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### I. Introduction
- BRIC financing to LICs is growing rapidly, driven mainly by China.
- In contrast with many industrial countries which are facing large fiscal consolidation and consequent challenges to meet their aid commitments, BRICs are in a strong position to continue increasing development financing.
- This paper contributes to the aid literature by examining the principles and modalities of BRIC financing, contrasting this with the main OECD-Development Assistance Committee (DAC) framework, and by drawing their implications for LIC economies and future LIC-BRIC engagement.
- The rapidly growing BRIC financing has intensified the debate on aid effectiveness and related policy challenges.
- Structure of the paper:
  - Section II describes the philosophies and modalities of BRIC financing.
  - Section III examines the impact of BRIC financing.
  - Section IV discusses policy implications.
  - Section V concludes.

### BRIC philosophies and modalities (key distinctions)
- Three significant differences from traditional donors (OECD-DAC members):
  - Mutual-benefit model (except Russia): Most financing concentrated in the infrastructure sector to support productive activities. Russia has focused on social spending, seeing poverty reduction as the main objective of their ODA.
  - Noncash financing and limited policy conditionality: Some BRICs, particularly China, provide noncash financing for projects without attachment of policy conditionality, citing noninterference and a means to circumvent corruption. Traditional donors view policy conditionality on institution building and governance as central.
  - Concepts of debt sustainability differ: BRICs tend to focus on micro-sustainability of individual projects; traditional donors pay greater attention to long-run debt sustainability taking into account macroeconomic linkages.
- South-South Cooperation principles: equality, solidarity, mutual development, and complementarity.
- Self-identification: Brazil, China, and India view themselves as “development partners,” not “donors”.
- Conditionality and tied assistance:
  - BRICs generally do not attach conditions on governance, economic policy and performance, and institutional reforms.
  - Conditionality is said to undermine “national sovereignty” and “solidarity”.
  - China emphasizes respect of national sovereignty and a policy of noninterference.
  - China often channels funds directly to firms (often Chinese) contracted for projects rather than to recipient-country entities (use of credit lines in special accounts).
  - China argues tied aid lowers risk of mismanagement; tied aid has been reported to raise concerns about transparency and corruption (e.g., over-invoicing), especially given lack of comprehensive, meaningful, and timely statistics.
- Empirical finding: Mwase (2011) finds LICs with weaker institutions tend to receive more BRIC financing.

### Sectoral focus, modalities, and “packages”
- Concentration in infrastructure:
  - Most BRIC development financing is concentrated in the infrastructure sector.
  - Chinese and Indian infrastructure financing to Africa alone is now of similar magnitude to that from traditional donors.
- Broader sectoral shifts:
  - Movement toward investment in agricultural development, debt relief, and expansion of preferential access.
  - BRICs also provide technical assistance, research support, and training (especially in agriculture and health).
- Country-specific modalities:
  - China:
    - “Free assistance” (grants—无偿援助) and interest-free loans mostly for social infrastructure (stadiums, market squares, medical clinics and schools, government complexes).
    - Preferential loans and credit lines for productive infrastructure (hydropower, water generation, roads/railways).
    - Distinguishes productive (generally loans) and nonproductive investments (generally grants); loans for productive investments are expected to repay themselves based on project feasibility and investment-induced growth.
  - India:
    - Grants, loans, and credit lines allocated to agricultural and infrastructure sectors (electricity, hydropower, railways).
    - Form: Grants, credit lines, interest-free loans and other concessional and nonconcessional loans.
    - Modality: Mostly project-oriented with exceptions (Bhutan, Nepal and Afghanistan), debt cancellation, and humanitarian assistance.
  - Brazil:
    - Concessional financing largely provided through multilateral channels.
    - Focus on technical assistance in education, agriculture, and health; research for development is a new element.
    - Key agency: Brazilian Cooperation Agency (ABC).
  - Russia:
    - Concessional financing largely provided through multilateral channels—Russia via budget support.
    - Focus on social spending to support poverty reduction; most financing is in the form of grants and debt relief.
- “Package” financing and FDI complementarity:
  - BRIC financing, particularly from China, often complements FDI and comes as part of a “package”: multi-year financing including grants, loans, and lines of credit with various participants.
  - “Angola Model” example: Chinese financing builds infrastructure, contracted to a Chinese company sourcing supplies from China; a Chinese company acquires rights to an FDI project (e.g., mining) and invests in it.

### Political economy, evaluation standards, and coordination differences
- Domestic politics and BRICs’ own experience as aid recipients influence sectoral focus and tied aid usage.
- Evaluation and project selection:
  - China (and to some extent India) evaluate assistance using cost competitiveness and completion time; focus on bilateral government-to-government relations and faster project approval times; sustainability and maintenance often regarded as recipient responsibility.
  - Russia and Brazil prefer coordination with civil society and other stakeholders to foster national ownership.
  - Traditional donors emphasize channeling aid through recipient budgets to avoid duplication and build governance standards and promote harmonization via the Paris Declaration and Accra Agenda for Action.
  - BRICs have “endorsed” Paris principles but often view endorsement in their capacity as recipients.
- Debt sustainability and relief:
  - China and India focus on project economic viability; traditional partners emphasize economy-level long-term debt sustainability (often via IMF/World Bank Debt Sustainability Analysis).
  - Russia participates in Paris Club and HIPC; Brazil and India participate case-by-case.
  - China has provided debt relief independently and in parallel with HIPC, including nonconditional debt cancellation to some pre-decision point countries.

### Determinants, allocation patterns, and measurement issues
- Geographic and sector drivers:
  - BRIC flows driven by natural resources, proximity, and cultural-language ties.
  - Brazil: concentrated in Portuguese-speaking countries and Mercosur priorities.
  - Russia: sizable financing to neighboring former Soviet economies.
  - India: assistance mostly to neighboring countries.
  - China: diverse in Africa; nearly 70 percent of China’s infrastructure financing in Africa reportedly concentrated in four countries: Angola, Nigeria, Ethiopia, and Sudan (all with oil fields).
- Definition and measurement differences:
  - Most BRICs include all development support (including below-market-rate loans) designed to help growth; OECD definition excludes nonconcessional assistance.
  - China excludes humanitarian assistance from development assistance data (considers it “stop-gap” rather than development).
  - Comparisons require caution because BRIC data are limited and not readily comparable with DAC data.
- Data gaps and transparency:
  - General lack of comprehensive, meaningful, and timely statistics from BRICs and recipient countries.
  - Reasons: political sensitivity and cultural reluctance to publicize debtor details.
  - Recipient-country discussions indicate recipients are often not fully apprised of financing terms.

### Institutional arrangements and implementing agencies
- China:
  - Central institutions: Ministry of Commerce (MoFCoM), China Exim Bank, and Ministry of Foreign Affairs; MoFCoM generally leads official assistance policy.
  - China Exim Bank and China Development Bank provide preferential/concessional loans and export credits.
  - Ministry of Finance allocates donations to multilateral organizations and manages debt cancellation.
  - Over 20 line ministries, state-owned banks, and other agencies also administer assistance activities, often without central coordination.
  - The State Council approves annual development assistance budget, grants of cash above US$1.5 million, aid projects above 100 million RMB (about US$12.5 million), assistance to “politically sensitive countries” and requests to exceed annual plans.
- India:
  - Announced in 2007 the intention to set up a lead agency—India International Development Cooperation (IIDC); MEA no longer monopolizes aid instruments; Ministry of Commerce influence has grown.
  - Various ministries and institutions continue involvement (ITEC, SCAAP, bilateral aid).
- Brazil:
  - Brazilian Cooperation Agency (ABC) housed in the Ministry of External Relations (MRE) is dedicated to development cooperation; ABC negotiates, promotes, and monitors Brazilian technical cooperation projects and programs and controls three forms of international cooperation: TCDC, bilateral, and multilateral technical cooperation.
  - Several Brazilian organizations act as project implementers.
- Russia:
  - Key agency: Department of International Finance; key ministries: Ministry of Finance and Ministry of Foreign Affairs; modality: mostly through multilateral channels as untied voluntary contributions.

### Box 1 — Major findings on macroeconomic and development impact
- Infrastructure needs and BRIC role:
  - The World Bank estimates that Sub-Saharan Africa (SSA) requires in excess of US$93 billion per year—about 15 percent of the region’s GDP or for SSA LICs, 22 percent of GDP—for infrastructure to begin reaching the level of other developing countries in Asia and Latin America.
  - Aid commitments from traditional donors would not be sufficient to meet these financing needs partly given the scale of the financing required and the recent focus of many bilateral donors on social sectors.
  - BRIC financing has played an important role in alleviating infrastructure bottlenecks in many LICs and should help them tap their natural resources.
  - Reported project outcomes include a 35 percent improvement in electricity supply (including 6,000 megawatts of hydropower), a 10 percent increase in rail capacity and reduced the price of telephone services.
  - At least 35 countries in SSA have benefited from or are actively discussing Chinese infrastructure finance.
- Growth and productivity effects:
  - Empirical surveys (Agénor et al. (2006) and Straub (2008)) find that the stock of infrastructure assets has a positive impact on the rate of economic growth, with the largest impact coming from telecommunications, roads, and electricity networks.
  - For SSA, the World Bank estimates that increasing the stock and quality of infrastructure to Mauritius’ level would have a growth payoff of 2.3 percent a year, with most of this coming from more—rather than better—infrastructure.
  - BRIC-financed investment could improve external competitiveness by raising productivity and reducing domestic costs of production, potentially offsetting demand-side Dutch disease effects over time.
- Trade, FDI, and regional linkages:
  - BRIC financing focused on trade and natural resources has been associated with a sharp increase in trade flows and foreign direct investment between LICs and BRICs.
  - Examples: rehabilitation of the Benguela railway line to facilitate trade between Angola, the Democratic Republic of Congo and Zambia; building of rail and port facilities in Liberia to facilitate export of iron ore in both Liberia and Guinea.
  - Samake and Yang (2011) find significant growth spillovers from BRICs to LICs both through direct channels (such as bilateral trade) and indirect channels (such as global commodity prices).
- Complementarity with traditional donors:
  - BRIC assistance has been by and large complementary to aid from traditional donors due to different sectoral concentrations (infrastructure vs. social sectors).

### Risks, challenges, and distributional issues
- Debt sustainability:
  - Key challenge: ensure sustainable debt in the long run and avoid repeat of past debt problems.
  - Both LICs and BRICs need a prudent approach evaluating impact of increased financing on growth and debt burdens.
  - Debt sustainability analysis should adequately take into account impact of lending on growth as well as debt accumulation.
  - Greater transparency on debt data by BRICs and recipient countries is needed.
- Resource dependence and comparative advantage:
  - LIC-BRIC engagement could increase the risk of long-term resource dependence; the emergence of China and India has reinforced Africa’s comparative advantage in resource-based commodities, increasing risk of a commodity trap.
  - Alternative view: reliance on natural resources can be a phase of development, and resources should be used to lay foundations for sustained, diversified growth.
- Competition and market effects:
  - Some BRIC export credits could create a nonlevel playing field by allowing BRIC firms access to subsidized export buyer credits, potentially harming local manufacturers.
  - Example concern: China-Africa Development Fund (CADF) set up to assist Chinese enterprises and entrepreneurs to invest in Africa could create unlevel playing fields with African investors. CADF’s direct capital and other domestic companies’ investments facilitated by it accounted for more than 30 percent of the country’s combined investments in Africa during 2009.
- Labor practices and local employment:
  - Concerns over labor practice: use of imported BRIC labor rather than local workers in projects (e.g., Angola, Ethiopia, Sudan, Namibia, Zambia) has been criticized.
  - Diverse practices: some companies report about 80 percent local employment (e.g., in Tanzania), while lower levels in post-conflict countries reflect limited local skilled manpower.
  - BRIC firms often cite local regulations and under-developed skills as impediments to hiring local workers and argue local wages should reflect labor productivity.

### Policy implications and recommendations
- Ensuring high returns on projects:
  - Align BRIC-financed projects with national development priorities.
  - Implement appropriate project selection (including feasibility studies), implementation, and maintenance processes.
  - Improve public investment management to translate infrastructure spending into sustained economic growth.
- Improving transparency and governance:
  - Improve data on size and terms of financing flows, structure and conditions of packaged deals, and rights of concessions for natural resources.
  - Competitive bidding for projects to ensure transparent and fair financing costs.
  - Participation in international initiatives (e.g., Extractive Industries Transparency Initiative) could help improve transparency and accountability.
- Safeguarding debt sustainability:
  - Conduct macroeconomic analysis of total project financing, including risk assessments, implications for public finances (including maintenance costs and contingent liabilities), and growth impact.
  - Make borrowing decisions within a sound debt management strategy.
- Deepening local linkages:
  - Build incentives within development financing packages to encourage local employment, skills development, and technology transfer.
  - LIC governments and BRIC firms should work with local communities to ensure labor regulations and conditions are conducive to local employment.
  - Adopt a consultative comprehensive approach to address concerns and deepen long-term engagement.

### Conclusion highlights
- Philosophical differences between BRICs and traditional donors:
  - BRICs (except Russia) emphasize ‘mutual benefits’ and South-South cooperation; Russia and traditional donors emphasize poverty reduction.
  - BRICs tend to view policy conditionality as interfering with sovereignty and often provide noncash financing; traditional donors use conditionality to ensure efficient use of aid.
  - Differences in emphasis on debt sustainability: some BRICs emphasize micro-sustainability and growth, while traditional donors emphasize long-run macro-sustainability. These differences are narrowing.
- Overall assessment:
  - Public investment scale-up associated with BRIC financing has benefited LICs by alleviating infrastructure bottlenecks, boosting export competitiveness and making goods and services more affordable.
  - Continued engagement with BRICs can raise LICs’ economic growth and reduce poverty in the long run, provided LICs ensure high returns through sound public investment management, improve transparency, adopt sound debt management strategies, and deepen local economic linkages including employment of local workers.

*Source: _wp1274 - Section IV discusses policy implications. Section V concludes.*

### References .............................................................................................................

### _wp1274 - References .............................................................................................................

### I. Introduction
- BRIC financing to LICs is growing rapidly, driven mainly by China.
- In contrast with many industrial countries which are facing large fiscal consolidation and consequent challenges to meet their aid commitments, BRICs are in a strong position to continue increasing development financing.
- This paper contributes to the aid literature by examining the principles and modalities of BRIC financing, contrasting this with the main OECD-Development Assistance Committee (DAC) framework, and by drawing their implications for LIC economies and future LIC-BRIC engagement.
- The rapidly growing BRIC financing has intensified the debate on aid effectiveness and related policy challenges.

### BRIC philosophies and modalities (key distinctions)
- BRICs’ philosophies for development financing differ from those of “traditional donors” (OECD-DAC members) in three significant ways:
  - BRIC engagement, with the exception of Russia, is founded on a model of mutual benefits. Most of the financing has been concentrated in the infrastructure sector to support productive activities. Russia, similar to traditional donors, has recently focused on social spending, seeing poverty reduction as the main objective of their ODA.
  - Some BRICs, particularly China, tend to provide noncash financing for projects without attachment of policy conditionality. They view this as part of the principle of noninterference of internal affairs and as a means of circumventing corruption. In contrast, traditional donors view policy conditionality on institution building and governance as central to ensuring efficient use of aid.
  - Concepts of debt sustainability differ, with BRICs tending to focus on micro-sustainability of individual projects while traditional donors pay greater attention to long-run debt sustainability by taking into account macroeconomic linkages.

- Footnotes:
  - 2 Although South Africa has recently joined the group, this analysis focuses on the original four countries: Brazil, Russia, India, and China.
  - 3 The traditional donor’s shift from infrastructure investment to social spending was mainly driven by findings of weak project selection and implementation, resulting in “white elephants”.

### Impact of BRIC financing on LICs — benefits and challenges
- Benefits:
  - Concentration of BRIC financing in infrastructure could have large positive growth effects by addressing infrastructure deficits in LICs.
  - Infrastructure financing can raise productivity by reducing business costs for tradables and nontradables sectors alike, and support expansion in trade and investment.
- Challenges and concerns:
  - Impact on debt sustainability has been raised as a concern.
  - Subsidized export credits received by some BRIC firms (Brautigam, 2010) have been flagged as an issue.
  - Labor practices associated with some BRIC-financed projects have raised concerns.
  - These concerns highlight the need to ensure that development financing is used to promote sustainable and inclusive growth.

### Structure of the paper (as presented)
- The rest of the paper is organized as follows:
  - Section II describes the philosophies and modalities of BRIC financing.
  - Section III examines the impact of BRIC financing.

*Source: _wp1274 - References .............................................................................................................*

### Section IV discusses policy implications. Section V concludes.

### _wp1274 - Section IV discusses policy implications. Section V concludes.

### Philosophies and modalities of BRIC development financing
- BRICs have provided financial support to LICs since the 1950s; Brazil, China, and India provided assistance as part of South-South cooperation while Russia’s engagement was shaped by the Cold War era.
- South-South Cooperation principles emphasize equality, solidarity, mutual development, and complementarity.
- Brazil, China, and India view themselves as “development partners,” not “donors”.
- BRICs generally do not attach conditions on governance, economic policy and performance, and institutional reforms to their cooperation:
  - Conditionality is said to undermine “national sovereignty” and “solidarity”.
  - China emphasizes respect of national sovereignty (broadly defined to include national economic policies) and a policy of noninterference.
  - China often channels funds directly to firms (often of Chinese origin) contracted for projects rather than to recipient-country entities (use of credit lines in special accounts).
  - Tied aid is argued by China to lower the risk of financial mismanagement and misappropriation of funds; however, tied aid has been reported to raise concerns about transparency and corruption (e.g., over-invoicing), especially given lack of comprehensive, meaningful, and timely statistics.
- Empirical finding cited: there is no significant positive relationship between aid allocations and institutions; Mwase (2011) finds LICs with weaker institutions tend to receive more BRIC financing.

### Sectoral focus, modalities, and “packages”
- Most BRIC development financing is concentrated in the infrastructure sector; Chinese and Indian infrastructure financing to Africa alone is now of similar magnitude to that from traditional donors.
- Shift toward investment in agricultural development, debt relief, and expansion of preferential access; BRICs also provide technical assistance, research support, and training (especially in agriculture and health).
- Chinese financing modalities:
  - “Free assistance” (grants—无偿援助) and interest-free loans mostly for social infrastructure (stadiums, market squares, medical clinics and schools, government complexes).
  - Preferential loans and credit lines for productive infrastructure (hydropower, water generation, roads/railways).
- India: grants, loans, and credit lines allocated to agricultural and infrastructure sectors (electricity, hydropower, railways).
- Brazil and Russia: concessional financing largely provided through multilateral channels—Russia via budget support and Brazil via project assistance; Brazil focuses on technical assistance in education, agriculture, and health; research for development is a new element of Brazil’s policy. Russia focuses on social spending to support poverty reduction; most of Russia’s financing is in the form of grants and debt relief.
- BRIC financing, particularly from China, often complements FDI and comes as part of a “package”:
  - Packages involve multi-year financing including grants, loans, and lines of credit with various participants to tackle multiple development constraints.
  - Example described as the “Angola Model”: Chinese financing builds a project (often infrastructure), contracted to a Chinese company sourcing supplies from China; a Chinese company acquires rights to an FDI project (e.g., mining) and invests in it.

### Political economy, evaluation standards, and coordination differences
- Domestic politics and BRICs’ own experience as aid recipients influence sectoral focus and use of tied aid:
  - Traditional donors justify public aid on poverty reduction, humanitarian assistance, or social welfare; DAC donors in 2001 agreed to virtually untie all aid to LDCs and monitor progress under the Paris Declaration.
  - India and China, as lower middle-income countries and aid recipients, support mutual-benefit approaches that also boost their domestic growth.
  - Some BRICs note over-emphasis by traditional donors on “social projects” versus building productive capacity for faster long-run poverty reduction.
- Evaluation and project selection:
  - China (and to some extent India) evaluate assistance using cost competitiveness and completion time; focus on bilateral government-to-government relations and faster project approval times; sustainability and maintenance often regarded as recipient responsibility.
  - Russia and Brazil prefer coordination with civil society and other stakeholders to foster national ownership; traditional donors emphasize channeling aid through recipient budgets to avoid duplication and build governance standards.
  - Traditional donors promote harmonization and coordination via the Paris Declaration and Accra Agenda for Action (country-owned systems, untying aid, reducing project implementation units). BRICs have “endorsed” Paris principles but often view endorsement in their capacity as recipients.
- Debt sustainability and relief approaches:
  - China and India focus on project economic viability; traditional partners emphasize economy-level long-term debt sustainability (often via IMF/World Bank Debt Sustainability Analysis).
  - China distinguishes productive (generally loans) and nonproductive investments (generally grants); Chinese position: loans for productive investments are expected to repay themselves based on project feasibility and investment-induced growth.
  - Russia participates in Paris Club and HIPC; Brazil and India participate case-by-case. China has provided debt relief independently and in parallel with HIPC, including nonconditional debt cancellation to some pre-decision point countries.

### Determinants, allocation patterns, and measurement issues
- BRICs’ development financing flows are largely driven by natural resources, proximity, and cultural-language ties—similar patterns to traditional donors.
  - Brazil’s flows concentrated in Portuguese-speaking countries and Mercosur priorities.
  - Russia provides sizable financing to neighboring former Soviet economies.
  - India’s assistance is mostly to neighboring countries.
  - China’s financing is diverse in Africa (covers all countries except Swaziland); nearly 70 percent of China’s infrastructure financing in Africa reportedly concentrated in four countries: Angola, Nigeria, Ethiopia, and Sudan (all with oil fields).
- Philosophical differences affect definitions and estimates of BRIC development assistance:
  - Most BRICs include all development support (including below-market-rate loans) designed to help growth; OECD definition excludes nonconcessional assistance.
  - China excludes humanitarian assistance from development assistance data (considers it “stop-gap” rather than development).
  - Comparisons between BRIC “aid” and traditional donors require caution because BRIC data are limited and not readily comparable with DAC data.
- Data gaps and transparency:
  - General lack of comprehensive, meaningful, and timely statistics from BRICs and recipient countries.
  - Reasons given include political sensitivity (e.g., for China, helping LICs while China has a large poor population) and cultural reluctance to publicize debtor details.
  - Recipient-country discussions indicate recipients are often not fully apprised of financing terms.

### Institutional arrangements and implementing agencies
- BRIC development assistance is implemented through multiple agencies, reflecting evolving programs:
  - China: three central institutions—Ministry of Commerce (MoFCoM), China Exim Bank, and Ministry of Foreign Affairs; MoFCoM generally leads official assistance policy. China Exim Bank and China Development Bank provide preferential/concessional loans and export credits. Ministry of Finance allocates donations to multilateral organizations and manages debt cancellation. Over 20 line ministries, state-owned banks, and other agencies also administer assistance activities, often without central coordination. The State Council approves annual development assistance budget, grants of cash above US$1.5 million, aid projects above 100 million RMB (about US$12.5 million), assistance to “politically sensitive countries” and requests to exceed annual plans.
  - India: announced in 2007 the intention to set up a lead agency—India International Development Cooperation (IIDC); Ministry of External Affairs (MEA) no longer monopolizes aid instruments; influence of Ministry of Commerce on aid allocation has grown. Various ministries and institutions continue involvement (ITEC, SCAAP, bilateral aid).
  - Brazil: Brazilian Cooperation Agency (ABC) housed in the Ministry of External Relations (MRE) is dedicated to development cooperation; ABC negotiates, promotes, and monitors Brazilian technical cooperation projects and programs and controls three forms of international cooperation: TCDC, bilateral, and multilateral technical cooperation. Several Brazilian organizations act as project implementers.

_Italic source: _wp1274 - Section IV discusses policy implications. Section V concludes._

### Box 1. Key Characteristics of BRIC Financing

### Box 1. Key Characteristics of BRIC Financing

### Key institutional features by country
- Brazil
  - Key agency: Brazilian Cooperation Agency (ABC)
  - Key Ministry: Ministry of External Relations
  - Other Agencies: EMBRAPA, FIOCRUZ, FARMANGUINHOS, SENAI, SEBRAE, CAPES, FINEP, CNP.
  - Form: Loans and grants
  - Modality: Mostly through multilateral channels. Co-financed projects and technical assistance
  - Official aim: South-south cooperation; mutual economic development, and strengthen cultural relations
  - Country focus: Latin America and African countries (especially Lusophone)
  - Sector: Mostly agriculture, education and health.

- Russia
  - Key agency: Department of International Finance
  - Key Ministry: Ministry of Finance and Ministry of Foreign Affairs.
  - Other Agencies: Federal Executive Authorities.
  - Form: Mostly grants (to international IDA funds and programs) and debt relief.
  - Modality: Mostly through multilateral channels in the form of untied voluntary contributions.
  - Official aim: Sustainable Poverty Reduction
  - Country focus: Mostly CIS countries, (in particular, Kazakhstan and Kyrgyzstan).
  - Sector: Mostly general budget support.

- India
  - Key agency: Indian International Development Cooperation Agency (IIDCA) was proposed in 2007 but has not been established.
  - Key Ministry: Ministry of External Affairs (MEA)
  - Other Agencies: EXIM Bank, Indian Council for Cultural Relations, and other respective Ministries
  - Form: Grants, credit lines, interest-free loans and other concessional and nonconcessional loans
  - Modality: Mostly project-oriented with the exception of Bhutan, Nepal and Afghanistan, debt cancellation, and humanitarian assistance
  - Official aim: South-south cooperation, regional stability and access to markets and resources, and strengthen cultural relations
  - Country focus: Immediate neighborhood (e.g., Afghanistan, Bhutan, Burma and Nepal), and Africa
  - Sector: Grants mostly rural development, education, health, technical cooperation, loans for infrastructure and disaster relief.

- China
  - Key agency: No such agency yet, but discussions to establish one are continuing.
  - Key Ministry: Department of Aid in Ministry of Commerce
  - Other Agencies: Ministry of Finance, Ministry of Foreign Affairs; Exim Bank; China Development Bank and other agencies.
  - Form: Grants, credit lines, interest-free loans and other concessional and nonconcessional loans
  - Modality: Mostly projects, in-kind, technical cooperation and debt relief.
  - Official aim: South-south cooperation and access to markets and resources
  - Country focus: Widespread though large amounts concentrated in a few countries
  - Sector: Mostly energy, transport and communications, but also construction of schools and hospitals, and prestige projects (e.g., stadiums)

### Major findings on macroeconomic and development impact
- Infrastructure needs and BRIC role
  - The World Bank estimates that Sub-Saharan Africa (SSA) requires in excess of US$93 billion per year—about 15 percent of the region’s GDP or for SSA LICs, 22 percent of GDP—for infrastructure to begin reaching the level of other developing countries in Asia and Latin America.
  - Aid commitments from traditional donors would not be sufficient to meet these financing needs partly given the scale of the financing required and the recent focus of many bilateral donors on social sectors.
  - BRIC financing has played an important role in alleviating infrastructure bottlenecks in many LICs and should help them tap their natural resources.
  - Reported project outcomes include a 35 percent improvement in electricity supply (including 6,000 megawatts of hydropower), a 10 percent increase in rail capacity and reduced the price of telephone services.
  - At least 35 countries in SSA have benefited from or are actively discussing Chinese infrastructure finance.

- Growth and productivity effects
  - Empirical surveys (Agénor et al. (2006) and Straub (2008)) find that the stock of infrastructure assets has a positive impact on the rate of economic growth, with the largest impact coming from telecommunications, roads, and electricity networks.
  - For SSA, the World Bank estimates that increasing the stock and quality of infrastructure to Mauritius’ level would have a growth payoff of 2.3 percent a year, with most of this coming from more—rather than better—infrastructure.
  - BRIC-financed investment could improve external competitiveness by raising productivity and reducing domestic costs of production, potentially offsetting demand-side Dutch disease effects over time.

- Trade, FDI, and regional linkages
  - BRIC financing focused on trade and natural resources has been associated with a sharp increase in trade flows and foreign direct investment between LICs and BRICs.
  - Examples: rehabilitation of the Benguela railway line to facilitate trade between Angola, the Democratic Republic of Congo and Zambia; building of rail and port facilities in Liberia to facilitate export of iron ore in both Liberia and Guinea.
  - Samake and Yang (2011) find significant growth spillovers from BRICs to LICs both through direct channels (such as bilateral trade) and indirect channels (such as global commodity prices).

- Complementarity with traditional donors
  - BRIC assistance has been by and large complementary to aid from traditional donors due to different sectoral concentrations (infrastructure vs. social sectors).

### Risks, challenges, and distributional issues
- Debt sustainability
  - Key challenge: ensure sustainable debt in the long run and avoid repeat of past debt problems.
  - Both LICs and BRICs need a prudent approach evaluating impact of increased financing on growth and debt burdens.
  - Debt sustainability analysis should adequately take into account impact of lending on growth as well as debt accumulation.
  - Greater transparency on debt data by BRICs and recipient countries is needed.

- Resource dependence and comparative advantage
  - LIC-BRIC engagement could increase the risk of long-term resource dependence; the emergence of China and India has reinforced Africa’s comparative advantage in resource-based commodities, increasing risk of a commodity trap.
  - Alternative view: reliance on natural resources can be a phase of development, and resources should be used to lay foundations for sustained, diversified growth.

- Competition and market effects
  - Some BRIC export credits could create a nonlevel playing field by allowing BRIC firms access to subsidized export buyer credits, potentially harming local manufacturers.
  - Example concern: China-Africa Development Fund (CADF) set up to assist Chinese enterprises and entrepreneurs to invest in Africa could create unlevel playing fields with African investors. CADF’s direct capital and other domestic companies’ investments facilitated by it accounted for more than 30 percent of the country’s combined investments in Africa during 2009.

- Labor practices and local employment
  - Concerns over labor practice: use of imported BRIC labor rather than local workers in projects (e.g., Angola, Ethiopia, Sudan, Namibia, Zambia) has been criticized.
  - Diverse practices: some companies report about 80 percent local employment (e.g., in Tanzania), while lower levels in post-conflict countries reflect limited local skilled manpower.
  - BRIC firms often cite local regulations and under-developed skills as impediments to hiring local workers and argue local wages should reflect labor productivity.

### Policy implications and recommendations
- Ensuring high returns on projects
  - Align BRIC-financed projects with national development priorities.
  - Implement appropriate project selection (including feasibility studies), implementation, and maintenance processes.
  - Improve public investment management to translate infrastructure spending into sustained economic growth.

- Improving transparency and governance
  - Improve data on size and terms of financing flows, structure and conditions of packaged deals, and rights of concessions for natural resources.
  - Competitive bidding for projects to ensure transparent and fair financing costs.
  - Participation in international initiatives (e.g., Extractive Industries Transparency Initiative) could help improve transparency and accountability.

- Safeguarding debt sustainability
  - Conduct macroeconomic analysis of total project financing, including risk assessments, implications for public finances (including maintenance costs and contingent liabilities), and growth impact.
  - Make borrowing decisions within a sound debt management strategy.

- Deepening local linkages
  - Build incentives within development financing packages to encourage local employment, skills development, and technology transfer.
  - LIC governments and BRIC firms should work with local communities to ensure labor regulations and conditions are conducive to local employment.
  - Adopt a consultative comprehensive approach to address concerns and deepen long-term engagement.

### Conclusion highlights
- Philosophical differences between BRICs and traditional donors:
  - BRICs (except Russia) emphasize ‘mutual benefits’ and South-South cooperation; Russia and traditional donors emphasize poverty reduction.
  - BRICs tend to view policy conditionality as interfering with sovereignty and often provide noncash financing; traditional donors use conditionality to ensure efficient use of aid.
  - Differences in emphasis on debt sustainability: some BRICs emphasize micro-sustainability and growth, while traditional donors emphasize long-run macro-sustainability. These differences are narrowing.
- Overall assessment:
  - Public investment scale-up associated with BRIC financing has benefited LICs by alleviating infrastructure bottlenecks, boosting export competitiveness and making goods and services more affordable.
  - Continued engagement with BRICs can raise LICs’ economic growth and reduce poverty in the long run, provided LICs ensure high returns through sound public investment management, improve transparency, adopt sound debt management strategies, and deepen local economic linkages including employment of local workers.

*Source: Box 1. Key Characteristics of BRIC Financing (excerpt).*

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### _wp1274 - REFERENCES

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### Working papers, policy papers, and reports
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- Mwase, N., 2011, “Determinants of Development financing flows from Brazil, Russia, India, and China to Low-Income Countries,” IMF Working Paper 11/255 (Washington: International Monetary Fund).
- Mwanawina, I., 2008, “China-Africa Economic Relations: The Case of Zambia.” Available via the internet: www.aercafrica.org/documents/china_africa_relations/Zambia.pdf
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- Yang, Y., 2011, “Global Rebalancing: Implications for Low-Income Countries,” IMF Working Paper, forthcoming (Washington: International Monetary Fund).
- Mwase, N., 2011, “Determinants of Development financing flows from Brazil, Russia, India, and China to Low-Income Countries,” IMF Working Paper 11/255 (Washington: International Monetary Fund).

### Institutional, conference, and policy briefs; other sources
- African Center for Economic Transformation, 2009, “Looking East: China’s Engagements with Africa Country Policymakers,” Vol. II: Key Dimensions of ChineseEngagements in African Countries. Available via the internet: http://acetforafrica.org/publications/post/looking-east-chinas-engagements-with-africa-country-reports.
- Angola Press News Agency, 2006, “Comunicado do Conselho de Ministros,” February 22.
- Atingi-Ego, M., 2005, “Budget Support, Aid Dependency, and Dutch Disease: The Case of Uganda,” World Bank Practitioners’ Forum on Budget Support, May 5–6, Cape Town, South Africa.
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- Mwanawina, I., 2008, “China-Africa Economic Relations: The Case of Zambia.” Available via the internet: www.aercafrica.org/documents/china_africa_relations/Zambia.pdf
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- The Reality of Aid Network, 2010, South-South Development Cooperation: A Challenge to the Aid System? Report 2010 (Philippines: Reality Of Aid).
- United Nations Economic and Social Council, 2011, Draft 29th April, Background Study for the 2012 Development Cooperation Forum: Trends in International Financial Cooperation for LDCs (Istanbul).
- United Nations Millennium Project, 2005, Investing in Development. A Practical Plan to Achieve the Millennium Development Goals UNDP (U.K. and U.S.A.: Earthscan).
- Vaz, A. C., and C. Inoue, 2007, “Emerging Donors in International Development Assistance: The Brazil Case.” Available via the internet: www.norrag.org/issues/article/1330/en/brazil-in-africa.html
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*Source: _wp1274 - REFERENCES*

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