US Developmental Assistance in an Era of of High Debt

By Sophia Moropoulos

The new presidential term is headlined by debt. It is no surprise than that the focus of US foreign policy has shifted to emphasize efficiency and austerity. As intervention and investment have traditionally been a large part of US foreign policy, how will the debt affect this?

In the past, US foreign policy has been able to invest in countries like Yemen to encourage regional stabilization and security. But do countries like this require government-funded intervention, especially in the light of an indebted US? True, we have seen notable results in Yemen. The presence of the AQAP is vanishing, businesses are reopening, and many services are returning to the country, including access to oil. The Friends of Yemen Group raised 5.7 billion dollars in pledges from others countries including Great Britain, Russia and China but many of these pledges have yet to produce reliable dividends. Additionally, filtering public money through corrupt governments may not be the most efficient process to produce results on these investments. Encouraging other States to aid in both political transition and humanitarian aid is necessary, even admirable, but not necessarily dependable. Equally poignant is the fact that these investments require a long term commitment. The US government can no longer afford that.

By allowing the private sector, both foreign and in the US, more freedom to invest in developing countries much of the cost associated with foreign intervention can be alleviated from the State. While legislation in the previous presidential term prompted US foreign policy to include the private sector, we have yet to see much of that take place. If the ultimate goal of US intervention is to achieve self-sustaining liberal democracies that do not rely on external support, how does the private sector help achieve that?

A case study of Somalia may help. There has been, to date, no successful presence of a centralized liberalized government but rather regional and localized governing bodies. Yet only 43% of the population lives on $1 a day compared to 52% in neighboring countries. The private sector has provided relatively reliable energy sources and infrastructure, including roads and transportation. While Somalia is by no means a complete success it does give us a look at the private sector working where neither a centralized government nor foreign investment could help.

Somalia’s standard of living is increasing within its system of localized networks due to the private sectors manageability and trust-building capabilities. Both are key to successful state building. These are also key to general business in the private sector. Private enterprise relies on credibility, reputation and trustworthiness. Additionally, they rely on relationship building and an established clientele. This, in turn, results in a better understanding of the local needs and ways to promote business.

Private enterprises also tend to be smaller. This further facilitates relationship building and manageability. In the case of Somalia, without large scale utilities, private enterprises provide electricity through generators and charge residents per light bulb on a daily basis. This creates a network system where businesses regularly communicate with buyers. This has also brought power to areas that would have remained off the grid.

Airport transportation is another example of the private sector achieving results in Somalia. Airports are run by private enterprises but rely on outsourcing. By leasing planes and maintenance crews from recognized and trusted companies from the UK and Eastern Europe, Somalia entrepreneurs have established credibility and utilized industry standards without the presence of centralized government or subsidized funds.

Innovation in the private sector strengthens a nation while State and foreign aid has proven to induce only temporary or moderate stability. Countries like India, Bangladesh, and Vietnam are experiencing more than 6% growth in their economy per a year. This is driven by local job creation, in turn, establishing prosperity and reducing poverty.

Canada has initiated a method to aid developing countries and thus extend its foreign policy interests. Formerly, the CIDA (Canadian International Development Agency) required that aid be sent from Canadian domestic entities to their foreign investments. In Ethiopia for example, Canadian companies flooded the market with underpriced grain and inhibited the local market from competing. Today, Canada subsidizes Ethiopian farmers to supply the region. Poverty reduction depends, ultimately, on the local economy to preserve itself.

Critics of Canada’s new approach say that this leads the CIDA away from its ultimate goal objective: developmental assistance. Which begs the question, what is the point of developmental assistance, if not to establish self-sustaining processes?

The combination of private sector and government funding has also shown notable results elsewhere. Organizations like the OPIC, the US government’s development finance institution, mobilizes private capital in the US to aid US foreign policy to businesses abroad. To date, the OPIC has supported $177 billion worth of investments towards developing countries, generating $13 billion in host revenue and 800,000 host country jobs. The ODA, organization for economic co-operation and development, is another agency that has prompted the governments of over 30 democratic countries to promote private investment in developing countries.

What are the risks? Security is primary. This leads me to the final point. Whether it is State sponsored aid or private investments, the objectives must remain clear. If US foreign policy dictates that investment and intervention is necessary in a particular region, security measures must first be met. This entails reasonable and time appropriate goals that would establish a safe haven for business to thrive.

So, what will the foreign intervention and investment look like in the US as we shift budget priorities? I can only hope and assume we will see a quieter, more focused presence from the Western hemisphere. Hopefully, the US will follow its own advice and be less likely to get in the way of innovation and entrepreneurship because there is no greater sense of pride and ownership than earning it for yourself.

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Sophia is a blog writer for the Whitehead Journal and a first year master’s candidate at the Whitehead School of Diplomacy

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