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Could It Be that Both Parties Agree on Foreign Aid?

September 27, 2012

At the 2012 Clinton Global Initiative held in New York City, Secretary Hillary Clinton pointed out the changes in the developing world and the rise of private financial flows. Similarly, the next day at the same venue, Republican presidential nominee Governor Mitt Romney laid out his vision for foreign assistance. Among his comments, he too pointed out how the developing world has changed and applauded the involvement of the private sector through partnerships– “public and private, for-profit and nonprofit, charitable and commercial.” The Center for Global Prosperity (CGP) was pleased to notice that both speakers used figures published in the Index of Global Philanthropy and Remittances to make their points, with portions of their speeches sounding uncannily similar.

It is no news to the readers of the Index of Global Philanthropy and Remittances that private flows from the United States to developing countries far outpace U.S. Official Development Assistance (ODA). In fact, in 2010 (the latest year for which complete figures are available), U.S. private flows in the form of philanthropy, investment, and remittances amounted to $296 billion while U.S. ODA was $30 billion. Furthermore, in 2010 private flows from all OECD donor nations to developing countries made up some 80% of total economic flows, while ODA amounted to 20%. (see graph)

For nearly a decade, CGP has stressed the value of private resources in international relief and development. Fortunately, CGP’s long-time push for better engagement between government aid and private actors has not gone unheard. As was demonstrated at this Clinton Global Initiative, key figures on both sides of the aisle touted the importance of private actors in development. With the ongoing presidential campaign, it’s refreshing to see both parties agree at least on one thing. The chart below shows the similarities between Obama administration’s and Governor Romney’s foreign aid strategies.

Secretary Hillary Clinton on 9/24/2012 Mitt Romney on 9/25/2012
“In the 1960s, official development assistance from countries like the United States represented 70 percent of the capital flows going into developing countries. Since then, we’ve increased our development budgets, and yet even with those increases, development assistance now represents just 13 percent of capital flowing into developing countries because the amount of investment, trade, domestic resources, and remittances to those countries has skyrocketed.” “…many of our aid efforts were designed at a time when government development assistance accounted for roughly 70 percent of all resources flowing to developing nations. Today, 82 percent of the resources flowing into the developing world come from the private sector.”
“But today, with so many other resources flowing into developing countries, development assistance can and should play a different role. We have to think differently about how it fits into a more dynamic economic picture, and how it can be a catalyst for economic growth and self-sustaining progress.” “For American foreign aid to become more effective, it must embrace the power of partnerships, access the transformative nature of free enterprise, and leverage the abundant resources that can come from the private sector.”
“There are many entrepreneurs in developing economies who are ready to launch new businesses, but first they need access to credit. We can help more domestic and international financial institutions provide it, such as through loan guarantees by the U.S. Development Credit Authority and the Overseas Private Investment Corporation.” “We will focus our efforts on small and medium-size businesses. Microfinance has been an effective tool at promoting enterprise and prosperity, but we must expand support to small and medium-size businesses that are too large for microfinance, but too small for traditional banks.”

Secretary Clinton went on to mention three objectives of the Obama administration’s foreign aid strategy: moving from aid to investment, ensuring country ownership, and finally, “putting ourselves out of business.” The last point has been CGP’s mantra for nearly a decade and hearing it said on stage was music to our ears. The Secretary clarified that she looks forward to “the day when our development assistance will no longer be needed, when it is replaced by strong public institutions and civil societies, when private sector investments and trade are robust in both directions, and people have the chance, through their own hard work, to build better lives for themselves and their families.”

Romney made similar remarks on the important role of the private sector, although his speech focused more on the role of private investment and free enterprise as a means to a free society. The Governor went on to state the three objectives of aid: humanitarian relief, diplomacy, and improving people’s lives. To reach these objectives, the Governor proposes “Prosperity Pacts” which would provide aid packages to countries that have removed barriers to investment and trade. Thus, countries after removing barriers would theoretically open their markets to foreign investment and additionally receive U.S. aid for rule of law and institution building. Romney’s “Prosperity Pacts” suggest a similar set up as Millennium Challenge Corporations’ (MCC) compacts. However, instead of meeting the various scores on health, corruption, education, and other indicators required by the MCC, Romney’s plan calls for countries to remove trade barriers and improve their investment climates.

After months of debates over taxes, budgets, and jobs, it seems that foreign aid has become the least partisan matter. Both parties agree that in the vast sea of private resource flows, government aid is a minority shareholder and that government aid needs to be transformed. This is good news for prosperity in developing countries.

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