The Problem with Competing for the Allegiance of Poor Countries

An earlier version of this blog appeared on the Brookings “Future Development” blog series.

In warning APEC leaders last week of China’s “constricting belt” and “one-way road,” Vice President Mike Pence provided the clearest signal yet that the US approach to foreign assistance will be shaped, if not determined, by competition with China. In the context of the administration’s trade war with China, this may not come as much of a surprise. But when it comes to the conduct of foreign assistance, it marks a striking turn away from the bipartisan approach to aid since the end of the Cold War—an approach defined around cooperation and one aimed at curbing the bad practices that arise when donors compete for the allegiance of aid recipients.

Development cooperation has been a common thread running through the geography of aid agreements of recent decades: from the Busan Partnership to the Paris Declaration and on to the Accra Agenda. If there’s one thing major donor countries have agreed on, it’s the need to cooperate, with developing country “partners” and with each other when it comes to the delivery of development assistance.

The cooperation agenda itself is a corrective to an earlier era of aid, when donors were as likely to lean on foreign aid to carry out a form of ideological competition during the Cold War or, just as often, a commercial one. Careful and hard-fought agreements to curb the practice of tied aid, which had revealed itself to favor donor country commercial interests over development progress in poorer countries, are the tangible outcomes that give force to the principle of cooperation over competition.

Yet, just as this set of issues appeared to be settled among OECD donor countries, with attention turning to how to bring emerging donors into the fold, the old competitive pressures have reemerged, led by a US government intent on responding aggressively to Chinese development finance. Without doubt, Chinese aid and financing is rife with many of the bad practices that traditional donors have curbed: closed procurement, lack of transparency, and little apparent regard for measurement of development impact or debt sustainability.

So when Trump administration officials turned their attention to China’s financing practices in developing countries, there were certainly grounds for them to levy criticism. But the general approach, steeped in a strategy of conflict and competition, risks abandoning the good that has been achieved through cooperation and reintroducing the bad that had been left behind from an earlier era of aid competition.

 An extreme version of the administration’s approach, apparently being given serious consideration, would force countries to choose between US assistance and Chinese finance. Softer forms of this approach would simply jockey for developing countries’ attention under a “Clear Choice” agenda, which would seek to convince these countries that Chinese financing is bad and US money is good.

But they may be surprised at just how clear the choice may be for most developing countries. Yes, these countries value the support from PEPFAR and US humanitarian assistance, particularly in times of natural disasters or pandemics. But when it comes to their day-to-day development priorities, infrastructure is often first, second, and third on the list. And on this front, Chinese financing is seemingly everywhere, compared to a meager US presence.

It’s not all threats and bullying coming from the White House. Worries about China’s infrastructure agenda helped to drive swift action this year to create a new US International Development Finance Corporation, building on the existing framework of the Overseas Private Investment Corporation.

Under the new law, OPIC, with an exposure limit of $29 billion, will become the US International Development Finance Corporation, with a limit of $60 billion. More development finance to support quality infrastructure with good standards attached to it is undoubtedly a good thing, and the legislation lays key markers that seek to ensure maximum development impact.

But this big push on lending for development is happening even as the traditional aid budget is under attack by the administration. Each budget put forward by this White House has sought to gut traditional aid and to reallocate money away from clearly defined programs like PEPFAR in favor of unrestricted (i.e., “slush”) funds. Greater flexibility in the aid budget could be useful, but not in the absence of clear standards and accountability.

Further, the new IDFC itself, despite a sound legislative framework, is vulnerable to bad practice. The more the United States sets a goal of competing with China, the more prone our government will be to either missing the mark in terms of meeting development needs, or worse, to mimicking some of the very problems associated with Chinese financing—namely, choosing and structuring deals in ways that clearly benefit a domestic firm or interest but less clearly deliver development impact in the developing country. This practice is essentially tied aid but without the aid component. To be fair, the legislation actually eases up on the hard requirement that the IDFC work with US firms (compared to current practice at OPIC), but it is stated as a preference, which will invite political pressure to continue to demonstrate support for US firms.

And as pressure mounts to compete with China, there will also be pressures to weaken the very standards that are meant to distinguish US finance from Chinese finance: things like holding potential projects to a high threshold for development impact and employing costly and time-consuming environmental and social impact measures.

If the IDFC and the rest of US assistance becomes captured by a “Clear Choice” framework that seeks to divide up the world in the fashion of the Cold War era, then we will undoubtedly see a real deterioration in the quality of US assistance. Development objectives will increasingly take a back seat to political considerations: seeking to size up developing country governments in terms of whether they’re with us or against us, and deploying cash to our “friends” in ways that have little to do with development.

Even as a larger US presence in development finance will almost certainly be welcomed by developing countries, US officials ultimately will have a hard time convincing these countries that this should be viewed strictly as an alternative to Chinese finance. Rather than seek to lure countries away from China’s money, US policy would do well to recognize it as a reality and seek to affect reforms to its problematic features. Achieving that will require cooperation, with like-minded countries (of which there are many) and with the Chinese themselves.