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Nancy Lee is a senior policy fellow at the Center for Global Development and a senior advisor at the Center for Strategic and International Studies. Her work at CGD focuses on the role of development banks in mobilizing private finance and increasing development impact. Previously, she was the deputy chief executive officer of the Millennium Challenge Corporation (MCC), an innovative, independent US aid agency that fights poverty through country compacts that support inclusive growth. Key MCC attributes are rigorous country selection, country ownership of compacts, data-driven resource allocation, results accountability, and transparency.
Prior to joining MCC, Dr. Lee was the general manager (CEO) of the Multilateral Investment Fund (MIF) at the Inter-American Development Bank, the Bank’s laboratory for private sector-led development and a key impact investor in the region. Under Dr. Lee's leadership, the MIF launched initiatives in lending to women-owned SMEs; a public-private partnership to scale youth job training programs; a program to introduce social impact bonds to the region; innovative climate finance models; and a crowdsourcing platform for development solutions.
Previously, Dr. Lee served at the US Treasury Department, where she was deputy assistant secretary for the Western Hemisphere and for Europe and Eurasia. She led Treasury’s work to put financial inclusion, SME finance, and women’s access to finance on the G20 agenda. She co-chaired the G20 SME Finance Group and led the development of the G20 SME Finance Challenge and the SME Finance Innovation Fund. She was a Treasury negotiator in the Uruguay Round of trade negotiations. Dr. Lee is a member of the Council on Foreign Relations and holds a PhD and an MA in economics from Tufts University and a BA in economics from Wellesley College.
Center for Global Development
WASHINGTON – Foreign private investment now supplies about as much finance as foreign aid in many low-income countries in Africa and Asia, according to a study published today by the Center for Global Development.
The study examined foreign private capital flows—meaning foreign direct investment (FDI), portfolio equity and debt, and bank and other lending—to low-income countries, a group of 27 countries primarily in Asia and Africa.* It found that for the median low-income country, the ratio of foreign private investment to GDP is about the same as the ratio of foreign aid to GDP.
“This was a surprise,” said Nancy Lee, a senior policy fellow at CGD, a former senior official at the Millennium Challenge Corporation, and the lead author of the study. “We thought that foreign private capital flows would not contribute much to investment in low-income countries, especially after the global financial crisis. Instead, we found that these private capital flows are a major source of finance—and they’ve mostly increased since the financial crisis. That’s in contrast to aid, which has declined sharply as a share of GDP.”
“Most of these inflows are in the form of FDI, which is a more stable, less volatile source of finance,” she continued. “That’s good news for these economies.”
Some of the study’s other findings include:
It’s not all about natural resources
These investments are not all captured by resource-rich countries. In 2017, more than half of capital inflows went to countries that are not rich in oil or other natural resources. “It’s increasingly clear that policies, not just resource endowments, shape FDI destinations for low-income countries,” Lee said.
China is a growing investor, not just a lender
Much of the new investment in Africa, where most low-income countries are located, is coming from China. China more than doubled its total foreign direct investment in the continent between 2011 and 2016—and the amount is now closing in on that of the largest traditional western investors like the US, UK, and France, which have mostly stayed flat over that same time period.
“There’s been a lot of focus on China’s role as a lender to African countries, but China has also emerged as one of the most important investors in Africa,” Lee said. “It’s clearly making a long-term commitment to the region.”
But foreign and domestic investment don’t necessarily reinforce each other
Low-income countries with higher rates of private foreign investment don’t tend to have higher rates of private domestic investment. That raises concerns, said the authors of the study.
“We would expect foreign and domestic private investment to be complementary, as is the case in lower-middle-income countries,” Lee said. “But we’re not seeing that pattern in low-income countries. They need to think about how to spread the benefits of foreign investment more widely in the economy.”
Policies make a difference
Foreign investors care about the policy environment for investment. The study finds a significant positive relationship between foreign investment/GDP and the perceived quality of the regulatory environment in low-income countries without resource riches.
“Foreign aid is still important for poor countries, but private investment is already as big and growing. That’s especially true for FDI to non-resource-rich countries. These countries are showing that their resource endowments no longer determine their destiny. Their policy choices matter,” Lee said.
You can read the full study at https://www.cgdev.org/publication/trends-private-capital-flows-low-income-countries-good-and-not-so-good-news.
* The study covered 27 countries: Afghanistan, Bangladesh, Benin, Burkina Faso, Burundi, Cambodia, Democratic Republic of Congo, Ethiopia, Guinea, Haiti, Kenya, Kyrgyz Republic, Liberia, Madagascar, Malawi, Mali, Mozambique, Myanmar, Nepal, Niger, Sierra Leone, South Sudan, Tajikistan, Tanzania, Togo, Uganda, and Zimbabwe.
In this CGD Essay, visiting fellow Nancy Lee provides the full details and policy recommendations for a strategy of regional investment integration in the Americas. The essay, excerpted from her chapter in the forthcoming White House and the World: A Global Development Agenda for the Next U.S. President, builds on a previously published CGD Note by specifying the scope of the proposed agreement, outlining its expected gains, and identifying the initial steps the United States could take to encourage a fresh agreement to be reached.
The purpose of this note is to provide a realistic analysis of where MDBs have made progress in improving performance and governance, the risks and challenges they and their shareholders confront today, possible areas of US-China collaboration, and a specific recommendation for a joint effort.