BOISE, Idaho — While foreign aid is a conventional strategy for addressing poverty in developing nations, it isn’t the only way to promote sustainable development. Private investment in developing areas can also be a potent driver of economic growth, often bringing more long-term stability and prosperity than aid alone. This is why, in 2018, Congress passed development legislation known as the Better Utilization of Investments Leading to Private Development (BUILD) Act. Now, the BUILD Act can support international recovery because it can help fight the economic impacts of the COVID-19 pandemic in developing countries.
What does BUILD do?
Since its inception, the BUILD Act has had strong bipartisan support and has created extensive governmental infrastructure, encouraging American companies to invest overseas in developing areas of the world. Typically, perceived risks of investment, including political instability and disproportionate impacts from events such as the COVID-19 pandemic, limit private investment in these areas.
Often, even when companies want to invest in developing countries, banks and private financiers are reluctant to lend money due to these risks. The BUILD Act addressed this issue by creating the U.S. International Development Finance Corporation (USIDFC), which provides loans for prospective private investors looking to invest in low to middle-income countries.
BUILD expands on the initiatives that the Overseas Private Investment Corporation (OPIC) promotes. OPIC was created in 1971 with a similar objective of encouraging American investment into fledgling economies. The new USIDFC has greater power and funding than OPIC ever did, giving it the ability to insure losses on investment loans in developing countries fully.
Why Is Private Investment Important?
In low-income economies, the lack of capital for both consumers and prospective entrepreneurs constraints growth. Foreign aid can be a helpful force in giving short-term monetary boosts to these economies and providing people with necessities such as food and clean water. However, it isn’t always easy to leverage foreign aid to have long-lasting impacts on developing economies. On the other hand, private investment recalls the adage “teach a man to fish and he’ll eat forever.”
A hefty influx of capital into a country’s industry and commercial economy has benefits that can outlast even the most generous aid package. Furthermore, it provides reciprocal benefits to the investors and their home economies. In fact, organizations such as OPIC and the USIDFC often make a profit for the U.S. In fiscal year 2020, the “DFC’s revenue exceeded its cost by $232 million.” Before that, OPIC regularly gained money for the federal government in its 40 years of operation. A Heritage Foundation study showed that shutting down OPIC would have cost taxpayers “$2.2 billion over 10 years.”
How the Pandemic Affects Foreign Investment
Of course, while foreign investment is a driver of long-term economic growth in developing areas, aid is crucially important in creating safety nets for those who don’t benefit from broader economic booms. Additionally, it is frequently saving lives by providing people with the basic tools for survival. Any support plan seeking longevity in a certain region must necessarily incorporate both aid and investment to tackle poverty effectively. Self-reliance and the aggressive development spurred by investment and capitalism are aspects of the solution. Another aspect is targeting foreign aid.
Right now, all these elements are more important than ever in the face of the COVID-19 pandemic and the disproportionate impact it has had on the economies and public health of developing countries. According to World Bank President David Malpass, the pandemic will push more than 95 million people into extreme poverty.
Simultaneously, the United Nations Conference on Trade and Development (UNCTAD) analysis found that direct foreign investment, the kind of investment that the USIDFC is designed to promote, fell by 69% in developing countries in 2020. Globally, it declined by 42%. Experts predict the investment rate will stay low through the end of this year. In the words of James Zhan, head of UNCTAD’s investment sector, “For developing countries, the prospects for 2021 are a major concern. These investment types are crucial for productive capacity and infrastructure development and thus for sustainable recovery prospects.”
BUILD Act During Covid-19
The investment statistics from 2020 are bleak indicators for the economic prosperity of the developing countries where the pandemic has hit hardest. One response could be leveraging the framework of the BUILD Act and the USIDFC to restart cash flow through foreign investment. The Biden administration could begin by expanding the USIDFC’s budget for subsidized loans, which help increase higher-risk investments in low and middle-income economies. It can also serve as a tool to advance the administration’s climate goals by encouraging investment in renewable energy sources in developing countries. Additionally, the USIDFC’s budget could be expanded if it were calculated not on a dollar-for-dollar basis but rather as an investment that would return profits to the U.S. as it has been shown to do.
Competing with China
Biden could also use the USIDFC to challenge China’s growing dominance in many developing countries in South America and Africa by directing an influx of American capital into those areas. In a written testimony for the Senate Committee on Foreign Relations, Daniel Runde of the Center for Strategic and International Studies explained, “China offers quick financing and no-questions-asked infrastructure policies [around the world]. We cannot change China’s policy, but we can have a better offer than China. The [USI]DFC is part of that better offer.”
By offering investment loans to smaller businesses internationally, the USIDFC can fill economic niches the Chinese government underutilizes and remain its dominant competitor in the international development arena. Besides, it can provide economic relief to countries suffering from the disproportionate shock of the pandemic.
Supporting development coupled with financial returns at home, the BUILD Act exists as a legislative and economic tool capable of reinvigorating developing, international economies from the ground up.
– Kieran Hadley