The Portfolio Model of Foreign Assistance

How U.S. Policymakers Can Maximize the Value of Aid
Foreign Affairs
Aug 11, 2017

In the first half of this year, U.S. President Donald Trump’s administration began to call for reform of the various agencies, offices, and programs that provide U.S. foreign assistance. In response, the foreign policy community produced several structural bureaucratic proposals. Organizations such as the Center for Strategic and International Studies, the Center for Global Development, and the Modernizing Foreign Assistance Network, as well as coalitions like InterAction and the Advisory Committee on Voluntary Foreign Aid all made various recommendations, ranging from the immediate incremental step of a multilateral foreign assistance review to a fundamental redesign that would integrate all smaller agencies into a single US global development structure.

If the United States wants to maximize the value of its foreign aid, it needs a fresh paradigm that supports the purpose of foreign assistance, acknowledges the aspects of international aid that it can alter through structural change, and acknowledges that there are global or market forces that remain beyond Washington’s control.

The best way to approach the issue is to recognize that foreign assistance is an investment that sustains the United States’ global leadership in the long run. Whether responding to international crises, encouraging positive economic and social change, or supporting growth in countries that share U.S. values and security concerns, money spent today is a down payment toward a future in which the United States remains a superpower because the benefits of its leadership are visible around the world. The future-oriented nature of foreign assistance makes it complicated to manage, but also suggests an organizing principle: in short, Washington should take an approach to its foreign aid programs similar to the way investors manage their portfolios. 

Both U.S. foreign assistance and personal investment portfolios share the common aim to produce a specific long-term effect of great magnitude, the requirement of a small but regular inflow of resources, and the understanding that they are only successful when the portfolio is appropriately diversified. The logic of portfolio diversity is straightforward. To maximize the return on an overall investment, managers put money into various kinds of assets, each of which has a different combination of potential and risk. By spreading the money across these different assets, investors protect their overall portfolio from negative returns—if one part of the market takes a hit, the return on assets invested elsewhere can compensate.

Foreign assistance should operate the same way. Maintaining U.S. leadership requires a combination of activities in different countries, working toward different goals, and relying on different types of tools, budgets, and agencies. And just as an individual investor’s financial goals change over time, the activities that best support U.S. global leadership also shift. Taking a portfolio management approach would allow officials to consider adjusting their approach when necessary without undermining their overall capacity to invest in progress.

THE THREE POLICY CATEGORIES

Despite the tremendous breadth of civilian foreign assistance programs and organizations, it is nevertheless possible to categorize them into one of three types of foreign-assistance “investment funds”: an index fund, a managed fund, or a fund for venture capital.

An investment index fund is tied to and follows the market, making it a useful organizing principle for the U.S. foreign assistance that directly supports economic growth. These programs clearly include direct investment tools like the Millennium Challenge Corporation, which focuses large growth-oriented investments in public goods in countries that qualify by meeting specific policy criteria; investment facilitation tools like the Overseas Private Investment Corporation (OPIC), which enables the U.S. private sector to make investments in the developing world that would otherwise be considered too risky; and market-opening tools like the U.S. Trade and Development Agency (USTDA), which facilitates US exports by supporting priority processes or infrastructure in emerging economies.

These investments are only successful to the extent that they work in the same direction as the market. For example, major investments in energy, telecommunications, or transportation infrastructure generate the highest returns when they occur in places that have enough economic activity for that infrastructure to be heavily used by people and businesses. To be successful, these programs need the flexibility to make market-oriented decisions based on factors such as rate of return, risk over time, and unmet demand for public goods and services.

Thinking of these elements of the U.S. foreign assistance portfolio as an index fund also makes sense because they are the type that works best when set up and left to run over time. The entire point of an index fund is to establish which parameters will be tracked, and then let it run. U.S. foreign assistance investments in economic growth should demonstrate the same trust in the market’s return over five, ten, and twenty-year windows as index funds do. This is the unsexy but reliable part of the foreign assistance portfolio that helps secure the United States’ long-term interests.


This piece was written by Alicia Phillips Mandaville, InterAction's Vice President for Global Development Policy and Learning. Read the full article at foreignaffairs.com