U.S. Assistance to Middle-Income Countries—Revisited

In April 2011, we wrote a Critical Questions piece entitled “Closing Aid Programs in Middle-Income Countries: A Big Opportunity,” as a lead-in to a year-long project on the changing U.S. relationship with middle-income countries, focusing on transitioning away from foreign assistance to partnerships built around trade and cooperation interests. That project culminated last month with the release of our report, Strategic Foreign Assistance Transitions, so now we revisit this topic.

The overwhelming consensus is that the U.S. relationship with successful middle-income countries should mature toward partnerships resembling the U.S. relationship with countries such as South Korea and Costa Rica, which transitioned away from U.S. assistance and established themselves as steadfast allies of the United States. Now there are a variety of candidates in the middle-income world that are ready to undergo these transitions, which will not only benefit U.S. foreign policy goals but also lead to significant savings in the foreign assistance budget at a time of austerity. It is important to emphasize that these processes are transitions, rather than “graduations” or “exits.”

Q1: How should the U.S. government decide when to pursue a foreign assistance transition with a particular country?

A1: Over the course of the past year, we visited Russia, Brazil, India, and Panama, the four focus countries of our report. We met with over 200 staff from U.S. embassies and the U.S. Agency for International Development, host country government officials, development professionals, representatives of nongovernmental organizations, and a host of other actors engaged in the shifting bilateral relationship. Almost no one thought that the United States should retain its traditional assistance relationship with these countries. Almost all agreed that traditional development assistance to these countries was an obsolete approach and comes at the expense of alternative, more productive forms of cooperation.

Over the years, there have been a number of attempts to create objective metrics to determine when a country should undergo transition out of U.S. foreign assistance, turning to macroeconomic and development indicators (e.g., overall GDP or GNP per capita). In all cases, the decision to transition has ultimately come down to political and budgetary factors, not these technical analyses. Therefore, determining standard metrics for this process is perhaps an unproductive endeavor. However, there are a number of indicators that can safely suggest a country is ready. Middle-income countries that still receive U.S. assistance and (1) are members of the G-20 group of nations, (2) own space programs or at least operational satellites, (3) possess their own foreign assistance programs, (4) have sovereign wealth funds, and/or (5) hold large amounts of U.S. debt (last year, Senator Tom Coburn of Oklahoma proposed ending U.S. assistance to all countries that hold over $10 billion worth of U.S. debt).

Q2: Are there any exceptions?

A2: There are a few exceptions. Countries of high strategic importance to the United States that would by other measures be ready for assistance transitions are subject to a different process. For example, development programs that support counternarcotics and security in places like Mexico and Colombia should continue, even though those countries have made significant progress in terms of economic performance and governance. There must also be an exception made for democracy and human rights programming in autocratic countries. U.S. support for dissidents and civil society actors in Russia and China is a worthwhile endeavor, whereas U.S. government funding for health-related projects in those countries is much more difficult to justify.

Q3: What are the most significant cooperation interests for the United States to pursue with middle-income countries?

A3: The most important focus area is trade. The U.S. trade relationship with rising middle-income countries is generally healthy but still far from its full potential. We need to move toward free trade agreements with these countries, although in some cases this could take 10 years or more.
Science and technology is another common area in which the United States can engage its middle-income counterparts, and there is great appetite for this among middle-income countries, including those traditionally strong in this field (e.g., India) and those attempting to catch up (e.g., Brazil). Similarly, in the realm of education, people-to-people exchanges and stronger linkages with U.S. universities are ubiquitous goals for middle-income countries.

Many of our interviewees felt that the United States could be particularly helpful by assisting middle-income countries with professionalizing the philanthropic and civil society sectors and encouraging the growth of entrepreneurship. Middle-income countries, despite great economic strides forward, continue to lag in these fields, which constitute an area of perhaps uniquely American expertise.

There is also considerable energy around triangular cooperation, whereby the United States joins an emerging donor (such as Brazil) to pursue joint development projects in third countries. There is no doubt that triangular cooperation holds significant potential, but there are enormous challenges to overcome and its immediate impact is limited. Therefore, triangular cooperation should be part of these deeper bilateral partnerships but not the centerpiece of a cooperation relationship.

Q4: What is the right way to transition?

A4: Effective foreign assistance transitions require the participation of a variety of U.S. government actors and sound interagency cooperation. The U.S. Agency for International Development, through innovative instruments such as the Development Credit Authority, plays a prominent role in these transitions. Furthermore, the U.S. government’s nontraditional development agencies, such as the U.S. Trade and Development Administration, the Overseas Private Investment Corporation, and the Export-Import Bank, can also thrive in this space by furthering both our development and trade goals.

Past U.S. government experience shows that the best foreign assistance transitions entailed the telegraphing of intentions over the medium term, with clearly defined objectives and, if not a strict timeline, then at least a general idea of when assistance is slated to end. Abruptly ending assistance to a country jeopardizes the legacy built through decades of time and resources committed by the U.S. government. In some cases, a legacy instrument, such as an endowed foundation or a sinking fund, will need to be left behind to carry forward the bilateral relationship after assistance has ended. The United States can look to successful examples in the past, such as in the cases of Portugal and Costa Rica, where legacy institutions were left behind but continue to function to this day, long after the assistance transition.

Most development professionals understand the rationale for assistance transitions and are amenable to the process. However, there is often resistance to assistance transitions from ambassadors and regional bureaus at the State Department. Another source of resistance comes from some members of Congress and their staff, who have a particular cause or issue that manifests itself in the form of earmarks. Congress needs to reconsider these longstanding earmarks that continue outdated approaches in countries such as Brazil and China. A smooth transition planned well in advance also requires engagement between the executive branch and Congress. It is also Congress that considers requests for flexible authorities such as endowment authority.

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. Amasia Zargarian is a research associate with the CSIS Project on Prosperity and Development.

Critical Questions 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.