Recently, politics in Washington has taken the little-known Export Import Bank of the United States (Ex-Im), the U.S. government’s official export credit agency, by storm. The reauthorization of the Ex-Im should be a no-brainer for U.S. politicians concerned about America’s standing in the world. Although primarily an agency that helps foreign buyers secure “Made in the U.S.A.” products with insurance, loans and loan-guarantees, Ex-Im also finances critical infrastructure projects in developing countries. Together with the Overseas Private Investment Corporation (OPIC), which provides political risk insurance, Ex-Im’s loans and loan guarantees are the muscles behind America’s soft power in the world. Since 2007, Ex-Im has supported $1.1 trillion in exports from over 7,000 U.S. companies, including 4,700 categorized as small and medium enterprises. This translates to 5 million jobs across the country, from the rustbelt of the Midwest to the energy hub of the Gulf Coast. For every dollar that Ex-Im lends out, more than one dollar is returned to the U.S. Treasury over the lifetime of these projects. With a default rate of less than one quarter of one percent, Ex-Im’s portfolio seems less risky than many U.S. commercial banks.
Many critics see Ex-Im’s assistance as corporate welfare and believe that the private sector lending can fill the funding gap. There are a few fundamental flaws with this argument.
1) If the U.S. wants to increase exports to frontier markets and developing countries in Africa especially, it fundamentally needs a guarantee institution before commercial banks can accept the risk of providing credit for their clients located in countries with weak institutions and high political risks. Without the support of an institution like Ex-Im, prudent U.S. based commercial banks will not be able to provide loans at affordable rates and terms to firms located in these high-risk countries.
2) Studies have shown that international experience is important for successes of both the firms that want to export and their bankers. Thus, since the U.S. has a lot of room to grow in expanding trade with Africa, the only way for firms without prior experience to expand their products to a burgeoning African country like Nigeria is through risk mitigation measures such as guarantees or insurance. Furthermore, Ex-Im’s working capital products also provide suppliers of U.S. exporters, many of whom also want to expand to risky markets, with such opportunities even if they do not sell directly to foreigners.
3) As the official U.S. government guarantee agency, Ex-Im is essentially a U.S. foreign affairs agency with convening power at high level policy tables with foreign government leaders, world bank, IMF and other institutions to potentially influence macroeconomic management in developing countries. Ex-Im’s support on a particular project puts that project on the radar of foreign governments. This by itself makes Ex-Im backed loans less risky than pure commercial loans or even commercial loans backed by private insurers. Moreover, Ex-Im’s involvement in one country will also benefit other forms of U.S. commercial engagements in that country, including Foreign Direct Investments.
4) With all the complaints about the ineffectiveness of U.S. foreign aid, the way Ex-Im loans can change our traditional aid and make it more effective cannot be ignored. U.S. grants are mostly in foundational investments of health, education, capacity building and agriculture. Yes these are very important investments in the long run, but they are neither enough nor sufficient to touch the lives of the majority of population, especially in countries that have a burgeoning entrepreneurial and middle class population. After people are healthy and educated, they would need jobs, and private sector development is the most effective and sustainable way of producing jobs. A prerequisite for catalyzing private sector growth is infrastructure – lack of reliability of power and transportation are fundamentally stifling business developing in these countries. So Ex-Im loan totally complements U.S.’s existing foreign aid initiatives by catering towards the lower-middle income group and the entrepreneurial cohort, which will only grow bigger and more important.
Another way to think of it: a modern steel bridge built by a U.S. loan will be remembered by thousands of locals crossing it everyday (people tend to not realize how in developing countries locals do consciously want to know which country built a piece of modern infrastructure that stands out against other dilapidated structures); yet some grant for capacity building in a government ministry, school or health institution will have no tangible structure that people can see, remember and appreciate.
5) Furthermore, there is no way the U.S. can give a country pure grant worth $1 billion for a natural gas processing plant in one country. These multi-billion infrastructure projects can only be financed through loans that are also affordable for the host country. Ex-Im’s ability to loan to sovereigns at OECD/concessional rates is extremely attractive for governments seeking cheap financing of capital infrastructure projects. With a $93 billion infrastructure funding gap in Africa alone, cash-strapped developing countries desperately need cheap external financing beyond institutions like the World Bank to sustain their high rates of growth. These projects are characterized by high upfront costs, long payback periods, and lots of project, commercial, political and sovereign related risks throughout the duration – which makes commercial loans even less likely.
6) With all the complaints from U.S. congress about Chinese involvement in Africa, Asia, Latin America with mega projects, people may not realize that U.S. Ex-Im is the counterweight. And that’s why every developed country in the world as well as emerging BRIC countries all have active export-import banks actively financing exports, infrastructure and securing goodwill abroad. Countries like China, India and Brazil are actively courting frontier markets in Africa, Asia and Latin America with low-interest loans. Between 2001 and 2010, China committed $20 billion in infrastructure financing for Sub-Saharan Africa alone, accounting for 34% of all infrastructure financing for the region. For the same period, Ex-Im supported transactions worth $4 billion in Sub-Saharan Africa, with lesser amounts still committed to infrastructure. Although small compared to China’s financing, the $4 billion, together with $5 billion more authorized since 2010, has put the U.S. on the map helping African countries construct hospitals, power plants, and water treatment facilities. With its terms of financing at times superior to Chinese financing, Ex-Im loans help U.S. companies maintain the competitive edge in the face of cheap financing from Chinese state-owned banks and state-owned companies.
7) But by shutting down the Ex-Im’s line of credit, the U.S. risks not only commercial opportunities, goodwill abroad and create jobs at home, but threaten the values that the U.S. government cherishes. Since the U.S. is governed by OECD’s export financing guidelines, Ex-Im sponsored projects follow strict open-bidding, award of contracts, labor and environmental standards. These best practices, as represented by U.S. companies doing business abroad, could only be imparted to developing countries and fledgling democracies if U.S. has the financial muscle in those countries. Unless U.S. politicians want countries in Africa and other frontier markets gravitate toward the state-owned corporate governance models that will inevitably be the result if their lenders come from countries that export different corporate governance models, then the U.S. must step up its financial footprint in the nascent frontier markets.