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Will BUILD Act Help US Regain Its Global Clout?
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Will BUILD Act Help US Regain Its Global Clout?

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Washington, DC - October 17, 2018

The greed of American elites and the endless war in the Middle Eastincreasingly lead to the loss of the US’s influence on the global economic stage, clearing space for China to become number one.

With its own hands, the US almost destroyed the global political system, created after WW2 on the basis of the American superpower. The US has destroyed the international law system, repeatedly violating its own rules, demonstrating its perceived exceptionalism to the world. The US created the Chinese economic power on its own and has brought relations with Russia to a crisis point on the verge of open confrontation. 

The US has lost China, Russia, and Africa, and almost lost Europe and even Latin America. The US has broken almost all the political instruments of its global clout, overestimating the importance and possibilities of "soft power" mechanisms. It was suddenly discovered that these mechanisms are not functioning very well.However, Trump’s administration still has cooler heads who have not lost the ability to think and analyze, even under severe pressureand working in a situation of political war. 

This October, the US Senate joined the US House of Representatives in passing the Better Utilization of Investment Leading to Development (or BUILD Act), a bipartisan bill creating a new US development agency—the US International Development Finance Corporation (USIDFC). This is the most important piece of US soft power legislation in more than a decade. The success of the BUILD Act is something to celebrate. The next step will be to make operational the new USIDFC, a process that may take up to a year.

The new USIDFC will merge OPIC with some key private capital functions of USAID and will seek to “crowd-in” vitally needed private sector investment in low and lower-middle income countries. The new agency is not prohibited from working in upper-middle income countries, and it can do so on two grounds: 1) for national security reasons or 2) for developmental reasons, that is, to work in an underdeveloped part of the country in question.

By crowding-in private investment, the USIDFC will help support developing countries through the transitory stage from non-market to market economies with an emphasis towards US assistance and foreign policy objectives. The USIDFC is authorized by Congress to make loans or loan guarantees (including in local currency) and acquire equity or financial interests in entities as a minority investor. It also will provide insurance or reinsurance to private sector entities and qualifying sovereign entities. Moreover, the USIDFC will provide technical assistance, administer special projects, establish enterprise funds, issue obligations, and charge and collect service fees. Through these market-based fees, the USIDFC will operate at no net cost to taxpayers.

The new US development finance institution (DFI) is a sort of a significantly expanded version of the current private overseas investment Corporation (OPIC). As officials said, OPIC is a very influential development finance agency, but it operates using old methods and outdated authorities. OPIC needs a remodeling to allow it to fully compete in today’s global economy. Our allies, Japan and the UK, have DFIs and want to work with OPIC, but OPIC has a limited toolkit and these limitations make it difficult to collaborate. The BUILD Act makes vital improvements with regards to its limitations, allowing the new USIDFC to:

1. make equity investments;

2. provide technical assistance;

3. increase the ability to take smart risks using local currency loans, first loss guarantees, and the provision of small grants;

4. raise the spending cap of the USIDFC’s investments to $60 billion, more than doubling OPIC’s current $29 billion funding cap;

5. provide a 7-year authorization; and

6. create a “preference” for US investors, rather than a requirement.

This "OPIC on steroids "should theoretically provide Washington with the tools necessary to counter what the US officials call China's "predatory lending activities" in Africa and beyond.

DFIs are government or quasi-government backed institutions that invest in private sector projects in low and middle-income countries. They are structured as either multilateral or bilateral organizations that seek to invest in commercially sustainable projects in conjunction with private investors. These institutions are not new, but they have grown in importance over the last 15 years. 

The first DFI was the UK’s Commonwealth Development Corporation (CDC) set up in 1948; the United States’ existing DFI, OPIC was created in 1971. New financial commitments for the DFI sector have increased from $10 billion in 2002 to $70 billion in 2014. 

DFIs have variations in terms of their governance structures (e.g., either fully government-owned or co-owned by government and the private sector), sectors (e.g., financial services, infrastructure, renewable energy) and regions (e.g., sub-Saharan Africa and South Asia) they invest in, and the tools they use to crowd in private capital (e.g., equity investments, loans, loan guarantees).

Washington believes the BUILD Act adds new tools for the United States to utilize its foreign aid allocations. Moreover, the newly formed USIDFC will help solidify the work of different US agencies that assist in fostering the private sector abroad. 

The USIDFC should also help the United States work better on development challenges with its allies such as Canada, Japan, the United Kingdom, the Netherlands and other partners with enhanced capabilities. The new USIDFC can help with a series of national security and foreign policy challenges, better than the current set of development finance instruments that the United States has at its disposal. By generating economic opportunities for citizens in developing countries, challenges such as refugees, drug-financed gangs, terrorist organizations, and human trafficking can all be addressed more effectively.

At the same time, Washington makes no secret that the main purpose of the BUILD Act is to respond to the challenge of China. From the very beginning, Trump said that China was a major challenger in the global economy. The new USIDFC is in part a response to China’s rise. It has been referred to in key speeches by President Trump and Secretary of State Mike Pompeo and in the National Security Strategy. As Secretary Pompeo recently stated, “The Act provides opportunities for American companies to compete overseas and create jobs here at home, a critical component of the President’s national economic strategy. BUILD strengthens the US government’s development finance capacity, offering a better alternative to state-directed investments and advancing our foreign policy goals.”

China is active in Latin America, Southeast Asia, and Africa by providing financing for large projects as part of its Belt and Road Initiative. China is filling the void created by a lack of funds from other bilateral and multilateral investors. It offers quick financing and “no questions asked” infrastructure projects in these places.

However, the USIDFC offers something different than China’s model of large state-to-state lending—it offers a private sector, market-based solution. Moreover, it fills a clear void that Chinese financing is not filling. China does not support lending to small and medium-sized enterprises (SMEs), and it rarely helps local companies in places like Africa or Afghanistan grow.

The BUILD Act is a useful addition to the United States in its competition with China, but it is not a sufficient response on its own. In addition to the BUILD Act, we will need a new international economic strategy and will need to reinvigorate our leadership in the multilateral development banks. In sum, we will need to enable a “better offer” than what China puts on the table. 

With this notion in mind, in the short run, we need a fully functioning US Export-Import Bank (EXIM). EXIM experienced a “lapse in authority” beginning in 2015, facing a severe shortage of leadership and capacity ever since. It protects against buyer nonpayment, provides financing, and exports credit insurance, among other functions. US competitors, including China and Japan,benefit from the strong support of their Export-Import banks, which reinforces the notion that the United States must make use of all its tools to strengthen US development finance. 

The BUILD Act has promised $60 billion in funding for the USIDFC, but it is still a far cry from China’s $60 billion pledged to Africa alone at the last Forum on China-Africa Cooperation in September 2018. We can have a better offer than China, and the new USIDFC is part of that better offer.

However, looking at China's leading position in Africa and the $ 143 billion that Beijing has already spent on infrastructure loans, I can’t help but wonder if the BUILD Act is a classic example of "too little and too late.”

 

Author: USA Really