US Austerity Ripples Outward

US Austerity Ripples Outward

WASHINGTON - Since the 2008 financial crisis, and most recently with the broad federal spending cuts beginning Mar. 1, experts have warned that an austerity-minded political system could bring about dramatic changes in the U.S. foreign aid model.

A significant part of this conversation has focused on shifting away from a government-led approach and instead strengthening the role of the private sector in development assistance. But critics are focusing attention on the potential pitfalls of such a redesign.

"The idea that there is a lack of public resources, so we need to be leveraging private money, ignores some of the options to increase public funds," Janet Redman, director of the Sustainable Energy and Economy Network at the Institute for Policy Studies, told IPS.

The danger lies in pretending that gross domestic product and foreign direct investment is the same as making economies more sustainable.

She says there are numerous other public sector options available for a country in the United States' position. These include, for instance, taxes on financial transactions and carbon, both approaches that have largely been left out of the political discussion here in Washington amidst a shift in focus onto the private sector.

In a report released this week, a think tank task force of development experts and business leaders here urged the U.S. government to increase its reliance on the private sector in foreign aid flows aimed at development.

Citing changes in technology and an increased willingness among developing countries to engage with U.S. companies, researchers with the Center for Strategic and International Studies (CSIS) predict that the United States' current model of development assistance could be obsolete within 25 years.

The CSIS report authors are calling for a shift from a government-based approach to a "blend of development, trade and investment".

Such recommendations are based on global shifts in technology and business, especially the rapid outpacing of public sector development funds by the private sector. According to the report, the private sector currently spends over 87 percent of U.S. funds flowing to the developing world.

The share of public funding, meanwhile, has fallen from 71 percent in 1960 to just nine percent today.

Some also feel there is evidence that the private sector may be able to deepen the impact of foreign aid by equipping people in developing countries with new skill sets.

By equipping a person with a skill set instead of simply money, said Thomas J. Pritzker, executive chairman of Hyatt Hotels Corporation, "You'll also give him hope - and hope is a crucial aspect of social stability." He called peace and prosperity "two sides of the same coin".

Narrative problem

Still, the prospect of the private sector serving as a primary engine of growth for development indicators is, for some, a controversial premise. Janet Redman, for instance, notes that the report's findings are predicated on a potentially dangerous "narrative problem".

She also cautions against adopting a system in which development institutions are designed to function more like companies, at the expense of meeting the needs of people who stand to benefit the most from foreign assistance.

Ensuring access to, for instance, health care, water and education should not be profit-driven enterprises, she stressed, because doing so would set up a "dynamic where companies looking for an investment may need to see a particular rate of return for them to invest."

Redman continued: "The danger lies in pretending that gross domestic product and foreign direct investment is the same as making economies more sustainable and enabling them to meet the needs of their citizens."

Private sector funds often don't trickle down to the poorest members of a host country, a finding supported by a 2011 report published by the Independent Evaluation Group, the internal watchdog for the International Finance Corporation, the World Bank's private-sector arm.

"The link from growth to poverty reduction is not automatic," that report found, "particularly in situations where market failures and other inefficiencies limit participation of the poor."

According to the auditor's findings, less than a quarter of the IFC projects that generated satisfactory returns also generated identifiable benefits to the poor.

U.S. weariness

Of course, there are major challenges to any such dramatic overhaul of the United States' development assistance model.

Many, for instance, refer to an increasing gap between how companies, federal agencies and NGOs function and communicate with each other. Business and NGO leaders at the event also attested to notable deficiencies in trust between the public and private sectors.

"There is not a system in place that would allow for cooperation on this scale between the different actors," Sam Worthington, president of InterAction, a coalition of U.S.-based NGOs, told IPS. Developing such a system may be a task for the donor countries, he added.

Meanwhile, the challenge of U.S. public opinion looms large in any current discussion of foreign aid. As the Mar. 1 budget cuts are phased in, and as the United State withdraws from more than a decade of military involvement in the Middle East, many here are eying any kind of international engagement more warily than ever.

Experts on the issue are urging a shift in public opinion, warning against allowing war-weariness to translate into weariness with international engagement in general.

Our work is licensed under Creative Commons (CC BY-NC-ND 3.0). Feel free to republish and share widely.