GOPideas... ideas done right

The Polish American Enterprise Fund (PAEF) was a foreign investment program that provided a return on U.S. taxpayer dollars --- and became the only foreign aid program to return money to the U.S. Treasury. PAEF was established in 1990 and endowed with $240 million of U.S. taxpayer dollars and had the stated objective to encourage free enterprise in Poland (other newly-free Eastern European countries had similar funds). Over the next ten years, PAEF invested $181 million in 50 large companies, $272 million in 7,000 small companies, $50 million in 30,000 microenterprises, provided $50 million in mortgage financing for 3,000 homes and raised $262 million in private capital to supplement PAEF funds. By the time the fund was wound down, it invested or loaned over $1 billion. The total loaned was approximately four times the initial amount due to the recycling of funds --- reloaning money that was paid back. For a full description of the program, see the USAID report. PAEF repaid $120 million to the Treasury and dedicated the remaining repayments to the Polish American Freedom Fund --- now in excess of $200 million. The Polish American Freedom Fund is dedicated to teaching business and entrepreneurship.

As part of my MBA, I undertook an independent study of PAEF in which I interviewed USAID officials, members of the PAEF board, former PAEF employees and other businessmen who were investing in Poland in the early 1990s (there were very few). Through my research, a number of key findings became apparent. First, the rationale that is used to turn a blind eye to corruption in other foreign aid programs --- "well, that's how things get done in this country" --- is a self-imposed constraint that was ignored by the PAEF management team. PAEF sidestepped this issue --- an issue that plagued other Enterprise Funds --- using a number of means. They forced all recipients of aid to provide business plans, ensuring that anyone who would be considered for financing would need to expend serious effort. In addition, the fund focused on collateralized lending and asset purchases --- many of the fund's initial investments were purchases of assets that the government was attempting to privatize. Also, when initial approaches were made, the management team made clear that if the price of doing business was engaging in corruption, then no business would be done. The result: over time, the number of requests for bribes and payoffs slowed to a trickle.

Most importantly, the management team ran the fund like an investment fund, not as an aid program. All of their investments were made for sound business reasons, they brought in American expertise to retrain workers, they partnered with other individuals and investment consortia to make large investments and they did not engage in public works projects. However, they soon grew to be one of the largest issuers of home mortgages in the country --- not because they were attempting to spread homeownership, but because no market for homes existed during communism (and if transactions did occur, they were for all cash). Thus, when individuals began having incomes, the PAEF team developed the first mortgage bank to serve the needs of the emerging middle class.

An Enterprise Fund model, staffed with the caliber of individuals of the PAEF, could do no worse than the current development grants, loans and programs undertaken to help less developed countries. (For a stinging indictment of previous attempts at foreign aid, see William Easterly's "The Elusive Quest for Growth." The book chronicles the theories of foreign aid in which developed countries have engaged: infrastructure development, health programs, education programs, debt forgiveness, etc. --- and none led to consistent economic growth.) Thus, instead of giving away grants, provide investments funds to developing countries and show them how free markets and investments are supposed to work. It is the only foreign investment strategy that provided a return to American taxpayers.