In 2018, Congress established the US International Development Finance Corporation (DFC) to fill regional infrastructure gaps and provide alternatives to China’s Belt and Road Initiative (BRI). However, opaque legislative language has resulted in the DFC significantly underperforming on both goals, jeopardizing President Joe Biden’s Indo-Pacific strategy.
The BUILD Act created the DFC to leverage America’s strength – the free market – to counter the BRI’s model of state-driven capitalism and fill regional infrastructure gaps. And yet, the DFC ignores countries with a strong BRI presence that are struggling the most to attract private investment, especially in Southeast Asia. According to the DFC website, the organization has no active projects in Laos, one of the BRI’s main partners. Similarly, the DFC disbursed only 2.3% of its finances in Asia between 2018 and 2022 to Indonesia, another major BRI partner in the region.
Congress is to blame for DFC’s minimal outreach to BRI beneficiaries in the Indo-Pacific. When Congress created the DFC, lawmakers touted the agency in public statements as a tool that could counter China’s economic influence and have greater development impact. However, these lawmakers did not include any reference to China’s BRI or require the DFC to work to fill regional infrastructure gaps. As a result, the DFC has no legal obligation to address key US priorities in the region, allowing the agency to deviate from its objectives.
The DFC’s shaky legislative base means the core of Biden’s infrastructure goals in the Indo-Pacific are in jeopardy. The DFC is the primary tool Biden will use to deliver on his promises to Indo-Pacific countries to promote “high-level” and “sustainable” infrastructure, as outlined by various partnerships, including the Global Investment Partnership. in $600 billion in infrastructure recently announced. If the United States does not reform the DFC to be able to achieve these goals, Biden risks being seen as an unreliable partner in the region and an empty competitor to China.
Unlike the BRI, the DFC is designed to function as a conduit to attract private sector investment for infrastructure projects in the developing world. As part of this market-driven approach, Congress raised the DFC’s funding cap from $29 billion to $60 billion, gave it new tools to make equity investments, and relaxed previous requirements. of a US ownership relationship.
So how did the DFC use these new tools? Currently, the vast majority of DFC projects and investments in the Indo-Pacific are concentrated in India, a Quad partner and a country that is one of the main supporters of the fight against China’s BRI. According to the DFC website, of all active projects between 2018 and 2022, 66.9% took place in India, although it is only one of eleven countries where the DFC operates in Asia. Additionally, with the announcement of the new $600 billion G7 infrastructure program, DFC’s only new contribution to Asia is a $30 million project in India.
India is a close partner of the United States with a huge market; thus, moderate levels of DFC investment in the South Asian country makes sense. And yet, DFC’s priority should be to work with BRI recipients who have the most difficulty in attracting private investment. The unbalanced focus on India does little to advance the DFC’s goal of becoming a viable alternative to the BRI in the Indo-Pacific, not just a South Asian state.
Similarly, from a development perspective, the Biden administration’s goals of addressing climate change and solving the infrastructure deficit will not be achievable if the DFC is absent or minimally investing in a variety of very diverse countries. vulnerable in the region.
Although perplexing, the most likely explanation for the DFC’s underperformance is a lack of government oversight and clear language about the DFC’s role in the BUILD Act.
As noted by experts, Congress created the DFC to provide alternatives to China’s BRI, but there is no mention of China’s BRI or the DFC’s role in providing viable alternatives to it. here in the BUILD law. While Sen. Chris Coons (D-DE) and other politicians rallied support for the DFC in Congress and wrote in the bill that it would “strengthen our hand to compete with China,” there was no no specific reference to China in the bill, besides alluding with the language “to provide countries with a robust alternative to state-led investments”.
Others suggest that the absence of the Chinese BRI from the BUILD Act was deliberate in order to preserve the effectiveness of the DFC as a development organization and to avoid turning the DFC into a geopolitical tool for the White House. In other words, Congress granted the DFC special financial tools to become a more effective development organization, with the implicit goal of the DFC becoming a more successful alternative to China’s BRI.
The end result of the convoluted messages from Congress is that the DFC is neither able to achieve regional development goals nor become a viable competitor to China’s BRI. Giving the DFC more effective tools without explicitly stating the above policy objectives means that the DFC is not effectively using its resources for US priorities in the region.
This is clearly seen in the evaluation measures of the DFC. The DFC assesses the success of its projects using three “pillar” indicators – inclusion, economic growth and innovation – in a host country. However, there are no metrics that measure the success of DFC across the region in providing alternatives to China’s BRI or closing the infrastructure gap.
The DFC annual report submitted to Congress each year is no different. While Congress requires the DFC to assess development impact in a host country, it has never required the DFC to analyze its projects in the context of the most significant development and policy impact in the host country. ‘Indo-Pacific. The absence of policy objectives means that DFC tools are not directed where they are most needed. As a result, it is not so surprising that DFC’s Asia portfolio today neglects Southeast Asia while excessively concentrating its resources in India, as it has no institutional incentive to do otherwise.
For the Biden administration to achieve its development and national security goals in the Indo-Pacific, it must be clear-headed about the structural problems of the DFC. Some argue that injecting political goals into the institutions of the DFC would reduce its capacity for development. However, the past five years have shown that DFC needs an explicit political mandate to be an effective development organization that has impact across the region, not just India. While the US-led partnerships deployed by Biden are a step in the right direction, they will only succeed if the DFC is reformed to be able to meet US policy goals.
Morgan Peirce is a China analyst based in Washington DC. She has conducted research on Indo-Pacific security at the Center for a New American Security and on China’s foreign policy at the Center for Strategic and International Studies and the National Committee on US-China Relations. Currently, Morgan is a Program Associate in the China, Hong Kong, and Taiwan Program at the International Republican Institute. She received her bachelor’s degree in government and Chinese language and literature from Smith College in 2021.