The Anatomy of Modern Development

Chinese President, Xi Jinping speaking at the 2nd Belt and Road Forum, 
Credit: The Presidential Press and Information Office of Azerbaijan / Wikimedia Commons

Introduction

Over the past century, the world has witnessed an era of unparalleled economic growth: around the world, incomes have risen and poverty has been alleviated. But these advancements have been far from universal with 1.1 billion people, representing 14% of the global population, still being classified by the United Nations Development Programme as “living in acute multidimensional poverty.”  Many of the world's poorest nations face the task of playing catch up with the original, predominantly Western members of the Organization for Economic Co-operation and Development (OECD), who are among the few who have benefited most greatly from the past century of economic growth. Now, those same OECD countries find themselves in a position where they are expected to address the growing global development gap, either out of a moral obligation to correct previous injustices in overseas exploitation or by a more pragmatic outlook with projects in the developing world often experiencing a greater return than equivalent projects in the developed world. In recent history, the West has been a dominant force in developmental assistance, but the ascension of China to become a leading economic power has, for the first time, presented the world with an alternative. The Asian giant has in large part been successful in leveraging its recent successes in developing its domestic economy to undermine Western developmental efforts, highlighting the need to reform much of the West’s developmental model.

Anatomy of Western Developmental Assistance

Modern developmental assistance primarily comes in three forms – lending, foreign direct investment, and nongovernmental donations. The model that is often utilized relies on the premise of multilateral lending, which entails governments providing funding to intergovernmental organizations such as the International Monetary Fund (IMF) and OECD's Development Assistance Committee.  Using this funding, these organizations then fulfill several functions such as providing low-interest loans, direct aid, or economic advising. The combined operations of these groups are significant, with the IMF alone lending $113 billion in 2022.  Countries are eligible for developmental assistance if their relative poverty falls below a certain threshold. The threshold often changes, but for the fiscal year 2025, the International Developmental Association of the World Bank has set the cutoff as any country with a gross national income per capita falling below $1,335, making 78 countries eligible for IDA lending. The funding obtained from said programs can be utilized in several ways, such as paying government wages, constructing key infrastructure, funding schools and healthcare, and subsidizing key industries. While robust, it remains a fact that this model possesses shortcomings that have had many consequences for developing countries.

Criticism of Western Development Assistance

As time has progressed, the long-term implications of multilateral lending are becoming increasingly apparent, revealing fundamental flaws with the current international development regime. For sustained growth to occur, investment must be going towards improving the productivity of a country's industries and the promotion of strong institutions. Unfortunately, international developmental assistance often fails in this regard. Foreign aid packages “that often lack proper oversight” frequently lead nowhere, either due to institutional deficiencies or government corruption, such as the case of the Middle-Eastern country of Lebanon where decades of developmental aid resulted in underwhelming returns. 

Another major flaw of the international development regime is the rising debt burden of aid. The prevalence of multilateral lending paired with the historic ineffectiveness of international development assistance has created a situation where developing countries borrow, only to find themselves burdened by the accumulation of interest. In 2023 the servicing of external debt by developing countries alone reached a record equivalent of $847 billion. Argentina, Egypt, and Ukraine were the largest debtors among the 94 countries who held a combined $150 billion of outstanding debts to the IMF in early 2024. But even at lower levels multilateral lending can lead to disaster for cash-strapped countries. In Kenya, mismanagement of $3.6 billion has caused debt servicing to consume 60% of government revenue. In response, the IMF imposed austerity measures upon the Kenyan government drastically raising taxation and cost of living. Countries with large external debts are forced to face difficult decisions. Economic measures meant to address repayment often necessitate a decrease in social spending and increases in taxation both of which impact quality of life. Additionally, the lack of available reserves makes it difficult to promote industrial efforts and reduces investor confidence, thereby limiting future foreign investment in the host country.

Anatomy of Chinese Development Assistance

A factor that has accentuated the flaws of Western development is that, for the first time in recent history, the West has a direct competitor in China. China offers an attractive partner to developing countries, only recently experiencing its own explosive economic growth. Having maintained a steady 10% annual growth rate for nearly three decades, China’s rapid transition from an agricultural state to a centralized industrial powerhouse represents the single greatest poverty reduction event in human history. Now, developing countries are looking to replicate this result. To achieve this, China focuses directly on raising productivity and developing infrastructure, an effort characterized by its flagship Belt and Road Initiative (BRI). Touted as the ‘new Silk Road’, Beijing officials aim to expand trade linkage through the construction of infrastructure across Eurasia and Africa. Since its founding in 2013, the BRI has become China’s preferred state apparatus for foreign direct investment (FDI), accounting for $USD 1 trillion of FDI over its first ten years of operation. BRI projects tend to prioritize the physical infrastructure related to trade such as ports and highways, while also investing in the extraction of natural resources.

China’s go-to tool for overseas investment has been Build-Operate-Transfer agreements (BOTs). Under a BOT agreement, China is responsible for the funding and construction of a project with the understanding that whatever is built will be owned and operated by Chinese nationals until the host country can afford to repay for the project. Upon repayment ownership will be transferred from China to the host country. It is estimated that the BRI has seen moderate success, lowering the cost of international trade, directly contributing to a 4.9% increase in trade volume within the BRI, and raising an estimated 7.9 million people out of extreme poverty.

Criticism of Chinese Development Assistance

While achieving some measurable success, China’s developmental model has been heavily criticized for what Western economists view as its “debt-trap” diplomacy. These criticisms center around cases where countries were unable to make payments on loans from China, resulting in an indefinite pause in the BOT process. For Sri Lanka, this meant granting China a 99-year lease after the country was unable to repay loans taken to fund the construction of a deep-water port. The result of debt-traps is that China maintains control of vital infrastructure across the developing world. While holding some merit, this view has since been debunked, with the emphasis being placed more on mismanagement by the host country than malicious practices by China. 

Far more concerning is China’s lack of emphasis on human rights and its active encouragement of corruption. As an authoritarian state, China holds few reservations as to who or where they lend. Officially, China maintains a “non-interference policy”, refraining from becoming involved in a recipient country's domestic politics. While setting off alarm bells in the West, China’s non-interference policy has been an attractive component of Beijing's aid programs. In 2023, developing countries made up the lion's share of the 88 countries described as autocracies, often resulting in funding going towards countries with weak democratic institutions. Western institutions frequently leverage aid to promote democratic institutions within developing countries. In contrast, China’s approach assures dictatorial regimes that aid won’t be conditional on threatening long-term regime survival. In exchange, politicians are expected to give special treatment to Chinese corporations, many of whom hold poor human rights records. A 2017 report found that “60 to 87 percent of Chinese firms” admitted to bribing officials to obtain licenses and a 2021 report recorded a total of 679 human rights abuse allegations linked to Chinese overseas business between 2013 and 2020. China’s approach to development offers an alternative that entrenches the existing ruling class and enriches corrupt public officials, a fact that has attracted many illiberal nations to Chinese initiatives. 

The Future of Developmental Assistance

The ineffectiveness of developmental assistance and crippling debt burdens necessitate reform of international developmental assistance mechanisms. To help countries currently in crisis, it is necessary to alleviate debt by reforming formal debt resolution mechanisms. In this regard, some progress has already been made. The largest global lenders, the World Bank, G20, and the IMF recently formed the Global Sovereign Debt Roundtable. This group aims to more effectively enable the restructuring of debt packages. Internally, groups such as the IMF are pursuing reforms to allow more flexibility for burdened countries. While a step in the right direction, these efforts fail to generate the systemic change necessary to address debt burdens and accelerate development progress. Ultimately, it will be necessary for multilateral lenders to forgive the debts of the world's most burdened countries rather than simply restructuring their debt to give countries more time to pay.

Moreover, to prevent developing countries from falling into future debt traps, institutions must conduct greater diligence when evaluating projects. To do so, oversight mechanisms must be bolstered to ensure that capital is going towards raising productivity and state capacity within the developing world. By raising the efficacy of foreign aid measures and reducing the likelihood of bad outcomes, the West can raise the intrinsic value of its programs, which could offset China’s current advantage in international developmental assistance.