What’s in it for Borrowers? Explaining the Domestic Drivers of Chinese Development Finance in Latin America, 2008-2009

By Zara C. Albright

Between 2008-2019, Latin American (LAC) countries borrowed $132 billion from Chinese development finance institutions (DFIs) and $155 billion from the World Bank, including its International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA) windows.

Figure 1 illustrates the region’s borrowing patterns; LAC countries have consistently borrowed higher numbers of loans from the World Bank, but average values of loans from China’s major DFIs, China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM), have been larger.

Figure 1: Chinese and World Bank Lending to LAC, 2008-2019

In a new working paper published by the Boston University Global Development Policy Center, I explore which domestic and international political factors and project-level pragmatic considerations drive LAC countries’ borrowing decisions between Chinese DFIs and the World Bank. The paper draws on a combination of quantitative data on countries’ economic and political conditions and qualitative data collected during interviews with 19 policymakers in Ecuador in early 2024. Ecuador has signed the highest number loans of any country in the region with China, and after Brazil and Venezuela, has borrowed the third-most money across these loans, making it a crucial case to examine. The results show that while political considerations, such as ideology and views of the United States, set the stage for borrowers’ decisions, pragmatic factors, including the project sector and amount of financing needed, are more proximate influences on policymakers.

Most existing studies of China’s overseas development finance, especially in LAC, have focused on China as the actor making decisions, identifying a variety of motives for its lending, such as commercial objectives, the One China Policy, reputation building, geopolitical goals and filling gaps left behind by the US. These studies tend to overlook demand-side factors for this lending, i.e. the reasons developing countries choose to borrow from China. These reasons could include different conditionality profiles, environmental and social governance, and/or anticipated distributional consequences.

The working paper expands this discussion by identifying the factors influencing borrowing countries’ decisions to take out loans from Chinese DFIs versus the US-backed World Bank. It concludes that supplementing existing supply-side explanations with more demand-side considerations is necessary to round out the picture of the determinants of China’s development finance in LAC. Results show that countries are aiming to diversify their international relations beyond the US, policymakers are seeking finance for more expensive infrastructure projects and left-leaning political parties are more likely to borrow from Chinese DFIs.

First, interviews conducted for this paper demonstrate that borrowing country needs and priorities shape outcomes, in addition to and beyond lenders’ preferences. Officials interviewed explained that despite outside observers claiming Ecuador’s borrowing was due to “pressure from China,” (Interview #1) in fact, China was “receptive to [Ecuador’s] requests” for financing (Interview #3). Additionally, while lenders’ considerations such as macroeconomic fundamentals, creditworthiness and political stability are indeed key components of the discussion, lenders do not dictate terms. Borrowers have their own political and pragmatic objectives. Table 1 lists the most common reasons that interviewees cited as influencing their decisions to borrow from China.

Table 1: Coded Interview Results

These interview findings are borne out in the statistical analysis as well. Politically, both domestic and international considerations play a role in decisions. Ecuador, like many countries in the region, sought to “diversify” the sources of their development finance beyond US-backed institutions such as the World Bank (Interview #5). Quantitative results show that at a regional level, as their distance from the US’s voting record at the United Nations increases, LAC countries are more likely to borrow from China. Furthermore, as China’s relative power compared to the US has increased, LAC countries have been more likely to borrow from China.

However, countries are not responding automatically to these broader international conditions. The paper finds that countries governed by a left-leaning political party are more likely to borrow from China than those governed by a right-leaning party. In Ecuador, this trend was particularly salient during the presidencies of Rafael Correa, from 2007-2017, when Ecuador signed over 20 loans with China. Several officials interviewed explained that the leftist political ideology of Correa’s governments, including the state-led development model and affinity with ‘pink tide’ anti-hegemonic regional movements, were crucial components in policymakers’ decisions at the time (Interviews #1, #3, #5, #8, #16, #19, #20).

At the project level, both quantitative and interview results highlight the importance of the project sector and loan amount as driving factors in countries’ decisions to borrow from China over the World Bank. While previous work has demonstrated that China’s preference for infrastructure lending is the result of its own overcapacity and expertise in the sector, this picture is incomplete without considering borrowing countries’ specific needs for infrastructure projects (Interviews #3, #4, #8, #12, #18, #19, #28). In Ecuador’s case, national planning documents identified renewable, hydroelectric energy as a key priority for funding, and loans from Chinese DFIs were “absolutely key” to their construction (Interview #5).

Finally, interviews conducted for this working paper provide new insights into how these different sets of conditions – macroeconomic, domestic and international political, and project characteristics – interact with each other. Officials familiar with Ecuador’s decision-making processes explained that political factors, especially party ideology and a desire to distance from the US, set the stage for borrowing decisions. Government ministries compile a list of projects seeking funding, and then high-level officials decide which projects to propose to which lenders (Interview #28). This early political discussion also establishes expectations for the loan amount (Interview #5). Only after these higher-level political processes do the more technical considerations such as loan terms take on a central role (Interviews #5, #7, #12, #29).

Development finance is non-exclusive, meaning that countries can borrow from a variety of lending institutions simultaneously. This ability to combine sources of finance provides borrowing countries in LAC and other regions with opportunities to leverage multiple options for different and complementary goals. Therefore, in research on the determinants of development finance, whether from China or other lenders, it is necessary to incorporate borrowers’ needs and preferences in addition to the priorities of lending institutions.

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