The U. S. Net Economic Engagement with the Developing World: A Gordian Knot

By Jeremiah Norris – Senior Fellow, Hudson Institute

In December 2010, the Secretary of State released the First Quadrennial Diplomacy and Development Review (QDDR)  It represents the most thorough examination of U. S. international development policies by the Department of State since the Statutory Authority for the Foreign Assistance Act of 1961 was passed from the Administrator of USAID to then-Secretary Madeline Albright in the last year of the Clinton Administration.

The QDDR “begins by assessing the world as it is today and the changes we expect in the years ahead.”   It would have been more fulsome had it found provenance in the 1961 Act and used it as a departure point for a contemporaneous re-alignment of development assistance in the 21st Century. When originally passed, it was a direct response to a world of emerging post-colonial countries in Africa and the entire sub-continent of Asia. At that time and for decades afterwards, it was absolutely essential to target aid to their public sectors, as their private sectors were minor contributors to national GNP rates.

Today, the most populous of aid recipient countries, e.g., India, China, Bangladesh, Vietnam, Indonesia, Brazil, Nigeria and South Africa, expend at least 70% of their national health resources in the private sector. It is above 83% in India and China, two countries that are designated to receive a total of $37 million through the Global Health Initiative (GHI) alone.

The developing world has change greatly since the Foreign Assistance Act of 1961. This is no more apparent than in the incoming resource flows from non-governmental sources as against those from U. S. Official Development Assistance (ODA). While ODA has increased dramatically in terms of absolute dollar amounts, it has been dwarfed since 2004 by other sources. In that year, ODA was 20% of the U. S. net economic engagement with the developing world, falling to 14% in 2008, as illustrated in the Table below.

U.S. Net Economic Engagement with the Developing World, 2004-2008 (in billions)















Official Development Assistance  












U.S. Philanthropy  












U.S. Remittances to        developing countries  












U.S. Private Capital Flows  












Sub-total Private: Philanthropy, Remittances, Private Capital Flows  












Total (Private & ODA) $97.4 

$192.0 $192.1 $235.2 $132.1 $848.8 

ODA as % of total 20% 14% 12% 9% 20% 14%

Remittances have been called “the diaspora that fuels development” by Financial Times. They have been shown to bring the poor into the financial services sector, to securitize loans in developing countries at both micro and macro levels, and to contribute to valuable community development programs in developing countries by the World Bank.

The transition from public to private aid is accelerating rapidly in response to the changing architecture of development assistance, one that is distinctly different than the environment which led to the Foreign Assistance Act of 1961.  In one sense, the QDDR recognizes this by proposing “to connect the private and civil sectors to our foreign policy work … [by] streamlining our public-private partnership process.”

Yet, it also recommends “to change our management approach by turning to the expertise of other federal agencies where appropriate—before engaging private contractors.” While this recommendation is welcomed, U. S. agencies such as HHS, NIH, and CDC generally have their institutional bona fides with counter-part public sector entities in the developing world. Since the vast majority of health expenditures in the largest aid-assisted countries reside in their private sectors, it is difficult to see how GHI “funding can be linked to performance” when those resource flows are combined with so many bilateral and multilateral donors, as well as domestic sources. In 2010, UNAIDS found that national fiscal commitments to AIDS programming was 52% of all funding on a global basis.  Their health systems don’t revolve around the presence of a USAID dollar.

In a 2010 speech, the USAID Administrator rightly called for future aid allocations to have “scale and impact” attributes. Those aren’t as viable in ODA as they would be if combined with non-governmental aid.  How to leverage this without it being an ODA agenda with non-governmental monies is the Gordian knot facing the U. S. net economic engagement with the developing world. .

The Secretary of State has made an provocative  start towards unraveling this knot with the QDDR; let’s not have it end there.


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