A major battle is brewing in Congress over the fate of the Overseas Private Investment Corp (OPIC). House Budget Committee Chairman John Kasich has targeted the agency for elimination. Corporate beneficiaries of OPIC largesse are lobbying vigorously to save their cash cow from destruction.
OPIC provides political risk insurance and financing for private investments in risky markets. Yet the private sector doesn’t need OPIC to invest overseas. Where investment is sound, private insurance and financing are available.
Corporate lobbyists have been making the claim that without the federal government’s promise to cover losses, American businesses could not invest in many volatile developing countries. Private insurance companies will not cover investments in unstable countries, like Russia, because the risks are too great. This is precisely why OPIC is a waste of money. Only government bureaucrats who gamble with someone else’s money are brave enough to underwrite such risky investments. If the private sector refuses to risk its own money, these investments probably should not be undertaken in the first place.
Indeed, if the true market risks were factored in properly, American companies would have to pay sky-high insurance premiums or interest rates in the private sector to insure risky investments. By going to OPIC, their costs are much lower. The differences between OPIC aid and a welfare check are few. Shouldn’t the champions of free enterprise find private backing for their investments, rather than milking Uncle Sam?
OPIC’s defenders say that it promotes economic stability in developing countries. However, capital markets are already flooding developing countries with private investment. In 1995, the U.S. direct investment in developing countries topped $200 billion. Compared to the vibrant private sector, OPIC hardly makes a dent in the developing world.
Most significantly, OPIC duplicates services the market already provides. Numerous insurance companies offer policies similar to OPIC’s, including American International Group, EXEL Ltd., and Ace Ltd. Another, the Zurich Insurance Company, recently launched a Washington, DC-based subsidiary offering political risk insurance for major infrastructure, mining, and telecommunications projects in emerging markets. A top OPIC official left the agency to head this subsidiary that competes directly with federally guaranteed insurance.
A separate consortium of private risk insurers led by Exporters Insurance Company has offered to re-insure OPIC’s insurance portfolio as OPIC is phased out. According to that proposal, all OPIC policies in all countries would be included, "and all terms and conditions of the policies would remain as originally issued by OPIC."
OPIC claims to boost exports and create American jobs. But the top purchasers of U.S. products, such as Japan, Mexico and South Korea, have no OPIC-backed investments. Of America’s $835 billion in exports, OPIC tries to take credit for a tiny portion — only one percent. Yet OPIC-related trade comes at the expense of countless job and export opportunities that are lost when OPIC alters the market’s allocation of capital.
Along with foreign policy, politically-correct environmental and labor standards take precedence over financial prudence at OPIC. While these niceties score points with Vice President Gore, they do not foster a better world. In fact, extraneous political considerations are used to steer capital away from sound investments. The higher risk factor produces a higher failure rate, the biggest enemy of the environment and workers. In addition, the uncertainty of coverage in a politicized risk allocation system means less stability and predictability for investors.
Through OPIC’s activities, the federal government has exposed the taxpayer to enormous risks. Should the $19.8 billion OPIC scheme prove to be as shaky as federal deposit insurance, it will need a costly bailout.
Foreign investment is too important to leave to bureaucrats. The free market should determine where and how much to invest. Congress should make a hard-headed business decision, and end government intervention in overseas private investment.