By Bryan Riley And Brett D. Schaefer
The Overseas Private Investment Corporation (OPIC) provides political risk insurance, loan guarantees, and direct loans to U.S. and foreign companies to encourage investment in developing and emerging economies. OPIC artificially lowers the cost of such investments by having the U.S. taxpayer assume a portion of the risk of the venture—a classic case of socializing risk and privatizing profits....
OPIC vs. the Private Sector
In today’s global economy, there are many private firms offering investment loans and political risk insurance. If a U.S. business wants to invest in an emerging market, it can approach a bank or another private lender, or it can use its own resources. Similarly, if a company wants to invest in an unstable foreign country, it can purchase private political risk insurance, which pays off in the event of loss due to war or expropriation. The costs of such services are linked to the risk of the venture, of course, which is a market-based method of helping separate good investments from bad ones.
In a significant number of cases, OPIC is likely displacing private-sector firms. For instance, OPIC is currently committed for hundreds of millions of dollars in support of projects in stable, middle-income countries such as Brazil and India, where international financial firms are active and/or robust domestic financial institutions provide financing and insurance. OPIC may provide lower cost services, but what compelling U.S. national interest is served by subsidizing, for instance, small and medium-size loans in a middle-income country with sound domestic financial institutions?
OPIC also provides services in risky environments where private services may be unavailable or prohibitively expensive. If the U.S. taxpayer is to assume risk for these ventures, however, the benefit to U.S. national interests and the unique utility of OPIC should be clear. Subsidizing Papa John’s Pizza franchises in Russia does not advance U.S. interests......
OPIC’s Questionable Jobs Claims
Through its activities, OPIC claims to have “supported more than 278,000 American jobs.” That is a simplistic and questionable assertion that assumes that OPIC-backed investments would not have occurred absent OPIC support.
First, at over $200 billion in OPIC-supported investments, that figure works out to $719,424 per job, hardly an ideal return on investment. More fundamentally, however, if the investment made economic sense, it would have taken place without OPIC support with a similar impact on U.S. jobs and exports. Some investments may not have proceeded, but the companies would not sit idle. Alternative investments might have been made with similar or better results. Without OPIC support, the investment might even have been made in Indiana instead of India with a more direct impact on U.S. jobs.
If the Fannie Mae and Freddie Mac bailouts taught policymakers anything, it should be that subsidizing loans that the private sector is unwilling to make is a poor way to create jobs.
OPIC and International Investment
OPIC was created to encourage private-sector investment in developing countries when such investment was relatively scarce. Today, direct investment in developing countries is booming, and much of it is financed and insured privately.
According to the United Nations, foreign direct investment in developing countries has been growing sharply since 1990, and for the first time, developing countries absorbed more foreign direct investment than developed countries in 2012.
What to Do About OPIC
Maxwell Kennedy, an OPIC board member, defended the agency from criticism recently: “We cannot rely on foreign aid alone to convince people in the world’s lowest income countries that America offers the greatest hope for their families. Private sector investment is the best way to prove that the free market works.”
He is correct in this view but wrong in his conclusion that OPIC aids this mission. Companies that want to invest in emerging markets should be free to do so, but they are not entitled to taxpayer support. OPIC sends the wrong signal by implying that investment should not rely on the private sector but turn to the government.
- Eliminate federal support for OPIC and other agencies that socialize risks and privatize profits,
- Not reauthorize OPIC in the Electrify Africa Act or any other legislative vehicle, and
- Instruct U.S. aid agencies and representatives in international financial institutions to encourage private investment by promoting sound investment policies and the rule of law in developing nations.....
- —Bryan Riley is Jay Van Andel Senior Analyst in Trade Policy in the Center for International Trade and Economics and Brett D. Schaefer is Jay Kingham Fellow in International Regulatory Affairs in the Margaret Thatcher Center for Freedom, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.