The demise of the US Agency for International Development (USAID) has prompted a robust debate about how best to redeploy United States Government resources overseas. While there is no shortage of ideas, a few common themes have begun to emerge. One of those is the importance of making investments in economic growth that will earn a return for the host country and the United States. Not surprisingly, critical minerals and other strategic assets have garnered the most attention, but there is an opportunity for the United States to help build economic infrastructure in countries around the world that will increase investment, stimulate growth, and generate returns for US companies.
This is based upon the fact that investments into emerging markets and developing economies (EMDEs) are severely hindered by weak institutions, policy uncertainty, unpredictable regulatory environments, and inconsistent application of the rule of law. In particular, arbitrary and opaque tax administration not only discourages investment, it also severely limits how much tax revenue is available to pay for the costs of basic services provided by the government. If one can bring greater certainty, predictability, consistency, and transparency to doing business in a given jurisdiction, it will directly and positively impact investment, both domestic and foreign, and spur economic growth. The best way to do that is to combine artificial intelligence (AI) and digitization to generate strategies for moving forward.
Digitizing tax administration, business registration, permitting, and customs procedures, just to name a few, would dramatically increase efficiency and transparency and decrease opportunities for corruption and rent-seeking. Such reforms will also improve revenue collection and public finances while simultaneously improving the climate for investment. Moreover, modernizing government services such as taxation through AI and digitization also creates significant opportunities for US technology firms that possess the expertise needed to design, implement, and maintain these systems. Modern tax administration, digital identity verification, electronic payments, cloud computing, cybersecurity, and data analytics all require specialized technical support. US firms are global leaders in most of these areas and are well positioned to help bring digital services online in countries that would welcome a long-term partnership. The question is how to pay for it.
Given the high likelihood that one of the first targets of any new digitization initiative will be tax collection, one would assume that over time, the host government will generate the revenue required to pay for it. However, in the short term, there will be costs that have to be covered associated with evaluating the need and opportunity, developing a plan of action, and beginning implementation. Covering those costs through a combination of grants and loans would represent an excellent example of the kind of economic diplomacy that the US Government should be pursuing. But if the United States is going to finance these services, US tech companies should be given the exclusive right to bid on each job. American companies such as Microsoft, Google, Oracle, and Mastercard are among the global leaders in technologies that support digital government services. By leveraging American technological leadership to address institutional constraints in the developing world, digital government investments can advance both development objectives and US economic interests.
The US International Development Finance Corporation (DFC) is uniquely positioned to finance digital government modernization as a development strategy. The DFC鈥檚 core mission is to mobilize private capital in support of economic development abroad while advancing US foreign policy and economic objectives. Historically, that mission has focused on sectors such as energy, transportation, telecommunications, healthcare, and financial services, and more recently, on critical minerals and strategic infrastructure. And yet the same logic that underpins investment in physical infrastructure also applies to digital economic infrastructure. If weak administrative systems discourage investment and hinder economic growth, then modernizing those systems represents a necessary and legitimate development finance objective.
Fortunately, the DFC already possesses many of the financial tools needed to support this initiative. Loans can finance large-scale modernization projects. Equity investments can support innovative firms developing digital government solutions. Loan guarantees can help attract more private capital by reducing risk and technical assistance can help governments design, manage, and implement complex reforms. By combining these instruments, the DFC can tailor support to the specific needs and institutional capacities of individual countries.
The DFC could also play an important catalytic role by supporting public-private partnerships that bring together governments, technology providers, financial institutions, and local implementation players. Successful digital projects require more than technology alone. They depend on local expertise, organizational change, workforce development, and sustained stakeholder engagement. By supporting partnerships between international technology firms and local implementation companies, the DFC can help ensure that digital systems are adapted to local conditions while building domestic capacity for long-term operation and maintenance.
The idea of using digitization to bring greater efficiency, consistency, predictability, and transparency to government services is not new. Indeed, there are countries all over the world that have used digitization to improve their delivery of government services. If there is any doubt, look at Ukraine. The world knows of its innovation in drones, but not the story of digital Ukraine which involves a very creative and resilient private sector working for the past decade with government on a digital platform that has been a major factor in its war with Russia.
However, what is new is the use of a constantly evolving AI to help analyze and evaluate the opportunities to incorporate digitization. For the US to launch an initiative to bring digitization to targeted emerging market and developing economies is not only the essence of economic diplomacy, it is also recognition of the fact that the US is in a struggle for who will lead the future of AI and digital development and who will set the rules to ensure that both are used responsibly and transparently. Those rules will be set by the country whose digital footprint is most prominent around the world, including the developing world, and that country should be the US.