Speech

April 16, 2007

As Prepared by John J. Danilovich, Chief Executive Officer

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Remarks by CEO Ambassador John Danilovich at Brown University’s Center for Latin American Studies

Thank you,  Professor Green, for the kind introduction and for inviting me to speak here today.   

As a proud parent of a Brown University soon-to-be-graduate, I am very happy to be on this beautiful and prestigious campus.  I am especially delighted to be here at the Center for Latin American Studies among so many who share my tremendous interest in the Americas.  As mentioned, I served as Ambassador in both Costa Rica and Brazil and now, at the helm of the Millennium Challenge Corporation, I am particularly committed to implementing our MCC Compacts with our three Central American partner countries of

  • El Salvador,
  • Honduras,
  • and Nicaragua.

I’d very much like for this to be an interactive  discussion, but let me take a few moments

  • first, to outline the values that define the MCC model and,
  • secondly, to speak specifically about our activities in the Americas.

The Millennium Challenge Corporation provides foreign assistance to a select number of the world’s developing nations in a new and innovative way.   MCC’s agreements for grant funding, which we call Compacts, provide assistance to poor countries committed to good governance as well as economic and human development. 

The MCC Model

MCC’s mission—to reduce poverty through economic growth—is simple to state but far more complex to achieve.  Yet, we are seeing success in the field by adhering to 3 principles that are at the core of the MCC model.  Let me explain each of these.

First, for assistance to have the greatest benefit on the lives of the poor it must be awarded to countries that are committed to and have taken concrete steps toward sound political, economic, and social policies.  MCC currently uses 16 policy indicators from independent, non-US Government sources to assess whether a country

  • rules justly, 
  • invests in the health and education of its people, 
  • and promotes economic freedom.  

We evaluate how a country performs in terms of

  • civil liberties,
  • the rule of law,
  • and government effectiveness. 

We review measures of a country’s health expenditures and primary education completion rates.  We use evaluations of a country’s regulatory and fiscal climate to see how conducive it is for business development. 

We examine a country’s control of corruption.  Next year, we will add 2 new indicators that assess how well a country promotes environmental stewardship and protects property registration and land rights. 

Since we maintain that development assistance goes further—and should be awarded only—when good policies are in place, we have found that countries are taking it upon themselves to reform their policies.  It is a powerful validation of the MCC approach that countries are enacting significant policy reforms to qualify for our help.  I call our role as a catalyst for reform the “MCC incentive effect,” and we are seeing it in action.

  • According to the World Bank’s Doing Business report, 24 countries cited the MCC as the primary motivation for their efforts to improve their business climate.
  • El Salvador dramatically reduced the number of days required to start a business from 115 to 26.  As a result, business registrations jumped by 500 percent. As El Salvador now begins implementing its Compact, it is enacting even further policy reforms. 
  • In Paraguay,  the cost to start a business has been reduced from $840 to $250. The number of days required to start a business has been cut in half from 74 to 36.

Second, to reinforce good policies we require “country ownership” of the development process. While we work in partnership to define and share respective responsibilities toward realizing a Compact, we ask the country to take the lead in creating and implementing its proposal for funding. Taking an approach much like an investor–rather than a traditional donor–MCC requires that countries themselves come up with their development plan. 

We expect that countries will identify their barriers to poverty reduction and economic growth in consultation with their civil society, including the private sector. We expect them to design their own proposals for funding that they then will implement.  We require that women,  alongside men, be part of this process from start to finish. In Nicaragua, for instance, a local gender expert was hired to ensure that gender concerns are integrated into the Compact’s implementation.

Third, tangible results matter. Our partner countries must identify from the outset what impact our funding will achieve.  Our assistance goes to those countries that develop programs with

  • clear objectives,
  • benchmarks to measure progress,
  • procedures to ensure fiscal accountability for the use of our aid,
  • and a plan to monitor and evaluate results.

MCC’s focus on measurable outcomes ensures that our assistance delivers a difference in the lives of the poor.   

Hallmarks of the MCC Model

MCC’s model—

  • good policies,
  • country ownership,
  • tangible results—

is beginning to change how development is conducted.  It demonstrates that:

Development requires good governance:  Good policies are essential for replacing corruption with transparency and the rule of law. Anticorruption measures

  • increase a government’s operating revenues,
  • improve service delivery,
  • and build confidence in public institutions.

By significantly reducing corruption, countries have more to invest in social programs or business development, all of which improve the economic status of the poor.

Development requires a country to build its own capacity:

  • Policy performance,
  • country ownership,
  • joint monitoring and evaluation programs,
  • and the focus on results

help countries jumpstart critical thinking about what policies are needed and what institutions need to be strengthened to sustain poverty reduction and economic growth.

Development requires an increased role for the private sector, trade, and investments:    In the end, if we are no longer in business because private enterprise is stimulating growth that is lifting the incomes of the poor, then we will have succeeded. By working toward “country ownership,” we foresee the day when our assistance can be replaced by the self-sustaining economic activity driven and spurred from within the country itself. We know that even the most generous investment of American development assistance will not be sustainable unless favorable conditions exist for private sector enterprise to flourish and become the engine driving growth and poverty reduction.

And, ultimately, development requires focusing on beneficiaries—on the lives of the poor. Reducing poverty and sustaining economic growth must translate into increased wealth for program participants,  whose standard of living improves as their incomes increase. 

At MCC, our goal is to be transformational, not magical. Development takes time.  It would be unrealistic—for us and for those following our work—to expect instantaneous outcomes in terms of poverty reduction.  Sustainable poverty reduction through economic growth is a marathon, not a sprint.  Yet, we are starting to see progress and results on the ground.

MCC in Central America

Let me illustrate how, by turning to the MCC model at work in the Americas.

We have signed Compacts for sizeable grants totaling $3 billion with 11 partner countries throughout the world.  Our three Compacts in Central America with

  • El Salvador,
  • Honduras,
  • and Nicaragua

total more than $850 million out of that $3 billion. While these three Compacts share the common goal of poverty reduction through economic growth, they differ in how that goal is achieved in each country.

In El Salvador, it’s about improving the lives of almost one million Salvadorans in the country’s Northern Zone through investments in

  • education,
  • public services,
  • agricultural production,
  • rural business development,
  • and transportation infrastructure.

The largest component of our Compact is a transportation project that will integrate El Salvador’s Northern Zone—where poverty is highest—with the rest of the country. 

This will

  • enable new economic opportunities for rural households,
  • lower transport costs,
  • and decrease travel times to schools, urban markets,  and ports. 

The MCC-El Salvador Compact was signed last November.  In keeping with our emphasis on country ownership, some 2,000 Salvadorans provided input on the Compact’s design and remain involved now in providing input for its implementation.  We expect that incomes in the Northern Zone will increase by 20 percent over the five-year life of the Compact, and by 30 percent within 10 years of the Compact’s start.

In Honduras, our Compact will increase the incomes of thousands of farmers as they diversify from corn and beans to include higher-profit crops, and by supporting rural improvements that will enable these farmers to reach

  • national,
  • regional,
  • and international markets.

So far, the first groups of more than 8,000 farmers have started their training in techniques for more profitable production and commercialization of horticultural products.  The road transport project of the Compact has also begun implementation.

In Nicaragua, it’s about improving the quality of life of the people of Leon and Chinandega by increasing the incomes of

  • rural farmers,
  • entrepreneurs,
  • and small- and medium-sized businesses.

This entails

  • reducing transportation costs,
  • improving access to markets,
  • strengthening property rights,
  • and increasing investments.

During my visit to Nicaragua last October, I inaugurated a pilot project at a milk-collection facility as part of the rural business development component of the Compact. The members of this dairy association are now working toward producing and exporting cheese. 

Rural producers of cassava have already managed to translate the technical assistance they have received into export contracts worth double what they usually obtain on the local market.  I also participated in the first Western Nicaragua Investment Summit,  which sparked several new foreign direct investments. 

By creating favorable business conditions in Nicaragua, MCC has helped attract a $6 million investment, for instance, from Grupo Beta, a textile manufacturing firm that will create 1,500 local jobs.

By contributing to development in different ways in each of these three countries, MCC is increasing the incomes of the poor and allowing them to more fully participate in the economic life of their country. 

Powerful regional synergies amplify this when we look at

  • El Salvador,
  • Honduras,
  • and Nicaragua

collectively rather than individually—not only as part of MCC but also as partners in trade through CAFTA-DR. 

MCC investments in the people—the human capital—of the Americas, as well as in the physical and commercial infrastructure, are better connecting countries to each other and to the wider regional and global economies.

MCC Compacts with contiguous countries are accelerating the pace of domestic market-led growth,  while maximizing the benefits of regional free trade arrangements already in place. 

For instance, with the construction of new transportation networks in El Salvador through MCC funding,  farmers will be able to move products to markets efficiently and economically.

The Northern Transnational Highway and connecting rural roads will link to other roads throughout El Salvador as well as to those in bordering Honduras.  MCC-financed highway work in Honduras is helping to create an alternative route for goods to cross the isthmus from the Atlantic to the Pacific, and vice versa. 

By improving transportation infrastructure, MCC programs are expanding business activity in El Salvador, Honduras, and throughout the Central American region, spurring economic opportunities and development through trade. 

Replacing aid with trade is one of the best means to spur development and achieve sustainable poverty reduction.

In addition to our Compacts,  MCC also has a Threshold program, which seeks to improve  specific policy weaknesses in eligible countries in the hope that their reform efforts will push them over the “threshold”  to Compact eligibility. In total, we have signed 13 Threshold agreements valued at nearly $310 million.  Our Threshold program is active in the Americas as well.

  • Paraguay, for instance, is receiving nearly $35 million in Threshold assistance from MCC to fund multisectoral initiatives to reduce corruption.  This is strengthening the rule of law by increasing penalties for corruption and building a transparent business environment by confronting informal business transactions. 
  • Peru, one of our newest Threshold-eligible countries, has
    • lowered trade barriers, 
    • eliminated restrictions on capital flows, 
    • and opened up to foreign investment. 

A Threshold program could become a tool to further accelerate reform efforts. We anticipate receiving a Threshold funding proposal from Peru in May. 

Other countries in the Americas have expressed  interest in becoming part of the MCC family and are ushering in reforms of their own to qualify for our assistance.

  • The Dominican   Republic, for example, is addressing performance weaknesses in our three areas of good governance, investing in people, and economic freedom.   Reforms are underway to cut the time and cost of starting a new business and to streamline customs procedures to reduce the time it takes to import and export. Since one of our performance indicators measures immunization rates, the Dominican government announced the rollout of a large measles immunization campaign that will reach 5 million people.
  • Similarly, Guatemala is pursuing a number of tough anticorruption reforms.  These include
    • prosecuting high-ranking officials on corruption charges,
    • creating a financial crimes unit,
    • hiring a foreign accounting firm to audit congressional spending,
    • initiating online disclosure of government procurements,
    • and implementing a performance-based budgeting process.

I am leaving at the end of this week to visit these two countries before heading to the World Economic Forum in Chile.  During my trip, I look forward to learning more about the policy reforms underway in the Dominican   Republic and Guatemala as I encourage them to continue pressing ahead.

Conclusion

Latin   America is very much in the news these days.  There seems to be a general sense that the region is changing political course, and political rhetoric is capturing headlines. 

Bolivia, for instance, is one of our Compact-eligible countries and as it continues to work on its Compact proposal, we are monitoring its performance on our indicators and its commitment—in word and deed—to

  • political pluralism,
  • open markets,
  • and human development.

At MCC, we consider what governments do, not what politicians say.   Our MCC Compacts and Threshold agreements outline measurable poverty reduction and economic growth strategies that reflect the political will and determination of a country to work with us toward achieving a better standard of living for its people.  

During President Bush’s travels to Latin America in March, he stated during his weekly radio address,

“The United States is doing its part to help our neighbors in Latin America build a better life for themselves and their families. We are helping these young democracies make their governments more fair, effective, and transparent.  We are supporting their efforts to meet the basic needs of their citizens—like education, health care, and housing. And we are increasing opportunity for all by relieving debt, opening up trade, and encouraging reforms that will build market economies, where people can start from nothing and rise as far as their talents and hard work can take them.”

The MCC model is certainly contributing to this reality of promise and possibility in the Americas.  By continuing our engagement with our Latin American partner countries, we are stimulating economic growth and reducing poverty in sustainable and transformative ways for the region’s poor.

On behalf of my colleagues at the MCC and myself, thank you again for inviting me to speak and for your interest in the Millennium Challenge Corporation and our work in the Americas.  I look forward to your questions and our discussion.