The U.S. Development Policy Is at a Crossroads

The U.S. administration presented a budget request for FY2018 that contains measures that will have an impact U.S. development policy over the next four years. The recommended funding cuts in foreign assistance and the proposed elimination of agencies mark a break from the bi-partisan approach of the last decades and might signal a major shift in policy. A momentous change in the financing, institutions, and priorities of U.S. development assistance would have consequences for the development sector, U.S. foreign policy, and prosperity around the world.

What next

 The President’s “America First” budget reflects a bargaining position that will be examined and moderated by Congress later in the appropriation cycle. But it will pave the way for an evolution of the U.S. development policy according to two scenarios: in a “marginal reform” scenario, the bi-partisan approach will largely prevail and development agencies and programs will undergo limited adjustments in terms of budget, instruments and priorities; in a “major upheaval” scenario they will face large budget cuts, some might be phased-out and the rest repurposed.

Impacts

 The elimination of U.S. funding for bilateral and multilateral climate change programs will jeopardize the implementation of the 2015 Paris agreement;

  • Reduced U.S. assistance to low-income countries that the U.S. administration deems “non-strategic” might reverse development gains;
  • The removal of U.S. development agencies for exports and foreign investments would limit business opportunities for U.S. companies;
  • The use of development assistance for short-term foreign policy objectives and reversal from untied aid would weaken international cooperation on development;
  • S. opposition to the reforms of International Financial Institutions would accelerate the fragmentation of the Bretton Woods order.

Analysis

 In 2015, the U.S. provided $31bn in Official Development Assistance (ODA), which represents about 0.17% of GNI (for a United Nations target of 0.7%) and 0.8% of the federal budget. About 65% of U.S. ODA is untied, meaning that there is no condition that the funds be used to procure goods or services from the U.S.

More than 85% of U.S. ODA is provided bilaterally, via more than 20 agencies and bureaus. The rest consists of contributions to multilateral funds managed by development banks and UN organizations.

Graphic: U.S. Development Spending (Gross Disbursements, billion dollars); Source OECD

President’s Budget Request

On March 16, 2017, the White House initiated the budget process by presenting its blueprint for the fiscal year starting on October 1st. The document introduces some headline numbers for development spending and reveals some of the administration’s development priorities. But it does not provide a definitive outline of the forthcoming U.S. development policy.

The administration requested $25.6bn in base funding for the Department of State and the U.S. Agency for International Development (USAID), a 28.7% reduction from the previous year. It requested an additional $12bn (-37.4%) as part of the Overseas Contingency Operations, an extraordinary fund for emergency activities, mostly in Syria, Iraq, and Afghanistan.

The blueprint calls for the elimination of funding for the U.S. bilateral and multilateral climate change programs. It reduces funding for the UN and affiliated agencies and sets a 25% cap for U.S. contribution to total UN peacekeeping costs. It reduces funding for Multilateral Development Banks (MDBs) by $650m over three years compared to commitments by the previous administration.

The blueprint pledges to meet current bilateral and multilateral commitments for vaccination, HIV/AIDS, and malaria programs. It allows for “significant” funding for humanitarian assistance, including food aid, disaster, and refugee program funding.

The budget proposes to eliminate independent agencies, including the African Development Foundation, the U.S. Trade and Development Agency (USTDA), and the Overseas Private Investment Corporation (OPIC).

Other Developments

In January 2017, President Trump signed an Executive Order that, for the first time, named the USAID administrator as a regular member of the National Security Council’s deputies committee. With another, he reinstated and expanded the Mexico City Policy (the so-called “global gag rule”) that restricts organizations that condone abortion from receiving any U.S. health funding.

In March 2017, the administration also requested a review of all agencies and programs for the purpose of reorganizing the executive branch.

U.S. Congress

The consent of the Republican-controlled Congress will be necessary for the budgetary and institutional measures put forward by the administration to become effective. The authorization bills will establish, continue, or modify agencies and programs; the appropriation bills will provide funding for those that are authorized.

Congress is not likely to agree on the proposed cuts in development spending, as several prominent Republicans have already declared their firm opposition.

Policy Pathways

The government can act on three main levers to reorient the U.S. development policy: funding levels, aid allocation, and channels of delivery.

Development spending for FY2018 is likely to be reduced, though not by the extent proposed by the administration. The cuts will not be spread equally across agencies, programs and sectors.

The administration has proposed that U.S. foreign assistance be re-focused on international organizations that “advance U.S. foreign policy interests” and on countries of “greatest strategic importance”. Any significant shift in spending allocation would require approval from Congress, which segments the budget into country and program accounts. It would not take effect immediately, in part because some funds are disbursed as part of multiyear strategies that would be costly to terminate prematurely. The existing federal budget process would also not be suited to a development policy based on “deals,” whereby the amount of aid a recipient receive depends on its support for U.S. international policies.

The administration is likely to propose a reorganization of U.S. development institutions later this year. The President’s budget suggests that such a reform would not be driven by budgetary concerns only. OPIC, whose elimination is proposed, returns about $280m annually to the Treasury.

The administration’s current approach to development reflects the positions of some conservative lawmakers, for whom OPIC, USTDA, and Export-Import Bank distort markets. However, the elimination of the agencies that help American companies export and invest overseas would run counter to the administration’s trade policy.

On the contrary, the administration might seek to offset some of the impact of budget cuts by accelerating the shift from aid to development finance, whereby scarce public funds would be used to leverage commercial capital for development purposes. This strategy would elevate the agencies that support private sector investments such as OPIC and USTDA, while maintaining those that reward good governance and economic freedom, such as the Millennium Challenge Corporation (MCC). It would phase out the other grant-based agencies, such as USAID, or re-focus them on emergency response and humanitarian issues. This approach could be accompanied by measures to support U.S. companies, including a more systematic use of tied aid.

All development finance programs could also be consolidated in a new entity dedicated to the private sector. Alternatively, agencies and programs could also be merged in a single entity at the cabinet-level on the model of the UK’s Department for International Development.

Presidential initiatives

Congress has codified presidential initiatives such as Feed the Future and Power Africa, which leverage private investment with aid-based instruments across U.S. agencies. But their existence remains dependent on the U.S. agencies that implement them and on the White House staff that coordinate the overall approach.

Multilateral Organizations

In FY2016, the U.S. contributed $2.3bn to MDBs and $1.1bn to the UN system, with an additional $2.5bn for peacekeeping operations. A significant reduction in U.S. voluntary funding for multilateral organizations would be mostly borne:

  • by the climate funds, such as the Green Climate Fund ($3bn previously committed, with $250m disbursed),
  • by the UN specialized agencies that grant membership to the Palestinian Authority; and
  • to a lesser extent, by MDBs’ concessional arms such as the International Development Association (IDA) ($3.9bn previously committed over three years).

The administration might oppose future capital increases in MDBs and the International Monetary Fund and hinder reforms that would increase the influence of emerging countries. It might also exercise its voting power in these organizations to pursue foreign policy objectives, beyond the prohibitions already mandated by Congress.

 

This is an electronic, unedited version of an article published in the Oxford Analytica Daily Brief