Remarks by USAID Administrator Dr. Rajiv Shah at the USAID Public-Private Partnership Forum

Thursday, October 20, 2011
Subject 
Embracing Enlightened Capitalism

For the vast majority of human history, mankind has been stuck in a trap.

Every time the world economy expanded or technology would progress, populations would increase. Besides an extremely small number of royals and elites, on average, people didn’t become wealthier. Economic growth and development as we understand it today simply didn’t exist.

But for the past 300 years—and really only since then—large parts of the world finally managed to spring that trap. The effects of the Industrial Revolution took hold and economic growth began to lead to large, sustained increases in the global standard of living.

This rising wave didn’t lift all boats—many were left underwater. As incomes rose and poverty fell in Europe and elsewhere, countries in Asia and Africa saw far slower growth, leading to a Great Divergence between those in the West and those in the rest of the world.

After the Second World War, independence movements, industrialization campaigns, and greater trade helped many countries begin a steady climb out of poverty.

But in the 1970s and ‘80s, economic shocks, debt crises and armed conflicts led to a deep period of stagnation for most developing countries, especially in Africa.

It wasn’t until after the Cold War ended that we witnessed rapid growth in the developing world once again, with the last 15 years in particular leading to the growth of a much larger group of emerging economies and democracies throughout Latin America, Asia and Africa.

Throughout this period of evolving growth, foreign aid went through its own evolution. Originally, it served as a way to help countries build infrastructure and capital stocks.

Then the focus turned to basic human needs as Robert McNamara coined them—investments in health, education, clean water and sanitation.

In the late 1980s and early 1990s, foreign aid focused on stabilizing economies suffering from debt, most typically through structural adjustment advocated by the West.

And as the Cold War wound down, foreign aid focused much more on delivering specific outcomes in debt relief and health, most notably in fighting HIV/AIDS and Malaria, with real success.

But as President Obama’s first-ever Policy Directive on Development made clear—and Secretary Clinton’s Quadrennial Review of Diplomacy and Development operationalizes—foreign assistance has to evolve once more.

Amidst the seismic changes in today’s world, aid shouldn’t serve as a substitute for private capital. It shouldn’t just improve health statistics. It should prioritize broad-based, sustainable economic growth that can boost incomes, create jobs, and reduce poverty, including right here at home.

President Obama launched an effort called Partnerships for Growth emphasizing that American engagement—if deployed creatively—could help catalyze private-sector investment in countries best positioned for future growth.

Along with the State Department and the Millennium Challenge Corporation, USAID is leading the Partnerships for Growth effort in collaboration with countries poised to become the next set of emerging markets.

We’ve worked in close partnership with the governments of El Salvador, the Philippines, Tanzania and Ghana to conduct joint economic analyses of their binding constraints to growth and develop joint action plans to work on breaking them down.

By the end of the year, we expect to sign Joint Country Action Plans with the Government of El Salvador and the Philippines, with Tanzania and Ghana soon to follow.

By demanding more of ourselves and our partners, Partnerships for Growth embody the President’s new approach to foreign assistance.

Foreign aid must emphasize mutual accountability—working collaboratively with partner governments that demonstrate a strong commitment to economic reform.

And as Secretary Clinton recently highlighted in her speech at the Economic Club of New York, foreign aid must work more collaboratively with a much wider range of partners—foreign governments, interagency stakeholders and American companies, bringing together a wider set of tools to knock down economic barriers and create a level playing field.

It should help countries ensure that the poor do more than survive the next famine, or the next epidemic, or the next fall in commodity prices—it should help them thrive.

There’s no right recipe for delivering that kind of sustainable, broad-based economic growth. But over the course of our 50-year history, we have consistently identified three key ingredients.

First, we know that a country must have strong institutions—government services and civil societies that can accountability respond to people’s needs and aspirations.

That lesson has been starkly illustrated by the events of the Arab Spring; even with economic reforms, countries without responsive institutions couldn’t deliver broad-based income growth that actually benefitted the poor.

It was also highlighted by our country’s own financial crisis, showing the need for appropriate, well-designed regulations that could protect consumers without stifling economic activity.

Without effective regulations and safety nets, financial crises and recessions can pull millions out of work and into poverty.

Second, we know that a country must develop its sources of human capital—it must ensure that its people are healthy and educated enough to contribute to their societies and economies.

Last week’s South Korean State visit, on the heels of the bipartisan approval of a free trade pact, highlighted just how powerful these investments can be over time.

Over decades, USAID worked with South Korea to develop their health and educational systems, helping transform a country of peasant farmers—poorer in 1960 than most countries in sub Saharan Africa—to a technological powerhouse, a donor of foreign aid and a trading partner responsible for hundreds of thousands of private sector jobs here at home.

We can tell similar stories about Costa Rica and Chile, countries who worked with USAID to build colleges, hospitals and water supplies, giving their citizens the opportunity to generate wealth and drive growth.

We don’t give development aid to these countries anymore; we trade with them, make products and services they buy—and if we’re lucky— we visit them on vacations.

But there is a final ingredient that we have seen in every country that’s grown its way out of the poverty: the emergence of a strong and dynamic private sector.

The development community has a long history of strengthening institutions and developing human capital.

But our record of supporting the investments of domestic and foreign firms in the developing world is far more mixed.

Despite strong private sector investment in several low-income countries, it is not occurring everywhere, and even where it is occurring, private investment is nowhere near its potential.

And while we have been engaged in this work for years, the development community does not always embrace the encouragement of private sector activity as part of our core mission.

That must change.

The sectors we most associate with development work—healthcare, agriculture, water—are dominated by private sector activity.

If we are going to encourage truly sustainable, broad-based economic growth in developing countries, we have to do a far better job of working with private firms—be they domestic or foreign, established or entrepreneurial.

I know this is uneasy territory for many in the development community.

The early experience of corporate investment in the developing world was characterized by activity that notoriously caused great harm. Sweatshops, infant formula, Bhopal—all words that conjure images of corporations taking advantage of bad regulations, enriching elites and exploiting the poor.

Those early experiences led to a deep mistrust of the private sector, by developing countries and the development community alike.

As a result, our community became far less comfortable partnering with the private sector. So today, if you’re a development expert working in the field, you probably understand a longitudinal study better than a balance sheet. And you probably know the names of more NGO leaders than local CEOs.

But the modern corporation has a much more enlightened understanding about the aligned interests it shares with the development community.

Walmart knows that when it partners with USAID to buy crops from subsistence farmers in Guatemala at fair prices, it helps lift these farmers from poverty while strengthening its own supply chain.

Coca Cola knows that our Global Development Alliance to bring clean water to communities around the world helps fight disease, while allowing the company to build bottling facilities in locations much closer to its customers.

And Alcoa knows that when it supports the implementation of the Extractive Industries Transparency Initiative that President Obama supported last month at the United Nations, it provides citizens with information to hold their governments accountable while improving the stability of its own operations.

The development community must step out of its comfort zone and imagine new linkages with private sector firms.

I’m not talking about partnership for partnerships sake. I’m not talking about Corporate Social Responsibility or charity work. I’m not talking about photo opportunities.

I’m talking about helping support the work of markets that can deliver profits and create opportunities for women, minorities and the poor.

We must partner with the private sector much more deeply from the start, instead of treating companies as just another funding source for our development work.

In short, we must embrace a new wave of creative, enlightened capitalism.

Just last month at the Clinton Global Initiative, USAID announced a partnership with PEPSICo and the World Food Programme that I believe demonstrates this approach.

Together, we will invest up to $6 million in Ethiopia to improve the yields of smallholder chickpea farmers.

Pepsi will buy those chickpeas—creating stable demand for the farmers—and use them to make a high-energy paste that the World Food Program can use today to save the lives of malnourished children suffering from the ongoing drought in the Horn of Africa.

This isn’t charity work. Pepsi will also use those chickpeas to make hummus that it can sell for profit in markets around the world. But its work is generating wealth for poor farmers and giving malnourished children lifesaving products that will improve their development.

Profit. Wealth. Development.

Those words may sound like an odd combination. But at a time when businesses believe in the urgency of development, those words will define the future of our field.

The question is, will the growth of the future be driven by firms transparently and responsibly investing abroad, aligned with international standards and norms like the EITI that help our companies compete fairly?

Will we embrace a more enlightened capitalism that helps American companies profitably invest abroad while helping the world’s poor?

Or will that growth be driven by foreign state-owned companies?

Will they continue to use huge, opaque investments to curry favor with the trade partners and resource-rich countries of tomorrow, leaving American companies at a severe disadvantage?

As the President has said, the strongest foundation for human progress lies in open governments, open societies and open economies. And I believe that USAID can help support an enlightened capitalism to lay that foundation.

In fact, USAID is actually ahead of the curve when it comes to directly engaging with firms to responsibly invest abroad. The OECD recently recognized us as the best amongst our peers when it comes to private sector engagement.

This week, we’re celebrating ten years since the creation of the Global Development Alliance. We’ve formed over 1,000 partnerships with over 3,000 private sector players—companies like Microsoft, General Mills and Coca Cola.

But despite the progress we and others like OPIC and IFC have made in energizing private sector activity in the developing world, we have to go much, much further.

To elevate the role of partnerships at USAID and to streamline the way we form these partnerships across the Agency, we recently created a new Office for Innovation and Development Alliances, the co-host of today’s Forum.

In addition to launching new Global Development Alliances, this office will house the Development Innovation Ventures, a venture capital-style group that evaluates and invests in high-potential, scalable development solutions.

But doing this engagement will require more than the right structures. It requires the right people. Development agencies have not traditionally recruited staff with capital markets experience. And the expertise that does exist is often underutilized.

To address this gap, next year we will deploy a small cadre of “Investment Officers” from among our more than 100 private enterprise officers to serve in priority missions. These Foreign Service Officers, who bring previous private sector and capital markets experience, will serve as deal originators.

By deepening linkages between our field operations and private firms and investors, they will help Missions develop private financing solutions to development problems.

With an unmatched global presence and a critical understanding of economic needs, I believe our USAID mission staff can serve as some of the best idea and deal originators in the world.

Whether you’re a seed company that wants to reach the smallholder farmers we help through our Feed the Future food security initiative in Uganda…

…or a mobile operator that wants to introduce mobile banking programs in parallel with our reconstruction efforts in Haiti…

…you will have a dedicated point-of-contact in the field that can connect you to our ongoing efforts.

We will also focus these officers on leveraging local capital through our Development Credit Authority. In 1999, USAID worked with congress to create DCA in order to use small investments to unlock large sources of local capital.

These loan guarantees allow us to deepen the sustainability of USAID programming and extract more value from our development dollars.

For instance, in Uganda, to support our effort to reduce rural poverty, DCA was able to leverage $28 for every dollar it invested, facilitating more than $24 million worth of lending to micro, small, and medium enterprises.

Not only was this small investment critical to transforming two fledgling microfinance institutions into deposit-taking institutions, but through this partnership, two traditional big banks were convinced to open small businesses and microfinance lending windows.

Today, I am asking each of our missions around the world to reallocate resources to these mechanisms to leverage more local capital—billions of dollars—at no extra cost to us taxpayers.

And since the local private sector is critical to the success of both Feed the Future and the Global Health Initiative, two-thirds of DCA’s portfolio will now be directed squarely toward private sector agriculture and health services and sub Saharan Africa.

We’re also going to pursue more high-impact deals at scale, standing up a new Strategic Transactions Group within DCA that will work with companies, investors and partners like OPIC and IFC to execute deals that reach hundreds of thousands of new entrepreneurs.

For example, earlier this month DCA and J.P. Morgan Chase, along with a unique collection of impact investors, capitalized a $25 million private investment fund in sub-Saharan Africa focused exclusively on growing agriculture enterprises.

This African Agricultural Capital Fund will infuse equity and expertise into a sector that has suffered from under investment for decades and will pave the way for increasing the incomes and food security of at least a quarter of a million subsistence farming households.

And by combining forces, we can go even further. For example, to help unlock the economic opportunity sought by many of the protestors during the Arab Spring, we are working together with OPIC to catalyze private sector investment in Egypt and Jordan, mobilizing up to $1.4 billion in local bank lending to support local entrepreneurs.

And lastly, we will go beyond partnering directly with the private sector; we will also work to better understand its needs, taking advantage of our unique relationships with foreign governments to drive pro-business policy reforms.

Over decades, we’ve had a strong track record of success, working with countries to strengthen their business enabling environments. In Rwanda, we cut the time it takes to register a business from 18 to three days and reduced fees by 95 percent. And in Afghanistan, we improved export safety regulations, allowing farmers to fly the first agricultural goods out of Kandahar airport in forty years.

Today, our streamlined Economic Growth bureau is taking steps to improve the way we work on strengthening enabling environments.

First—because we know that economic reforms require sustained high-level commitment from governments—we will focus our core economic growth assistance in countries that demonstrate real commitment to private sector led growth.

Second, we’re going to accelerate our shift from a model where we provide technical assistance to governments through foreign consultants to one that employs local expertise, responds to the requests of partner governments and pays out based on measurable impact.

Instead of filling the cabins of Africa-bound flights out of Dulles, we’re going to hire even more local experts and seat them in ministries. Instead of deciding what technical assistance programs to initiate on our own, we’re going to ask partner governments.

Instead of paying for proposals, we’re going to continue our effort to rigorously monitor and evaluate impact and tie payments to results.

Finally, to work more effectively with partner governments and gain a better understanding of the political costs and obstacles to reform, we will increasingly turn to local political experts who understand governments best.

If we don’t understand the political cost of pushing through reforms, then we can’t be effective advocates for the business community or the people we serve. To quote a line from Prime Minister Tony Blair’s brilliant essay Not Just Aid: “If we miss the politics, we miss the point.”

In 1954, USAID’s predecessor, the International Cooperation Agency, made an $800,000 grant to start a plastics company in Taiwan. That grant helped establish Formosa Plastics, a corporation that produced PVC to make water pipes.

Today, Formosa Plastics is global corporation, with a division in the USA that sells more than $4 billion in goods every year. It also employs 2,110 people in Delaware, Louisiana and Texas.

In 1954, USAID’s Food for Peace program brought flour to Taiwan and taught people how to bake. Today, the country is our sixth largest agricultural market and the US is Taiwan’s largest supplier of wheat and corn.

Our entire history of development aid to Taiwan cost the American taxpayer about $1.4 billion between 1949 to 1963—about $100 Million a year.

Taiwanese tourists now spend over $1 billion every year traveling to the US.

A lot of people are currently giving speeches about the need to move beyond foreign aid.

They say that America simply can’t afford to stay engaged in the world, even though foreign aid is less than one percent of our budget.

They ask what good foreign aid actually does, despite decades of results fighting disease and strengthening governance.

And they ask what a country that’s growing between one-to-two percent a year even has to offer to countries growing at five, eight, even twelve percent a year.

The answer is simple: America has the most innovative, the most technologically advanced and—even today—the most dynamic economy in the world by far. And if we want to stay in pole position, then we need to keep our commitments to the developing world.

China can write big checks and build big roads throughout Africa, but it still doesn’t offer countries what U.S. companies and our partners do.

When we visit developing countries, they do not ask us for more than cash; they ask us for something more valuable: connectivity.

They ask us to connect them to our world-class research institutions because they want to build their own but don’t know where to set them up or how to start.

They ask us to connect them with retired American businessmen and women to help their firms plan and invest more effectively.

They ask us to certify their hospitals and doctors so they can improve their standards of care and the health of their citizens.

And—above all—they ask us to connect them to US corporations to help them develop new supply chains and markets.

In short, they ask us to serve as connectors to American ideas. And best of all, transferring ideas enriches us both, creating new markets for American goods and services and new jobs for American workers.

Today, exports support more than 9 million jobs in the United States—jobs that pay 15 percent more than average. Just last year, our surge in exports supported half a million additional jobs here at home.

If we are going to get our economy working again, then we must deliver on President Obama’s pledge to double exports in five years, and boost our sales to the 95 percent of the world’s customers that live outside our borders.

Those people don’t just live in India or in China or in Brazil; they live in Nigeria and Bangladesh and the Philippines, places where our development work is providing critical support.

The engagement we have with these countries today will determine how much we can trade and partner with them tomorrow, just as it did in Taiwan decades ago.

There’s nothing surprising about the fact that we just signed free trade agreements with South Korea, Colombia and Panama. The US has had strong diplomatic and development ties to those countries for decades.

The free trade pacts of tomorrow—the ones that will strengthen American companies and create jobs here at home—will be in exactly the places that USAID is working in now, helping to improve standards of living and provide linkages to American firms.

If we want to tap into the $5 trillion of purchasing power that even the poorest two-thirds of our world has today…

…if we want a leading share in an African common market that has more economic potential than China…

…if we want to truly get to a world that has moved beyond aid…

…then we need to invest in exactly the kind of diplomatic, developmental and private sector engagement that will get us there.

Because there is another American idea we offer to countries through our work—an idea that stretches back to our nation’s founding, manifested in a six-decade long record of bipartisan support for development assistance:

That all men are created equal and that as beneficiaries of prosperity, Americans have a responsibility to support that equality for those less fortunate.

That is the idea that drives hundreds of thousands of people of faith to volunteer abroad…

….that is the idea that led millions of American families to donate money to earthquake relief in Haiti…

…and that is the idea that distinguishes our nation.

For an exceptional country, it is perhaps our most exceptional idea.

Thank you.

USAID Public-Private Partnership Forum, Washington, DC

Last updated: May 19, 2014

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