‘Can Indicator-Based Competition Make Foreign Aid Work?’
Thanks, Paul, for that kind introduction. I’m very happy to be here at the American Enterprise Institute to start the New Year among friends! And, I appreciate all the hard work Mauro [De Lorenzo] and the AEI team put into organizing today’s program. Thanks so much!
I welcome the opportunity to talk about MCC’s indicator-based competition for awarding development assistance to reduce poverty through economic growth in our partner countries worldwide.
The panel, including MCC’s Managing Director for Development Policy Sherri Kraham, will lead what promises to be a very thought-provoking discussion on how indicators are creating a shift from conditionality to competition.
I’d like to use this occasion to take stock of the Millennium Challenge Corporation’s pioneering role in this transition.
But, first, I want to share a story that, for me, sums up the underlying power of awarding development assistance to countries through an
- indicator-based selection process.
Last year, I visited Guatemala and had lunch with President Berger and spoke with him about the reforms underway in his country. Motivated by its interest to qualify for MCC funding, Guatemala has taken significant steps to improve its policy performance on our eligibility indicators.
- They formed a working group to carefully examine all MCC indicators.
- Their technical team consulted extensively with many of the institutions that supply the indicators we use.
- They also traveled to El Salvador to learn more about what that government has done to improve its performance on MCC’s eligibility criteria.
Based on their findings, the Guatemalan government created an action plan to improve its performance on each and every MCC indicator.
They spotlighted current reforms that they believe directly relate to improved indicator scores, such as:
- a $54 million-increase in the budget of the Supreme Electoral Tribunal,
- a thorough updating of the electoral registry,
- approval of regulations for political party financing,
- passage of an executive decree on access to public information, and
- major reductions in the time and cost required for starting a business, registering property, and exporting and importing.
They then outlined additional steps to be taken over the coming years, including
- stiffer penalties for those who commit crimes against journalists,
- the creation of an International Commission against Impunity to help investigate and prosecute illegal, clandestine groups that threaten human rights and the rule of law,
- plans to reform the electoral law,
- approval of a consultation law for indigenous people, and
- the implementation of a policy for the protection of human rights defenders.
With the presidential elections underway, FUNDESA, a Guatemalan civic organization, asked each of the leading candidates to publicly signal whether they were willing to do what was necessary to improve Guatemala’s chances of becoming eligible for MCC funds.
It’s a striking validation of MCC’s incentive effect that even presidential candidates now feel compelled to express their commitment to the reforms necessary for MCC assistance.
We hope that the reforms currently underway in Guatemala will bring the country closer to qualifying for MCC assistance. While Guatemala is a terrific example, it is only one example of how MCC’s methodology is a catalyst for change.
Through the competitioncreated by our indicator-based selection process, we are changing country behavior for the better, giving reformers the political space—and the incentive—to implement difficult policy changes.
Such long-term policy change is what makes development sustainable and transformative in the lives of the world’s poor.
Part I: Then—how MCC got to this point
Some fifteen years ago, however, the indicators we now use to measure policy performance either did not exist or were just emerging.
When Congress created the Millennium Challenge Corporation in 2004, MCC pushed the envelope by making indicator-based competition the centerpiece of our model and our unique way for choosing partner countries. We award aid to countries that perform well on a set of 17 indicators taken from non-U.S. government sources—such as the
- World Bank Institute,
- Freedom House, and
- the Heritage Foundation—
that measure a country’s commitment to
- ruling justly,
- investing in the health and education of its citizens, and
- promoting economic freedom.
This assessment process sets MCC apart.
And, we remain committed to this approach for the most fundamental of reasons: It is the best way to identify the best partners best suited for making the best use of U.S. tax dollars. There is no silver bullet for development—but the closest thing to it is the political will exercised by a country’s leadership.
The right policies are essential for economies to prosper and for the private sector to invest, and this is what, ultimately, matters: Private sector investment is what will make economies grow and what will break the cycle of poverty.
Development experts know that private enterprise reduces poverty and increases tax revenues in the long term, and that is why
- modernizing infrastructure,
- fighting corruption,
- streamlining business development, and
- expanding market-based agriculture opportunities
play such huge roles in MCC programs.
The right policies are also essential for democratic practices to take root. They create free societies where people demand voice and transparency and accountability in and from their governments. This serves the interest of these countries; and prosperous, peaceful democracies are a core principle of America’s foreign policy and security objectives.
The HELP Commission describes how the most effective development assistance supports
- democratic principles,
- good governance,
- country-led development, and
- economic growth—
all of which define MCC’s approach, and all of which start with the right policies.
Some say MCC works with “the winners.” Though the countries with whom we partner may have relatively good policies in place, this, in no way, means that they
- are no longer poor,
- or are about to escape poverty on their own,
- or don’t need help.
Rather, these countries want to loosen poverty’s grip by putting the best policies in place to do so; it’s the “by your bootstraps” mindset at its best. Countries themselves freely determine if they are to benefit from our assistance by how they perform on the indicators.
With $5.5 billion now committed in MCC grants to 16 countries, is it not common sense and the best use of taxpayer dollars to target our foreign aid to those countries where it is most likely to do the most good?
Yet, let me be clear. While we are working with developing countries that are the best performers in their peer group with regards to improving their policy environments, serious work remains to be done. MCC partner countries are taking the right steps, and we are encouraging and strengthening their ongoing reform efforts.
Part II: Now—what breakthroughs and challenges we face in operationalizing our indicator-based approach to allocating aid
This is why our work is both rewarding and challenging. In every instance, making indicator-based aid allocation operational at MCC requires hard work and taking risks.
On the one hand, the rewards are real. MCC is enabling a global conversation about policy reform. All the development assistance in the world will not matter if the policies are not right and in place to effectively use that assistance. MCC’s period of investment might be limited to the scope of a compact or threshold program, but the reforms we inspire in these countries take on a life well beyond that. That’s why the emphasis on getting the policies right is so intense…and so important.
Tying MCC assistance to policy performance drives home this point.
- That’s why we see ambassadors, ministers, and other government officials visiting our offices to learn more about what indicators their countries need to improve on to qualify for MCC assistance.
- Like Guatemala, at least a dozen countries have created interministerial committees and presidential commissions to develop reform strategies to improve policy performance and address MCC eligibility criteria.
- That’s why we see countries reforming to make their way into the MCC club—and to stay in it—in a phenomenon called the MCC Effect.
- The Dominican Republic, for one, implemented reforms to improve its investment climate and strengthen anticorruption policies and institutions to qualify for MCC assistance.
- Mali and Benin are undertaking significant land reforms, which are necessary to promote
- secure land rights,
- access to credit,
- investments, and
- increased productivity.
- Madagascar reduced the minimum capital requirement for new businesses by 80 percent in 2006 and saw a 26 percent increase in new business registrations.
- Similarly, El Salvador reduced the number of days required to start a business from 115 to 26 days, which resulted in El Salvador being named as amongst the top-10 performers worldwide in the World Bank’s 2007 Doing Business report.
Steve Radelet of the Center for Global Development characterizes the MCC Effect as “the major success story of the MCC.” He says, “a strong MCC Effect…to pass specified quantitative indicators…has created the incentives for potential recipients to more carefully track the data and introduce the policy changes needed to meet the requirements.”
We agree with this assessment; and what we see in partner countries confirms it.
We also see the success of our indicator-based approach in our threshold program. The threshold program is designed to work with countries to improve their performance on those specific indicators that they are close to passing.
- Nearly $400 million has been awarded in threshold programs to 18 countries aimed at improving their policies.
- As a result, we see 132 new girl-friendly schools in Burkina Faso.
- We have seen Philippine President Arroyo, in an unprecedented move, match MCC’s $20 million threshold funding to fight corruption. The threshold program has given the Philippines renewed vigor in this fight, and corruption-related investigations and dismissals have stepped up significantly.
- We have seen the days and costs required to start a business drop in Paraguay and Zambia.
- We have seen an increase in investigative reporting to expose corruption in Malawi and Tanzania.
On the other hand, as much as the rewards of allocating aid based on indicator performance are real, the challenges are just as concrete. I see this in two ways.
First, the reality of how reforms take place in partner countries is challenging. The reform process is often complex as partner countries initiate and consolidate reforms.
- How do indicators capture the nature of reform?
- What do we do when countries drop in performance?
- How do we build-in incentives for ongoing reforms?
We are looking at ways to address these challenges at MCC, and Sherri will share our thinking with you during the panel presentation.
In an ever-changing global environment, I’d underscore that our model is also dynamic, and we are committed to making it more relevant and responsive.
In many partner countries, the indicators have become a tool for citizens to hold their own governments accountable, becoming a hot topic for domestic political discourse. This heightened visibility drives attention to the indicators and motivates sustainable policy changes.
Second, the need for better, most up-to-date data is another challenge. Because of the increased demand created by MCC and other donors, we are pushing the development community to provide us with more accurate data. While this has already happened to a certain extent, we have further to go. I have an excellent staff; smart, mission-driven people come to work for us. However, their work is contingent on the work of others.
No matter how exacting our analysis is, we must depend on external sources to supply objective, transparent data on the 17 indicators we use to evaluate some 135 countries. We rely on the development field—many of you in this room—to assist us by providing us with the best possible data.
In short, there are challenges to applying an indicator-based selection system. Data lags make it problematic to assess country performance in real time. As countries move from one income category to another, the competition intensifies and it is challenging to monitor performance during the transition.
Part III: Future—where is MCC heading in this field]
At MCC, the future is about looking at all these challenges as opportunities to make our indicator-based model for awarding development assistance better. We are 100 percent committed to this approach, and we will continue to look at ways to make it even more effective.
We are, without question, supporting and accelerating the efforts of real reformers. MCC compacts and threshold programs are signed with government leaders but they reflect a partnership with
- business associations,
- women’s groups, and
- all facets of civil society in partner countries
committed to meaningful reforms.
Our use of indicators elevates the intensity of competition and helps us make “smart investments”—like any strategic investor—in those countries committed to their own policy reform agendas in order to deliver the best possible return on our investment of U.S. tax dollars.
And, as we learn from other donors who are interested in our approach, we find ways to improve our model. Some donors are considering using indicators similar to ours to determine which countries might receive their assistance and are putting incentives in place to encourage policy improvement. We believe this a good step forward.
We believe the future of indicator-based assistance will come from this fruitful interaction with others in the development community, including manyof you here today.Your perspectives bring dynamism to our model and help us think through complex issues. We welcome your ongoing ideas and input and challenge you to challenge us.
“Can indicator-based competition make foreign aid work?” That is the question we are here to debate. MCC wants to prove that the answer is a resounding yes.
Our experiences prove that aid based on indicator performance is working and can motivate policy changes. If nonperforming countries look to their neighbors and see substantial resources pouring in as a result of good governance and a genuine commitment to reform, it is compelling them to re-evaluate their lagging performance.
- promoting local capacity-building,
- strengthening institutions, and
- jumpstarting critical thinking about the policies necessary to ensure sustainability
by insisting that our partner countries design and implement their own development programs. Our focus on country ownership reinforces the good policies we demand in the first place.
By adapting and applying age-old lessons on the importance of
- accountability, and
we believe that MCC’s indicator-based approach is an effective and efficient tool for the delivery of U.S. foreign assistance.
The bedrock of how MCC chooses partners will continue to be an
- transparent, and
- competitive process.
With your perspectives, we can further refine our model and lead the way in awarding development assistance based on performance on policy indicators.
This is what we can best offer our partner countries, and this is what Americans should rightfully expect from their government, as the prudent steward and wise investor of American foreign aid.
Thank you very much for your interest in the Millennium Challenge Corporation, and I would be happy to answer some questions before the panel convenes. Thank you!