If U.S. foreign assistance is to be truly effective and transformational, it must be better aligned with the activities and resources of the private sector. For starters, there must be a recognition that the composition of global capital flows has changed drama- tically in the past 40 years. While government funded development assistance accounted for roughly 70 percent of all resources flowing to developing nations several decades ago, today 87 percent of the resources flowing into the developing world come from private sources. Therefore, aid programs must be designed with a much clearer intent to leverage these private capital flows, which are the primary driving force for growth in the developing world.
Better alignment between government development programs and the private sector is also critical to improving U.S. economic competitiveness in emerging markets. Today’s fastest-growing markets are in the developing world, which now accounts for half of U.S. exports and supports 1 in 5 jobs in the United States. In coming years, projected economic growth rates in the developing world (especially in Sub-Saharan Africa) are likely to be at least twice that of the U.S. and Europe. At a time of decreasing foreign assistance budgets, the U.S. government must look for ways to stretch the impact of its development dollars. At the same time, American businesses are facing tighter competition and smaller margins, making access to new markets a critical dimension to their future growth strategies.
The emergence of a stronger middle class in cities like Abuja, Accra, Nairobi and even Kigali is fuelling demand for all sorts of products and services, from mobile banking to canned drinks. Oftentimes, the biggest obstacle to American businesses in the developing world is the absence of essential institutions and conditions that support private business activity — commercial legal systems, land tenure, transparency in procurement, privatized banking and access to credit, etc. There is a clear role for public sector institutions to address and improve these conditions in developing markets in order to create a more level playing field for American businesses to compete. As investors see the potential for high returns in such ventures, they will commit capital, which in turn creates jobs and helps increase incomes, providing greater sustainability to economic development.
Enhanced Interagency Private Sector Coordination
With 12 departments, 26 agencies and more than 60 government offices all involved in the delivery of U.S. foreign assistance, it is no wonder that American businesses have a very difficult time partnering with U.S. development programs. Rather than placing the burden on the private sector to navigate the complex and disjointed foreign assistance apparatus, the Executive branch should be tasked with creating a streamlined, interagency coordination function that connects interested parties from the private sector to U.S. development efforts. Although many U.S. development agencies have taken steps to improve their private sector coordination capabilities in recent years, these agency-specific strategies remain opaque and must be integrated into a coherent interagency coordination structure for private sector engagement.
President Obama’s 2010 Policy Directive on Global Development created an Interagency Policy Committee (IPC) for Global Deve- lopment. While the IPC has created a new vehicle for interagency coordination of development programs, the need for a stream- lined, interagency coordination function remains. Enhanced interagency coordination is also needed to facilitate the combination of various development and finance tools to attract greater private sector participation in development activities.
Therefore, the President or Congress should mandate that the Department of State, the United States Agency for International Development, the Millennium Challenge Corporation, and other development agencies work together to establish an interagency private sector coordination office to provide a single point of contact to American businesses that seek partnership opportunities with U.S. development agencies. The interagency private sector coordination office would also coordinate and integrate the vario- us private sector liaison functions for all U.S. development agencies.
Bringing the Private Sector into the Development Programming Process
In order to better leverage U.S. foreign assistance dollars and to promote sustainable economic development in partner coun- tries, the private sector must be given a seat at the development programming table. This begins by creating a more coherent and strategic development programming process that emphasizes multi-year, interagency reviews of development priorities and resources, and that elevates economic growth as a top priority for all development strategies and programs. Whether it is in the context of country, sector or global development strategies, decisions on program prioritization and resource allocations must take private sector perspectives and market forces into account.
By consulting with the private sector from the outset, development programs can be designed to better attract private sector investment and to promote public-private partnerships in key development sectors. Therefore, the Secretary of State and the Ad- ministrator of the U.S. Agency for International Development should work with their policy and country teams to include private sector consultation in all country, sector and global development strategy and programming processes.
Institutionalizing Constraints to Growth and Investment Analyses
Development programming should also place a greater emphasis on identifying and mitigating obstacles to economic growth through private sector investment. U.S. development agencies should partner with the private sector to perform constraints to growth and investment analyses, and produce recommendations for mitigating investment obstacles that are integrated into all relevant development programming processes (e.g. Integrated Country Strategies, Regional and Functional Strategies, Country Development Cooperation Strategies, Mission Strategic Resource Plans, Global Development Strategy, etc.) Although the cons- traints to growth will vary by country and by sector, there are several core areas such as critical infrastructure, rule of law, tax/ investment codes, and customs and regulatory regimes that must become a greater priority in all development programming. These constraints to growth analyses should also focus on particular economic sectors that are most central to achieving eco- nomic growth in developing countries, such as agriculture, critical infrastructure, energy, and financial services. The MCC and the Partnership for Growth both emphasize constraints to growth in their programming processes, but these analyses need to be included in all agency country and sector development strategies to more effectively inform and guide the full spectrum of U.S. foreign assistance programs.
Therefore, the Secretary of State and the Administrator of the U.S. Agency for International Development should work with their policy and country teams to include constraints to growth and investment analyses as a component of all country, sector and global development strategy and programming processes. Third party representatives from the private sector, to include both American businesses and representatives from the indigenous commercial sectors in partner recipient countries, should conduct these analy- ses. The inclusion of such analysis will lead to more tailored investments of U.S. assistance funds, but will also create a mechanism to engage the private sector at the entry point of U.S. assistance, allowing for a more comprehensive and effective approach.
The U.S. is perceived globally as an economic engine that empowers entrepreneurs and thought leaders to be successful through innovation and free market creativity. The U.S. government should adopt those same principals in its development assistance pro- grams through enhanced partnerships with the private sector that bring greater depth and sustainability to U.S. assistance while creating new opportunities for private sector engagement in emerging markets.