Merging Onto The Belt And Road

Via The Wall Street Journal, an article on the United States’ plan to merge several existing development finance agencies:

All of Washington these days is scrambling to counter a rising China, and the awakening is necessary. The problem is that it too often is leading to bad policy that imitates China’s behavior rather than playing to American strengths. Take a market-distorting development finance expansion now moving through Congress.

The House last week passed a measure to merge several existing development finance agencies into the U.S. International Development Finance Corporation as part of reauthorizing the Federal Aviation Administration. The bill now before the Senate would expand the Overseas Private Investment Corporation (OPIC), raising its direct lending, loan guarantee and risk insurance portfolio cap to $60 billion from $29 billion, as well as giving it new finance tools like owning equity stakes in projects.

The higher lending ceiling is being sold as an alternative to China’s predatory development loans that have ensnared countries from Malaysia to Pakistan in multibillion-dollar Belt and Road projects. Florida Rep. Ted Yoho, a co-sponsor, summed up the logic in August: “People are waking up to what China is doing and see that we have to counter that.”

Fair enough, but the first problem with this strategy is OPIC’s record. The organization has veered far from its original purpose of financing U.S. investment in developing markets that private companies consider too risky without government support.

The agency’s stated mission is contradicted by what supporters tout as its shining virtue: profitability. The organization boasts a low default rate and a yearly profit that has put $8.5 billion toward deficit reduction in the last 40 years—an argument currently used in the expansion effort to placate deficit hawks. But if financing companies that go into the world’s poorest and least politically stable quarters were profitable, private business would do it.

OPIC’s secret is that a large chunk of its financing goes where it’s not needed. According to a May 2018 Heritage Foundation report, nearly half of the value of OPIC’s outstanding commitments to individual countries are in high-income or upper-middle income countries. OPIC’s larger successor would bar high-income projects but could still cover upper-middle income countries if support is “highly developmental,” whatever that means.

Current beneficiaries include financing for 22 Wendy’s restaurants in Georgia and Papa John’s franchises in Russia. Does selling pizza in St. Petersburg require taxpayer backing? This looks more like corporate welfare akin to the Export-Import Bank. The Trump Administration says it wants to end Chinese state subsidies to business, but the antidote isn’t more subsidies for U.S. business.

The best way to push back against Beijing’s debt traps is what the Trump Administration has already pulled out of in Asia: multilateral trade and investment agreements. Consider Malaysia, which wants to extricate itself from more than $20 billion of Belt and Road projects. Kuala Lumpur and its neighbors lost leverage against Beijing when the U.S pulled out the Trans-Pacific Partnership, and Washington lost a chance to write the Asia trade and investment playbook in an agreement that doesn’t include China.

The new version of OPIC is likely to pass, but there’s still a chance that Mr. Trump could veto the overall aviation bill. The urge to do something in the competition with China is no excuse for passing bad ideas.

This entry was posted on Wednesday, October 10th, 2018 at 5:50 pm and is filed under New Silk Road.  You can follow any responses to this entry through the RSS 2.0 feed.  You can leave a response, or trackback from your own site. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.