In the coming weeks, Congress will debate the future of the
Overseas Private Investment Corporation (OPIC), a government
corporation founded in 1971 to extend political risk insurance,
loan guarantees, and direct loans at subsidized rates to U.S.
companies that invest abroad. According to Nobel laureate Milton
Friedman, OPIC fails to justify its own existence: "I cannot see
any redeeming aspect in the existence of OPIC. It is special
interest legislation of the worst kind, legislation that makes the
problem it is intended to deal with worse rather than better....
OPIC has no business existing." Congress should close down this
government corporation to prevent it from continuing business as
In an attempt to convince Members of Congress to maintain this
wasteful organization, OPIC officials and their supporters are
advancing a number of myths.
Myth #1: OPIC creates a net increase in U.S. jobs
This is a curious myth because OPIC activity does not lead to
any net increase in U.S. employment. OPIC subsidies merely shift
employment from certain sectors of the economy to subsidized
Myth #2: OPIC creates a net increase in U.S. gross domestic
In fact, subsidies to businesses like those provided by OPIC
distort the market-driven distribution of capital and labor
resources. Therefore, OPIC subsidies are most likely to have no
effect-and may even have a detrimental effect-on overall national
Myth #3: OPIC reduces the deficit by earning a profit
Over 80 percent of OPIC's "profits" is made up of paper
transfers from the U.S. Treasury that do nothing to reduce the
deficit. The remaining 20 percent is lost to the taxpayer in
government appropriations for OPIC. In fact, according to the
Congressional Budget Office (CBO), preventing OPIC from engaging in
new activities would save U.S. taxpayers more than $500 million
over a ten-year period.
Myth #4: OPIC is needed to encourage U.S. firms to invest in
the developing world
In 1996, sources other than OPIC provided 93 percent of the
financing and 75 percent of the political risk insurance for
businesses in countries in which OPIC has a presence.
Myth #5: OPIC is needed to combat the export and foreign
direct investment subsidies of other countries
In fact, OPIC's portfolio is concentrated in regions in which
foreign countries have little interest. Furthermore, many countries
have been reducing their role in providing export and investment
assistance. Finally, OPIC assistance plays only a minor role in
U.S. exports and foreign direct investment: 1 percent of U.S.
exports in 1996, less than 2 percent of financing for foreign
direct investment, and less than 10 percent of political risk
insurance for U.S. investment abroad.
Myth #6: OPIC emphasizes assistance to small businesses
Using the standards set by the Small Business Administration, only
5 percent of the firms that did business with OPIC in 1996 could be
classified as small businesses. Moreover, only 3 percent of
OPIC-assisted projects in 1996 involved small businesses.
It is clear that if Congress is to make an informed decision on
the fate of OPIC, the truth about OPIC's ineffectiveness must be
LEGISLATIVE HISTORY OF OPIC
The legislation creating OPIC was signed into law by President
Richard Nixon in 1969, and the agency began operation in 1971. OPIC
was envisioned as a more market-oriented alternative to traditional
foreign aid programs, which transfer income to foreign governments
in unsuccessful attempts to spur development. At the time, some
were concerned that OPIC would become just one more way to provide
a government handout to business; others questioned OPIC's
potentially negative impact on the federal budget and on
private-sector international lenders and insurers.2 Despite these concerns, Congress approved the
creation of OPIC and has allowed it to continue since 1971 with
only minor changes in operational emphasis, such as legislation in
1974 and 1978 requiring OPIC to focus on poor and developing
Last September, the House unexpectedly failed to pass the
Exports, Jobs and Growth Act of 1996 (H.R. 3759), which would have
reauthorized OPIC through 2001 and doubled its political risk
insurance and financing statutory limits. Instead, the program was
allowed to continue for one more year only. Congress appropriated
$72 million for OPIC in FY 1997, the same as the amount
appropriated for FY 1996, and refused to expand the program's
statutory limits on financing and political risk insurance.3 As a result of this one-year extension, OPIC
will cease to exist in September 1997 unless it is reauthorized by
The Clinton Administration has indicated in several public
statements that it wishes to see OPIC continue. The proposal
favored by the Administration would authorize OPIC through 2000 and
expand its ability to extend insurance and loans by 38 percent over
a three-year period.4 An alternative to
the Administration's proposal has been offered in both the House
and the Senate. This legislation, the OPIC Termination Act, has
been introduced by Representative Robert Andrews (D-NJ) as H.R. 387
and by Senator Wayne Allard (R-CO) as S. 519. Essentially, it would
forbid OPIC from issuing new insurance or loans.5
EXPLODING THE MYTHS OF OPIC
Fearing a replay of Congress's surprising refusal in September
1996 to reauthorize OPIC, the corporation's proponents continue to
conduct a strong lobbying effort on Capitol Hill to preserve it. To
support their efforts, they have circulated a number of myths. At
best, these myths distort the facts about OPIC and its impact.
Myth #1: OPIC creates a net increase
in U.S. jobs.
Proponents claim that OPIC creates jobs. In its 1996 annual
report, OPIC claimed to have created 225,000 American jobs since
its founding in 1971. Proponents also contend that OPIC has a
positive impact on job growth in the export sector but no
detrimental effect on existing employment in the other sectors of
Reality: Not true.
Numerous studies have concluded that government subsidies to
business have little impact, no impact, or even a detrimental
effect on net job creation.6 When the
government takes labor and capital from the economy through
taxation and then gives it to private companies in the form of
export or foreign direct investment subsidies, it merely shifts
resources from one sector of the economy to another.
In other words, OPIC creates nothing; it merely reshuffles
existing resources within the U.S. economy. Therefore, it causes no
net increase in jobs. In the words of the Congressional Research
Service (CRS), there is "little theoretical support or empirical
evidence that supports claims that subsidizing exports or overseas
investment offers a positive net gain in jobs to the U.S.
Furthermore, the methodology employed by OPIC to determine its
effect on employment is questionable. The first flaw in this
methodology is that assertions of job creation are based on the
estimates of U.S. firms that are applying for OPIC insurance or
loans. Because firms must demonstrate that they are creating (or at
least not reducing) domestic employment in order to receive OPIC
assistance, self-interest encourages them to skew their estimates
favorably. The second flaw is that OPIC makes no effort to estimate
the effect of its activities on the entire job market. Firms
reporting increased employment due to OPIC assistance may be hiring
workers away from other employers, but all this means is that jobs
are shifted from one employer to another. These flaws in OPIC's
methodology led the CRS to conclude that there is "no way of
verifying the employment effects of the individual OPIC
Myth #2: OPIC creates a net increase
in U.S. GDP.
OPIC's 1996 annual report asserts that projects supported by the
corporation created $9.6 billion in exports in 1996. Supporters
claim that the corporation increases the overall economy by
creating these exports.
Reality: Not true.
The belief that OPIC can increase the overall U.S. economy by
subsidizing exports contradicts accepted economic wisdom. By
lowering costs through subsidies, OPIC may make selected exports
and investment more attractive, but these subsidies shift domestic
capital and labor resources to the subsidized firms away from other
sectors of the economy. With resources diverted from activities to
which they would be allocated under market-driven conditions, the
economy operates less efficiently.
Moreover, the costs of reducing efficiency in the economy offset
the benefits garnered from subsidizing exports and investment. CRS
researchers note that most economists oppose subsidized credit to
promote trade or foreign direct investment abroad "because such
actions negatively affect the efficient allocation of resources,
thereby lowering the overall standard of living."9
Therefore, while overall exports may be increased, there is no
net benefit to GDP or to the American people generally. In fact,
according to The Economist, such subsidies as those provided
by OPIC result in taxpayers' "subsidizing exporters to produce
goods, while paying foreigners to take them away."10 Far from benefiting Americans in general,
OPIC subsidies transfer income away from taxpayers to selected U.S.
exporters and foreign consumers.
Myth #3: OPIC reduces the federal
deficit by earning a profit.
The financial statement in the 1996 OPIC annual report indicates
that the corporation earned nearly $209 million in profits. Because
OPIC profits must be invested in government bonds, proponents claim
that they reduce the U.S. deficit.
Reality: Not true.
Although this argument looks good on the surface, it collapses
under scrutiny. In 1996, 80 percent of OPIC's profits was derived
from interest earned on holdings of government bonds. These
"profits" are merely a transfer of paper from the U.S. treasury to
OPIC; nothing is done that would reduce the deficit. Moreover,
money appropriated to OPIC (some $72 million in 199711) is not fully accounted for in the
corporation's financial statements. If these revenues and
appropriations were counted correctly, it is unlikely that OPIC
could be shown to be making any profit at all.
This conclusion is supported by two independent studies. The
first is a CRS analysis of OPIC financial data. Despite OPIC's
claims of prosperity, this study shows that it actually operated at
a deficit in two of the past five years. Further, the study
estimates that OPIC will run a deficit of $39 million in FY
1997.12 The second study, a revised
budget accounting by the CBO, is even more damning. It examines
what would happen if OPIC were forbidden to engage in any new
insurance, loan, or investment fund activity as required in the
bills sponsored by Representative Andrews and Senator Allard. The
CBO finds that taxpayers would save $296 million in the first five
years, and over $500 million in ten years, after the legislation
Myth #4: OPIC is needed to encourage
U.S. firms to invest in the developing world.
Proponents claim that OPIC's subsidized insurance and loans are
needed because private financing and political risk insurance are
unavailable or carry prohibitive rates in emerging markets.
Reality: Not true.
Numerous private-sector businesses-including American
International Group, Exporters Insurance Company, Ltd., and Mid
Ocean Ltd.-specialize in political risk insurance, international
business loans, and market analysis. These firms are active in
nearly all of the countries to which OPIC extends insurance and
financing, but OPIC enjoys an unfair advantage because its
insurance and financing are backed by the power and faith of the
The evidence shows that the private sector will insure and
finance foreign direct investment in developing countries if OPIC
is not present. For example, over $285 billion in private foreign
direct investment flowed into the developing world last year from
the United States and other Western countries-largely without
benefit of government subsidy.15 Total
U.S. private foreign direct investment increased by over $89
billion in 1995, with nearly $26 billion of this going to the
developing world.16 Of this total,
$24billion was invested in OPIC-eligible countries, while $67
billion went to OPIC-ineligible countries.17 Even if one considers only countries
eligible for assistance, OPIC provided financing that was
equivalent to only 7 percent of U.S. investment, and its share of
the political risk market in these countries was equivalent to only
36 percent of total U.S. foreign direct
Moreover, OPIC is not active in many of the most desirable
destinations for foreign direct investment in the developing world,
such as Mexico, the People's Republic of China (PRC), and the
Republic of Korea (South Korea). Yet, by 1995, Americans had
invested over $21 billion in these three countries.19
Colombia is the one country in which OPIC has ceased its
activity, 20 but this has had no
negative impact on U.S. foreign direct investment. If proponents of
OPIC were accurate in their claims, U.S. investment in Colombia
should have declined (or at least leveled off) after OPIC's
withdrawal. The opposite, however, occurred. The private sector
filled the sudden vacancy left by OPIC, and foreign direct
investment continued apace, increasing by $351 million (10 percent)
from 1995 to 1996.21 Clearly, OPIC is
not essential to U.S. foreign direct investment.
Finally, the fact that the private sector is willing-even eager-to
assume OPIC's current portfolio defies OPIC's claims that it
operates only in places in which the private sector will not.
Exporters Insurance Company, Ltd., has offered to buy out OPIC's
insurance portfolio, assuming up to $5 billion of OPIC's
outstanding insurance policies immediately and possibly the entire
portfolio by 2002. According to its proposal, "All policies would
be reinsured to their natural date of expiry or termination, all
countries would be included, and all terms and conditions of the
policies would remain as originally issued by OPIC."22
Myth #5: OPIC is needed to combat the
export and foreign direct investment subsidies of other
Proponents of OPIC claim that subsidies provided by foreign
governments are far greater than those provided by the U.S.
government and that, without OPIC, American exporters and investors
would be at a disadvantage.
Reality: Not true.
Even though other countries do provide some OPIC-like subsidies,
they commonly do not compete with U.S. exports and foreign direct
investment. 23 For example, Japan, the
only country with a subsidy program comparable in dollar terms to
OPIC's, has focused on Asia in general and China in
particular.24 OPIC is not active in a
large portion of Asia, including the Democratic Republic of Korea
(North Korea), Myanmar, the PRC, Pakistan, the Republic of Korea,
Taiwan, or Vietnam; 70 percent of its portfolio is in Latin America
and the former Soviet Union and its allies-regions in which
Japanese investors have shown much less interest.25
In addition, many countries are reducing government involvement in
export and foreign direct investment subsidies. For example, the
three largest economies in Western Europe are working to privatize
their export credit facilities. England's Export Credit Guarantee
Department has sold its short-term credit portfolio to NCM Credit
Insurance, Ltd., a private-sector business from the Netherlands.
France's Compagnie Francaise d'Assurance pour le Commerce Exterieur
(COFACE) has hired a private-sector company to manage its
investment insurance underwriting and insurance portfolio. Finally,
Germany's export credit facility, HERMES, also utilizes the private
sector to reinsure and underwrite its insurance.26
Furthermore, OPIC operates at the margins, involving only a very
small portion of the exports, foreign direct investment, and
foreign direct investment insurance of the United States. In its
annual report, OPIC claims to have created $9.6 billion in exports
in 1996. Total U.S. exports of goods and services during 1996,
however, were nearly $835 billion.27
OPIC supported only 1 one percent of total U.S. exports in that
year. According to its annual report, OPIC financed $2.2 billion in
U.S. foreign direct investment and sold $16.5 billion in political
risk insurance in 1996.28 The total
net gain in U.S. direct investment abroad during 1996, however, was
$96 billion. Thus, OPIC extended financing equivalent to only about
2 percent of U.S. investment abroad, and provided insurance
covering the equivalent of only 17 percent of U.S. direct
investment abroad, in 1996.29 Over 98
percent of foreign direct investment financing and over 83 percent
of political risk insurance were successful with no assistance from
OPIC (see Chart 3).
The fact is that OPIC is not active in the primary country
destinations for U.S. exports and foreign direct investment.
OPIC-eligible countries constituted less than 25 percent of the net
increase in foreign direct investment in 1995; most of the growth
in U.S. foreign direct investment is occurring in countries-both
developed and developing-that are ineligible for OPIC assistance.
For example, the two largest developing country destinations for
global foreign direct investment are the PRC and Mexico, which
together represent 33 percent of total foreign direct investment
from all countries in the developing world during 1996.30 If OPIC is supposed to combat the subsidies
of foreign countries, it logically should focus on countries in
which competition for foreign direct investment and export
opportunities is the fiercest. Obviously, however, OPIC is doing
little or nothing to counter the export and foreign direct
investment subsidies of foreign governments.
Myth #6: OPIC emphasizes assistance to
Proponents claim that small businesses will suffer if OPIC is
eliminated. OPIC's acting administrator, Mildred Callear, insists
that a "large portion of OPIC clients are small businesses-not big
Reality: Not true.
An examination of OPIC insurance, loan, and loan guarantee
activity listed in the 1996 annual report clearly refutes this
myth. OPIC extended insurance or financing to 95 businesses
involving 146 projects in 1996. Only 5 percent of the businesses
for which financial data were available could be qualified as small
businesses.32 Moreover, these small
businesses received only 2 percent of OPIC's insurance and no OPIC
financing,33 and benefited from only 3
percent of all OPIC projects, in 1996 (see Chart 4).
Congress should heed the advice of noted economist Milton
Friedman as it debates the future of the Overseas Private
Investment Corporation. The defense of OPIC presented by its
proponents consists largely of myths with no basis in reality.
OPIC does not benefit the United States. It does not create jobs
or exports or help combat foreign business subsidies: It creates
distortions in the overall U.S. economy by encouraging a
misallocation of capital, labor, and resources that is likely to
reduce national income. Moreover, the private sector is eager to
assume OPIC's niche in the private foreign direct investment
insurance market, a beneficial development that would render one of
OPIC's main functions superfluous. Instead of perpetuating this
counterproductive program, Members of Congress should recognize the
seriousness of its flaws and work to eliminate it.
1 Milton Friedman, letter to
Representative John R. Kasich (R-OH), chairman, Committee on the
Budget, U.S. House of Representatives, September 5, 1996.
2 Congressional Research
Service, Memorandum to U.S. House of Representatives Budget
Committee, 105th Cong., 1st Sess., May 19, 1997, pp. 3-4.
3 James K. Jackson, "The
Overseas Private Investment Corporation: Reauthorization and
Funding," CRS Report for Congress, Congressional Research
Service, updated February 14, 1997, p. 1.
4 Statement by former OPIC
president Ruth Harkin before the Subcommittee on International
Economic Policy and Trade, Committee on International Relations,
U.S. House of Representatives, 105th Cong., 1st Sess., March 18,
5 Under this legislation, OPIC
would continue as caretaker of its existing functions and be
eliminated after they have been fulfilled or canceled. Although
OPIC offers long-term loans and loan guarantees and 20-year
contracts for political risk insurance, few recipients of its
assistance maintain their contracts for the entire term. On
average, OPIC insurance policies are maintained for ten years. At
the current rate of project cancellation, all OPIC insurance and
financial commitments would be eliminated in less than ten
6 James K. Jackson, "Effects
of Trade on U.S. Jobs and Wages," CRS Report for Congress,
January 28, 1994, pp. 1, 6.
7 James K. Jackson, "OPIC:
Employment and Other Economic Effects," CRS Report for
Congress, May 23, 1997, p. 6.
9 Ibid., p. 14.
10 "Don't Be Salesmen,"
The Economist, February 1, 1997, p. 17.
11 Jackson, "The Overseas
Private Investment Corporation: Reauthorization and Funding," p.
12 Jackson, "OPIC:
Employment and Other Economic Effects," p. 13.
13 Congressional Budget
Office estimate of the budgetary effect of implementing the
proposals outlined in Representative Andrews's bill, as provided to
the House Budget Committee, January 29, 1997.
14 See Brett D. Schaefer,
"OPIC-ing the Taxpayer's Pocket," Heritage Foundation Executive
Memorandum No. 458, September 3, 1996.
15 David Wessel, "Flow of
Capital to Developing Nations Surges Even as Aid to Poorest
Shrinks," The Wall Street Journal, March 24, 1997, p.
16 U.S. Department of
Commerce, Survey of Current Business, September 1996, pp.
124-125, and April 1997, p. 33.
17 Survey of Current
Business, September 1996. See also "A Message from the
President of OPIC," Overseas Private Investment Corporation 1996
18 "A Message from the
President of OPIC," op. cit. OPIC will not release data on
OPIC-assisted investment. Therefore, this paper compares OPIC
activity for one financial year with total U.S. direct investment
activity for that year in order to demonstrate the relative value
of OPIC assistance.
19 Survey of Current
Business, September 1996, pp. 124-125.
20 When Colombia failed to
receive presidential certification of its cooperation in combating
the drug trade, OPIC was forbidden to continue operations in the
country. In 1995, Colombia was decertified but received a national
interest waiver allowing continued OPIC activity; in 1996 and 1997,
however, it failed to receive certification and national interest
waivers, and OPIC assistance was ended.
21 Investment figures for
1995 from Survey of Current Business, September 1996,
pp.124-125. Investment figures for 1996 are an estimate provided by
the U.S. Department of Commerce, Bureau of Economic Analysis.
22 Exporters Insurance
Company, letter to Representative John R. Kasich, chairman, House
Budget Committee, summarizing the company's proposal to privatize
OPIC's insurance portfolio, May 1997.
23 Moreover, even the small
portion of foreign competition supported by export and foreign
direct investment subsidies is being constrained. Numerous existing
agreements already limit the ability of countries to subsidize
trade or foreign direct investment, and more are under
consideration. In 1978, for example, the Organization for Economic
Cooperation and Development (OECD), which includes most potential
U.S. export or investment competitors, adopted the Arrangement on
Guidelines for Officially Supported Export Credits. This agreement,
which outlined the circumstances and limits under which governments
could extend export loans, has been strengthened regularly since
its inception. In addition, numerous restrictions on export
subsidies were adopted in the Uruguay Round of negotiations under
the General Agreement on Tariffs and Trade (GATT). GATT, the
General Agreement on Trade in Services, and other international
provisions are enforced by the World Trade Organization, which has
131 member countries and encompasses over 90 percent of the world's
trade. Although a multilateral restriction on investment subsidies
has yet to be adopted, one is being considered by the OECD in its
discussions on the Multilateral Agreement on Investment.
24 U.S. Department of
Commerce, Survey of Current Business, May 1997, p. D-57.
25 Overseas Private
Investment Corporation 1996 Annual Report, p. 18, and
memorandum from Congressional Research Service to the House Budget
Committee, April 3, 1997, p. 2.
26 Based on information
provided by Malcolm Stephens, Secretary General of the Berne
27 Survey of Current
Business, May 1997, p. D-57.
28 Figures on OPIC support
of investment are for 1995 because of a lack of country-specific
data on U.S. direct investment for 1996.
29 See note 18,
30 World Bank, Global
Development Finance 1997: Vol. I, Analysis and Summary Tables,
Washington, D.C., 1997, p. 7.
31 Mildred Callear,
Statement before the Subcommittee on Tax, Finance, and Exports,
Committee on Small Business, U.S. House of Representatives, 105th
Cong., 1st Sess., May 15, 1997.
32 Because OPIC does not
provide its definition of "small business," this paper used the
definition provided by the Small Business Administration (SBA) at
. The SBA
definition, measured by annual receipts in dollars, differed
depending on standard industrial classification code, which
separates businesses into industrial categories. In most cases, a
business was considered a small business if it did not earn more
than $5 million annually. Some industrial categories had a much
higher ceiling. In no industry, however, was a business earning
more than $25 million annually considered a small business.
Therefore, for purposes of this paper, only businesses with annual
receipts of less than $25 million are considered small
33 Information on OPIC
insurance and loan activities and recipients is drawn from
Overseas Private Investment Corporation 1996 Annual Report,
pp. 20-25. Information on annual revenues of OPIC recipients was
derived from "The Fortune 500," Fortune, available at ; from
The Value Line Investment Survey-Expanded Edition, Value
Line Publishing, Inc., New York, N.Y., May 16, 1997; or directly
from company sources.