International Development Priorities for the Next Presidential Term: A GOP Perspective
By Ambassador John Simon | MAY 31, 2016
Despite common stereotypes, Republican administrations have a proud history of supporting international development. An analysis by the Center for Global Development of U.S. official development assistance (ODA) spending with regard to Africa indicated the political configuration most amenable to aid increases is a Republican president with a Republican Senate and Democratic House. Importantly, this analysis does not take into account the massive aid increases under the administration of George W. Bush or the significant development efforts of the Reagan administration in Central America. It may seem at odds with the position of the current presumptive GOP nominee, but past candidates have found the value of strong development agenda once in office. As a candidate, George W. Bush famously derided “nation building,” but then dedicated more resources to that effort than any other president since Harry Truman.
Republican administration’s contributed much more than just funding to international develop- ment. They have been among the most prominent innovators in the development space. Under President Reagan, the United States made private-sector initiatives a major component of U.S. aid policy, which hitherto had been heavily government focused. Reagan used aid to encourage the opening of markets and the establishment of pro-market policies—what came to be known as the Washington Consensus. This much-maligned set of policy prescriptions ultimately helped much of the developing world advance into middle-income status, particularly in Latin America.
THE BUSHES’ LEGACY
President George H.W. Bush presided over the initiation of a major development effort to integrate the former Soviet Union and its satellites into the global economy. In so doing, his administration pioneered a mix of private and public engagement that utilized several facets of U.S. government and private-sector leverage. The success in the countries of Eastern Europe has been profound, though the results have been more mixed in the republics of the former Soviet Union.
Few presidents, Republic or Democratic, however, have had as broad or far-reaching an impact on international development as his son, George W. Bush. The Millennium Challenge Corporation (MCC) created a new model of aid delivery that tied significant increases in aid to measurable policy performance as verified by third-party monitors. The emphasis on measurable results was also at the heart of his major public health initiatives, the President’s Emergency Plan for AIDS Relief, and the President’s Malaria Initiative, which have saved millions of lives across sub-Saharan Africa. Other areas of emphasis included the Freedom Agenda, which ramped up democracy-promotion efforts globally; the $60 billion Multilateral Debt Relief Initiative (MDRI), which sought to clean up the balance sheets of poor countries to give them access to global capital markets; and significant increases in trade capacity building tied to new Free Trade Agreements, which led to a new round of market openings in the developing world. As a result of all of these efforts, U.S. ODA more than doubled in real terms during the Bush presidency, and aid for Africa more than quadrupled. More to the point, the policy and development performance increased dramatically, particularly in Africa, with growth and investment rates several times those of the previous decades.
Importantly, the innovative approaches of all these presidents ultimately were adopted by their Democratic successors, solidifying a legacy of bipartisanship that persists in the international development realm, despite some notable dis- agreements largely around areas of reproductive health and population control. It is also interest- ing to see how the initiatives of one administra- tion built on the other, with the private-sector orientation of the Reagan administration and the whole-of-government approach of the first Bush administration being incorporated into the initia- tives of George W. Bush.
How should the next Republican president expand on this legacy? Thanks to the policy reforms emphasized by the MCC, the reduction in debt from MDRI, and the increased opportunities for trade, African and Least Developed Countries (LDCs) are now much more hospitable to investment than at any time in their history. In addition, due to the large increases in aid in the past decade, and the limits on public spending in the developed world going forward, the potential and returns from continued large increases in aid have diminished. Therefore, we need to place private investment at the core of our long-term efforts. Much of the developing world has now entered an era of investment-driven as opposed to aid-driven development. A discussion with any African or LDC head of state or government quickly confirms this fact. As Paul Kagame, president of Rwanda, wrote, “While helpful, aid has not delivered sustainable development. It is clear that trade and investment bring greater opportu- nity for wealth creation. Africa welcomes invest- ment, from the east and west, north and south.”
A focus on investment not only brings more resources to the table. It also creates feedback mechanisms to encourage continued positive policy performance. Failure to maintain progress in these areas will result in this key spigot for development resources being shut off, whereas advancing policy performance will multiply it several times. This has been the experience, both positively and negatively, in the BRIC (Brazil, Russia, India, and China) countries, which saw a major growth in investment as they became more market oriented. Some, such as Brazil and Rus- sia, have now seen a retrenchment as their policy performance has deteriorated.
To make investment central to our aid strategy, we need to buttress our investment-promotion tools. The most significant of these is the Overseas Private Investment Corporation (OPIC), the United States’ Development Finance Institution (DFI). Unlike other countries’ DFIs, OPIC is very restricted in the forms of support it can provide, with no ability to make equity investments or to provide technical assistance. The United States has other agencies that promote investment as well, including the U.S. Trade and Development Agency, which provides grants to assess the feasibility of investment projects, and the Development Credit Authority of USAID, which provides local currency guarantees to promote local banking markets. To have a robust arsenal of tools to promote development-oriented investment, these agencies should be combined into a U.S. Development Bank, which can deploy a multiplicity of methods to mobilize investment capital for development.
The United States should also leverage the various forms of investment interested in the developing world. This includes the investment of large U.S. and multinational companies, the traditional constituency of OPIC, but also investment from impact investors (who focus their investments on opportunities with the potential for social as well as financial returns), the diaspora (who have an interest in promoting the development of their home countries), and local investors (who often focus on relatively “safe” opportunities like real estate and government paper as opposed to more development-oriented opportunities). Providing risk-mitigation tools—guarantees, first loss capital, outcome payments—can unlock this capital and provide a demonstration effect that ultimately can lead to the much larger set of resources available from mainstream institutional investors: major asset managers, pension funds, and sovereign wealth funds. The investment needs of the developing world are massive ($1.4 trillion annually for the next 10 years to reach the just-agreed Sustainable Development Goals by one estimate). But that is still only a fraction of what is available from the large-scale investment institutions that have tens of trillions of dollars under management.
With this focus on investment, the economic growth programs of the traditional aid agencies should be geared to support the efforts to mobilize investment capital with technical assistance for financial regulators, enterprises and fund managers, coinvestment, and guarantees. More and more, these efforts can be located in the MCC, leaving other areas of traditional strong competence for the United States—disaster relief, global health—as the primary focus of USAID.
The result will be an aid approach that can dramatically increase resources for development without increases in budgetary appropriations, promote pro-market reforms, and build a strong middle class in developing countries that is the best safeguard of social and economic development.