from Development Channel

Expanding Private Sector Engagement in Developing Countries

A construction worker takes measurements of roofing metal bars of a new hospital under construction in Hoima town, Uganda April 27, 2015 (Courtesy Reuters/James Akena).

May 18, 2015

A construction worker takes measurements of roofing metal bars of a new hospital under construction in Hoima town, Uganda April 27, 2015 (Courtesy Reuters/James Akena).
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Emerging Voices features contributions from scholars and practitioners, highlighting new research, thinking, and approaches to development challenges. This article is by Elizabeth Littlefield, president and chief executive officer of the Overseas Private Investment Corporation, the U.S. governments development finance institution.

This month marks the 70th anniversary of Victory in Europe Day—when Nazi Germany surrendered to the allied powers and World War II ended in Europe. This occasion is an important opportunity to reflect on how the postwar reconstruction plan shapes our current model of economic engagement with the developing world and to consider expanding the role of the private sector in these efforts.

The postwar consensus came together at Bretton Woods. To rehabilitate a ravaged Europe, representatives of the allied powers agreed on a few basic lessons from the war: (1) advanced nations, especially the United States, need to engage with the world; (2) economic instability breeds conflict; and (3) military and economic preparedness of individual nations alone can’t provide stability. These beliefs have informed U.S. post-war policies and led to the creation of the International Monetary Fund (IMF) and World Bank.

For decades after, multilateral institutions and national governments led the investment in the developing world. In the early 1970s, official development assistance dwarfed private capital flows into emerging nations.

The Bretton Woods consensus continues to shape the approach to economic development. Today, developing countries receive IMF and Bank loans as well as aid from donor governments. But development assistance is no longer the primary source of international capital. For every $1 in official flows, $7 in private investments flow into the developing world. (Official flows are $134 billion, while private flows are $778 billion). Yet, the need remains, and the private sector is well positioned to deliver where aid efforts have fallen short—in meeting immediate demands, especially creating jobs, building infrastructure, and stimulating the economy.

The Overseas Private Investment Corporation (OPIC) was established in 1971 as a mechanism to help companies enter emerging markets. The U.S. government spun this development finance institution (DFI) out of the U.S. Agency for International Development. OPIC provides financing and political risk insurance to private investors seeking to work in emerging markets. By leveraging U.S. private sector capital and capacity to address critical needs in development countries, OPIC advances U.S. foreign policy and national security objectives.

Today, OPIC’s global portfolio totals $18 billion in financing and insurance, supporting development projects in over 100 countries. Yet, OPIC’s capacity to support these investments doesn’t meet the scale needed today. Nearly $800 billion in global foreign direct investment (FDI) goes to developing economies, but the world’s least-developed countries receive less than 4 percent of global FDI flows.

Aid will not satisfy the unmet needs of the world’s least developed regions. Currently, less than 1 percent of the U.S. budget is allocated to foreign assistance, and it is difficult to imagine this figure will drastically increase.

Rather, increased private sector investment is the answer. Numerous U.S. companies are ready to invest their capital in emerging markets, but they need support to meet the business challenges and risk common to such environments. OPIC has already played an important role, providing loans and guarantees to mobilize investments and insurance to protect against unforeseen events

But, the United States lags behind in economic engagement in developing countries. To expand U.S. private sector engagement, it will be necessary to redouble OPIC’s efforts. It is time for the United States to lead once more in the effort to spread peace and prosperity to the developing world—as we did post-World War II.

More on:

Emerging Markets

Development

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