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Senator Jim Webb (D-VA) says the Millennium Challenge Corporation (MCC) should stop funding development projects awarded to non-U.S. companies in Africa. I can think of three reasons this response is misguided:
1. It’s bad development. Restricting overseas development contracts to domestic bidders - so-called “tied aid” - buys political support at home, but often costs more and is less effective. It reduces recipient governments’ freedom to shop for the best deals and, according to one economic study, reduces aid’s value by 15 to 30 percent. The MCC puts good-performing countries in charge of their development because it yields better results; tied aid takes those countries back out of the driver’s seat. Many U.S.-based companies (including some of the Initiative for Global Development’s members) also oppose tied aid, not just because it is bad development, but because it prevents competition and when other donor countries do the same thing, it hurts American businesses. (These are among the reasons countries with high levels of tied aid are penalized in CGD’s Commitment to Development Index.
Taxpayers pay more, but get less. The MCC aims to spur economic growth and reduce poverty in select, well-governed countries. Taxpayers should get the biggest development bang (and best price) for their bucks. Requiring the MCC to use only U.S. companies in regions where they could be more expensive, less effective, or may not exist, unduly constrains our aid dollars and ends up costing American taxpayers more money.
The MCC is not ExIm or OPIC. The U.S. Export-Import Bank (ExIm) and the Overseas Private Investment Corporation (OPIC) are designed specifically to help U.S. businesses invest overseas. The MCC, in contrast, has a clear and different mission — economic growth and poverty reduction in well-governed, poor countries — that is also in the U.S. moral, economic, and national security interest. We have different tools for different (and equally valid) purposes, but conflating them puts both objectives at risk.
As CGD president Nancy Birdsall and senior fellow Todd Moss said, tying development assistance to U.S. companies is "one of the worst habits that undermines the ability of foreign aid to deliver development results." Let's hope that even in tough economic times and as we enter silly-season in Washington with mid-term elections, we can remember how to do good development.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.