Moral Hazard – A situation where one party assumes greater risk because it understands that another will remedy the harmful effects.
While the hundreds of billions of dollars in U.S. foreign assistance spent over the years have dramatically improved many people’s lives and livelihoods around the world, too often the United States’ approach to foreign assistance failed to advance U.S. interests, failed to spur systematic development, and enabled and perpetuated dependence and corruption by leaders in recipient countries. Since 1991, the United States has provided more than $200 billion in foreign assistance to Africa, yet the African Union reports that African countries lose an estimated $88 billion each year through tax evasion, money laundering, and corruption. Too often, what is needed for economic growth and development is not more money, but sound reforms that incentivize enduring private investment and growth.
Instead of insisting on mutual accountability to use U.S. assistance to address the causes of poverty and underdevelopment, too often we funded outputs to allay the symptoms. In so doing, we failed both the American taxpayer and the citizens of developing countries who looked to their governments and ours to help create the conditions to realize a better future.
For decades, the United States did not have a consistent policy as to even whether assistance was charity or a foreign policy tool. We did not require a committed partner, a coherent business plan, equity collateral at risk, or funding subject to performance-based disbursements. We infantilized recipient governments instead of having candid discussions on mutual performance expectations. Too often our approach to developing countries – frequently perpetuated by the excuses of those same governments – reflected the soft bigotry of low expectations. We excused away the lack of political will as “capacity constraints,” dismissed it with “we shouldn’t expect too much,” and did not challenge them when governments acted in contrast to their professed commitments.
Too often, we were content to confuse governments’ commitments for actions. We misinterpreted our access to leaders as influence with those leaders. We mischaracterized aid projects’ outputs as outcomes and program objectives as results. We misconstrued governments’ permission for us to expend aid as evidence that they shared a commitment to advance professed objectives. Perhaps worst, we failed to acknowledge when leaders of aid recipient countries demonstrated over and over through their actions that they prioritized their personal interests over, and at the expense of, the interests of their own country and citizens. Virtually never did we withhold assistance funds because host governments failed to deliver on their commitments, instead we responded by providing even more aid “because they have needs.” By trying to save people from bearing the brunt of the bad governance and corruption of their leaders, we helped perpetuate that very same corruption and bad governance.
Quite simply, we violated the central maxim of international development: the donor cannot want development more than the recipient. By doing so, we fueled moral hazard. From the pure greed of Malawi’s “Cashgate” scandal under Joyce Banda to the systematic kleptocracies of Bangladesh or South Sudan, by back filling health and social service needs recklessly created by bad governance, we have enabled and underwritten government corruption. In the worst cases, such as the predatory abuses of Mali’s Ibrahim Keita or Guinea’s Alpha Conde against their own populations, corruption and the failure to deliver basic public services needs led to military coups and incursions by terrorist organizations.
American foreign assistance is not charity but a tool to advance American diplomacy, security, and prosperity.
To accomplish these goals, we must focus our assistance and insist on administering it with host-government buy-in and mutual accountability for outcomes. This, in turn, will leave space for market driven growth that will also help close off the means by which malign international actors exploit developing economies and workers. We should not be dissuaded by detractors who will attempt to vilify a more transactional approach as “neocolonialism.” Quite the opposite is true. By insisting on systematic reforms that spur transparent and accountable growth and allow governments to retain funds to support their people, the United States can do more to catalyze actual economic development and the upliftment of developing countries’ societies – and advance tangible U.S. interests – better than we have in recent decades. It is the dependency-oriented, NGO-driven old model of development that is fundamentally colonial in mindset – refusing to respect development nation sovereignty, determinism, or agency.
Operationalizing this approach involves adopting investment-oriented goals, requirements, and incentives:
- A Serious Host Nation: Secretary Rubio has been clear, “Americans should not fund failed governments in faraway lands…we will favor those nations that have demonstrated both the ability and the willingness to help themselves.” If a government is not already taking steps to stem corruption and grow the economy when its own funds are at stake, we should have no expectation that they will be better stewards of U.S. funds. Without an aligned host-government, we should focus our resources elsewhere.
- The Right Focus: Our purpose is not to give money away, but to catalyze systemic reforms that enable sustainable growth and opportunities for the U.S. and recipient country. Neither governments nor donors create growth; instead, our roles are to foster conditions for the private sector to invest, create jobs, spur growth, and pay taxes to fund public services. Hence, U.S. foreign assistance should focus on curbing corruption and overcoming and remediating binding constraints to growth to lay the foundation for a transparent, level, and accountable business enabling environment.
- Confidence in The Business Plan: Most developing countries have national development plans, but too often they are unresourced and unprioritized works of fantasy, and seldom do governments enforce accountability for their actual implementation. What President Trump explained in clearly delineating America’s national interests in this year’s National Security Strategy is equally true of developing countries: when everything is supposedly a priority, nothing really can be. We should help sincere host governments develop focused, realistic strategies based on core sectors and targeting key constraints that are founded on candid analysis and include specific, tailored tactics.
- Skin in the Game: If a country is not going to put its own resources behind an effort, it is either not really a priority, they are not really serious, or they don’t have confidence in their plan. Few investors would engage where the owner hasn’t put collateral down or his own equity at risk. Why should foreign assistance not require the same? Here, the Millennium Challenge Corporation (MCC) has demonstrated two key best practices that ensure buy-in. The first is a requirement for co-financing by the host government. The second is conditions precedent: tangible reform actions a host government takes before funding even begins, to enable the success of the project outcomes.
- The Right Resources: Again, our purpose is not to give assistance away, and the history of both corruption and assistance has shown that money is not what is most lacking to spur development. So, building on an analysis of binding constraints to growth and a business plan that we have confidence in, it is incumbent on the United States and the recipient government to craft a bespoke package of technical assistance interventions to inform and enable the reforms needed. This should not be an approach of letting a thousand flowers bloom, and it must not be built around the question of “how can we help?” Instead, we must start with the questions “what are the outcomes we want to achieve in the American interest and what needs to happen to realize them?” and build an assistance program around that.
- Have a Contract: Unlike the Development Objective Agreements (DOAGs) of USAID that bound the U.S. to fund sectors but seldom included host governments’ performance commitments, the MCC model again provides a best practice. Explicitly detailing shared objectives and commitments by both governments – typically ratified by the legislature to carry the force of law – reduces uncertainty and improves accountability by enshrining the binding obligations of both parties.
- Performance-Based Funding: Too often, once development projects were approved, donors’ focus turned inward to implementation, achieving outputs, and keeping funds flowing even if receiving governments actively undermined them. Gradually, funding agencies have begun shifting to performance-based disbursements. By requiring a host government to demonstrate – through its actions, not merely its rhetoric – that it remains politically and financially committed to achieve professed objectives, we ensure that U.S. assistance achieves greater impacts.
Under President Trump and Secretary Rubio’s leadership, we have the opportunity and courage to acknowledge our mistakes, to embrace candid lessons learned, and to do better. America’s generosity in doing business with those who help themselves remains as strong as ever. We are not turning away from less developed nations, instead now is the time to lean in to lend a useful hand to those who are sincere and treat them as mature stakeholders. In engaging valued, sincere nations, nothing should be imposed, hidden, given as ultimatums, or come at the partner’s expense; we are not China. Foreign assistance that delivers for the American people and our partners must be founded on sincere, voluntary, and transparent engagement. But it must be backed by tangible action and, if a recipient nation proves through their actions that they are not committed to our professed shared objectives, our allegiance must first be to the American people to be stewards of their resources.
Having dedicated my life and career to Africa and the developing world, I am invigorated by the massive potential these nations possess, and I have witnessed how the United States can help turn that potential into a reality that benefits both nations. By restructuring our approach to foreign assistance and engaging developing countries based on national interest, we can help curb the corruption that deprives families of the hope of that better future. We can deliver lasting and systematic growth alongside recipient countries. And, we can deliver tangible value for the American people through a more secure and prosperous world.
For the Silo, U.S. Ambassador Michael C. Gonzales.
Michael C. Gonzales is the U.S. Ambassador to the Republic of Zambia and the U.S. Special Representative to the Common Market of Eastern and Southern Africa (COMESA). He has held senior posts throughout Africa and Asia over his career.
