Chinese Aid Projects and Local Tax Attitudes: Evidence from Africa

Abstract

AbstractThe provision of Chinese aid to Africa is characterized by a policy of minimal conditions, whereby aid is extended to African leaders in response to their requests. This approach may afford African leaders greater discretion in expediting the implementation of Chinese aid projects. However, it also renders Chinese aid vulnerable to corruption, as leaders may exploit it to secure political favor for a specific region without the need to adjust government tax and spending policies. Such a characteristic of Chinese aid projects may ultimately shape local attitudes towards taxation and, thereby, influence state–society relations. This paper puts this claim to an empirical test using data from the Afrobarometer surveys and the AidData. The results indicate that exposure to Chinese aid projects creates negative perceptions among citizens regarding the state’s tax enforcement behavior. Interestingly, the study also reveals a positive association between Chinese aid and tax morale or compliance among citizens residing around Chinese aid projects. Noteworthily, these results are confined only to less democratic settings. A similar analysis for World Bank aid projects does not exhibit such a relationship. The findings suggest a tradeoff associated with Chinese aid. On the one hand, it promotes compliance among beneficiaries. On the other hand, it engenders weak tax enforcement perceptions. The implication is that if the negative consequences outweigh the positive ones, Chinese aid has the potential to undermine the government’s reputation for fiscal responsibility, which in turn poses challenges to the development of state capacity through robust fiscal contracts.