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Turning Good Intentions to Action
How the United States should refocus and retool its soft-power economic diplomacy.
If the United States hopes to maintain a level of influence in the world commensurate with its economic and military strength, it must modernize and dramatically improve some of its soft-power foreign policy tools. Many of those tools have proven ineffective, and fail to reflect the transformational changes in the past two decades prompted by technology, connectivity, and global markets.
For example, unrestricted aid grants to foreign governments, commonly known as "budget support," often do more to perpetuate poor governance than improve it. Assistance for programs that are neither scalable nor sustainable after their funding ends are frequently a waste of taxpayer money. And support for projects that are based upon "inputs" (such as the number of people enrolled in a program) rather than "outcomes" (such as the number of people who actually completed and benefited from the program), are examples of soft-power approaches that represent an old way of thinking.
These types of aid also fail to take advantage of what people admire most about America, which is economic growth and opportunity. As the United States looks for new ways to project its influence abroad in the 21st century, there is one item in the foreign policy toolbox that should be relied on more heavily: economic diplomacy.
An important lesson of the current turmoil in the Middle East, Africa, and South Asia, is that it is difficult to discourage violent extremism and establish stability in places where there is little or no economic hope. Despite seemingly insurmountable differences in culture, religion, and lifestyle, people around the world share the same aspirations to put food on the table, a roof over their heads, and provide for their families. American foreign policy should be built more around those shared aspirations than around the traditional political or military strategies currently pursued. Indeed, stronger economic relations could increase the leverage and effectiveness of U.S. diplomatic and defense objectives.
This is not to suggest that we diminish the critical role the United States plays in providing humanitarian assistance and fighting disease and starvation through our aid agencies. That work constitutes roughly 1 percent of the U.S. federal budget and is an essential part of our character as a generous and compassionate people. Nor should we abandon our efforts to improve governance and strengthen civil institutions. However, we must also develop a more robust, creative, and nimble set of options that encourage and support job creation and economic growth.
But all too often, economic development is a second- or third-tier objective after other diplomatic and development priorities. Field personnel at our embassies, whether from the State Department or USAID, often lack operational business experience, rendering them poorly attuned to what is necessary to kick-start economic activity. Indeed, we tend to focus first on legal, regulatory, and structural reforms, otherwise known as "capacity building." The intentions here are good ones. Trying to establish the right environment for business creation and growth is absolutely essential to building a strong economy. However, this project normally takes years — and while the United States and other international entities are focused on capacity building, the local population grows frustrated, if not alienated, by the lack of any tangible economic progress. This is particularly true in places like Afghanistan and Iraq: if people are willing to put down their weapons, they need to be able to pick up a shovel, or some other tool for work.
Speedier fixes are necessary. There are many things we can do immediately to support economic growth in the developing world, thereby engendering positive views of the United States. A more dynamic approach must include short, medium, and long-term initiatives undertaken simultaneously rather than the current sequential approach.
Short-term options include easing credit access for small- and medium-sized enterprises (SMEs), or providing high-value infrastructure improvements such as replacing a broken water pump for a community. In the medium term, building a farm-to-market road not only reduces the time and cost of transporting commodities, but also provides a more competitive point of sale. In terms of longer-term priorities, we should encourage the enactment of legal and regulatory reforms that protect and enable more private-capital investment and private-property ownership.
To be successful, U.S. economic diplomacy must focus on a mix of investment, trade, technology, and infrastructure initiatives. It should enlist private-sector experts to work side-by-side with public-sector players. It is important to remember that almost 90 percent of the capital flows into the developing world come from the private sector: from business investments, non-profits, and remittances. This means that public-sector funding now represents only 10 percent of the capital flows. Thus, the failure to work cooperatively with the private sector seriously inhibits the success of public-sector development programs.
Examples of investment initiatives that can have a highly catalytic impact on existing businesses include easier access to credit for SMEs, combined with modest angel equity investment. The Overseas Private Investment Corporation (OPIC) is well-placed to share the risk with a local financial institution or intermediary to help make this happen. Coupled with advice and guidance from trained business experts on how to improve cash management, marketing, planning, and other skills, this can speed the path to an SME’s sustainability, leading to faster job creation and growth. Coupling access to capital with business advisory services is an approach increasingly pursued by international financial institutions around the world. However, the U.S. government struggles to provide these services in a seamless, cooperative fashion. As local businesses grow and are able to access new credit and capital, greater emphasis should be placed on enabling those businesses to enter export markets and encouraging their governments to pursue more international trade.
According to the Organization for Economic Cooperation and Development, countries that reduce trade barriers and increase access to markets generally see greater progress in reducing poverty and raising living standards than those that do not. The United States needs to strongly encourage countries to reduce trade barriers by providing incentives and rewards for doing so, fully recognizing that domestic politics surrounding trade often make the reduction of trade protections difficult.
Rather than relying primarily on preference programs that simply reduce quotas or duties paid by countries or companies seeking access to the U.S. market, Washington should pursue more streamlined trade and investment agreements that tie economic assistance to commitments for market reforms. For example, the United States should help finance critical infrastructure, such as trade-processing terminals at an airport, only in exchange for that country’s commitment to a bilateral trade agreement, opening up the country to increased trade with the United States.
The Chinese strategy for building bilateral relationships in many frontier market countries is to offer to build the same types of infrastructure without requiring any trade policy reforms in return. However, the infrastructure Beijing builds always comes with a price (which often includes access to natural resources) and some extension of credit that ultimately can prove very costly.
Roads, ports, airport terminals, electric power, and water-treatment facilities, are in great demand throughout the developing world. The U.S. role in these types of infrastructure projects should be to facilitate private-sector investment, and pay only for those pieces that the private sector will not fund. A perfect example is financing power transmission and distribution systems, as opposed to generating capacity. Building new power projects is something that can and should be undertaken by private-sector companies because it can be done so profitably, assuming governments have the right investment and regulatory frameworks in place. However, building transmission or distribution systems is much harder to do profitably, which is why it often requires public-sector resources. We must do a better job of distinguishing appropriate private-sector financeable activity from those areas that require public-sector financing to be completed in a timely manner. Finally, we must try to ensure that every public-sector dollar spent leverages considerably more private sector investment.
In technology, cell phones are already used across the developing world to enable bill payment for those without bank accounts. They are also used to bring real-time commodity price quotes to farmers in the field. Those platforms can be expanded to support lending and the purchase of business insurance. They can also be used to simplify and accelerate the payment of farmers for their crops, eliminating some of the middle men and helping farmers realize a better and quicker return on their commodity. The U.S. government can convene and facilitate conversations between local farmers and other business sectors, and American companies possess the technology and know-how to introduce these improvements. Although the respective parties will have to negotiate their own relationships, the United States can offer financing for feasibility studies, or actual investments.
New innovations that can improve the quality of life and economic future of developing countries are announced constantly in Silicon Valley and elsewhere. Our government should share more of those innovations as part of its menu of soft-power options, once again using a combination of convening, facilitating, and financing capacity to enable the commercial application of relevant scientific and technological advancements. Some of this is already underway in the health care field, including innovations like mobile monitoring of chronic health care conditions. But it needs to be expanded into other business sectors, such as manufacturing, energy, and agriculture.
These are just a few examples of the types of initiatives that should be included in a 21st-century soft power toolbox. To the extent that we can help generate inclusive and sustainable economic growth in more of the developing world, not only will it lead to more stability, but it will also provide more potential customers for American goods and services. Entrepreneurial capitalism remains our greatest comparative advantage. We must learn to use it more effectively throughout the world.