November 2, 2021

Analysis

The Diverging Gap

On June 11, leaders at the G7 summit signed the Build Back Better World (B3W) Partnership, an agreement which commits signatories to meet the infrastructure needs of low- and middle-income countries. The deal is an explicit response to China’s Belt and Road Initiative (BRI), which, since 2013, has gained the support of more than 60 countries and dedicated over $500 billion of funding to thousands of projects. These range from construction of a fiber-optic connection in Pakistan to the Mombasa-Nairobi Railway in Kenya, and the still-unmaterialized port development in Italy. Amidst mounting criticisms around debt obligations, labor sourcing, contract transparency, and environmental standards, the BRI continues to address a trillion-dollar annual “global infrastructure gap.”

The G7’s B3W, on the other hand, follows a long trajectory of US-backed commitments to infrastructure investments that, at least in part, fail to materialize. What happened to Western infrastructure investment and why, up to this point, has the US failed to deliver on its promises? Where did the infrastructure gap—which reflects a gap in the international development paradigm, and which China is aptly filling—arise?

A great decline

In general, physical infrastructure—from roads and ports to power plants and cell towers—constitutes a public good: supporting economic activity and raising living standards of local communities. But it’s risky, slow to deliver returns, and difficult to profit from. Following World War II, infrastructure projects became a central feature of development strategy, associated with the “big push” theory of industrialization and economic development. The US government was famously involved in infrastructure-related initiatives, including the Marshall Plan and the Pan-American Highway. In 1961, the “Decade of Development” began with the founding of the US Agency for International Development (USAID). US officials and academics believed that resource transfer from rich countries to poor ones (many of them newly independent) in the form of capital-intensive projects was necessary for their economic and political development. For the US, this investment was a Cold War imperative to counter Soviet influence in the Global South.

In the 1970s, however, the US government ceased to directly fund overseas infrastructure; political, economic and ideological shifts tempered the ambitions of the previous decade. In light of insufficient growth rates, the development community began to favor “trickle-up” approaches, as the international environment deteriorated with the oil price shock. Congress, concerned about facilities in disrepair, opportunities for corruption, and the policies’ distributional impacts, advocated increased multilateral lending, and greater responsibility from recipient countries.

The Vietnam War played no small part in these changing attitudes. South Vietnam was USAID’s greatest beneficiary between 1962 and 1975, accounting for more than a quarter of its global budget in 1967. Support included construction of highways, civilian hospitals, and power plants, but also social programs, security assistance, and propaganda campaigns.

Amid growing criticism of US foreign policy and international aid efforts, President Nixon pledged to “help when it makes a real difference and is considered in our interest.” USAID responded to the changing winds by developing a narrower focus on food, health, and education—“basic human needs”—rather than broader development aims. With this shift, as House Rep. Charles W. Whalen, Jr. put it, a “regrettable prejudice in the Congress and the Executive Branch”1 against infrastructure spending was established. By 2013, infrastructure had gone from being USAID’s primary activity to less than 11 percent of its overseas funding.

Developing countries continued to borrow heavily to fund infrastructure and other projects, only to be hit by the Volcker shock and debt crises in the 1980s. Combined with the loss of the Soviet Union as an aid sponsor and the collapse of communist systems, this crisis opened the path for renewed US investment. And an infrastructure gap was already evident. The 1990 UN World Economy and Social Survey dubbed the 1980s a “decade lost for development.” While the Washington Consensus envisioned a generalized retraction of the public sector, it maintained productive infrastructure as one of the few justifications for large budget deficits.

But the US government had largely rejected the state—in the domestic and international contexts—as a significant tool for development. By the end of the Cold War, US policy promoted the private sector and macroeconomic management as the twin engines of investment. The Reagan administration’s 1987 National Security Strategy stated: “At a time when developing countries are striving to meet their debt-servicing obligations and the resources of our national budget are under pressure, the contribution of private-sector investment assumes increased importance.” For post-communist Central and Eastern Europe, West European leaders created (with the US government’s reluctant support) the European Bank for Reconstruction and Development (EBRD), the last of the Western multilateral development banks and the only one explicitly dedicated to promoting private enterprise. Although it was clear that public investment in infrastructure was crucial to the business environment, the US insisted on a 40 percent cap on public-sector lending to prevent, as an Overseas Development Institute briefing put it, an “almost bottomless pit of requests for public sector infrastructural projects.”

It was not the first time that supply would not meet demand. The policy priorities of the US were elsewhere—the transition of post-Soviet states to market systems; competition with Japan and Germany; and the domestic politics of the budget deficit. In 1993, the George H. W. Bush administration recognized that past foreign assistance in infrastructure development had contributed to global security, but still argued that the “results of foreign aid have not been commensurate with the resources expended.” (Foreign aid in 1990 was $14 billion, or 1 percent of total federal spending.) The National Security Strategy suggested that if countries focused on building “pluralistic democratic institutions” with “free market principles,” investment would naturally follow.

Pushing private capital

With the security imperative receding into the background, exporters became the only domestic lobby for an active US role in global infrastructure development. In 1990, under pressure from businesses afraid of losing sales of equipment and services in international markets, Congress began to reevaluate its emphasis on basic human needs. “We have relied on our contributions to multilateral banks to support capital projects,” commented Senator Patrick Leahy in a hearing on foreign operations. “That is the opposite of our competitors… they use their bilateral programs to promote capital projects that benefit their domestic business…. Would we be better off doing what they do?”2 The Bush administration advanced a business development initiative within USAID that emphasized infrastructure, but the agency was hesitant to embrace export promotion at the expense of its human development focus. Congress mandated an Office of Capital Projects but, opposed to this “micromanagement” and constrained by competing priorities, USAID offered the minimum available funding, around $300 million.3

Other institutions were better able to leverage small budgets. The Overseas Private Investment Corporation (OPIC), a US development agency created by Nixon to mobilize private capital, increased insurance coverage of power, telecommunications, and gas transmission from less than $100 million in 1990 to more than $3 billion in 1996, 18 percent of its insurance that year.4 Although its infrastructure footprint had diminished since the 1970s, the Export-Import Bank (EXIM), the other large overseas lender, noted in 1997 it was responding to “strong demand in developing countries seeking to build infrastructure without overly burdening their governments’ debt.” EXIM’s outstanding loans in power generation, telecoms, and other infrastructure rose to $2.5 billion, along with another $6 billion in guarantees for power generation, the second largest sector. Private companies soon displaced governments as its primary borrowers. Under these business models, if public money did not directly support investment, it insured against risks like expropriation and encouraged positive investor outcomes, matching the world’s expanding private capital with lagging development. In some cases, diplomatic clout helped, as foreign governments were more inclined to settle with investors when considering the relationship with the US. Importantly, such loan and insurance programs were “politically light”—they generally made profits and had little impact on the budget, but this still failed to shield them from attack.

US efforts to “crowd in” private investments in developing country infrastructure were too small—global need was estimated at $200 billion per year. OPIC’s portfolio invested outside of infrastructure and was capped at less than $25 billion, and ran out of operating funds in June 1994. Enron, whose international arm developed energy projects, proposed reallocating aid funds to the finance agencies, which amounted to “a privatization of US development assistance.”5 But opponents of big government and big business ensured OPIC and EXIM were regularly reviewed for termination, leading to unambitious budgets. The order of the day was public-sector austerity, and developing countries presented potential drags on the federal budget. According to the Republican majority in Congress, debt relief for poor countries would, in the words of then-majority whip Tom DeLay, “rob the Social Security surplus to underwrite the national debt of Nepal.” The issue became “Ghana versus grandma.”

The US sought to cede infrastructure lending to the World Bank and other multilateral institutions when the private sector was insufficient. But as the largest shareholder in the World Bank, the US cut support for their role as well. Public criticism of the Bank reached new heights in the 1980s after it infamously helped pave a highway into Brazil’s Amazon, displacing Indigenous communities and contributing to deforestation. International NGO campaigns reached Congress, and the 1989 Pelosi Amendment required US representatives at multilateral banks to abstain or vote against projects that did not report their environmental impact well in advance.

But rich nations’ declining interest in a broad multilateral infrastructure program was not just aversion to environmental destruction and white elephants—their construction firms also stopped winning contracts. For the Clinton administration, the World Bank was a foreign-policy tool whose infrastructure efforts were most useful in strife-torn areas like Southeastern Europe. Bank management, meanwhile, argued that project quality and private participation were more important than its direct involvement in meeting infrastructure needs, and infrastructure lending fell 50 percent from 1993 to 2002. The organization transitioned into a “knowledge bank,” emphasizing its provision of development best practices rather than funds and project delivery.

Middle-income countries valued the Bank’s participation and expertise, but the burden of compliance with its environmental and social safeguards led them to give up on borrowing. In China, for example, in 1991, the Bank recommended to Shanghai that the city abandon building a subway system in favor of buses. Local officials proceeded anyway, ultimately creating one of the world’s largest and busiest metro systems. The Bank was fitted uncomfortably in the gap between Northern shareholders and its clients in the Global South. In 2003, Chinese and Indian board members rebuked its approach, resulting in a partial win with a new strategy and budget for infrastructure. However, the Bank’s model project, an Exxon-built oil pipeline in Chad, illustrated the dangers of extractive infrastructure—Idriss Déby’s regime diverted revenues from poverty reduction to weapons.67 Although the Bank lent counter-cyclically following the Global Financial Crisis, by 2010, “the world’s largest infrastructure lending institution had largely exited the business of infrastructure lending.”

For a time, it appeared private investment would supplant multilaterals. During the 1990s the public-private partnership (PPP) emerged as the model for investment, and private participation in developing countries’ infrastructure rose sevenfold from $18 billion in 1990 to nearly \$128 billion in 1997. The turn was not seamless. That sum fell to $57 billion after the Asian Financial Crisis, and drawing private foreign investment into infrastructure projects was often politically explosive. In Bolivia, efforts to privatize water systems in 2001 led to mass protests in a “water war” that ran US-based Bechtel Corporation out of the country. To the World Bank, only reformers who undertook structural adjustment would develop sustainable infrastructure; to the working class and rural communities, the rise in water bills was a perverse consequence of “leasing the rain.”

Private investment eventually recovered, but at a reduced scale. Poland’s finance minister from 1994–97 commented, “The incorrect assumption that market forces can quickly substitute the government in its role towards new institutional set-up, investment in human capital, and development of infrastructure, have caused severe contraction and growing social stress.”8 Private investment remained highly sensitive to risk, with only $1.5 trillion raised over 2008-17, of which 98 percent went to middle-income countries. While private investors had the funds, they did not have ready, “bankable” projects and continued to worry about unpredictable democratic changes of government that could harm their investments. A BlackRock manager was frank about Wall Street’s inability to monetize one of the world’s most pressing needs: “There’s absolutely zero correlation between the scale of need for infrastructure and addressable opportunities for the private sector.”

A sinking priority

At the turn of the century, there was a lack of global consensus on what would remedy the developing world’s infrastructure issues. The UN’s Milennium Development Goals (MDGs), adopted in 2000, left industrialization and infrastructure out of its list of eight ambitious anti-poverty objectives for 2015.

For the White House, 9/11 shifted development priorities. After linking global poverty with the attacks, President George W. Bush announced the creation of the Millennium Challenge Corporation (MCC), arguing that aid in countries with “good policy” would promote economic liberalization and political freedoms and serve US security interests by lifting people out of desperation, “conditions that terrorists can seize.” MCC did invest $4 billion in infrastructure through 2010, but infrastructure featured little in the Bush administration’s campaign against poverty. The administration’s National Security Strategies notably omitted it from priority areas, except where absolutely necessary, like its reconstruction in Iraq.

The President’s Emergency Plan for AIDS Relief (PEPFAR) best reflected the aid-oriented US approach in Africa. The severity of AIDS required a robust response, but poor transportation and communications infrastructure had hindered continental development for decades. Congress continued to urge multilaterals to avoid corruption and inefficiency. Nonetheless, China’s investments emerged on US policymakers’ radar.

In 2008, Joe Biden, then the chair of the Senate Foreign Relations Committee, stated, “The debate that surrounds this issue is whether or not the purpose of this investment is designed to undercut American influence deliberately… whether it’s Africa or in South Asia or in Latin America.” The administration emphasized the superior benefits of US aid programs. Deputy Secretary of State John Negroponte argued, “I think that the Chinese effort pales in comparison to the United States efforts in Africa. So, I guess I’m not overly concerned about it.” Foreign policy think tank scholars testified that “some of what the Chinese do on infrastructure… would also be welcome” and that “persistent disillusionment among Africans with Western commercial approaches has played to China’s advantage.”

While low internal returns dissuaded private investors, and mitigating adverse impacts reduced multilateral institutions’ lending, the emerging Chinese approach demonstrated a “build it and they will come” mentality, according to Francis Fukuyama. In Jamaica’s Highway 2000 project, commercial banks funded the first phase in 2001 (later refinanced by multilateral institutions), but the French contractor declined to work on the second phase, calling it commercially unviable. By this stage, China had already begun to export its construction strengths. In 2012, China Development Bank and China Harbour Engineering Company stepped in with financing, gaining a 50-year concession and rights to develop the land around the highway. The traditional players supported stronger standards and standalone financial sustainability, but the project moved closer to completion only after the Chinese responded to its aspirations.

The pendulum swings back

Recognizing the importance of infrastructure to their own economies and to China’s rise, Western institutions attempted a pivot in the early 2010s back to “big” development. In emerging markets, American business was potentially losing out in the sector. In 2011, the chairman of EXIM gave one example: “Half the order was split between the United States and China for locomotives in South Africa.” Meanwhile, the disastrous wars in Iraq and Afghanistan suggested to policymakers that strictly military responses would not guarantee US security. A member of the Joint Chiefs of Staff told a House committee, “[I]t is not the Department of Defense that is going to put power grids in place or build roads. And it is that permanent infrastructure that allows a country to become stable.” To that effect, in the early 2010s, the US did provide considerable aid for infrastructure in some countries—Afghanistan, Egypt, Pakistan, and the West Bank/Gaza—places where investing in transport, power, and/or water were crucial to attaining military or diplomatic objectives.

The longstanding US approach was most lacking in Africa. In its initial National Security Strategy, the Obama administration promised that African infrastructure priorities “remain high on our agenda,” and in 2013 it launched the Power Africa initiative. Rare bipartisanship seemed to coalesce around the long-unfulfilled energy needs of Sub-Saharan Africa. But the initiative remained encumbered by coordination problems, hamstringing a “whole-of-government” approach and hopes that the private sector would fulfill the lion’s share of financing needs. Congress appropriated no new funding, and Republicans attempted to gut OPIC and EXIM. USAID, a non-Cabinet-level agency, could not play a strong role as interagency coordinator. One of the most significant US infrastructure initiatives to date has brought online just under 5,000 of the 2030 target of 30,000 megawatts in new energy.

With ambitious targets and resource constraints, multilaterals faced similar problems. In 2012, the World Bank announced a new infrastructure strategy with a heavy emphasis on private capital. The US was neither willing to contribute more capital to the development banks nor accept more from other members that would dilute its vote share. Shut out of greater influence in traditional multilateral institutions, Brazil, Russia, India, China, and South Africa established the New Development Bank (NDB) in 2014. China’s Asian Infrastructure Investment Bank (AIIB) followed soon afterwards. Adamant opposition to the AIIB did little to convince those in Asia that the US was truly concerned about infrastructure needs, and the warning that Chinese lending might come with strings attached—“debt trap” diplomacy—did not impress countries accustomed to World Bank loans conditioned on reform or geopolitics. Japan, the other opponent of the AIIB, could offer something of an alternative with its outward infrastructure policies, but a US alternative was not forthcoming.

It was increased Chinese investment that precipitated a shift in US policy. The Trump administration’s National Security Strategy acknowledged that a desire for infrastructure investment in the Global South had created a geopolitical problem, and they sought to respond. In 2018-19, Congress upgraded OPIC to a development bank, the International Development Finance Corporation (DFC), doubling the portfolio cap to $60 billion; the Senate restored EXIM’s board; the State and Commerce departments coordinated to match US companies with opportunities; and the US, Japanese, and Australian governments established the Blue Dot Network, a standard-setting initiative for infrastructure projects. The funding for the implementing agencies remained relatively modest, leaving them to reconcile competing development priorities.9The World Bank and private investments for infrastructure, however, continued to lag, particularly in the poorest countries, where Chinese financing was most appealing.

Since the 1970s, when the emphasis on infrastructure was abandoned, US development efforts have periodically confronted calls to address the infrastructure gap: to increase domestic exports, to bolster governance and security, and lastly to compete with China. The B3W initiative may be another such effort, which could, like previous commitments, be heavier on standards than financing, or break with the recent past—and introduce ambitious financing apart from the private sector. An approach considerate of corruption, climate change, and social impacts will be welcome to many in the developing world, but the market-oriented approach of encouraging private investment, which waxes and wanes, has led to continual disappointment. The US intends to show itself the better development partner, but it remains to be seen whether its efforts will displace China and fill the infrastructure gap.

The views expressed by the author of this article do not necessarily represent the views of the Export-Import Bank or the United States government.

  1. Hearings, Reports and Prints of the House Committee on Foreign Affairs, Parts 5-8, US Government Printing Office, 1979.

  2. Foreign Operations, Export Financing, and Related Programs Appropriations for Fiscal Year 1992: Agency for International Development, US Government Printing Office, 1991, 547.

  3. Agency for International Development (A.I.D.) Transition Book for the Clinton administration, “X.Z3 Capital Projects Office,” 7.11-12.

  4. Timothy Irwin, Michael Klein, Guillermo E. Perry, and Mateen Thobani, Dealing with Public Risk in Private Infrastructure (Washington: World Bank, 66).

  5. Foreign Operations, Export Financing, and Related Programs Appropriations for 1996: President’s fiscal year 1996 budget request for Russia, Ukraine, and the New Independent States, US Government Printing Office, 1995, 234.

  6. Sebastian Mallaby, The World’s Banker: A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations (New York: Penguin Press, 2004, 357).

  7. Steve Coll, Private Empire: ExxonMobil and American Power, (New York: Penguin Books, 2013, 349-70).

  8. Grzegorz W. Kolodko. “Ten Years of Post-socialist Transition Lessons for Policy Reform,” Communist and Post-Communist Studies 32, no. 3 (1999).

  9. According to budget requests, from Fiscal Years 2015 to 2020, the annual program budget of the agencies comprising the DFC increased from $96 million to $299 million; EXIM and MCC remained flat at around $110 million and $900 million, respectively. USAID’s standalone budget rose from $1.4 billion to $1.7 billion; the general bilateral economic assistance budget rose from $20.9 billion to $24.3 billion. To the extent they are comparable, the Department of Defense’s budget rose from $496 billion to $705 billion over the same period.


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