House of Commons - DFID and China - International Development Committee

DFID and China - International Development Committee Contents

1 Introduction

1. Twenty per cent of the world's citizens—1.3 billion people—live in China making it the most populous country in the world. China has experienced a sustained period of huge economic expansion: growth has increased tenfold since 1978 and until 2007 was in double digit rates. As its economy has grown, so has its influence in the world. China's decisions on how it fuels and finances its continued growth, and how it uses its new-found wealth and influence, are felt across the world.

2. China matters to aid donors such as the UK's Department for International Development (DFID) because its growing global reach—especially within Africa—has considerable influence on the achievement of development objectives such as the Millennium Development Goals (MDGs). Around 476 million people were brought out of poverty in China between 1990 and 2005. This makes it the main contributor to global progress against MDG 1, which seeks to halve world poverty. The number of the world's poor decreased by 418 million between 1990 and 2005—but if China is excluded from the calculation, the number of poor people globally would have increased by 58 million during that time.[1] These figures illustrate starkly that China is on track to meet MDG 1, by more than halving the proportion of its population who are in poverty, while many poorer countries are not only off track, but actually moving away from the Goal.

3. We decided to launch an inquiry into DFID's support to China in February 2008. Key issues for the inquiry included: the appropriate size and scope of DFID's aid programme in China; the effectiveness of the UK Government's strategy to engage with China on international development; and DFID's decision to phase out its bilateral programme by 2011. We received 16 submissions of written evidence from a wide range of stakeholders including: government departments; NGOs; academics; consultancies; and the private sector. We held four evidence sessions in Parliament between May 2008 and January 2009. We are grateful to all those who took the time to engage with the inquiry, especially given that it took place over a more protracted time period than first envisaged. Our initial plan to visit China in May 2008 had to be revised following the devastating earthquake that hit China in that month. We did not want our visit to divert attention from the recovery effort in the immediate aftermath of the disaster, and took the decision to postpone our visit until later in the year.

China's development

4. China's own record of poverty reduction and development offers many lessons for donors and developing countries. Rapid job creation and infrastructure construction have quickly pulled whole swathes of the population above the poverty line. The production of global public goods such as science and innovation has propelled China into the global knowledge economy.[2] China has been hugely successful in feeding its vast population and, given the current global problems in food production and supply, the country could have many crucial lessons to share with other developing countries.[3]

5. But it is equally clear that growth alone has not ensured poverty reduction throughout China.[4] 208 million Chinese people, or 16% of the population, live on or below the $1.25 per day poverty line.[5]This is equivalent to nearly one-third of the population of sub-Saharan Africa.[6] Poverty is concentrated in rural areas, within ethnic minorities and in western provinces. While Beijing and Shanghai have reached the development threshold of high-income countries such as Cyprus and Portugal, south-western provinces such as Guizhou bear more similarity to middle-income countries like Namibia or Botswana.[7] Inequality across China is now higher than in any OECD country: the richest 10% of the population has 35% of total income, the poorest 10% has less than 2%.[8] Now that China has emerged as a middle-income country, it needs to make more rapid progress on welfare policies and redistribution of resources from richer to poorer people through taxation and public spending.

Current challenges

6. Inequality is one of a series of internal and global challenges that are likely to affect China's development path. Another key challenge is internal migration. It is thought that China is undergoing the largest rural to urban migration in history, with an estimated 300 million people moving to cities over the next two decades.[9] The implications for the country's development are wide-ranging and include poverty for those left behind in rural areas and overcrowded, polluted cities. It is estimated that 40 million children have been 'left behind' in their home communities by parents who have migrated for work.[10]

7. The future impact of this migration will be closely allied to the effect of the current global economic crisis on China's economy. The OECD has recently predicted that the downturn is causing China's economy to deteriorate faster than most other economies (in common with other countries with export surpluses such as Russia and Germany). Annual growth predictions for 2009 are being scaled down from 9% to as low as 5%.[11] This is causing concern about both people's livelihoods in China and the effect of China's economic decline on the world economy (and hence other countries' ability to reduce poverty). China's target growth level of 8% for 2009 is partly based on the prevailing wisdom in China that each 1% of growth represents 1 million jobs. China needs 8 million jobs each year just to satisfy the demand from new entrants to the labour market. It is estimated that unemployment could already have reached 26 million by January 2009 and that 20 million migrant workers have returned to rural areas from Chinese cities.[12] In an attempt to stimulate the economy, the Chinese Government announced a fiscal stimulus worth £400 million in November 2008.[13]

8. In addition to these challenges, China suffered its most serious natural disaster for three decades in May 2008, when an earthquake measuring 8 on the Richter scale hit Sichuan province and killed up to 75,000 people. The Chinese Government was credited for its swift and comprehensive response but the need for huge amounts of reconstruction and recovery work remains. The Government estimates that at least 10 million people have been driven below the poverty line as a result of the earthquake.[14]

9. The process of climate change is likely to increase the incidence of extreme weather events in China, which could have a similar, devastating impact to the earthquake. Predicted impacts (some of which are already becoming apparent) include: increased flooding in the south; droughts in the north; Himalayan ice melt; and significant reductions in net agricultural production.[15]

China as a development actor

10. China has a critical role within international efforts to mitigate and adapt to climate change. It has recently overtaken the USA as the world's largest emitter of greenhouse gases (although its per capita annual emissions rates are still only a quarter of those in the United States—see paragraph 74) and its energy consumption continues to grow quickly.[16] Its thirst for oil and other natural resources has intensified since the mid-1990s. China's approach to gaining access to natural resources in developing countries does not emphasise good governance and human rights in the way that most developed country approaches do. This has led to criticism that China has provided tacit support for rogue regimes such as those in Sudan and Zimbabwe.

11. Chinese investment has brought benefits to many developing countries. China is now Africa's second largest trading partner with two-way trade totalling $70 billion. In the first nine months of 2006, China invested as much in infrastructure in Africa (at least $5 billion) as the investments made by all OECD countries added together.[17] China has also begun aid relationships with many countries. However, there are concerns over the transparency of these aid flows: China does not generally give details about the aid it delivers, does not usually describe it as aid, and it is not currently a member of the OECD, although it is discussing this with the organisation. We would welcome China joining the OECD and its Development Assistance Committee (OECD DAC), which reports on donor countries' international aid funding.

The UK Government's development relationship with China

12. As a result of its growing wealth, China has graduated from the World Bank's 'low-income' category to become a 'middle-income' country. The Bank divides this category into upper and lower middle-income countries; China is in the lower middle-income bracket.[18] However, because of the remaining poverty in China, a number of countries—including the UK—retain an aid programme in China. This foreign aid represents a very small proportion of China's Gross Domestic Product (GDP). Total Official Development Assistance (ODA) disbursed by all donors in China (currently 15 bilateral and four multilateral donors) in 2006 was $2.76 billion, or less than 0.1% of China's GDP. Half of this amount was given in grant form and half as concessional loans.[19] UK assistance through DFID represented around 2.5% of total aid spent in 2006.[20] This means that DFID assistance to China was worth 0.0025% of China's GDP.

13. DFID's aid programmes over the first half of the last decade (under its 1998-2001 and 2002-2005 Country Strategy Papers) incorporated work on social and economic reform with poverty-focused activities in health, education and sustainable environmental management. The opening of a DFID country office in 2003 led to a re-evaluation of the programme and social and economic reform was dropped in favour of a narrower focus on supporting China to reach the MDGs in: education; health (including HIV/AIDS and TB); and water and sanitation.[21]

14. DFID's 2006-2011 Country Assistance Plan continues the focus on the MDGs and adds a new strategy to engage with China on international development issues.[22] DFID's projected expenditure for 2008-09, 2009-10 and 2010-11 is £35, £30 and £20 million respectively which it says are the amounts needed to fulfil its agreed programmes with China.[23]

15. The 2006-2011 Plan also set out the anticipated future evolution of DFID's relationship with China:

We anticipate that by the end of 2011 our partnership will have evolved from a donor-recipient relationship to one largely based on dialogue and cooperation with China on international development issues.[24]

DFID reiterated its intention to withdraw its bilateral programme in China in 2011 in its written submission: "Given the pace of China's development, the bilateral programme in China will end by 2011."[25]

DFID's strategy for middle-income countries

16. The decision to withdraw bilateral aid from China conforms with DFIDs's 2005-2008 Strategy for middle-income countries (MICs). In this paper, DFID acknowledged that, given that nearly one-third of people living on less than $1 a day are in MICs, it makes sense to channel a proportion of its bilateral assistance towards this grouping of countries, especially the "large, strategically important countries that affect the achievement of the MDGs regionally or globally."[26]The Strategy is based on DFID's commitment to spend 10% of bilateral aid in MICs, leaving the remaining 90% for low-income countries ('the 90:10 split').[27] In 2007-08, DFID allocated £263 million, or 12%, to MICs out of the £2,183 million that it spent on Country Specific Bilateral Aid.[28] DFID states: "We will develop clear graduation plans for DFID bilateral assistance in all MICs, which will be negotiated and shared with governments and other bilateral donors."[29] We strongly agree with this statement.

17. However, DFID's MIC Strategy expired in 2008. We asked DFID's Parliamentary Under-Secretary of State, Michael Foster MP, whether a successor strategy would be produced. The Department provided a short note telling us that they no longer have a public version of their middle-income strategy. This note reiterated the commitment to the 90:10 split. It set out two criteria for the use of this 10% allocation:

Upon achievement of middle-income status DFID's general approach is to pursue a strategy of sustainable graduation from bilateral assistance.
DFID's limited bilateral assistance for middle-income countries is increasingly focused on large, emerging global partners which have the potential to make a significant impact on poverty reduction in other countries (e.g. China, South Africa).[30]

18. No further elaboration was provided of which MICs would receive funding and how programmes would be designed and implemented in such countries. We are disappointed that no follow-up strategy is in production, given engagement with MICs is a core part of DFID's overall programme of work. This lack of clarity over DFID's strategy for future engagement with MICs has made it difficult for us to assess China as an element in a coherent DFID strategy for MICs—but it seems logical to us that China should feature in any middle-income strategy.

19. Whether or not a successor strategy for MICs is produced, it is our view that China may need to be assessed on its own terms. However, the strategy adopted for China needs to be coherent and intellectually consistent with the strategy for other MICs, even though DFID itself admits that China represents a unique set of circumstances:

Country resource allocation within DFID is normally informed by DFID's corporate resource allocation model. This uses relative country need and performance in reducing poverty and achieving improvements in living standards as the basis for allocation. However, China is specifically excluded from the model because of China's overall population—1.3 billion; and still considerable number of poor people.[31]

DFID says that "In these circumstances, estimating what is a reasonable allocation for China is a matter of judgement."[32] It is certainly clear that China's size and the pace of its development have given it an international influence which other DFID-supported MICs simply do not have (for example, Indonesia). We will return to the issue of China's place within DFID's future MIC strategy in Chapter 4.

The future UK-China development relationship

20. A number of factors have led us to believe that, whilst DFID is right to withdraw its bilateral aid programme to China in 2011, the Department should replace it with a new, bilateral development partnership with the country—a partnership that would include a funding element. We will explain how we have reached this conclusion over the coming chapters. However the considerable success of DFID's aid programme in China over the last decade is a major factor.

21. Over the last 10 years, the Department has built, within a unique and sometimes challenging context, what is probably the most respected bilateral aid programme in China. It has used limited resources to maximum effect, building influential relationships and highly effective aid projects from relatively small amounts of money. Central to this approach has been DFID's strategy of introducing small-scale pilot projects and, once their success has been proven, encouraging the Chinese Government to scale them up. DFID has called this approach "modest", but the results have been anything but.[33]

Our visit to China

22. The process of developing our view of the UK-China development relationship was greatly assisted by our visit to China in December 2008. Over the course of ten days, we visited three contrasting regions—the capital city, Beijing; Gansu, a poor, rural western province; and Sichuan province, the region most seriously affected by the earthquake of May 2008. We visited a number of sites and held discussions with a broad range of people including: government ministries; schools; clinics; provincial authorities; training schemes; and non-governmental organisations (NGOs). We met with other donors and with academics, consultants and representatives of the private sector. We witnessed the destruction wrought by the Sichuan earthquake in settlements close to the epicentre and talked to local people. We were greatly impressed with the DFID staff and programme in China and would like to thank everyone who made the visit so worthwhile and interesting (see Annex for the visit programme).

The structure of this report

23. Following this introductory chapter, our report will continue by exploring DFID's aid programmes in China since 2003 which have mainly focused on supporting the achievement of the MDGs in: education; health (including HIV/AIDS); and sanitation and water. The chapter will also look at DFID's support to sustainable development. Chapter 3 will examine the impact of DFID's relationship with China on development in third countries and on international priorities such as climate change. Chapter 4 will draw together conclusions from the earlier chapters to inform our analysis of what form the UK's future development partnership with China should take.

1 Ev 71. This statistic uses newly revised World Bank estimates of poverty that are based on a $1.25 poverty line. Back

2 Ev 64 Back

3 Ev 97 Back

4 Ev 90 Back

5 These statistics are for 2005. Ev 71 Back