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Wed. November 25, 2020
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Why Does America Exclude Development Finance from its Foreign Aid Account?

Comments(2)

By Mumukshu Patel

What if Apple excluded iPad revenues and supplier payments in its balance sheet? Or, what if General Motors did the same excluding its Cadillac line? Would their company balance sheets, revenue streams and share prices list accurately on the stock market?

Curiously, the American government follows a similar practice in its foreign aid balance sheet by not counting its development finance funding - resulting in billions (yes, BILLIONS!) of dollars being missed. 

The newly created US Development Finance Corporation (DFC) can help rectify this omission immediately and quite easily.  We urge it to do so to help advance American development and strategic interest.

America does not count contributions to – or by - US Development Finance Institutions (DFIs), like DFC and previously OPIC, reducing its overall total Official Development Assistance (ODA) - the technical term for aid compared across donor countries. With changes in the ODA definition such funding is eligible to be counted as ODA.

The omission is somewhat unique to America among major donors, other donors having been including development finance in ODA for years..

For instance, the United Kingdom counts its entire capital transfer to the Commonwealth Development Corporation (CDC) in its ODA total. In fact, just the UK’s government CDC capital allocation was well over a billion dollars, not to mention indirect transfers to CDC, which would take the amount even beyond a billion.

This exclusion of DFI investments results in an inaccurate picture of American aid.  That matters for a number of reasons related to development program efficiency, effectiveness and US strategy.

First, such omissions hinder efforts to harmonize development investments across government agencies.  If we do not have an accurate picture of overall foreign aid, how can we allocate it efficiently?  

Let us take a hypothetical example.  If the State Department and USAID are working to combat an infectious disease with a partnership in country X, through a traditional foreign aid program funding X’s government, would it not make sense to partner with DFC or see if there are existing private sector partners that it supports like hospitals, pharmaceutical companies or diagnostic labs to complement/supplement that effort?  Without common counting and accounting of funds, such harmonization becomes difficult.

Second, without proper coordination of funding, US overseas development programs become less efficient.  We risk duplication of effort, lose leveraging opportunities and these issues in turn result in less development impact – in terms of less poverty, more literacy, better health - not to mention sub-optimal returns to be American tax payer.

Third, America loses out in the battle of soft power and strategic interest.  By under-reporting its foreign aid, America loses crucial goodwill generated by generosity.  Moreover, to coherently implement US National Security Strategy, such as the Indo-Pacific program, development finance funding will be critical to be aligned with traditional instruments like foreign aid and trade – these instruments of soft power complement hard power.

New donors, who tend to be less transparent about their overseas funding, usually account for development finance in their overall foreign aid.  A number of analyses show that more than a third of Chinese official giving comprises development finance.  They are not hesitant to use that funding to promote their strategic interests. America risks losing the battle to win hearts and minds – not to mention strategic interests - in the developing world, on this front.

How can DFC rectify the omission of its funding from ODA? It can work with the US Agency for International Development (USAID)  - a key partner and agency in charge of reporting US ODA  - to issue a rule change in America's reporting to the OECD DAC dataset - the repository of foreign aid/ODA information.

DFC’s leadership, particularly its Chief Development Officer, should work with the ODA lead at USAID, and OECD-DAC, to ensure that this happens in the current year.  OECD DAC will report its 2019 numbers in December, so DFC can work with USAID to include OPIC investments for that year and report 2020 numbers next year using a common criterion.

What should be the criterion for development finance reporting in ODA? It should be a simple one: Contributions made to DFC, which drive global development and target poverty, should count toward US ODA

This accounting may not include the entire capital transfer to DFC since some of its funds go to higher income countries.  UK’s decision to include all CDC funding as ODA presents an inaccurate picture as some of the investments go to developed economies.

American ODA reporting has been quite accurate to only count funds allocated to development impact: for instance, the entire overseas anti-HIV funding was discounted to reflect that fact that some research on HIV would also benefit America and other developed countries. 

We recommend including all DFC funds that go to promote prosperity and development in low and middle income countries – as defined by the World Bank- to be included in US ODA. 

This will ensure accuracy of foreign aid reporting, since funds not aimed at promoting development in poor countries are not counted toward ODA; thereby, preserving the purpose of ODA reporting. It will also help better coordination of development programs at the whole of government level and help advance American interests globally. 

DFC has had a good start so far – now it needs to ensure that its funding gets counted as ODA so that it counts in global development, going forward.

 

 

Comments in Chronological order (2 total comments)

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Thu, April 16, 2020 09:39 AM (about 5364 hours ago)
If development finance is not reported as foreign aid by the US, where is it reported?

What do the Germans and Japanese do ? Are they also like CDC
 
Thu, April 16, 2020 10:03 PM (about 5351 hours ago)
Interesting article. Where does development finance get reported then?

What do the Germans and Japanese do? They also follow USG practice or are
 
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