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Vehicles pass by on a road near the construction site of the new Great Mosque, which is being built by the China State Construction Engineering Corporation (CSCEC), in Algiers, Algeria January 20, 2016. Algeria is turning to China for external financing for several infrastructure projects including a new $3.2 billion port as the North African OPEC state looks to weather the collapse in global oil prices. REUTERS/Ramzi Boudina - GF20000101188
Future Development

What happens when development cooperation becomes development competition

Development cooperation has been a common thread running through the geography of aid agreements of recent years: from the Busan Partnership to the Paris Declaration and on to the Accra Agenda. If there is one thing that 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 that favored donor country commercial interests over development progress in poorer countries are the tangible outcomes that give force to the principle of cooperation over competition.

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This is not to say that aid in the era of cooperation has left self-interest behind. But more expansive definitions of self-interest, compared to the Cold War era, have enabled or at least tolerated a greater focus on development effectiveness, driving the types of cooperation and reforms to aid practice embodied in the major multilateral agreements.

The new 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. They are led by a U.S. administration intent on responding aggressively to Chinese development finance.

Chinese aid and financing is undoubtedly rife with many of the practices that traditional donors have curbed: closed procurement, lack of transparency, and little 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 grounds for the U.S. to criticize them. But the approach, steeped in a strategy of conflict and competition, risks abandoning the good that has been achieved through cooperation and bringing back the bad practices of the earlier era of aid competition.

An extreme version of the administration’s approach, apparently being given serious consideration, would force countries to choose between U.S. 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 U.S. 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 U.S. 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 for infrastructure, Chinese financing is seemingly everywhere, compared to a meager U.S. presence.

Bad choices

Fortunately, 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 U.S. International Development Finance Corporation (IFDC), 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 U.S. 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 well-defined programs like PEPFAR in favor of unrestricted (“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 on development needs or, worse, to mimicking some of the very problems associated with Chinese financing—choosing and structuring deals in ways that clearly benefit a domestic firm or interest but deliver little development impact. This practice is essentially tied aid without the aid. To be fair, though, the legislation does ease up on the hard requirement that the IDFC work with U.S. firms, the current practice at OPIC. But it is stated as a preference, not a requirement, which will invite political pressure to continue to demonstrate support for U.S. firms.

The real clear choice

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

If the IDFC and the rest of U.S. assistance are captured by a “Clear Choice” framework that seeks to divide up the world in the fashion of the Cold War era, then we will probably see a deterioration in the quality of U.S. assistance. Development objectives will take a back seat to political considerations: sizing 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 U.S. presence in development finance will be welcomed by developing countries, U.S. officials will have a hard time convincing them that this should be viewed as an alternative to Chinese finance. Rather than seek to lure countries away from China’s money, U.S. policy would do well to recognize it as a reality and seek to reforms its problematic features. Achieving that will require cooperation, with like-minded countries—of which there are many—and with the Chinese themselves.

This blog was first launched in September 2013 by the World Bank in an effort to hold governments more accountable to poor people and offer solutions to the most prominent development challenges. Continuing this goal, Future Development was re-launched in January 2015 at brookings.edu.

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