Book Talk: Has the U.S. Given Up on Exporting Capitalism to the Developing World?

In your book, you show that the U.S. commitment to promoting capitalism overseas has been remarkably durable and consistent and goes way back to the Truman and Eisenhower administrations. Why has Washington been so insistent and consistent about promoting private enterprise in developing countries over so many decades?

I might take a minute to explain why I got involved in the book project, because it will provide some context for your answer. The reason I became engaged in private sector development is because economic development was a passion from a very young age. In fact, I dropped out of high school and joined the Merchant Marine and my ship sailed around West Africa, bringing food aid and military aid. That experience ignited this interest in and passion for economic development. In asking myself, “where could I make a difference?” I looked at the data and saw that foreign direct investment [FDI] is a vast multiple of official development assistance. Yet, when I started doing this work a few decades back, not too many people were focusing on the multinational as an instrument of development. And it seemed to me that that might be a place where I could make a difference—working with multinational firms or with development agencies interested in private sector development, and trying to ensure that they have as large a developmental footprint as possible.

As I worked on private sector development around the world, I began reflecting on the history. Where did this interest in private sector development come from? It took me back to the Truman and Eisenhower administrations. What I discovered is that private sector development fused, for American officials, their ideological and budgetary objectives. One of my favorite quotes in the book is from an adviser to President Eisenhower, who says, “the way of economic life, which goes by the name of private enterprise, is the sound and true gospel.” As you read the memoirs of American officials, they often reflect a strong belief in private enterprise, the magic of the market. It’s something very deep, particularly for older generations.

Our view of the history of American foreign aid has been skewed by the Marshall Plan. We think that the Marshall Plan represents the American view about foreign aid, but it was an exception and it was not popular. A combination of ideological and material factors is what drove the American commitment to private sector-led development. And the reason why officials believed that this was crucial was because they saw the developing world as a crucible—a battleground where communism versus capitalism would play out. And they believed that the Soviets had a lot more instruments at their disposal. All the United States had was this massive private enterprise, which it hoped to channel for developmental purposes. The book is largely about how that was disappointed for various reasons.

What does it mean to promote capitalism? What is capitalism supposed to do? And for whom?

Capitalism is supposed to serve a bunch of purposes. But rooted in the American ideology is what we nowadays call grievance theory—that a lot of social instability and political instability is due to grievances. People have economic grievances such as poverty, inequality, and lack of opportunity. If you look at the American discourse, going back to Woodrow Wilson, if not earlier, a lot of American intervention around the world is driven by this kind of grievance theory view of political instability—if Americans don’t respond to poverty this region is going to fall to the communists. The view is that America has to find ways to intervene, such that people see future opportunities available to them that are better than those being offered by the ideological opponent. Capitalism is supposed to serve that objective. It is the instrument that provides the promise of future well-being, not only for ourselves, but for our children, and for our grandchildren.

More immediately, of course, Americans believe that private enterprise is what ultimately drives economic growth and productivity, not the state. Private enterprise has an interest in efficiency in a way the state might not. That’s what drives productivity gains and productivity gains are basic to economic growth and well-being. What’s really fascinating is that American officials had a well-articulated theory of change, linking private enterprise and economic growth, going back decades. FDI linked with local private enterprise would generate economic growth. American officials were articulating that theory of linkages informally when they promoted this idea that if we can channel foreign direct investment to the developing world, and those foreign companies link up with local firms, they will generate local economic development and belief in democracy.

How does the United States promote capitalism? What are some of the most common activities and on what scale are these activities happening?

In this book, I’m focused on the role of multinational corporations and foreign direct investment and their linkages to local firms. Having said that, the United States was most successful when these private sector development policies were embedded in a coherent economic strategy. And what exemplifies that is the case of Taiwan. Initially, the United States had little interest in Taiwan following the fall of China and Chiang Kai Shek’s removal to Taipei. They thought he was a failed leader, utterly corrupt, and that Taiwan would be very quickly overrun by Mao. A good stroke of luck for Taiwan was the Korean War. Because all of a sudden, Taiwan became central to American strategy. Taiwan had to be rescued. This entailed a massive aid program to Taiwan. But just like with the Marshall Program, the aid program was viewed as an exception. It’s not like there was broad acceptance for aid. No, it was—there’s this existential threat and we’re going to do what it takes to keep this country in the western orbit.

So there’s a massive aid program, which supports land reform where the United States goes to big landowners and says: there’s a lot of social disruption around land tenure, we want you to give some land to the peasants to put a damper on social instability within Taiwan. In return, we’re going to give you industrial bonds, so that you’re able to invest in local industry. By the way, we’re going to strike trade agreements with you. There’s a coherence around American policy, which is fairly exceptional, and that helps nest this private sector development within this broader set of policies. Foreign investors, particularly in the developing world, often want to use those countries as export platforms. If the United States or Japan or whoever is protectionist and won’t take those exports, that undermines the business case. So, the United States at the peak financed 45 percent of Taiwanese gross capital formation.

The deeper argument of the book is that foreign economic policy is most successful where the United States can identify the moving parts in that foreign society and somehow provide incentives to those moving parts to align them with U.S. policy interests. And you find those moving parts in countries with fairly diverse sets of elites. In Taiwan, you had a land-based elite, and you also had an industrial elite and technocrats. There was enough diversity that you could find some moving parts to manipulate. In many of the places where the United States has gone, it’s very hard to identify what those parts are, and what you might possibly do to manipulate them to align with your interests. Success is not only a function of being coherent, but it’s also having these fertile conditions on the ground.

You mention in the book, among the activities that development finance institutions and bilateral agencies have emphasized are improving the investment climate, directly financing local companies, or capitalizing banks so that they can finance local companies. Are these the activities that you’re primarily concerned about?

In the early post-war period, Truman and Eisenhower went to the multinational enterprises, and asked what it would take to get them to invest in the developing world. The answer was access to tax breaks for the profits that they generated in the developing world. They asked for political risk insurance. And they wanted trade agreements. However, even after the administration delivered these things, there wasn’t a big uptake. And that’s one point of the book: the United States has not been that successful in motivating firms to go into the developing world.

Is that because despite the incentives, it’s just not enough to overcome the risks?

Developing countries have agency, even in the face of big powers. And some developing country leaders were not interested in a private enterprise solution. They wanted official foreign aid. They argued, particularly in settings like the United Nations, that they needed education and infrastructure before private enterprise. That’s the lesson that Lee Kuan Yew learned in Singapore, right—create this wonderful infrastructure and it’ll attract foreign investment. And if you’re a CEO of a multinational firm, you’re looking around the world and thinking: my portfolio depends on profitable investments. And there are a lot of profitable investments to be made in the industrial world.

You measure the success of private sector development by looking at increases in credit to the private sector over time. Within that frame, you find that Taiwan and Korea are the success stories. But given the huge, supercharged effort that was made in terms of aid in those countries, and given the fact that those days—of massive firepower in a single country—are probably gone, what sort of lessons should we draw from the book?

First, measuring the private sector is really hard. There aren’t neat datasets and some of the best proxy measures, like credit to the private sector, are imperfect. I want to make that clear to your audience. I used credit to the private sector in part because it is available for a large swath of countries over a fairly long period of time. And it is remarkable the extent to which East Asia stands out in terms of this increase in credit to the private sector compared to every other region of the developing world. Central and Eastern Europe is more of a mixed case, but I wouldn’t relegate the entire region to total failure. There were efforts at policy coherence in that region, creating the European Bank for Reconstruction and Development, with a dual objective to promote private enterprise and to promote democracy. It’s the only development bank with democracy in its charter.

A separate question is the extent to which the private sector and democracy went hand in hand. Interestingly, U.S. officials, were skeptical about that relationship, even though academics have talked about it a lot. U.S. officials did not necessarily believe that capitalism would propel all countries toward democracy, but they thought it would be helpful. There were great debates within the National Security Council in the 1950s about whether we should focus our private enterprise support on democracies, and different views were expressed by President Eisenhower, Vice President Nixon, and Secretary of Treasury Humphrey.

Insofar as exporting capitalism is also about protecting American hegemony and promoting development, how has it fared against those other goals?

It’s been a mixed bag. I worked in Brazil for many years, and I think it’s hard to argue that Sao Paolo has not been a success story. Sao Paulo adopted the sorts of policies that became very favorable to FDI, after the period of import substituting industrialization. These linkages created a sophisticated industrial base in Sao Paulo state. You compare Sao Paolo state on almost any objective measure of poverty, incomes, growth rates, and productivity, compared to the rest of Brazil, and it’s pretty phenomenal. There is success in those areas where you could harness these linkages and provide a supportive environment. I don’t think we should be gloomy about the prospects.

Relations between the United States and China seem to reach a new nadir every week. One of the principal battlegrounds of this competition is each country’s attempts to grow its influence in developing countries. There’s a lot of concern about Chinese investment in infrastructure in Africa. Those concerns have existed for 15 years, but they are gaining new currency and momentum now. And in fact, a new government agency, the International Development Finance Corporation was created in 2018 to counter China’s influence. Help us understand what China is doing. What is it offering relative to what the U.S. is offering?

Here at the Empirical Studies of Conflict project at Princeton, where I’m co-director, we’re actually engaged in a big project looking at the Belt and Road Initiative (BRI). For China, there isn’t a ton of transparency. It’s hard to know how some of these projects are financed. But Chinese outward FDI now equals that of the United States. China has turned around from being a net recipient of foreign direct investment to being a large exporter of foreign direct investment. There have been some studies of that, including by the World Bank, and the evidence is mixed. The World Bank found that overall, these investments have bolstered productivity in target countries.

Chinese financing is criticized for being less concessional and less transparent, setting countries up for unsustainable debt. On the other hand, they are providing finance that countries need that the United States is not providing. Why doesn’t the United States invest in infrastructure in developing countries?

The developing world needs something in the neighborhood of $1 trillion a year for infrastructure outside of climate. Western foreign aid is $176 billion a year. So even if all of that went infrastructure, you’d still have a huge gap. That’s one reason why you have to harness the private sector. That’s where you have that gap and that opportunity for the Chinese to help fill those needs, if the United States is unwilling to lead in that area. But there certainly seems to be a lack of belief in the importance of development as critical to American wellbeing.

What effect Chinese investment has on recipient countries? Are the criticisms—that Chinese investment impacts institutions, governance, and corruption—well founded?

I think it’s a very mixed bag, but it depends on the type of Chinese investment. It matters if there’s more trade than investment, and the type of infrastructure that’s being provided. One interesting question for me is, what lessons are the Chinese learning? Which of their investments is most effective in advancing whatever objectives they might have? I have not seen that. There’s certainly concern about Chinese corruption. In Africa, corruption is associated with Chinese projects. But public opinion from what I’ve seen, again, is kind of a mixed bag. If I look at the Afro Barometer poll, I haven’t been able to get a very clear signal on how views are shifting one way or the other.

 What are China’s motives for engaging in private sector development in developing countries?

Well, you know, as you inferred at the beginning, China has been engaged in development assistance in Africa for a very long time. Justin Lin, the former chief economist of the World Bank, has been talking about this new development model that China exemplifies. I think they are proud of their growth—they believe there are lessons for countries to learn from. As China becomes a greater power and has geopolitical interests, one would expect the outward orientation that we’ve seen. What’s interesting, China is having its own economic problems and its own demographic problems. What’s that going to mean for things like the Belt and Road initiative? That’s an open question.

What should the United States be doing in this context? The Development Finance Corporation is capitalized at $60 billion, which is small compared to what the Belt and Road Initiative is doling out. In the founding of the DFC, you quote an official who says that the advent of this agency is one of the biggest changes in U.S. foreign policy in this century. Talk us through the DFC and what lessons they should be learning.

First, I’ll return to this theme of policy coherence. Even if the DFC were incredibly effective, if the United States is not going to take the exports of those countries and their companies, is not going to be engaged more actively with the economies of those nations, then I don’t think you’re going to get much bang for your buck. The United States seems incapable of coming up with anything resembling a coherent development strategy or set of economic policies right now.

The second lesson is, where there is coherence, I think the United States has been effective. It seems like the Biden administration is scared of foreign aid and reluctant to address it. Someone needs to be out there saying: foreign aid has had a lot of success, particularly when the United States has acted coherently, and that’s really been important to our security, and a huge benefit to our economy and the global economy. I don’t personally think state capitalism substitutes for private enterprise. I think there are incentive problems in state capitalism. There’s a reason the world evolved away from state capitalism and so I’m not sure the shift back is that great. The Chinese, for example, are in the midst of rediscovering that state capitalism has its limits, and that there are differences between the state and private enterprise. So respecting what the private sector does and giving it incentives to do what it does is really important.

Given that the United States seems to be turning increasingly inward, do you think the United States’ ability to advance a capitalist agenda has been tarnished?

Well, it’s timely you asked this question, because next week, I’m chairing a panel here at Princeton on industrial policy and Africa. Many African countries pursued industrial policies—they controlled the marketing boards, set agricultural prices, and created state-owned enterprises. And in many cases, it was a disaster. With the rest of the world moving toward these industrial policies, these interventions, these subsidies, and races to the bottom, countries around the world are concerned about getting left behind. Developing countries are trying to plug in to a world economy that might be shrinking due to industrial policies that are becoming more nationalistic. Leadership on the part of the United States is certainly missing.

This book is a wonderful compendium of not only the historical evidence, but also part of your own story as a professional. How have your views about how development happens changed over the course of your career?

With time, I’ve become much more sensitive to the peculiarities of particular situations. I’ve worked in some really tough settings, from Afghanistan, to the Soviet Union right after the collapse of Soviet Bloc. In every one of these settings, there was always someone who wanted to make things better. And these people are all heroes. In my own evolution, it’s understanding that it is all very micro. So it might not be that exciting for people who want to change millions or billions of lives. But can we identify those settings where we can make a difference? And what interventions can we introduce that are helpful to people? I think that’s much more my mindset than the grand theories that I learned in graduate school. Those are still extremely helpful, I don’t want to dismiss at all the theoretical toolkits, but in terms of my evolution, I’m much more focused on heterogeneity and are there opportunities to make a difference even at a very local level?