The United States and Impact Investing in the Developing World
April 23, 2012
On April 26, Secretary of State Hillary Clinton will address a State Department–sponsored conference on impact investing in the developing world. Impact investing makes an investment based on social and environmental impact, as well on financial returns. Development finance institutions, such as the Overseas Private Investment Corporation (OPIC) and the World Bank’s International Finance Corporation (IFC), are key catalysts for impact investing in emerging and frontier markets. As secretary of state, Clinton’s focus is on facilitating increased investment to the countries most in need of it in sub-Saharan Africa, Southeast Asia, and Latin America. At the November 2011 Fourth High Level Forum on Aid Effectiveness in Busan, South Korea, Clinton said, “we need to continue shifting our approach and our thinking from aid to investment, investment targeted to produce tangible returns.” Clinton added that “with official development assistance representing a much smaller share of the resources flowing into developing countries, we have to think differently about how we use it.” The secretary’s speech on April 26 is the last best opportunity in the next two to four years to propose significant changes by laying out a bold agenda.
Secretary Clinton is uniquely positioned to do this because of her own intellectual understanding and the support of key individuals and interest groups. First, she understands the power of partnerships as well or better than former secretary of state Colin Powell, the political father of the Global Development Alliance. Second, Elizabeth Littlefield, chief executive of OPIC and one of the stars of the Obama administration, is also very dedicated to these ideas. Finally, the philanthropy and impact investment communities are willing to take suggestions and follow Clinton’s lead in ways they might not follow other secretaries of state. In her Busan speech, the secretary mentioned several important agency-level methods to spur greater investment in the developing world. She argued that development assistance can reduce the risks companies face when investing in the developing world, increase access to finance for local small and medium-sized enterprises, reduce structural barriers to investment, and provide local governments with technical assistance to increase their own capacity in these areas. However, Clinton should go further in her recommendations.
OPIC is a powerful agency, which has generated nearly $5 billion in revenue for the U.S. Treasury since 1971. However, it faces an unsettled future. Prior to 2007, it received a series of five-year reauthorizations; since then, Congress has allowed its authorization to lapse on at least one occasion (2008) or granted it short-term reauthorizations in continuing resolutions. Clinton must make a clear statement that OPIC’s functions should be reauthorized either permanently or on a long-term basis. She should argue that only with stability in OPIC can the United States pursue a new agenda for development finance and spur growth in the developing world via private-sector investment.
On April 26, Secretary Clinton should advocate enhanced capabilities for OPIC and other agencies, such as the U.S. Agency for International Development (USAID), the Millennium Challenge Corporation (MCC), and the State Department. First, these agencies must be more aggressive about using grant money as risk-sharing investment capital. These funds should be used in sectors and regions of national priority. As a starting point, Clinton could announce that she will convene the top leadership of OPIC, USAID, MCC, and the State Department to hammer out adjustments or clarifications to provide guidance on using grant resources as investment capital. As an end goal, the agencies should identify $50 million in USAID (including Feed the Future), State Department, and MCC grant monies to use as investment capital.
In addition, Clinton should request that the administrator of USAID and the chief executive of OPIC review the use of enterprise funds in zones of conflict or geostrategic interest, including Afghanistan, Iraq, Southern Sudan, Yemen, Libya, and Haiti. Although there is some trepidation about involving public dollars in such funds, they are a useful instrument to leverage large sums from the private sector by helping to mitigate risk that serves as a barrier to investment. The two leaders should report back to Clinton with a recommended way forward to seek legislative fixes with Congress to receive limited authorities for enterprise funds in these countries.
Further, greater collaboration between OPIC and USAID is needed to better integrate development finance into the broader U.S. foreign assistance framework. There are signs that collaboration is increasing. USAID recently created investment officers who will work to identify potential projects throughout the developing world. A system of temporary postings between OPIC and USAID should be instituted to deepen understanding of the work of the two organizations. Finally, Clinton should announce that USAID and OPIC will issue a call for bids for a global technical assistance contract ($20 million) to be used in parallel with OPIC investments anywhere in the world. Managed by USAID, jointly funded by USAID and OPIC, and selected by a joint panel of USAID and OPIC professionals, this system would draw on a consortium of globally recognized technical assistance providers and provide OPIC support for its investments. If this happened, one of the technical assistance providers could sit at OPIC among investment officers to understand the deal pipeline and assist in identifying technical assistance opportunities.
Fundamentally, the United States must be more willing to take risks in how it uses its development finance tools. Impact investing is a useful idea, but if the U.S. government is unwilling to make changes in how it approaches development finance, there is little hope that impact investing will be successful. In 1960, 72 percent of capital flows were public. Now that number is 13 percent; the rest is private. This and other trends have dramatically altered the development landscape. Strengthening the development finance tools of the U.S. government is also recognition of the role the private sector can play in creating lasting economic growth. Secretary Clinton should take the opportunity of her April 26 speech to make this case to the impact investing and broader development community. The time for change is now; Secretary Clinton understands the dynamics and has a capable team to implement such a vision. This moment should not be wasted.
Daniel F. Runde is director of the Project on Prosperity and Development and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Conor M. Savoy is assistant director of the CSIS Project on U.S. Leadership in Development.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2012 by the Center for Strategic and International Studies. All rights reserved.