Academic journal article Contemporary Economic Policy

Complementary Measures to Foreign Aid: Taiwan and the PRC under Diplomatic Rivalry

Academic journal article Contemporary Economic Policy

Complementary Measures to Foreign Aid: Taiwan and the PRC under Diplomatic Rivalry

Article excerpt


The competition on foreign aid, as a means for securing foreign policy and other benefits by the donor, can lead to diplomatic rivalry. This article utilizes a game theoretic model to analyze the existing rivalry for foreign aid and international status between Taiwan and the People's Republic of China. Similar to the role of political contributions in the public choice theory, foreign aid is taken a means of international lobbying, to realize the donor's objective. Research results, based on the policy effect consideration, indicates that the equilibrium aid policy which is endogenously determined, renders an inability on the part of the donors, which affects the recipient's optimal foreign policy. How does a donor obtain favorable outcomes when such rivalry exists? Strengthening diplomatic endeavors to realize the access effect has been proved an effective method. Analytical results have shown that this method not only complements aid rivalry but also increases the welfare of the donor. (JEL C72, D78, F35)


The People's Republic of China (PRC) gained international recognition when it replaced the Republic of China (Taiwan, as commonly called) in the United Nations in 1971. Taiwan has since attempted to offset the PRC's diplomatic victory by establishing new or firmer relations with the third world countries. The PRC, on the other hand, has continued to launch counteractions to nullify or outweigh the efforts of Taiwan. Diplomatic rivalry between these two countries has emerged and has continued to intensify over the years. Various channels have become major instruments of diplomatic rivalry, in which foreign aid is prominent. Taiwan and the PRC are often engaged in aid competition through grants, soft loans, technical assistance, and others to receive a favorable foreign policy connection from the foreign recipient.

Despite the fact that this rivalry has intensified, foreign aid donations have come under criticism by Taiwan and the PRC as a means of buying foreign relations. Moreover, public opinion in Taiwan has raised concern over whether this competition is worth all the trouble, for the costs may be more than the expected benefits. When will such money diplomacy come to an end? Is there a complementary measure available to the donors, in order not to waste too many resources in this unproductive competition? These doubts and questions are raising issues, for which answers are sought.

Analytical models (see, for example, Duddly and Montmarquette [1976], Hirschman [1964], and Lundborg [1998]) have been set up to elaborate on the U.S./Soviet diplomatic competition through the use of foreign aid during the cold war period. However, there are fundamental differences between this case and the case of Taiwan and the PRC, such as the inclusion of egoistic and altruistic purposes in the former and the minor role of the recipient in the latter. The application of the existing models, hence, is inappropriate. Furthermore, the role of complementary measures becomes important, because both Taiwan and the PRC have increasingly denounced the unlimited utilization of foreign aid. The existing research seems to provide no reference on how to select a complementary measure. Based on this, the need for a careful analysis prevails.

This article aims at finding a complementary measure to the conventional aid competition. It employs a game theoretic analysis to explore the optimal aid polices of Taiwan and the PRC under diplomatic rivalry. Similar to the role of political contributions in the public choice theory, aid is taken as international lobbying to realize a donor's foreign policy purposes. The resulting policy of the recipient will influence a donor through the channel of national utility. Such influence is called the policy effect and has been the major concern by the public. By considering this effect alone, this article begins to derive the Cournot Nash equilibrium, which gives the optimal donations for the donors. …

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