This month, the U.S. Department of Defense found out that it cannot fund mil-to-mil engagements, training, and exercises, or do most of the activities that fall under the general heading of “security cooperation,” in Panama and Chile. The decision in this case is driven not by the domestic political dynamics of these countries but on their income levels. Both Chile’s Gabriel Boric and Panama’s Laurentino Cortizo attended the Summit of the Americas this month in Los Angeles, likely a strong signal of their interest in continuing a strong relationship with the United States. But Chile last year was classified as a high-income economy by the World Bank and passed the income threshold again this year. Panama has been classified as such in years past, then dropped to a lower income level, only to rise again to high income according to the World Bank country groupings released on July 1. Since they are high-income, the Department of Defense cannot fund the security cooperation activities authorized in Chapter 16, which are nearly all security cooperation activities.
U.S. Code (Title 10, Section 312) specifies that security cooperation funds “may be used only for the payment of expenses of, and special compensation for, personnel from developing countries.” The same section explains that the term “‘developing country’ has the meaning prescribed by the Secretary of Defense.” The current iteration of that meaning is outlined in a memo from the Under Secretary of Defense for Policy dated May 15, 2017. The memo specifies that countries are considered “developing” if they are not “high income” on the World Bank classification of countries. The World Bank releases its country groupings by year in July, and that classification governs spending for the following year: The classification released next month decides whether or not the United States can spend security cooperation money on Panama for all of Fiscal Year 23. The decision impacts cooperation from July to the following June. It’s not synched to the fiscal year calendar, which means that theoretically if a country is announced as high-income next week, security cooperation activities that rely on Section 312 would stop immediately for the rest of the fiscal year and halfway into the following calendar year.
In this sense, the World Bank classification decides who the Department of Defense can engage in security cooperation with. The secretary of defense can “authorize the payment of such expenses and special compensation for personnel from a country other than a developing country” on a case-by-case basis. Exceptions have to be requested by individual Department of Defense components and have to be justified as “necessary to respond to extraordinary circumstances and is in the national security interest of the United States.” Such a threshold can be difficult to meet in almost any case, and all the more so in the case of countries in the developing world. In practice, if a country rises to “high income,” U.S. spending on security cooperation with that country will all but disappear.
The World Bank employs a rigorous system to sort countries by income. The Bank classifies countries with reference to their per capita gross national income (GNI) calculated using the Atlas method. GNI is the sum total of the money earned by the country’s people and businesses regardless of where they are located. It’s a larger number than gross domestic product (GDP), which looks only at what is produced within the country’s borders. The Atlas method smooths fluctuations in prices and exchange rates. To keep the income classification thresholds fixed in real terms, the thresholds are adjusted annually for inflation using the Special Drawing Rights deflator. For the country groupings released in July 2021, a country is classified as high income if its GNI per capita (using the Atlas method) rises above $12,695.
Most countries in the Latin American and Caribbean region have never broken into the high-income category: Belize, Bolivia, Brazil, Colombia, Costa Rica, Cuba, Dominica, Dominican Republic, Ecuador, El Salvador, Grenada, Guatemala, Guyana, Honduras. These are countries with which security cooperation has been enduring over time (or at least hasn’t been hampered by restrictions related to income). However, since 2000, six countries in the region have made it to high income: Antigua and Barbuda (2002), Barbados (2000), Chile (2012), Panama (2017), St Kitts and Nevis (2011), and Uruguay (2012). Of these, Antigua and Barbuda, Barbados, and Panama have since slid down.
Barbados has had a roller-coaster ride. The Caribbean nation of 287,000 people was high income in 2000 and 2001, high income (and thus ineligible for U.S. security cooperation money) the following year, then back to upper-middle income in 2003-2005. In 2006, it broke through to high income again and has stayed there. Last year, its GNI per capita was $14,350, less than $2,000 above the cutoff line. Its entire GDP of $4.42 billion is closer to its most famous citizen’s net worth (Rihanna’s net worth is $1.7 billion) than it is to its closest high-income neighbor’s GDP (Trinidad and Tobago’s GDP is $21.59 billion). Though Barbados has achieved high levels of human development (measured adding years of schooling and life expectancy to GNI per capita), its national income has been the component of development that has increased the slowest. National income is key to spending on security and security cooperation. Barbados’ GNI per capita of $14,350 is a third of that of Canada, a country that shares the same classification as the Caribbean island.
Panama, home of the Panama Canal and at one time the headquarters for U.S. Southern Command, has had a similar journey. The Central American country’s GNI rose enough to make it to high income in 2017 and remained that way until 2020, when it dipped into upper-middle status. The years that Panama was a high-income country coincided with the establishment of Section 312. During this time, funding for security cooperation activities was restricted. This meant that, for example, military personnel could attend training in the United States if Panama covered the cost (or the Defense Department component organizing the training obtained a waiver). In 2020, Panama’s GNI per capita fell to $12,420, which means that in FY21 and FY22 the country’s armed forces were eligible for security cooperation funding. The World Bank’s own reporting suggests that Panama’s income has since recovered, potentially making it again too rich for cooperation from the United States.
Though the issue of restricting security cooperation to developing countries as defined by the World Bank is important in Latin America, this is not the only region where this has happened. In Africa, Equatorial Guinea and Mauritius both slid out of the high-income group (in 2015 and 2020, respectively) but might rise again. Equatorial Guinea almost certainly will. Oil rents account for over a fifth of the country’s income. The current increase in oil prices could cause Equatorial Guinea’s GNI to rise so significantly that it crosses the high-income threshold. In Europe, Croatia, Hungary, Latvia, and Malta have all risen into high income only to drop again and rise again. In Asia, Nauru has had the same fate. The impact of the changes in these countries might not be as strong as it is in Latin America. The Defense Department’s emphasis on strategic competition means that funding for activities in all these countries could be easily justified as necessary to compete with Russia and China. To be clear, though, Russia is competing for Latin America. Just this week, Nicaragua authorized Russian troops, planes, and ships to enter the Central American country for training and other purposes. China is also investing and competing for Latin America and doing so without income-related restrictions.
Limiting security cooperation funding to countries with incomes below a certain threshold decreases the Department of Defense’s ability to compete effectively in the developing world. While the United States strives to be the “partner of choice” to countries in the Americas, its limits on cooperation risk making it unreliable one. Rather than being a steadfast, trustworthy partner, restricting cooperation and tying the restrictions to a level of income suggests that unlike committed partners that promise to stay together for richer or for poorer, the United States is ready to step aside should its partner’s situation improve.
The case of cooperation with Panama is perhaps the most concerning in the region. The World Bank listed the country as high income for the first time in July 2018 (using data from 2017). This meant that for FY2019 (which started in October of 2018) the Department of Defense could not fund security cooperation activities with Panama because the country was no longer a “developing country” under the definition adopted by the secretary of defense. Just a year before Panama crossed into high income, the country had made another major switch: It went from recognizing Taiwan to recognizing the People’s Republic of China. The announcement came in June 2017. In July 2018, the World Bank announced the change to Panama’s classification. In October 2018, Department of Defense funding for security cooperation with Panama was restricted under Section 312 right as Beijing was rolling in to wow its new partner. Proposed Chinese investments in Panama included bridges, ports, and even a cruise-ship terminal. The nascent relationship between Panama and China hasn’t included significant security cooperation yet, though likely scrutiny from President Cortizo and domestic dynamics in Panama are the main reason for this.
The restrictions on security cooperation funding to developing countries do not affect all forms of cooperation to the region. Security assistance efforts authorized under Title 22 of the U.S. Code are administered by the State Department, not by the Department of Defense, and thus are not subject to the same restrictions. This restriction affects specifically the aspects of the relationship that are managed by the Department of Defense, which include efforts as varied as combined exercises and defense institution legal capacity-building. This distinction might be well understood by American bureaucrats but does not translate well to the region, especially to partners that are sifting through more than one proposal when they make decisions about security and defense.
To remain competitive in the region, the United States should fully embody the trustworthy partner of choice it aspires to be. Doing so might require rethinking what constitutes a developing country for the purposes of security cooperation. The restrictions described here came into effect only in NDAA2017. Five years in, it’s a good time to reconsider this definition. The World Bank country groupings have a sound methodological foundation but are inconsistent with a goal of sustained engagement. A better strategy might be to continue to follow the World Bank income groups but allow for countries to be considered “not-developing” only after they have crossed the income threshold and remained high income for five consecutive years. This approach would maintain consistency with other government agencies that also use the World Bank’s definition and would allow an off-ramp that could afford these countries the opportunity to plan ahead for reduced security cooperation from the United States.
Rethinking the definition of “developing country” under Section 312 is key to maintaining sustained relationships between the Department of Defense and countries in the near-abroad: Latin America. Insisting on a definition that doesn’t capture the full reality of the region paints the United States as a partner that can be demanding and inconsistent, a less attractive proposition than that of some of the U.S. competitors in the region. Crafting a definition that takes into account the economic characteristics of the region increases transparency and understanding and better positions the United States to be the partner of choice. Good partnerships prevail through richer and poorer, and so too should the partnership between the United States and Latin America.
Fabiana Sofia Perera is an associate professor at the William J. Perry Center for Hemispheric Defense Studies and a non-resident fellow at the Modern War Institute.