in Zambia is looked back upon in a positive way. I found that my informants use different definitions of Chinese economic aid, which influence their perception of the volume of Chinese aid and the range of activities that China is involved in. The traditional donors and most government officials use a narrow definition, which only includes grants and loans. Because of this, they argue that the amount of Chinese aid is negligible compared to traditional donor aid and China is only doing some small-scale projects. Most Zambians, however use a broader definition that also includes investment. Using this definition, the volume of Chinese aid comes close to the amount of traditional donor aid and Chinese aid flows into a broad range of sectors. All my informants agree that China attaches fewer conditions than the traditional donors and does not look at the political context and governance issues in the recipient country. However, Chinese aid is not unconditional since Zambia cannot recognize Taiwan and there are several commercial conditions attached to it. China however provides easy aid, thereby ensuring continued access to Zambia’s natural resources and political support for the foreseeable future.

In chapter six, I assessed to what extent the availability of Chinese aid leads to diversification of Zambia’s donor community. I showed that Chinese and traditional donor aid are different in their historical background, their aid policy and on the content, volume, activities and conditions attached to it. The two types of aid are also being portrayed in a different way in Zambia’s popular newspapers. Whereas China is put forward as a friendly country providing aid, the traditional donors are often represented in a paternalistic way. I concluded that China gives a different type of aid than the traditional donors. Although there have been several initiatives for cooperation between China and the traditional donors, China is still operating outside the traditional donor frameworks in Zambia. Because of this, Zambia’s donor community is diversifying.

My theoretical framework predicts several changes that would result from the diversification of Zambia’s donor community: donor competition, an increase in the bargaining power of the Zambian government, and a resulting decrease in conditionality. In chapter seven and eight, I discussed the extent to which my informants think these changes are becoming reality in Zambia. I found that many Zambian informants agree with the sequence of events, as predicted by the theory. The traditional donors and most officials in the MoFNP, however argue that these changes are unlikely to occur. The difference of opinion between my informants, can be traced back to their different perceptions of Chinese and traditional donor aid. Most Zambian informants argue that traditional donor aid is still highly conditional. Because of this, they think that the government is looking for a less conditional alternative, which it finds in China. Moreover, because they see investments as a form of Chinese aid, it is argued that China’s aid is substantial enough to compete with traditional donor aid. The traditional donors and officials in the MoFNP, however claim that the government does not have a problem with current conditionality and is not looking for less conditional aid. Furthermore, they use a narrow definition of Chinese aid and argue that the volume of Chinese aid is too small to compete with traditional donor aid. According to them, Chinese aid is an additional instead of a competitive source of finance.

The people that see competition between China and the traditional donors, argue that the availability of Chinese economic aid gives the Zambian government more policy space, since it enables the government to finance projects that the traditional donors are unable or unwilling to fund. Moreover, they claim that the government no longer has to meet all the conditions that the traditional donors put forward. Most people however argue that the government is unable to use this policy space in order to increase its bargaining power towards the traditional donors. As discussed in my theoretical framework, next to the composition of the donor community, there are several national factors that influence the negotiating power of the recipient government. Because of Zambia’s high dependence on donor aid and a lack of capacity, the government is said to be unable to negotiate the aid it is being offered, let alone play off donors in order to get more desirable aid. Furthermore, the traditional donors are said to have penetrated Zambia’s policy making process, which allows them to influence Zambia’s choice of donors.

Possible changes in donor competition and the bargaining power of the Zambian government, are also thought to be influenced by the amount of interests that traditional donors have in Zambia. The theory argues that donors are more likely to compete and be responsive to requests of the recipient country if they have national interests to protect. Although some Zambian informants argue that the traditional donors have more or less direct interests in Zambia, most people say that the traditional donors have few strategic interests in Zambia. This reduces the likeliness of competition between China and the traditional donors and an increase in the bargaining power of the Zambian government.

Even though there are several factors that limit the probability of a decrease in traditional donor conditionality because of Chinese economic aid to Zambia, in chapter eight, I looked at my informant’s perceptions of changes in past, current and future donor conditions to Zambia. Although they cannot come up with any specific cases, some Zambian informants argue that the traditional donors have adjusted their conditions. Most people however claim that traditional donor conditionality has not changed and is unlikely to change in the future. Several informants state that current donor conditions are based on deep beliefs, which the donors see as a prerequisite for development. Because of this, they cannot do away with them. Other informants take a realist perspective and argue that the donors will not lower conditions because they do not have any interests in Zambia, for which they will stay and compete. The donors have a general interest in having a good relationship with Zambia, in order to keep Zambia’s support in international institutions. This is however unlikely to be enough for the donors to change their conditions. They are therefore more likely to refuse to make a deal or withdraw than compete by lowering conditionality. This might however be different in African countries that have strategically important natural resources or are less stable, thereby creating a possible threat for international security.

Based on current perceptions, I conclude that traditional donor conditionality towards Zambia is not changing and is also unlikely to change in the future because of Chinese economic aid to Zambia. The perceptions of my Zambian informants that argue the opposite, seem to be based on wishful thinking. Because of negative experiences with traditional donor aid in the past, many Zambians still long for an alternative, which they hope to find in China. Their expectation is reinforced by Zambia’s popular media, which frequently reports on Chinese aid to Zambia and portrays China as an attractive alternative for traditional donor aid. Furthermore, the MoFNP and the traditional donors, who are the main actors involved in negotiations over donor conditionality, say conditionalities will not change because of Chinese aid. Since they are the ones making the decisions, their perceptions carry more weight than the perceptions of my Zambian informants, who do expect changes in traditional donor conditionality. Finally, traditional donor conditions are unlikely to change in the future, because the Zambian government cannot influence all the factors that limit the likeliness of adjustments in conditionality. It can try to increase its capacity and reduce its dependence on donor aid, but it cannot influence the national context within the donor countries or change the interests that the donors have in Zambia.

Some theoretical reflections

In order to be applicable to the Zambian case, my theoretical framework needs several adjustments. All informants agree that Chinese economic aid leads to diversification of the donor community. Not everybody however thinks that this diversification will result in lower conditionality. In order to explain this difference of opinion, the theory should take into account the various definitions of traditional donor conditionality and Chinese economic aid that are being used, since these influence informant’s perceptions of possible changes in donor competition. Moreover, the theory should consider that next to the composition of the donor community, there are different national factors that influence a country’s bargaining power, such as its donor dependence and the capacity within the government. Finally, my theoretical framework is based on the Cold War period, in which African countries were of strategic geopolitical importance. According to the theory, donors need to have a certain amount of self-interest in order to stay, compete and adjust their conditionalities. The theory should however take into account that several African countries have long lost their strategic importance. Most traditional donors do not have any major political or economic strategic interests in Zambia at the moment. Because they do not have any interests to protect, they are unlikely to adjust their conditions in order to be able to compete with Chinese less conditional aid.

It will however be important to do further research on the possible consequences of Chinese economic aid for traditional donor aid and the conditions attached to it, both in Zambia and in other countries. Further research in Zambia is important because China has only recently re-entered Zambia’s donor community and its aid is increasing rapidly. As I discussed before, it is still quite soon to see any real changes. Moreover, changes in the Zambian presidency and the end of the financial crisis, can be expected to alter the current situation. It will therefore be important to do more research in a later stage. Since no empirical research has been done on the consequences of Chinese economic aid for traditional donor aid, it not yet possible to compare my findings with other research data and assess the extent to which my data can be generalized. It is therefore important to conduct similar research in other African countries. In my research, I outlined different variables, which make it unlikely that traditional donors will adjust their conditionalities in Zambia. In order to be able to verify my findings, it is important to do comparable research in countries with different circumstances, especially countries that are of strategic importance to the traditional donors, like Angola, Nigeria, Sudan and Zimbabwe. If my argument is correct, the donors will be more inclined to change their aid conditions in countries that are less aid dependent, have more government capacity and are of strategic importance to the donors.

Since my research took place in an early stage, it would have been impossible to link possible changes in traditional donor conditionality to China’s presence in Zambia. In future research, it might however be relevant to ‘measure’ conditionalities in aid contracts and MoUs between the traditional donors and African countries, which appeared after China’s re-entrance into the donor-community. Moreover, the method of CDA has much to offer and could in further research be used more thoroughly. It would be worthy to explore the difference between reality and perception more in depth, since perceptions seem to carry a lot of weight when looking at the donor-recipient relationship. Next to this, because research on traditional donor conditionality deals with the policy level, it is hard to go beyond the public discourse that is being put forward. If possible, future research should therefore try to collect data through participant observation in discussions amongst the donors, and during negotiations between the donors and the recipient government. Furthermore, it would be useful to do interviews at the donor’s head offices, since this is where the strategic policy towards China in Africa is decided upon. Finally, it is also important to do research on topics that are related to my research. As I discussed in chapter five, there are several risks attached to Chinese aid. Although my research focused on the opportunities and did not deal with the possible negative consequences of Chinese aid in depth, research on this topic is important, since it might hinder development in African countries.

As I stated in the beginning of this thesis, over the years, traditional donor conditionality has become highly intrusive on the policies of African states. In my research, I found that many Zambian informants think traditional donor conditionality is over-ambitious and time-consuming, which can have damaging consequences for the recipient country. Because of this, they express the hope that something will change because of Chinese economic aid to their country. In this thesis, I however concluded that traditional donor conditions are not changing at the moment and the traditional donors are also unlikely to adjust their conditions in the future. If the government uses its increased policy space in a wise way, China’s re-entrance into Zambia, can however still allow Zambia to discard conditions that are damaging, ineffective, or out of date, thereby giving it more space to try new development paths.

He, Wenping (2007), “The Balancing Act of China’s Africa Policy,” in China Security, Vol. 3, No. 3, pp. 23-40.

[…] Helping Africa Help Itself

Perhaps the most salient feature of the Sino-African relationship is that it is progressive and forward-thinking. China is looking to further cooperation with Africa both horizontally and vertically – to increase interaction between China and Africa at a multitude of political, social and cultural levels while also expanding economic cooperation beyond traditional sectors to all areas of com­merce, industry and technology.30 Released by the Chinese government in 2006, China’s first white paper regarding its relations with Africa, China’s African Policy, elaborates a detailed plan for future relations with Africa including political co­operation (on international affairs and between political parties and political organizations), economic cooperation (resource exploration and financial deal­ings), and cooperation in the fields of education, science, culture, health and so­cial work, as well as peace and security.31

While China’s African Policy is a blueprint for future relations, FOCAC is the vehicle to explore and implement effective methods to realize the goals of the white paper. This forum is the culmination of a half-century of China’s active di­plomacy on the African continent. Established in October 2000, it is also the first multilateral, consultative mechanism between China and Africa. Since the Cold War, there is an increasing awareness among African countries of the need to unite to increase their power by “speaking with one voice” to the outside world in order to effectively pursue goals of self-develop­ment and independent conflict resolution. The estab­lishment of the African Union reflects a deep desire to achieve this. A collective multilateral mechanism, such as FOCAC, provides Africa with a platform to take action and strengthen its position through integrated and strategic policy formulation on a comprehensive range of African issues. Lastly, it reduces re­dundancy and increases efficiency in diplomatic interaction, no small cost-saving when considering the number of sovereign nations in Africa.

Unlike the many “clubs” around the world that allegedly provide assistance for development in Africa, FOCAC does not attempt to exhibit its work like a showcase for acts of benevolence. Rather it is a low key, concrete, stable and yet very important platform to build relations between China and African countries. Back in 2005, the Group of Eight countries made an historic decision to forgive $50 billion in debt to 18 of the poorest countries in the world (14 of them in Africa) and to vastly increase their aid to Africa.32 Yet, to date, these promises have not been honored. China, on the other hand has taken action toward debt reduction and other commitments over its’ past six years of aid expansion in Africa. Up to 156 debts totaling $1.4 billion from 31 poor and heavily-indebted Af­rican countries have been reduced and/or exempted by China. Furthermore, ap­proximately 200 commodities from the least developed countries in Africa have been given tariff-free status in Chinese markets.33 China and Africa continue to explore new ways to effectively combine FOCAC’s action plans with “The New Partnership for Africa’s Development,”34 which is set to inject new impetus into future cooperation.

China must continue to focus on its growing relationship with Africa – not only to rectify current criticism and doubt from the international community, but in an effort to carry out its promises and commitments. The Sino-African relationship is deepening in an array of political, economic, foreign policy, so­cial development and environmental areas, all of which are important for domes­tic stability in both China and African nations, their bilateral relations and the broader international community. While China faces an extremely difficult task to follow through on its commitments to Africa, there is no doubt that China will not only fulfill such promises, and also do so with a degree of integrity that will produce effective, high-quality outcomes.

Ho, Peter (2009), “Beyond Development Orthodoxy: Chinese Lessons in Pragmatism and Institutional Change,” in Kremer, Monique, van Lieshout, Peter and Went, Robert (eds.), Doing Good or Doing Better: Development Policies in a Globalizing World, pp. 177-210, Amsterdam University Press.

Implications of Chinese Development: Some Concluding Observations

The effects of China’s development are visible everywhere: international markets are increasingly interwoven with the Chinese market and vice versa. China has become the workshop of the world, and not only the proverbial ‘sweatshop’ for cheap textiles, shoes and toys. On the contrary, in recent years China has shifted to the production of hi-tech electronics, cars and computers. This shift is testimony to China’s growing economic, scientific and innovative power for decades to come. The Chinese economy generates a huge capital surplus and, in turn, attracts even greater flows of investments. As the enormous capital surplus seeks its way out of the country, the world is entering a new era of “globalization with Chinese characteristics”. Yet, just a couple of decades ago China was still a developing country.

How did this rapid development come about, and what might the development sector learn from it? Many scholars see the Chinese state as decisive in fostering development and talk about “state-led development” and the “Chinese developmental state” (So 2001; White 1988). Others draw attention to China’s rapid industrialization and the “local corporatist state” – an efficient partnership between local government and rural industries (Oi 1995). Yet, these explanations neglect to explore how the state channels development. In this regard, knowledge about the change of institutions is critical. We have little information about the choices of institutional change that Chinese policymakers faced: what form institutions should take; whether new institutions should be established; and if so, when they should be introduced. At a certain point in time, any national government that has started down the development road is confronted with the question of what position informal institutions, such as customary and communal land use arrangements, should be accorded relative to formal, statutory institutions. Should the state actively intervene in communal, agrarian society by setting up new institutions, or should informal institutions be simply incorporated into the national regulatory framework? Should traditional, informal sectors be left alone, or should they be restructured to fit the commercial demands of national and international markets?

The Chinese case proves these questions to be a non-issue. The debate should not be about the desired level of formality or informality of institutions, their required level of privatization or communality, but about their current level of credibility. Only by looking at the extent to which institutions are supported or contested by social actors can states ultimately assess their viability. There is nothing to gain by spending huge amounts of time, energy and financial resources on the establishment of institutions that a few years later simply prove to be ‘empty institutions’. The development sector might have much to learn in this respect, whether we talk about large-scale land titling projects, irrigation and rural development schemes, civil society building projects or economic restructuring programs. One of the core institutions that moved forward China’s development is the Household Contract Responsibility System. It is the institutional successor of a communist, bureaucratic Moloch – the People’s Communes. But different than the commune system, the agricultural lease system manages to provide a stable livelihood to the majority of the population while enabling rural industrialization, the transfer of agricultural surplus labour, and the overall diversification and modernization of agriculture.

It is becoming increasingly clear that China’s agricultural lease system is converging towards tenure systems elsewhere in the world.58 For instance, it bears a striking resemblance to the system of long lease in some parts of the Netherlands under which municipal governments own land, but lease it to individuals for 55 or 75 years. One might also say it is similar to the British system of Crown land that entitles tenants to a ‘freehold’ – a lease as secure as the civil law definition of absolute ownership.59 There was, however, never an institutional plan or blueprint by the Chinese state to move the nation towards such a tenure system. It is the result of institutional evolution. The main reason why the state was successful in channelling such evolution is the result of the main features of Chinese development: credibility and gradualism.

On institutional change, Stiglitz once remarked: “Typically, institutions (…) develop an internal coherency that is not too dissonant with the external environment they must face. When it becomes too dissonant, then institutions must change” (2000: 64). China proves him right about the internal coherency. The credibility that the Household Contract Responsibility System has enjoyed throughout the reforms is all about internal coherency. It is the reason why China’s lease system – contrary to what axioms of neo-classical theory predict and postulate – has succeeded in coupling stable, sustained development with a high degree of insecurity, informality, and communality. On the other hand, whether institutions must change if their internal coherency gets out of syncopation with the environment is by no means evident. In fact, if the Chinese case proves one thing beyond any doubt, it is that institutional innovation is no task for the state. Contrarily, institutional innovation was initiated at the rural grassroots.

Was China’s agricultural lease system then a fully fledged, autonomous peasant movement? As a Chinese scholar described with passion:

“A spontaneous, unorganized, leaderless, nonideological, apolitical movement, and it is rapidly sweeping away everything in its path. (…) The farmers of China are changing China this time around – not the leaders, not the bureaucrats, not the cadres, not the intellectuals but the farmers themselves” (Zhou 1996: 1-4).

Appealing as it may seem, such a romanticized idea misreads China’s institutional dynamics. The evolution of credible institutions is not a matter of one or the other – state versus society, dependent versus independent variable, cause versus effect – it is a matter of interaction. Thus, while China’s institutional innovation started at the grassroots, it was the state that allowed it to happen, protected it when it was contested, and codified and upscaled it once it had proven effective. Doing this regardless of an institution’s form or function – formal or informal, secure or insecure, private or common – touches on the core of credibility. One can only concur with Grabel that “credibility is always secured endogenously (…), rather than exogenously by virtue of the epistemological status of the theory that promotes it” (Grabel 2000: 2-3).

While credibility is one crucial component in Chinese development, gradualism is certainly the crucial other. Only if we allow for the elapse of time can we truly see how state and society interact in the shaping of institutions. Ironically, precisely this fact tends to be neglected now that the Household Contract Responsibility System has proven itself. Once more, similar to the 1980s and 1990s, there are forceful voices that call for the commercialization, privatization and formalization of land tenure. During the drafting of the 2007 Property Law, many scholars and congress members felt that the state should no longer postpone market liberalization, but push forward the commercialization of rural land tenure.60 They see the recent sprouts of a rudimentary land market around the cities as substantiating their argument.61 These proponents forget that it was gradualism that facilitated the “capitalist market experiments” within a context of state-upheld institutional ambiguity, and that it took two decades of local experimentation before they were finally legalized. More importantly, the fact that in some regions the Household Contract Responsibility System seems to be changing in nature does not preclude that it still functions as a social welfare net for the rural populace in most parts of China. The continued support of the majority of the farmers for an egalitarian land distribution points in this direction.

China’s tremendous development has effectively split the nation in two: a largely agrarian society with the main part of the population still under-employed on small-scale, fragmented family farms versus an industrialising, urbanizing society with a rising middle class eager to buy their own cars and houses and chose their own political representation. Carefully balancing the hugely different institutional constellations of these two worlds is the daunting challenge that confronts the Chinese state. As the villages around the cities are integrated into the urban and global economy, the central state starts to ponder how the institutional change of the evolving lease system can be channeled. It does so by looking outside China in the hope of finding institutional histories with converging trajectories. China’s quest for institutional parallels means that we have come full circle: at exactly this point, opportunities for a new kind of development cooperation are opened up. Contrary to the popular belief that China is no longer a developing country, the Chinese state still faces fundamental choices of institutional design, quite different from those faced by governments in, for instance, Western Europe and North America. Nowhere is this more obvious than around the institutional governance of land. Important questions that China seeks to answer in this respect are: What are the possible drawbacks of a land lease system? Or, can land lease sufficiently ensure social actors’ confidence in the value of property rights even if ownership is not theirs? The Dutch system for instance of long lease has existed since as early as the 15th and 16th century. Understanding why this institution has survived for so long is critical for the Chinese authorities and can aid them in better facilitating their own institutional experiments. And it is important for them to know the historical and cultural reasons that caused some cities such as Amsterdam and The Hague to adopt long lease, while others adopted private ownership (Koerts 2006: 12).

For one thing, China lacks a cadastre in the countryside, and the rights of ownership and individual lease still need to be titled and registered. A basic institution in society that facilitates economic transfers, such as a cadastre, takes many decades to evolve and is strongly dependent on country-specific circumstances. The Dutch cadastre, today renowned for its efficiency, transparency and accuracy,62 dates back almost two centuries to 1832. During this long time span the Dutch have made certain institutional choices, for instance, to protect the truthful owner rather than the buyer of the property.63 Only after a verdict of the Supreme Court in 1838 was this regulation formally established. For a country like China where the urban sprawl has caused the forced evictions of millions of farmers and homeowners, the protection of the true owner rather than the buyer might thus have important legal consequences.64

China no longer needs conventional aid such as for poverty alleviation, literacy programs, or the building of schools, roads and hospitals. But there is a heartfelt need for new ways of development cooperation in the form of international exchange, action research and pilot projects on institutional change. Such development cooperation embraces ‘country-drivenness’ and ‘bottom-up development’ as we are dealing with a state that drives its own development, while knowing how to facilitate rather than to intervene in bottom-up innovation. For China, new development cooperation can help to grasp the opportunities and constraints of its own institutional architecture. For us, China’s successful divergence from widely accepted theorems is well worth studying in greater detail. It might have profound implications for our conceptualization of development. The balance between state and society, informality and formality, private and common, intervention and a “hands-off” approach, needs serious reconsideration. As China’s institutional constellation step-by-step consolidates in one way or the other – a British system of Crown land or the Amsterdam system of long lease – it will prompt us to rethink theory and praxis of development, and shift to new ‘rules of developmental engagement’. It all comes down to gradualism and credibility, or what the Chinese call pragmatism.

Information Office of the State Council of the People's Republic of China (2005), China’s Peaceful Development Road.

I. Peaceful Development Is the Inevitable Way for China’s Modernization […]

II. Promoting World Peace and Development with China’s Own Growth

Peace is the foundation for development while development is fundamental for peace. For years, the Chinese government and people have made unremitting efforts to create a peaceful international environment. They cherish dearly the peaceful international environment jointly created by the peace-loving and progress-seeking countries and peoples, concentrate on their own construction and whole-heartedly seek development, and strive constantly to make positive contributions to world peace and development with their own growth, and promote human civilization and progress.

China's development needs a peaceful international environment. Since 1978, when the policies of reform and opening-up were adopted, China has endeavored to develop itself within a peaceful international environment. Its GDP has increased from 362.4 billion yuan (about US$215.3 billion if converted directly from Renminbi into US dollar at the average exchange rate of that year) to 15,987.8 billion yuan (about US$1931.7 billion if converted directly from Renminbi into US dollar at the average exchange rate of that year) in 2004, an average growth rate of over 9 percent per annum, calculated according to constant price. Its per-capita GDP has risen from less than US$300 to more than US$1,400. China has also made new progress in its building of political civilization, with its democratic system being improved continuously, the freedom and rights of citizens being protected and guaranteed by law, and its people exercising their rights of democratic election, decision-making, administration and supervision in accordance with the law. A legal system centered on the Constitution has taken initial shape, and the basic strategy of ruling the country by law has been implemented. Rapid progress has been scored in its education, science and technology, culture, health, sports and other undertakings, and the increasing spiritual and cultural needs of the people have been constantly satisfied. The construction of a harmonious society has been reinforced, and the state is working hard to realize and safeguard social fairness and justice, increase creativity of the whole society, beef up social construction and administration, and maintain social stability and harmonious relations between man and Nature.

China's development is an important component of global development. China has promoted world peace with its own development and made contributions to the progress of mankind.

China has made contributions to the sustained development of human society. Based on previous experience and the fruits of modern civilization of mankind, it has adopted the scientific outlook on development to transform its concepts, create new modes for growth and enhance the quality of development. Over the years, China has persisted in exploring a new road to industrialization, featuring high scientific and technological content, good economic returns, low resources consumption, little environmental pollution and a full display of advantages in human resources, and striven to steer the entire society along a road of sustained development of civilization, with advanced production, affluent life and favorable ecological conditions. China's success in population control has retarded the expansion of the population of the world as a whole. China emphasizes energy saving, and has adopted various measures in this regard. During the period 1980-2000, its GDP quadrupled, but the annual consumption of energy only doubled. Due to China's intensified efforts at environmental protection, its dust discharge has remained the same as in 1980 despite a big increase in installed thermal-power capacity. Its energy consumption of per 10,000-yuan GDP in 2004 dropped by 45 percent compared to 1990. China has made medium- and long-term plans for energy conservation, aiming to keep an annual energy-saving rate of 3 percent by 2020, to save 1.4 billion tons of standard coal.

China has made contributions to reducing human poverty and improving the quality of life. It has created a miracle by feeding nearly 22 percent of the world's population on less than 10 percent of the world's arable land. The living standards of its 1.3 billion people are constantly improving. The Chinese government has lifted 220 million people out of poverty, and provided minimum living allowances to 22.05 million urban residents and aid to 60 million disabled people. The life expectancy of the Chinese has been extended from 35 years before New China was founded in 1949 to 71.95 years today, close to that of moderately developed countries.

China has made contributions to safeguarding world peace and promoting international cooperation. On the basis of the Five Principles of Peaceful Coexistence, China has developed friendly, cooperative relations with other countries and promoted peaceful coexistence and equal treatment among countries. China has always adhered to the principle of being a friendly neighbor; and has constantly developed good and cooperative relationships with surrounding countries and other Asian countries and expanded common interests with them. China has established various cooperative relationships with major powers, and unremittingly augmented mutual dialogues, exchanges and cooperation. China has also expedited cooperation with a vast number of developing countries, to seek common development by drawing on one another's advantages within the South-South cooperation framework. Active in the settlement of serious international and regional problems, China shoulders broad international obligations, and plays a responsible and constructive role.

China has made contributions to world economic development. In recent years, despite increasingly severe global economic fluctuations, China's economy has maintained a stable and relatively fast growth, bringing hope and a new driving force to world economic development. Statistics released by the World Bank show that China's economic growth contributed on average 13 percent to world economic growth from 2000 to 2004. In 2004, the world economy reported the swiftest growth in 30 years, while China's economy grew by 9.5 percent and became a key driving force for the former. Also in 2004, China's import and export figure doubled that of three years previously, reaching US$1,154.8 billion, and its import figure nearly doubled that of three years previously, reaching US$561.4 billion. By the end of 2004, China had made use of US$745.3 billion paid-in foreign capital, and approved more than 500,000 foreign-funded enterprises.

China has made contributions to the stable development of surrounding areas. China has more than 20 neighbors that either border on its territory or lie across the nearby seas. China's sustained economic growth, social stability and its people's peaceful life also benefit its neighboring countries. The Asia-Pacific economy kept a 6-percent growth between 1999 and 2004. To ensure a stable environment for the continuous development of its surrounding areas, China overcame arduous difficulties at the time of the 1997 Asian financial crisis, and stuck to the principle of keeping the value of the Renminbi stable while expanding domestic demand, and helped to the best of its ability the victim countries to weather the crisis. China played its role in finally overcoming the crisis. In the case of the 2003 sudden outbreak of SARS, the Chinese government took decisive steps, and cooperated with its neighbors in effectively curbing it. Upon the occurrence of the Indian Ocean tsunami in late 2004, the Chinese government and its people offered timely and sincere aid - the largest external aid in the history of New China - to the suffering countries in their rescue and re-construction effort. The Chinese also expressed great sympathy and extended assistance when South Asia was struck by massive earthquakes in October 2005.

Despite gigantic achievements, China still remains the largest developing country in the world, with a formidable task of development lying ahead. According to the latest statistics released by the World Bank and statistics recently released by China, in 2004, China's aggregate economic volume accounted only for 16.6 percent of that of the US, and its per-capita GDP was merely 3.6 percent that of the US and 4.0 percent of Japan, ranking 129th among 208 countries and regions around the world. By the end of 2004, 26.1 million rural Chinese still lived under the poverty line, more than 100 million farmers have to be provided with jobs elsewhere, and the government is obliged to create jobs for nearly 24 million urban and rural residents every year. There is still a long way to go for China to reach the level of the moderately developed countries and achieve common prosperity for the whole country. China still needs to make persistent efforts to strive for a peaceful international environment for its own development, and promote world peace and development with its own growth. This is particularly significant for both China and the world as a whole.

III. Developing by Relying on Its Own Strength, Reform and Innovation […]

IV. Seeking Mutual Benefit and Common Development with Other Countries

China cannot develop independently without the rest of the world. Likewise, the world needs China if it is to attain prosperity. Following the trend of economic globalization, China is participating in international economic and technological cooperation on an ever larger scale, in wider areas and at higher levels in an effort to push economic globalization towards the direction of common prosperity for all countries. Today, the mainstream of international trade is to share successes, with all as winners. China adheres to its opening-up strategy for mutual benefit. For this, it has made conforming to China's own interests while promoting common development a basic principle guiding its foreign economic and trade work, develops its economic and trade relations with other countries on the basis of equality, mutual benefit and reciprocity, and makes constant contributions to the sustained growth of global trade.

China has exerted itself to push forward multilateral economic and trade relations and regional economic cooperation, actively participated in the formulation and execution of international economic and trade rules, and joined various other countries in settling disputes and problems emerging in their cooperation, so as to promote the balanced and orderly development of the world economy.

China has been an active supporter of and participant in multilateral trade system. Since its accession to the WTO in December 2001, China has strictly kept its commitments to create more favorable conditions for international economic and technological cooperation. China has sorted out and revised some 3,000 laws, regulations and department rules, continually improved its foreign-related economic legal system, and enhanced the transparency of its trade policies. China has cut its customs tariffs step by step, as promised, and by 2005 its average tariffs had been reduced to 9.9 percent, and most non-tariff measures had been cancelled. Banking, insurance, securities, distribution and other service trade sectors have opened wider to the outside world. Of the 160-odd service trade sectors listed by the WTO, China has opened more than 100, or 62.5 percent, a level close to that of the developed countries. China has actively pushed ahead with a new round of multilateral trade negotiations, participated in talks on various topics, especially on agriculture, market access of non-farm products and the service trades, and played a constructive role in helping developing and developed members reduce disputes through talks. China, together with other WTO members, has done a lot of work to spur substantial progress to reach early agreement among the negotiators.

China has continuously stepped up participation in regional economic cooperation. The building of the China-ASEAN Free Trade Area is going full steam ahead. Following the practice of zero tariffs on farm products under the "Early Harvest Program," the Agreements on Trade in Goods and the Dispute Settlement Mechanism Agreement were formally signed in November 2004, and in July 2005 the free trade area launched its tariff concession program, clearing the way for realizing its goals. At present, the building of the Shanghai Cooperation Organization is proceeding with comprehensive and pragmatic cooperation, and its process to facilitate trade investment has been launched in an all-round way. China has also initiated negotiations on such free trade areas as the China-Southern African Development Community, China-Gulf Cooperation Council, and China-New Zealand, China-Chile, China-Australia and China-Pakistan, and signed relevant agreements with its partners. China is also an active and pragmatic participant in the activities of the Asia-Pacific Economic Cooperation, Forum on China-Africa Cooperation, Sino-Arab Cooperation Forum, Asia-Europe Meeting and Greater Mekong Subregion Economic Cooperation Program. China advocates the liberalization and facilitation of investment in bilateral trade, and has signed bilateral trade agreements or protocols with more than 150 countries and regions, bilateral investment protection agreements with more than 110 countries, and agreements with over 80 countries on the avoidance of double tariffs.

China sticks to the principle of mutual benefit and win-win cooperation, tries to find proper settlement of trade conflicts and promotes common development with other countries. Trade conflicts are quite natural in international economic exchanges. Following international practice and WTO rules, China has tried to resolve such conflicts through dialogue on an equal footing and through the WTO dispute settlement mechanism. When promulgating and implementing domestic economic policies, it tries to take international factors and influences into account as well as the impacts its own economic growth imposes on the outside world. Based on its reform and development, China is serious in judging the effects its exchange rate reform may bring to surrounding countries and regions, and the global economy and finance. It has thus advanced the reform in a steady way, adopted a managed floating exchange rate regime based on market supply and demand, and linked and adjusted it according to a basket of currencies, so that the Renminbi exchange rate will remain stable at a reasonable and balanced level. China has intensified its protection of intellectual property rights, improved the relevant legal system, and tightened up law enforcement to crack down on all kinds of violations.

Growing China is active in international economic and technological cooperation, and provides good opportunities and a huge market for the rest of the world. All countries, the developed countries in particular, have reaped lucrative benefits from investment in and service trade with China.

China's active involvement in the international division of labor and cooperation is conducive to the reasonable and effective distribution of global resources. As the largest developing country in the world, China boasts an abundant labor force, the quality of which has been constantly improving. It is a natural advantage of China in developing labor-intensive industries and some technology-intensive ones. Along with economic and social progress, as well as the improvement of the living standards of its people, China's demand for capital-, technology- and knowledge-intensive products keeps increasing, offering great opportunities for foreign products, technologies and services, as the country has now evolved into an internationally acknowledged big market. China's foreign trade is mutually supplementary with many countries. About 70 percent of China's exports to the US, Japan and the Europe Union (EU) are labor-intensive, while 80 percent of its imports from the three are capital-, technology- and knowledge-intensive. In the new structure of international labor division, the country has become a key link in the global industrial chain.

By importing cheap but good-quality products made in China, the importing countries can reduce their expenditure and pressure caused by inflation while satisfying the demands and enhancing the welfare of their consumers. China's labor-intensive products enjoy unique comparative advantages in the global market. Since 1997, US consumers have saved billions of dollars every year by buying Chinese commodities - US$600 billion in the past decade and nearly US$100 billion in 2004 alone.

The expansion of China's reciprocal economic and trade relations with other countries has benefited both in a tremendous way. China's imports have kept growing by a yearly 16 percent since 1978, and the country imported commodities worth US$1,270 billion in the three transitional years following its WTO accession. In 2004, China became the world's third largest importer, next only to the US and Germany, with US$148.47 billion of increased imports or 9 percent of the world's total growth of imports. Also in 2004, China's trade volume with the EU, the US and Japan totaled US$177.3 billion, US$169.6 billion and US$167.8 billion, respectively, making them China's top three trade partners and main sources of foreign investment. In the same year, China's trade volume with Asian countries and regions amounted to US$664.9 billion, 34.2 percent up over that of the previous year. This figure accounted for 57.6 percent of China's total foreign trade value. In addition, China has become the fourth largest trading partner of and a fast-growing market for ASEAN.

The huge market of China offers such great opportunities for international capital that investors around the world have benefited from China's rapid economic growth. From 1990 to 2004, foreign investors repatriated US$250.6 billion in profits from China. In 2004, US-funded enterprises in China generated US$75 billion in sales revenue in China, and their products earned another US$75 billion elsewhere. A 2005 survey by the American Chamber of Commerce-People's Republic of China shows that 70 percent of American firms are making profits in China, and about 42 percent report a higher profit rate than their global average.

China's growing investment abroad has also fueled the economies of the destination countries. At the end of 2004, China's net non-banking direct investment abroad amounted to US$44.8 billion, spreading to 149 countries and regions. Among which, US$33.4 billion, or 75 percent, went to Asia.

China's foreign economic and trade cooperation has tremendous potential and boosts bright prospects. In the post-WTO era, China imported US$500 billion worth of commodities annually during the period from December 2001 to September 2005, which meant 10 million jobs for the countries and regions concerned. In the next few years, it will import US$600 billion worth of goods annually, and the amount will exceed US$1,000 billion by 2010. By 2020, the scale and total demand of the Chinese market will quadruple that in 2000. During the process, the rest of the world will find development and business opportunities in their reciprocal cooperation with China, which will greatly accelerate the growth of the global economy.

V. Building a Harmonious World of Sustained Peace and Common Prosperity

Mankind has only one home - the Earth. Building a harmonious world of sustained peace and common prosperity is a common wish of the people throughout the world as well as the lofty goal of China in taking the road of peaceful development.

China holds that the harmonious world should be democratic, harmonious, just, and tolerant.
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