Foreign Aid Vs. Foreign Investment
(originally published May, 2015)
If we really want to make an impact on emerging markets, we should be lowering the FDI cost of capital and risk profile for our entrepreneurs, investors, and growth oriented competitive, i.e. non-monopolizing, businesses. Take a significantly higher percentage of direct foreign aid and transfer it to foreign direct investment insurance programs. Let investing be done by the folks who generate returns, rather than deficits.
Recently read about MTN, Nigerian wireless carrier who is shutting down portions of its network due to a fuel shortage. A fuel shortage, in Nigeria, estimated to rank 10th among all countries in cumulative oil deposits. Nigeria receives $80+B per year in foreign aid, with few outward strings attached. This represents roughly 7.5 % of its GDP. For reference, oil and ag represent 54%, followed by services in large part supporting these industries and a budding financial sector, at 30%, and manufacturing, including manufacturing of fuel based electricity generators, at 15%.
The problem with unconditional aid is it distorts both incentives and economics. Imagine setting up a lemonade stand where it costs you $2 to make $1 worth of lemonade, and your parents chip in the extra dollar. What sort of lessons might you learn from such an endeavor?
There has persisted a belief that direct foreign aid creates a gateway to instilling democratic values, which in turn, creates economic opportunity. The results of this philosophy point more toward the inefficient lemonade stand. A country can call itself democratic, yet it’s values espoused in its actions tell a different story. Unconditional aid, and unenforceable conditional aid, sustain the failed business models of countries, bolstering forces opposing economic diversification and democratic values and principles.
What happens when direct foreign aid is withdrawn? In the absence of free money, survival kicks in. You brand your lemonade, procure better lemons, cross sell discount refill cups, raise prices, and place your stand near the baseball field. You innovate, turn a profit, and pay your new shareholders, your demanding classmates, their percentage.
In the absence of foreign aid, non-totalitarian governments are forced to look inward to generate revenues in order to support the services that stave off revolution, increasingly turning to economic diversification, growth, and value creation. Entrepreneurship and business investment combine to create diversified and growing economies, which in turn reinforce and inspire increasingly value oriented governmental policies. Democratic values ensue.
If we really want to make an impact on emerging markets, we should be lowering the Foreign Direct Investment (FDI) cost of capital and risk profile for our entrepreneurs, investors, and growth oriented, i.e. non-monopolizing, businesses. Let our collective knowledge, resources, and innovative capacity flood their markets and create value chains stronger than any oligarchy of aid. Take a significantly higher percentage of direct foreign aid and transfer it to foreign direct investment insurance programs such as those supported by the World Bank’s Multilateral Investment Guarantee Agency (MIGA). Leveraging domestic entrepreneurial talent and investor resources through increasing NPV positive opportunities allows the establishment of healthy incentives for foreign business participants and governments. Investors will establish conditions on their capital, and entrepreneurs and investors together will use discretion in employing their talent and capital. Foreign countries will learn the rational lessons of multi-round game theory, and adjust, or be left behind.
More likely than not, the transformstive power of private business investment will instill democratic values in the vast majority of nations and economies, relegating the few remaining cases of extreme isolationism to a different category of foreign policy.
