Cato Policy Analysis No. 260 September 19, 1996

Policy Analysis

Uncle Sam as Investment Banker:
The Failure of Washington's Overseas Enterprise Funds

by Doug Bandow

Doug Bandow, a senior fellow at the Cato Institute, is a nationally syndicated columnist with Copley News Service.


Executive Summary

The failure of traditional foreign assistance programs is now widely recognized and has led Washington to devise new ways to distribute foreign aid. Through the U.S. Agency for International Development and the Overseas Private Investment Corporation, the U.S. government has established investment funds that provide the private sector with billions of dollars in grants and guarantees.

Under the Clinton administration, American taxpayers' obligation to support those funds has increased 10-fold, yet Washington's efforts to "privatize" aid through the enterprise fund approach have been no more successful than were traditional government-to-government transfers. There is no evidence that enterprise funds have generated additional private investment, helped create better investment environments, or had a positive impact on development in poor countries.

Indeed, most enterprise funds are losing money and many have simply displaced private investment that otherwise would have occurred. Conflicts of interest and administrative problems are also common at the funds. In short, the government-supported funds are artificial political creations charged with the impossible goal of investing in profitable private ventures in which the private sector is unwilling to invest.

Congress should recognize that Washington's attempt to become a venture capitalist has failed and vote to get the government out of that business.

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