A Strategy for Economic Growth
9. Economic Growth in the Framework for U.S. Foreign Assistance
In 2006, USAID and its programs were placed under the newly created Director for U.S. Foreign Assistance (DFA), housed within the U.S. Department of State. Key goals of the DFA include creating a more unified and rational structure that will more fully align the foreign assistance efforts of the State Department and USAID, increase the effectiveness of those programs for recipient countries, ensure the best possible stewardship of taxpayer dollars, and focus U.S. foreign assistance on promoting greater ownership and responsibility on the part of host nations and their citizens.
Strategic planning under the DFA began immediately, organized around a matrix of five country categories and five broad program objectives, which together constitute the Framework for U.S. Foreign Assistance. Economic Growth was adopted as one of these program objectives, alongside Peace and Security, Governing Justly and Democratically, Investing in People, and Humanitarian Assistance. Efforts in these five program objectives are intended to be complementary and mutually reinforcing. For example, country evidence suggests that political democracy can help strengthen economic governance, though the East Asian experience makes clear that democracy is not a precondition for growth, and the initial period of a democratic transition often yields slow or negative growth.47 Similarly, improved health contributes to faster growth through its impact on educational attainment, savings rates, and worker productivity.48 Together, these efforts contribute toward the overall goal of U.S. foreign assistance in each country category
Under the Framework, country strategies are developed by combining programmatic interventions drawn from one or more of the five objectives, depending on the development situation of the country in question. Although the details of each country strategy must be tailored to the particular circumstances of that country, the country categories are defined so that each contains a set of countries that are broadly similar in development status, performance, and prospects. As a result, all country programs within a particular country category are expected to emphasize a broadly similar set of interventions to promote economic growth (or any other objective).
The remainder of this section briefly defines the five country categories, and suggests some broad generalizations about the kinds of economic growth activities likely to be appropriate in each. Readers should note that this Strategy focuses most strongly on the challenges of achieving faster and more sustained growth in Developing and Transforming countries – those with a reasonable degree of political stability. The distinctive problems arising within Rebuilding countries – particularly those emerging from conflict – are addressed in detail in a separate document, which complements this Strategy.49
Developing countries are low- or lower-middle income countries that do not meet criteria for Millennium Challenge Account (MCA) eligibility and/or criteria pertaining to political rights. They cover a wide range in terms of policy performance, conflict and stability, and level of development. The overall goal of U.S. assistance in these countries is to support progress towards transformational development and eventual graduation into Sustaining Partnership countries.
In Developing countries, a preliminary question that needs to be resolved is whether or not the existing macroeconomic situation is sufficiently stable to support growth and job creation. If not, re-establishing macroeconomic stability should be regarded as a top priority.
Where the macroeconomic environment is reasonably stable, efforts should mainly focus on improving the microeconomic environment, both generally and for growth in key sectors. Going beyond these general principles to identify specific priorities requires a deep understanding of the specific circumstances of each country, in order to identify the binding constraints to growth.
Lower priority should generally be assigned to direct support for investments in productive capacity. In most cases, weaknesses in the business climate pose the main constraint to increasing productive capacity by discouraging private investment. As the business climate improves, private investment – domestic or foreign – can provide a much greater volume of resources to enhance productive capacity than would normally be available from the United States or from other donors, and can direct those resources more efficiently to the most growth-enhancing areas.
Transforming countries are also low- or lower-middle income countries but, unlike Developing countries, have met criteria for MCC eligibility and criteria pertaining to political rights. The overall goal in these countries is to support rapid progress in terms of transformational development and graduation to Sustaining Partnership status.
Because they are (by definition) relatively good performers, most Transforming countries have achieved reasonable macroeconomic stability, though some may experience temporary setbacks. Most economic growth programming should be focused on further strengthening the microeconomic environment generally and, for specific sectors, building on the foundation of basic measures that distinguishes these countries from those in the Developing country category to undertake the higher-order reforms needed to maintain progress toward faster and more sustained growth. Many countries are likely to have particular areas in which policy remains especially weak, despite their above-average policy environment overall. As with the Developing country category, other priorities should be determined on a case-by-case basis depending on the binding constraints.
Rebuilding countries are those in or emerging from internal or external conflict. The overall goal of U.S. assistance in Rebuilding countries is to establish the foundations for development progress.
Economic growth efforts in Rebuilding countries will generally differ significantly from those in Developing or Transforming countries. Countries currently embroiled in conflict typically offer few immediate opportunities for economic growth. Where the United States seeks to support the government of a country in conflict, the key economic intervention is generally budgetary support to allow the embattled government to manage without resorting to inflationary finance. Countries rebuilding after conflict often require immediate attention to macroeconomic policies, including stabilization. Rapid employment growth is also important, especially when there are large numbers of demobilized combatants.
The immediate post-conflict period can be a valuable opportunity for economic reform, both because the political power of the special interests that benefited from economic distortions has been weakened, and because the case for simply returning to pre-conflict policies has been undermined. However, the rate at which reforms can actually be implemented is often limited by weaknesses in government capacity, which, in most cases, can only be addressed gradually. As a result, careful attention to sequencing, along with a strong emphasis on simple, basic reforms, is important to ensure that existing capacities are used as effectively as possible. This will help ensure that the opening for reform is not wasted, and that the legitimacy of the new government is enhanced in the eyes of the public. It is also important to identify those components of the economic system that functioned before the conflict erupted and that might be resuscitated quickly, in order to help jumpstart economic activity and job creation.
A recent study of major U.S. post-conflict reconstruction work offers useful principles for sequencing efforts to improve economic governance in such settings.50 One basic principle is to initiate high-priority and time-consuming activities toward the beginning of the reconstruction effort. High-priority activities include actions to ensure security, improve budgetary execution systems (critical for reducing the scope for large-scale and high-level corruption), and reduce inflation and otherwise restore macroeconomic stability through appropriate fiscal, monetary, financial, and exchange-rate policies. They also can include addressing the short term need for employment in the period before the growth-inducing effects of peace, stability and economic reforms take effect. Time-consuming activities include efforts to build new institutions of economic governance, train a professional class of analysts and policymakers, and develop systems to generate reliable economic data.
Once the efforts identified above have been set in motion, attention can begin to shift toward improvements in other areas, beginning with the basics and postponing more sophisticated activities until the country has emerged from post-conflict vulnerability. For example, efforts in the financial sector should begin with creating a payments system along with a rudimentary system for regulating private banks; tax reform should begin with simple, indirect taxes; reforms of commercial law and supporting institutions should concentrate on such basics as registering businesses with minimum red tape, protecting private property, and enforcing contracts. More thorough, but more complicated, reforms can wait.
Safety nets comprise an additional area flagged for attention, especially programs focused on key social and political constituencies, such as social programs for the most vulnerable population groups and efforts to give veterans and decommissioned soldiers a stake in the new society.51 In the Foreign Assistance Framework, some of these programs are included within the Economic Growth program objective; others have been placed under Investing in People.
Finally, reconstruction and rehabilitation of basic infrastructure will often be a priority in Rebuilding countries, especially where conflict has damaged the country’s infrastructure or allowed it to deteriorate. In contrast to other country categories, it will often be necessary and useful to provide direct support for such investments in infrastructure in order to help jump-start economic activity more broadly. The specifics of the country situation will generally dictate priorities in this area.
Sustaining Partnership countries are upper-middle or high income countries for which foreign aid is provided to sustain partnerships, progress, and peace in areas of mutual interest. In most such countries, foreign aid plays a relatively minor role. The major programmatic area within economic growth is likely to be trade and investment.
Finally, Restrictive countries are those in which there are significant governance issues and/or legislative restrictions on direct U.S. funding. Foreign aid aims to strengthen civil society to generate demand for greater freedom, improved governance, and stronger accountability. Economic growth efforts will typically play little, if any role in Restrictive country programs.
47 As documented at length in note 17 and the analyses cited there, there is considerable diversity in interpreting the evidence on this point.
48 Bloom, Canning, and Jamison (2004).
49 USAID (2007), “A Guide to Economic Growth in Post-Conflict Countries.” draft.
50 Lewarne and Snelbecker (2004).
51 Lewarne and Snelbecker, previously cited.
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