In the quarter century preceding the global COVID-19 pandemic, the world achieved something astonishing: worldwide poverty fell by more than 60 percent. Foreign aid played an important role in ameliorating the conditions of life for millions of people—helping to slash child mortality by more than half between 1990 and 2019, for example, and providing 26 million people with lifesaving HIV medications in 2020.
But even the most enthusiastic champions of such progress had to concede that inclusive and sustainable development remained elusive. Still today, nearly 700 million of the world’s people live below the international poverty line, unemployment in low-income countries is spiraling, and the world’s 47 poorest countries count for less than one percent of global trade. Aid alone cannot—and should not—be called upon to address this problem at scale.
In 2018, the United States Congress addressed this concern by passing into law Better Utilization of Investments Leading to Development, or BUILD, Act, with strong bipartisan support. Private-sector investment in developing countries is critical to achieving sustained and inclusive economic growth, but foreign direct investment in low-income countries is low, partly because of the real and perceived risks of investing in weak economies. The BUILD Act supplied a framework for encouraging and channeling significant U.S. private-sector investment to development overseas, including in large-scale infrastructure projects and other ventures beyond the scope of traditional foreign aid. Through the creation of the U.S. International Development Finance Corporation (DFC), the BUILD Act paves the way for American businesses to increase their investments in developing countries by limiting risk and creating new tools to help the government support and partner with promising entrepreneurs. The BUILD Act reinforced a growing understanding that foreign aid is an investment that not only reflects the United States’ values but also serves its interests by cultivating a strong national and viable global economy.
Because of the BUILD Act, the administration of U.S. President Joe Biden inherits an agency that has the support of both parties and the capacity to achieve far-reaching global change. The DFC is a new agency, and this administration has an opportunity to deliver on its mission, refine its operations, and re-envision development investment on a scale equal to the president’s ambitions.
Empowering the DFC to authorize more loans, grants, and other guarantees for investment projects will make a difference for people living in extreme poverty and for stability around the world, which will have a long-term positive impact. As President Biden recently said, “When we invest in economic development of countries, we create new markets for our products and reduce the likelihood of instability, violence, and mass migrations.”
Investing in Development
From 1971 until the BUILD Act, the United States supported private investment in overseas development through a little-known agency called the Overseas Private Investment Corporation, or OPIC, which promoted U.S. investment in emerging economies. The BUILD Act transformed OPIC into a full-fledged development finance institution by deliberately reorienting the agency toward development. The new DFC has debt and equity authority, an increased budget, and greater flexibility than OPIC ever had, making it a powerful tool for global change in the hands of the U.S. executive branch.
Government-owned development finance institutions invest primarily in low- and lower-middle-income markets, where access to capital is constrained. At their best, these institutions catalyze enough foreign direct investment to create jobs and revenue and strengthen markets. Worldwide, development finance institutions marshal roughly $50 billion in investment capital. And while governments capitalize them, development finance institutions yield profits, returning more funds to national treasuries than they receive. OPIC repaid money into the U.S. Treasury every year for nearly 40 years. In 2020, the DFC’s revenue exceeded its costs by $232 million.
Private investment is critically important to the sustainable development of the world’s poorest countries. Aid is important, too, as it can build capacity, fill gaps, and, in cases of extreme humanitarian need, save lives. But to tackle poverty and achieve self-reliance, according to the Addis Ababa Action Agenda signed by 193 countries in 2015, three streams of capital are necessary: aid, domestic revenues, and private investment.
Foreign direct investment in the world’s poorest countries is dismally low and falling further on account of the pandemic’s economic shock. Globally, foreign direct investment collapsed by 42 percent in 2020, slipping below $1 trillion for the first time since 2005. It is projected to decrease by a further five to ten percent in 2021. And as is the case with any exogenous shock, developing countries are hit the hardest: flows to Africa, for example, declined by 18 percent in 2020, after having already declined by ten percent the previous year. Globally, the least developed countries received just 1.4 percent of all foreign direct investment in 2019. Even before the pandemic struck, potential investors often balked at the political risk—and perceived risk—associated with investing in developing countries, alongside macroeconomic instability, weak institutions, and red tape.
Development finance institutions can break through the logjams that inhibit foreign and domestic investment. They have the convening power to bring together different actors, unlocking capital to make sure resources are flowing to where they are most needed and can have the greatest impact. Power Africa, for example, is a U.S. initiative that has brought electricity to nearly 18 million homes and businesses since 2013, using both on- and off-grid technology to supply first-time power to 82 million people across sub-Saharan Africa. Getting there has meant closing more than 120 deals between private- and public-sector partners, in order to generate an aggregate capacity of more than 11,000 megawatts, at a value of $22 billion. Private-sector capital was not making its way to African energy investment opportunities at scale, in some cases because Africa is a new market, unfamiliar to many investors, but also because of real and perceived risk. OPIC and now the DFC have enabled the flow of private capital and have thus not only yielded meaningful returns but also, in doing so, furnished the “proof of concept” that can overcome those perceptions of risk and make other investments more likely.
Unlocking the Powerhouse
The DFC is a potential powerhouse. It can help expand the renewable energy sector in developing countries, stimulate the tourism sector, and finance the infrastructure that allows countries to build and sustain highly productive economies. But in order for the agency to achieve its potential, policymakers must clearly define its mission, refine some operational issues, and leverage its investments to achieve meaningful scale.
The DFC’s primary mission is development, and to reinforce it will mean focusing investments on developing countries, where access to global capital markets is most constrained. The Biden administration should work with Congress to increase funding for credit subsidies, so that the DFC can do more deals in low-income and lower-middle-income countries, where risk is often high, and fund the staff and overhead budgets these deals require.
But the administration also needs to decide where the agency should fit into its foreign policy agenda. Should the DFC be deployed in the service of short-term foreign policy objectives—for example, deals that seek to shore up relations with particular countries? Or is it better suited to securing long-term foreign policy goals—for instance, through investments in renewable energy that further the administration’s climate policy? Realistically, the DFC’s portfolio will include a combination of tactical and strategic investments, but the scales should tip far in favor of the latter.
In the last year, the DFC has taken on a domestic role that also requires the new administration’s attention. In May 2020, President Donald Trump invoked the Defense Production Act (DPA) and called on the DFC to help the country mobilize its industrial base to reshore supply chains disrupted by the pandemic and produce supplies to respond to domestic COVID-19 needs. Some of the DFC’s greatest proponents felt that this role was the wrong one for the institution and argued that domestic financing, particularly where focused on onshoring manufacturing, was a marked departure from the agency’s statutory mandate. The DFC went on to sign a letter of interest to provide a $765 million loan to Eastman Kodak so that the company might open a pharmaceutical manufacturing arm. Some members of Congress called for an investigation into the Kodak deal and potential insider trading, alleging that Kodak disclosed the deal prior to the public government announcement. As the Biden administration has invoked the DPA in support of its own pandemic policies, it should promptly reassess and end the DFC’s current DPA mandate.
Other problems have come to light that require largely technical fixes. The DFC needs Congress or the Office of Management and Budget to address the underresourcing of its equity authority. The BUILD Act gave the DFC a limit of $21 billion for equity financing, but the fiscal year 2020 appropriation allowed it only $150 million. This extreme discrepancy came about because rather than scoring equity investments at fair market value, as loans that generate returns, the Office of Management and Budget made a determination to score equity investments on a dollar-for-dollar basis, as if they were grants that did not produce returns. In July 2020, Representatives Ted Yoho (R-Fla.) and Adam Smith (D-Wash.) introduced bipartisan legislation (H.R. 7570) to amend the BUILD Act and provide instructions for scoring equity as an investment tool expected to produce financial returns. Either the passage of this legislation or a new determination on scoring from the Office of Management and Budget could resolve this issue.
The DFC has the potential to help bring about broad and sustained economic change. It currently aims to mobilize $75 billion in private capital by the end of 2025. But it can extend its impact even further by striking lateral agreements with the Millennium Challenge Corporation and the U.S. Agency for International Development to bring foreign aid investments in alongside it. Moreover, the DFC can collaborate with its counterparts around the world. Global development finance institutions could devise a shared strategy—one that approaches change not project by project but at scale, thereby transforming rural infrastructure, for example, or renewable energy, or the tourism sector.
The DFC could in this way help address the growing concern among policymakers that China has outstripped the United States as an investor in the developing world. The Chinese government is investing twice as much in Africa, for example, as U.S. companies. Sounding the alarm at this trend will avail the United States little unless it can present a viable alternative. African countries need investment capital and would prefer to draw it from multiple sources and countries—North America and Europe can render that possible by making more investment capital available.
The Biden administration has an ambitious agenda, at home and abroad, and the DFC offers an easy win: it enjoys strong bipartisan support and can deliver results. A few small reforms will allow the United States to achieve more than many thought possible, and to do so with a new and improved government agency that pays for itself.
This article was originally published on ForeignAffairs.com.