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The Trump administration is worried about the role of Chinese finance in spreading Marxism around the developing world. But it’s Chico Marx, not Karl, that they should be focused on. Groucho Marx’s brother famously asked in Duck Soup, “who you going to believe, me or your own eyes?” And so, members of President Trump’s team are sounding the alarms about China’s lending to developing economies, attempting to convince these countries that China’s “state-driven” lending model will lead to wasteful projects and amounts to “debt trap diplomacy.”

Center for Global Development research has found that debt risks are real in some countries, and Chinese lending practices too often lack appropriate disciplines to guard against over-indebtedness. But framing all Chinese lending in these negative terms is misguided. And for many, if not most, developing country finance ministers, it sounds a lot like Chico Marx. They can believe their own eyes, which see productive Chinese-financed infrastructure investments in their economies, or Trump officials who are telling them that it is all a waste or worse.

New evidence from AidData, a research lab at the College of William and Mary, brings to light the degree to which Chinese investment in developing country infrastructure is generating economic growth effects and also improving the distributional impact of growth in these economies. 

AidData’s newly released study, Connective Financing, measures the distributional effects of Chinese development projects and finds that investments in roads, bridges, railways, tunnels, seaports, and airports reduce economic inequalities within and across the subnational jurisdictions where they take place. The authors conclude that Chinese investments in "connective infrastructure” spread economic activity to the rural hinterlands by helping households and firms reach more distant markets and places of employment. 

What does all of this mean for US policy? Last week, the White House issued a strong rebuke to El Salvador, suggesting that US aid to the country could be in jeopardy after the Salvadoran government established diplomatic ties with China and severed ties with Taiwan. The move by El Salvador (as well as the Dominican Republic and Panama) belies Chinese officials’ claims that they ask for nothing in return for their finance. But it also raises considerable risk that the United States will bungle its response based on a miscalculation of the value of Chinese finance.

The United States currently provides about $75 million in aid to El Salvador each year, most of it on “governance” issues. It’s unclear how much China may be willing to invest in El Salvador and Central America more broadly. But attempting to convince these countries that Chinese investments are bad and forcing them to choose between relatively modest US aid and larger-scale Chinese-financed infrastructure could well be a losing proposition for US interests in the region.

Disclaimer

CGD blog posts reflect the views of the authors drawing on prior research and experience in their areas of expertise. CGD does not take institutional positions.