Speech

June 4, 2005

As Prepared by Paul V. Applegarth, Chief Executive Officer

Bread for the World Conference

MCC CEO Paul Applegarth’s Remarks at Bread for the World’s Conference

Thank you David for your remarks and introduction.

Good evening. It is a pleasure to be here, with you and with so many representatives from our partner countries. It is particularly good to be here tonight because we share a common objective—poverty reduction. MCC’s mission is poverty reduction, helping improve the lives of the over one billion people in this world living on less than one dollar a day—to help them find a way to sustain themselves, their families and communities.—People like the farmer I was speaking with recently in the paddies in Sri Lanka, who said that the thing he most wanted for his children was that they would not have to lead the kind of subsistence life he led.

You’ve seen how eloquent David is. He has indeed provided the MCC with support and we welcome his continued monitoring of us. But he couldn’t do his work without the support of all of you. And I want to extend a personal thank you to all of you. Many in this audience wrote letters to Congressmen encouraging them to make the concept of the MCA a reality. With your help, we were finally established in January of 2004 with new foreign aid funds, and I was confirmed just about year ago. Although, it seems much longer than that!

It may be helpful to revisit the themes that form the foundation for MCC—to reconsider why it was founded and the changes that were needed to make foreign aid more effective. Over the decades of foreign assistance, there have been some successes, particularly in the area of poverty alleviation. In my view, there is no question that food aid and traditional humanitarian assistance have helped many people to fight hunger and to provide basic healthcare.

But the track record in permanent poverty reduction, not just poverty alleviation, and helping people escape the cycle of dependency on aid is mixed.

  • In a report earlier this year OxFam and Action Aid concluded that only one-fifth of international aid actually gets to the people who need it.”
  • World Bank research shows that between 1980 and 2003, the United States gave $116 billion to 89 low-income and lower-middle income countries. Of those 89 countries, 37 — including half of the countries in sub-Saharan Africa that received aid — got poorer. The per capita GDP in these countries actually declined. Another 20 countries experienced marginal growth of 1 percent or less. That means only slightly more than a third of the countries that we aided actually had some significant development success

Clearly something different was needed to make aid more effective, and that is one of the primary reasons MCC was created.

Tonight I would like to update you on our activities to date and talk a little about the lessons we’ve learned since we opened our doors in January of last year.

As many of you know, MCC signed a $108 million Compact with the Government of Madagascar in April, and next week, on June 13 th, we will sign our second Compact, a $215 million agreement with the Government of Honduras. Both of these Compacts represent real opportunities to reduce poverty by fostering sustainable economic growth. And because MCC money comes in the forms of grants we do not contribute to a country’s—in many cases, already large—debt burdens.

We’ve also agreed to provide funding for to develop Compact proposals development and to accelerate Compact implementation (by what we call 609g funding) to Ghana, Nicaragua, Georgia, and Madagascar .

For example, we are providing up to $4.1 million to Georgia for a detailed engineering design and environmental study, and other preparatory activities for the proposed Samtskhe-Javakheti Road that will have a major impact on helping integrate some of the poorest people and regions in the country into the national economy.

In Ghana we are providing pre-Compact money to fund technical assistance to the Irrigation Development Authority of Ghana to design irrigation systems. Irrigation infrastructure for the development of agricultural potential of Afram Plains, and the proposed Compact program would bring irrigation to poor people living in an area considered highly suitable for the cultivation of certain high value crops but currently with no available irrigation facilities.

I’m also pleased to make two announcements tonight. Just yesterday we signed an agreement with Lesotho for Compact preparation and development, which will help them to complete feasibility studies for a Compact targeted at increasing the water supply. I’ll talk more about that in a minute.

My second announcement is that tomorrow—and this may come as a pleasant surprise to a couple of the ambassadors who are here with us tonight, we will be distributing recommendations to the Board to approve our next two Compacts—our third and fourth—a $110 million dollar Compact with Cape Verde, and a $175 million dollar Compact with Nicaragua. If the Board approves, this will bring our total approved Compact and pre-compact agreements to somewhere between $600 and $625 million with at least seven different countries.

And now I return to Lesotho and why the agreement we signed yesterday is an example of the power of MCC to make positive change. As I mentioned before, Lesotho’s Compact proposal, which was developed with the active input of both NGOs and the local business community, is focused on water. Lesotho’s Lowlands region, where the capital, Maseru, lies, lacks a reliable water supply, which prevents its people from accessing safe drinking water and limits the growth of agro-industry and business. This is particularly important, because the rich will always have water, they can pay a higher price to have it brought down from the highland areas. But for the poor this vital resource will be less available and more expensive if water becomes more scarce in coming years.

As we worked with the government and people of Lesotho, another advantage of MCC’s emphasis on country ownership emerged. As the Basutho focused on what benefits they wanted from the project, and how we were going to measure success, it became clear that to maximize the benefits of the Compact, some fundamental policy reforms were needed. Accordingly, for the first time we have a cabinet-level agreement with a government to work with us in some key policy reform areas. Part of the funding under this agreement will help the government draw up and implement policy reforms needed to improve the business and investment climate, such as enhancing property rights, improving commercial law, and developing the skills of small business owners. These reforms will have a positive effect on most sectors of the economy, but they will have a particularly positive effect on women who own the majority of small businesses. The reforms also include some gender equality reforms in terms of access to finance and land ownership, and even some as basic as allowing married women to open bank accounts independently.

As an aside, I was reminded again just this week, of the power of MCC’s competitive approach in encouraging policy reform. Before going to Lesotho I participated in a large conference in Cape Town . A president of another African country saw me and came running over. He handed me a piece of paper and said, “I’m glad to find you, because I want to give you this. The World Bank has just released its new rankings on some of the indicators you use. And I want you to see how much we have improved on them.” And it was true, his country had made some very significant improvements in the areas of corruption, voice and accountability, and government effectiveness. Our efforts to find good partners who will use aid effectively to reduce poverty are having an impact- so much so that the president of this country not only knows the MCA criteria, but is focusing on improving the policies that will help him qualify for MCA assistance—and more importantly will help reduce poverty and promote growth in his country.

As I mentioned above, an important lesson from development that is incorporated into MCC’s approach to poverty reduction is grounded in the philosophy that country ownership is essential to the identification and development of poverty reduction programs. Countries best understand the challenges and context of their impediments to growth. MCC will fund whatever a country wants—agriculture, regulatory reform, health and education to name a few. We simply ask countries to demonstrate to us that their programs are the country’s priorities and the programs will reduce poverty through growth

We saw another example yesterday about how what we’re doing is not just about funding. As we intend, we are having an impact on a country’s capacity to take charge of its own development. Just after the signing of Lesotho, members of the NGOs and the business community talked about their involvement in the process of putting their country’s proposal together. They talked about what it was like to sit down together, coming as they did from very different constituencies, unsure at first of exactly what to do, then arguing about different priorities, building trust, then finally reaching consensus and finding a way to work together to move the proposal forward. This process itself is helping Lesotho-even before a Compact is signed.

In fact, in almost all of our eligible countries, we’ve seen that countries can and will consult with their citizens—often providing the Government with valuable feedback and perspectives on how to reach the poor. We’re seeing that country ownership can work, although it takes time. We almost certainly could have moved faster in approving Compacts if we had simply picked priorities for our countries and designed benchmarks and detailed implementation plans ourselves. But this would not help to achieve our objective of helping to build the institutional capacity within the countries to do it themselves.

As another example, I was meeting with another African president last week to talk about how we might help them move faster. I related to him the same point that they might move faster if we were doing it. But he shook his head, and said, “No, no. We must do it. This is the only way to learn.”

Our first two compact—with Madagascar and Honduras—are great examples of how countries are designing good programs themselves, and provide concrete examples of the work MCC is funding to reduce poverty and empower the poor through employment, increased knowledge and wages, cheaper mobility and other means.

Poverty in Madagascar is overwhelmingly rural: seven out of every ten people live in a rural area and most live on less than 41 cents a day.  The Government of Madagascar and MCC signed a four year nearly $110 million dollar Compact to support a program designed to raise incomes in rural areas by enabling better land use, expanding the financial sector, and increasing investment in farms and other rural businesses.

In Honduras, sixty-four percent of the population lives in poverty. The $215 million Compact with the Government of Honduras focused on two key areas: rural development and transportation. The programs will increase the productivity and business skills of farmers operating small and medium-size farms which will improve the lives of the farmers, their families and their community, create jobs, and give them better access to national, regional and global markets—allowing the poor access to employment, social services and schools. To put it more concretely, our initial data indicates that small farmers can earn $400-$800 per hectare growing traditional subsistence crops like rice and beans, and, of course, many farmers have plots even smaller than this. By providing irrigation, credit, and training, that allows them to grow higher value crops like vegetables and other horticultural products, they can sell crops for between $2000-$4000 per hectare, increasing their income five to eight times.

You probably noted that the similarities between the two Compacts. Both programs focus on increasing agricultural productivity—through technical assistance and better access to markets. In fact, while there are differences, among all our proposals we have seen five key themes emerge—increased agricultural productivity, improvements in critical infrastructure, land tenure reform, increased aid to small and medium enterprises, financial sector reform, including micro-credit and broadening access to financing. It is not surprising that increasing agricultural productivity—in different ways, by providing improved infrastructure, technical assistance, and better access to markets—is probably the most common them, for that’s where the many of the poorest people are—in rural areas—on farms.

You will notice tonight that I’ve talked a lot about poverty reduction- that is our mission. But I’ve also talked about growth. Why growth? Because simply redistributing income does not work, the pie must be larger.

There is little doubt now as to the strong link between sustainable poverty reduction and growth. Simply redistributing wealth will not lead to meaningful and sustainable benefits for the world’s poorest people.

The UN Commission report on “Unleashing Entrepreneurship” notes that in 1990s:

  • in East Asia GDP grew at 6.4% per year and the measured rate of poverty (in this case, those living under $2 per day) fell 15%;
  • in South Asia 3.3% annual growth resulted an 8.4% decline in poverty;
  • in contrast, slow growth of 1.6% per year in Latin America led to marginal gains;
  • and negative growth rates increased poverty rates by 1.6% in Sub-Saharan Africa and by 13.5% in Europe and Central Asia .

And the private sector must be freed up to help generate this growth. Just as foreign aid cannot develop a country, its government alone cannot develop a country. Business, small farmers, rural women- must have the opportunity to create jobs and generate wealth.

I emphasize that we do not focus on growth simply for its own sake, but because broad-based, sustained growth, leads to poverty reduction. The challenge is ensure that growth leads to meaningful improvements in the day-to-day lives of the poor.

Now, what have we learned in the 16 months we have been in business?

We are learning that countries respond to the competitive nature of our selection process.

The most dramatic examples have come in the area of policy change:

Many countries have targeted corruption—a primary MCC indicator—and have passed anti-corruption legislation in the hope of getting MCC assistance.

We have witnessed dramatic improvements in MCA-candidate countries’ performance on the “days to start a business” indicator which the authors say are in no small measure attributable to the existence of the Millennium Challenge Account. According to World Bank officials, because of MCA’s incentive effect, Paraguay, a Threshold Country, adopted significant policy reforms in 2004 that both improved their score on the “days to start a business” indicator and catalyzed an increase in registration of approximately 6,000 (or 20%) more firms than usual.

We also have learned that countries can take, and are taking, leadership – they can take ownership, consult with their people, and, with our help develop coherent programs.

We see governments paying a great deal of attention to the indicators. We are providing a tool for reformers both inside and outside the government to push for changes, and we’re seeing actual improvements on the scores. We are seeing and helping to develop quality proposals and we are investing in quality programs. We are also seeing requests for things not done by other donors.

We’ve confirmed that you can attract an extraordinarily talented group of people to a government entity, and build a culture and operating style modeled on, and that would be equal, the best of the private sector. MCC has a roster of extremely talented experienced professionals, from diverse backgrounds, from the private and public sector, from investment banks, law firms, universities and NGO’s, veterans from USAID and State Department, others who have worked for multi-lateral institutions such as the World Bank and Inter-American Development Bank. Many also have extensive experience living and working in emerging markets.

There are also things that are not yet proven, and that bear close scrutiny going forward:

Implementation – Because Compacts are just beginning, we naturally have not yet established a proven track record in Compact program execution and implementation. We are only now laying the foundation and providing the resources to help countries get started.

Secondly, can we continue to strike the right balance between getting things done fast and yet not doing them before our partner countries and their programs are ready and their implementation plans are sufficiently completed and before fiduciary controls are in place to ensure our money gets from us to the people it is intended to help.

We are under constant pressure to get funding out the door— to commit resources— yet we must simultaneously make sure that we are getting Compacts right, not just signed. It is easy to write checks; it is harder to make sure our aid is effective. Yet if it is not effective, does not lead to results, MCC will not deserve and will not receive the increased funding we all want.

Third, staff retention: We have attracted an exceptional team that works long hours and quite efficiently, can we retain them? Can we reward them for the way they are investing Tax dollars, and for the savings in operating costs and efficiencies they help generate? This is particularly important given the ­­­drumbeat to spend, as the quality professionals we’ve assembled are the best bulwark against bad, wasted programs .

Those of you who followed my Congressional testimony know that the proposals from already eligible countries are expected to exceed resources currently available by about $1 billion. Even after eliminating through due diligence, items that did not contribute sufficiently to poverty reduction and growth, components that did not appear to arise from an adequate consultative process, and phasing of items that might unduly delay an initial compact. This $1 billion shortfall, combined with the need to fund new low income FY 2006 eligible countries that will be selected in November, plus Threshold program eligible countries, plus, for the first time, lower-middle income countries, shows the importance of receiving the President’s full $3 billion requested for FY 2006. The ability to reward countries fro making tough policy changes and to improve the lives of many poor people depends on our receiving the funding to make our efforts credible.

Before I end tonight, I do want to ask for your help. We are trying many new things. We need your feedback and ideas. We listen. If you have comments or questions, let us know. If you hear something that sounds strange or doesn’t seem right, let us know. If it’s a misunderstanding, we’ll clarify it. We welcome and we value your input.

A current example of how you can help is today’s New York Times article, where Jeff Sachs is once again quoted as saying that MCC has not disbursed a dime. We have been trying to help Jeff see the impact that MCC is already having in terms of policy changes, and that when looking at aid flows, you should look at aid effectiveness and how the money will be used, not just dollar volume. I don’t know how successful we have been with him yet; I suspect it has to be considered still “a work in progress.” I also believe that today’s quote may be dated, as he would know his quote is not true and has not been true for almost three months. We will be seeking a correction tomorrow. But not everyone will see the correction, and the misinformation could be quite damaging as Congress makes appropriation decisions over the next couple of weeks. So I ask you—when you see things like this, get the message out and correct them. If you do not know the facts, call us and we will provide them.

Finally, I was asked talk briefly about the recently-published Report by the Commission for Africa . I was particularly struck in reviewing the commission’s recommendations, how much of what they recommend parallels what MCC is already doing.

The Report’s central message is that “African countries need to take greater responsibility for their own development, and that donors need to provide more, and more effective, aid.” This of course is fully consistent with the President’s message at Monterrey, and the principles on which MCC is built.

Also, a key theme of the report is that, “Donors must significantly improve the quality of aid and how it is delivered.”  And they specifically say, “that means more grants, more predictability, and untied aid, … harmonized with the aid of other donors and better in line with the priorities, procedures, and systems of African governments.” 

All MCC aid takes the form of grants, it is predictable – when we enter a compact the program is for 3 to 5 years, fully funded up front; it is untied; it is designed in light of what other donors are doing, and our partner countries pick the priorities.”

Finally, you should feel good about what you have helped create and supported – the Millennium Challenge Corporation. It is fist of all helping some really poor people, people living in deplorable conditions, and helping them help themselves. It is making a positive international statement about US values and our role in the world It promotes freedom and democracy. It adds to US security and fights terrorism by giving people hope and a stake in their own future. With your help, we can continue to work together toward our common mission.

Thank you very much.