Does Chinese foreign aid enhance state capacity in recipient countries?

This paper examines whether Chinese foreign aid strengthens state capacity in recipient countries. We construct a country-year panel covering 214 countries over 2000–2021 by combining AidData’s Global Chinese Development Finance Dataset with a latent-variable measure of state capacity. To address aid allocation endogeneity, we instrument Chinese official development assistance (ODA) using the interaction between China’s steel production and each recipient’s historical propensity to receive Chinese aid. The results show that one additional Chinese ODA project increases the state-capacity index by 0.032 points, equivalent to 9.22% of the sample mean. This finding remains robust to controlling for additional recipient characteristics, other aid sources, policy factors, and spatial spillovers. The effect is stronger in countries that are institutionally or politically closer to China and for aid directed towards production and infrastructure sectors, with infrastructure provision and bilateral economic engagement serving as the primary channels. The estimates for official finance (OF) and other official financing (OOF) remain positive but are smaller and less precisely estimated, highlighting the distinctive role of concessional ODA in state capacity building. From a policy perspective, this finding suggests that concessional aid can strengthen recipient governments’ capacity to implement policies and pursue self-reliant development.