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The Millennium Challenge Corporation Marks Its Second Anniversary with a Conference at the American Enterprise Institute

January 23, 2006

Transcript

NORIEGA: Good afternoon, ladies and gentlemen. Good afternoon. May I have your attention, please?

Good afternoon, and thank you very much for coming. As you can plainly see, those of you who particularly are on their feet seeing this, we have a lot of interest in this extraordinarily important program and subject. And this event is obviously oversubscribed, but it's a great pleasure to see you all here to review the Millennium Challenge Corporation, two years on. The specific question that we will be studying here with our panel and our presenters is whether this points to the future of foreign aid.

Ambassador John J. Danilovich began his duties as Chief Executive Officer for the Millennium Challenge Corporation on November 7th, 2005. Prior to joining the MCC, the Ambassador had a distinguished career of more than 30 years in both the public and private sectors. He served as our ambassador to both Brazil and Costa Rica, and he is the only U.S. ambassador to receive Costa Rica's highest diplomatic order.

My personal experience has been that people wait until you leave important jobs before they say nice things about you. While you have those jobs, they don't really say very many nice things about you. But, another period is when you're being sworn in, and, about John Danilovich, President George Bush said the following: "The MCC is an integral part of our strategy to fight poverty and to encourage economic development, and leading this organization requires a combination of idealism and managerial skill and diplomatic savvy, as well as economic expertise. John Danilovich has all of those qualities."

And it's a great pleasure to have him here with us today. Without further adieu, I am pleased to introduce and welcome to AEI Ambassador John Danilovich.

DANILOVICH: Thanks very much, Roger. It's great to be here at the American Enterprise Institute today and to see Roger again. We worked very closely when I was our ambassador in Costa Rica and Brazil, and Roger at that time was the Assistant Secretary of the Western Hemisphere in the State Department.

I also want to recognize Ambassador Brito of Cape Verde, who is here, and the panel who will follow me -- Clay Lowery, Sean Mulvaney, Maureen Harrington and Allan Meltzer -- they'll offer you, I hope, some very important insights into the Millennium Challenge Corporation.

I want to thank the American Enterprise Institute for inviting me here to speak, in recognition of the Millennium Challenge Corporation's second anniversary. I greatly value the contribution that the leaders and scholars at the AEI bring to the policy debate, and admire your commitment to promoting more effective government, to expanding private enterprise and to strengthening U.S. foreign policy.

Today is an exciting and landmark day. Two years ago today, Congress appropriated nearly $1 billion to establish the Millennium Challenge Corporation, further advancing the vision President Bush first articulated in 2002 when he said, "The needs of the developing world demand a new approach. We have a tremendous opportunity to begin acting on a new vision of development. This new vision unleashes the potential of those who are poor, instead of locking them into a cycle of dependence. This new vision looks beyond the arbitrary inputs from the rich and demands tangible outcomes for the poor."

The president's message was clear: Foreign aid should be about results, not simply giving a donation. And in demanding a return on investments made with U.S. taxpayer dollars, which is not too much to ask, we work with countries that are committed to taking the difficult steps toward social, economic and political reform.

That assistance has the potential to achieve improvements in institutional infrastructure, physical infrastructure and standards of living far greater than any foreign aid policy in history. The MCC experienced the usual difficulties inherent in all startups. Coming from the private sector, I'm well aware of how startups can be difficult, and I confronted similar challenges while I as our ambassador in Costa Rica and Brazil. Lessons have to be learned. The startup phase is over, and we're moving forward, confident that we can fulfill our mission and mandate.

We and our partner countries are now in the right place to go forward as we move further into the 21st century. I'm going to share with you some numbers that you may have already heard, or you may have seen on our Web site. They're important numbers, because they tell a story about significant progress.

We are working with 23 eligible countries and 18 threshold countries. We have signed and are implementing five compacts with Madagascar, Cape Verde, Nicaragua, Honduras and Georgia, and two threshold agreements, with Burkina Faso and Malawi. Three more compacts will be completed in the immediate future.

These compacts represent a combined commitment of over $1.5 billion. We will add several more compacts and threshold country programs by the end of 2006.

These are no small achievements for a young organization, but despite these achievements, I do not believe that we have any laurels to rest on, and we must move forward with greater focus and alacrity.

Nearly half the world's population struggles to live on less than $2 a day. We are committed to helping the world's poor and to loosening the chronic grip of poverty. This commitment was made clear to me when the president made the unusual, but gracious, gesture of presiding at my swearing in last month. He made plain his expectations for me and for the Millennium Challenge Corporation: Be bolder. Be faster. Make a bigger difference; and if you need support from the top, you've got it.

Expectations are a powerful motivator, especially when they're combined with the confidence of others that you can get the job done. Looking forward, I want the Millennium Challenge Corporation to be more assertive, both internally and with our interactions with our partner countries. In the last two months, we have restructured several parts of our organization to streamline the proposal evaluation and compact development process.

We are now providing clear guidance to countries immediately after they are selected, so that we can move swiftly to develop their compacts. We're finding ways to shorten the time between compact approval and disbursement, so that funding can flow more rapidly after signings. We're bolstering our staff to over 300 by the end of next year, so that we can recruit the best talents and be more aggressive in our approach, attack our organizational priorities and manage the risks in our investments. I'm encouraging my colleagues at the MCC to show the courage, to be creative and innovative in challenging our working assumptions and models.

As we forge ahead to fulfill our objectives, we will also remain committed to our core principles.

First, Millennium Challenge funding is based on performance. The Millennium Challenge Account is built on the belief that sustainable economic growth occurs fastest in countries that adopt and adhere to good policies.

Countries are selected for MCC assistance based on 16 policy indicators in three areas: ruling justly, investing in people and promoting economic freedom. Countries that do not perform well in these areas are encouraged to improve and to try again in the next selection round, and many countries are doing exactly that.

Millennium Challenge is not for everyone. Since selection is driven by scores and data, countries suffering from corruption, poor governance and instability won't receive our assistance. Furthermore, countries accepted into the program, but that fail to maintain passing scores on their policy indicators, or fail to design good proposals, or fail to implement their compacts, will risk losing eligibility.

We will not hesitate to say no, or no more. In November of 2005, the MCC board suspended Yemen from our threshold program for significant drops in its policy indicators. We will welcome Yemen's return when it reverses its slide and puts itself back on track. In December, I also issued a warning to Armenia, that its eligibility may be reexamined if the trends in its ruling justly category continue to weaken.

Our second core principle is that partner countries, not the MCC, have ownership of their compacts.

This is difficult and complex work. It stretches capabilities and in some cases establishes capabilities that did not previously exist. Countries have not been expected to take on this level of accountability and responsibility before, but it is absolutely necessary if we are serious about improving the effectiveness of our assistance, and if the recipient country is serious about reducing poverty.

Third, we believe that a great many of the poor will thrive if they are provided access to healthy economic systems and if wealth-creation strategies are made available to them. We support programs designed to encourage increased incomes and create opportunities for the poor to overcome barriers that prevent them from fully participating in basic economic activity. MCC compacts are removing barriers for improving roads in Nicaragua, increasing productivity of high-value crops in Honduras and overhauling the antiquated land-titling system in Madagascar.

As part of this overall strategy, we welcome activities that remove impediments to growth and poverty reduction, such as health and education projects.

Fourth, as the president said at my swearing in, lifting nations out of poverty requires partnership, not paternalism. From the outset, we insist that each country outline what our joint efforts will achieve. By focusing on these results, we hope our partnership will provide lasting hope and opportunity to those living in poverty. That is our aim and that is our objective.

I think it is only appropriate to ask on behalf of the American taxpayer, as well as on behalf of the citizens of the countries we are trying to assist, that Millennium Challenge become the foreign aid program with clear, measurable objectives at the front end, and with an exit strategy at the back end.

The MCC is about human beings transcending statistics and enabling and empowering citizens of poor countries to get out of the poverty trap. Our success is defined not only in terms of dollars spent, but also on the long-term sustainability of the institutional reforms put in place to support the efficient and effective use of our foreign aid to reduce poverty and to achieve lasting political, economic and social transformation in our MCC countries.

Our ultimate success will be fully manifest only when we are no longer necessary. Earlier, I mentioned the challenge President Bush gave to myself and to my colleagues at the MCC, to be bolder, to be faster and to make a difference. We all know that that's a tough assignment. You know it's a difficult assignment for me and for the MCC, and I know that your endeavors are no less difficult.

But I also know that, working with you, that we can together achieve our objectives. Next year, Roger, if you're so generous to invite me back here to speak to you, I'm confident that I will at that time be able to report to you on our impressive achievements for 2006.

I want to thank you for your support and for your attention this afternoon, and I look forward to answering any questions you may have. Thank you very much.

NORIEGA: Ambassador Danilovich has agreed to take several questions. I'm going to start. We'd ask you that you keep your questions on the plane of policy, and not necessarily submit your applications for money at this meeting, or ask the status of your applications for money.

Ambassador Danilovich, over the weekend, Bolivia had a new president, Evo Morales. Bolivia is a country that is eligible to compete based on criteria assembled by the government toppled by the current president of Bolivia. Nicaragua is an eligible country, based on the work of President Bolanos, and in spite of the rest of the body politic of Nicaragua.

Could you tell us a little bit about your thinking and how you deal with the tensions of those, just being two specific examples?

DANILOVICH: I think those two specific examples, Bolivia and Nicaragua, I mentioned Armenia, and there are many more, in fact, out of our eligible countries, where we must consider the development of political trials and tribulations on a case-by-case basis, and on a time-present basis. The indicators that we use, I mentioned 16 indicators that we have in the [3] categories, are sometimes not perfect, and there's sometimes a time lag between when the assessment is made and current events that occur, as in the case specifically of Bolivia.

And we're constantly working with Transparency, with Freedom House, with Heritage, with other organizations that produce our third-party objective indicators to get these tighter and stronger and more readily applicable as time goes on. We will consider, specifically, Roger, in answer to your question, the situation in Bolivia very carefully.

It remains to be seen how the political evolution and the economic evolution of that country will go forward under President Morales. As you know, he's had a victory tour in Europe, as well as in Havana and Caracas. He has a very intimate relationship with Brazil, where I previously served, and the Brazilians are very deeply committed to a peaceful economic relationship with Bolivia.

Brazil accounts for 15 percent of Bolivia's GDP, and Petrobras and other companies from Brazil have enormous investments, particularly in the Santa Cruz area, which is critical for not only Brazilian energy supply, but also energy supply in the Southern Cone in general. Repsol YPF, I think, was also very strong with President Morales when he visited Madrid on his recent trip.

So, he clearly understands the economic reality of what he's facing should he embark upon a radical nationalization of those properties in the southern part of the country. That being said, with regards to the MCC and the MCC's relationship with Bolivia, it is something which we will monitor and have a very close eye on in the coming months.

NORIEGA: Thank you very much. There are young ladies with microphones -- one young lady. There we go, right there. In the back. No, not in the back, to the right there, sixth row.

QUESTION: Isaac Post, Competitive Enterprise Institute. I'm just wondering, can you update us on the status of the natural resources indicator. I know the process had begun about a year ago, and I'm just wondering if there is an indicator, and, if so, what it might be.

DANILOVICH: We will have an indicator in the coming months. It's been a very difficult process for us to go through and get any type of market consensus, if I can call it that, on what our indicator should actually be and what it should include. However, we're getting near that point where we can address that issue, and I'm hoping that certainly by the summer we'll have a natural resources indicator of acceptable standards.

It's something we've wanted for a long time, not only with the environmental guidelines, but also with natural resources, and it will be incorporated in the near future. That being said, we already have certain sensitivities to the environment and natural resources, when we go through our compact approval process, which we have applied.

QUESTION: Good afternoon. Richard Pearl(ph) with Bearing Point's Emerging Markets. Recently, Secretary Rice has made an announcement that she is appointing Ambassador Tobias to be the foreign affairs coordinator and deputy secretary of state. And at the speech she gave to the U.S. Agency for International Development, she praised MCC on several occasions.

I was wondering if you could comment on how MCC tends to work in this new vision that she is proposing?

DANILOVICH: Randy Tobias will be head of USAID and director of foreign assistance. He'll have an office both at USAID and in the State Department. He of course has to go through an approval process, a Senate confirmation process. It seems to me, and I think it just is general knowledge and wisdom, that reform in our foreign assistance has been screaming out for decades, and I think this is a very strong and forceful attempt to bring some coordination to that effort.

The MCC is an independent organization. We're an independent corporation. We go to Congress independently for our budget, for our appropriations. The Secretary of State has made it clear that the MCC is to remain outside of this overall restructuring in terms of direct-line reporting. She's made that clear, as you mentioned, in her speech at USAID, and she and I have talked about this on a number of occasions, as have others involved in the State Department, as have Randy Tobias and I.

There's no question in any case that we're all part of the same team and there has to be a great amount of coordination. For example, this weekend, as you know, there were some disturbances, some explosions on the Russian gas pipeline. The Russian gas pipeline directly affects a number of the countries in the Caucasus and Central Asia, two of which are MCC countries, Georgia and Armenia.

Specifically, we have in our Georgia compact a $40 million component for the rehabilitation of the Georgian pipeline. Although it wasn't the Georgian pipeline that was disrupted this weekend, gas flows and energy flows into Georgia have been disrupted.

So, I was on the phone on Sunday to our ambassador in Yerevan in Armenia and also in Tbilisi to get an accurate picture of what exactly the problem was and how immediate the problem was. It appears that the problem, although serious, very serious, is not immediately dangerous to Georgia in terms of getting supplies.

It seems that the Azeris, and to a certain extent the Armenians and the Turks, may be able to compensate for part of the loss which they're going to incur because of the explosions on the Russian pipeline. That's part of the coordination that has to go on with regards to the MCC and the State Department and all U.S. aid agencies so that there's not a poor coordination of our efforts overall.

That's a very specific example and an immediate time-relevant example of where there has to be coordination in our foreign assistance.

But there is a vast collection of areas where the MCC and USAID and other organizations are operating. I'd like to think the MCC, given its narrow, small and very focused definition, manages to go forward in a very direct manner without overlapping too much with other programs that either exist from the U.S. government or others.

But the question of coordination of U.S. foreign assistance is one which has to be addressed and one which we are very much a part of, although we are an independent organization.

QUESTION: Annabelle Lee (ph), I'm an independent consultant. My question is at the level of policy and strategy in developing compacts, a few days ago, my conversation with African nationals, there were some interesting remarks on sort of renewed interest in East Asian model of development. How do you see -- when you develop a compact, do you have, in terms of priorities in allocating funding and development strategy, what are the current priorities between public sector, private sector and nonprofit, or non-governmental organizations?

DANILOVICH: The priorities that you've mentioned are not MCC priorities. The priorities that we insist upon are from our recipient countries. They must conceive, create and propose a proposal to the MCC. We give them no specific guidelines as to what we think they should be doing in their country.

We rely upon them -- this is part of the country ownership aspect, this is part of the accountability, this is part of the responsibility of having the recipient countries be in charge of their programs. We insist that they pursue a very broad and deep consultative process within their countries, taking into account a vast assortment of comments from the public sector, the private sector, from NGOs, from a number of other individuals and institutions within their countries, to then come up with a proposal without interference from us.

That proposal is then presented to us and we negotiate that with them in case there may be -- let's say, certain aspects of their proposal which might be better used or better expressed or better created. So the burden is really on the recipient country to come forward with their proposals, not on us to go to them and say, "These are our priorities." The priorities, in answer to your first part of your question, are theirs.

You raised a very interesting point with regards to the private sector. I very much want to find a way for us to cooperate more fully with the private sector. Chuck Sethness, one of our vice presidents, is here today, and he is also pursuing public-private partnerships and things where we can cooperate with the private sector to bring their impact, their influence, their comments, suggestions, criticisms, and perhaps involvement, at some point, into our whole process.

QUESTION: Thank you, Ambassador. The question is timing and leverage. In the advance of the Doha development round opening up some markets in the West for many of your recipient or beneficiary countries, but often building a port or building transport link may not in itself be enough to make these countries more effective and more competitive. It may need to be linked with a softer type of technical assistance in the form of, say, using cotton, agricultural seed varieties, technical assistance on growing practices, ginning and so forth.

Is there going to be any effort -- I know they write their own plan, but will there be ways in which we can help supplement those plans with technical assistance that might be available? And not only initially just from the U.S. government, because, like you say, it's in the process of reform.

DANILOVICH: Well, with regards to cotton, you might well imagine that I've had some very interesting conversations with Rob Portman on this subject, specifically. And we are involved in West Africa, where it is a critical factor in their economies. It somewhat goes back to the question of we rely upon the countries to tell us what they want to do, and they surely know of their cotton requirements in these countries.

They have chosen, however, in those countries, not to have a-- let's call it a cotton component -- and have come up with other projects and have sought other donors to assist them in the cotton area.

I think it would have been interesting had they found some way to incorporate cotton into some of their packages, and it may well be that with regards to -- for example, if we have an ongoing irrigation project, that automatically affects the agriculture and affects the cotton in that area.

What would have been interesting, I think, and what is interesting, would be if these countries were to come up with a package which calls for diversification of their agricultural sector, instead of concentrating on the support of their old agricultural sector, which is in poor straits, in many cases.

I'd welcome an opportunity to be able to address agricultural reform in countries, along with irrigation, soil, those types of projects. And, as a tack on, somewhat deviating, educational projects that directly relate to agricultural reform I think would be of interest.

NORIEGA: We have time for one last question.

QUESTION: My name is Nicole Christianson (sp), I'm from Jefferson Consulting Group. This is just a more general question. You touched upon, perhaps, a new environmental indicator coming into effect by summer 2006. I wondered if you'd be at liberty to discuss any other changes in indicators that you foresee occurring either in 2006 or 2007.

DANILOVICH: The indicators that have evolved to date I think are really very solid in our three categories: in the economic freedom, investing in people, ruling justly. It's important to bear in mind that we're dealing with countries that have often -- not always, but often -- a very feeble institutional infrastructure. And, as I mentioned in my remarks, some of these countries are being asked to do things they have never had to do before, and in some instances they don't know how to do them, and in some instances we're establishing those capabilities in cooperation with them for the first time.

So it's not as if we could request, or impose upon them, at the other extreme, those same demands and qualifications and standards that we would have on our own country or in the developed world. So, it really is a matter of working together with them on the 16 indicators -- or perhaps 17, which we will have in the near future. It's not quite clear, by the way, on the natural resources area where we're going to incorporate that indicator. We may stick with the 16 and sort of re-jig them in one form or another.

But, as I mentioned, we're close to getting a resolution on that. We do examine our indicators regularly. We do reconsider them regularly, and we're not afraid to adjust them if we need to.

Thank you very much.

NORIEGA: Thank you very much, Ambassador. Do you want to take one more question?

DANILOVICH: Sure.

NORIEGA: I've got a tough one right here.

DANILOVICH: A tough one.

QUESTION: Mel Foote. Constituency for Africa. My question has to do about development. Development is the goal. Is there any thought to regional projects, or are we going to limit it to country only, which might breed...

DANILOVICH: Sure. There is thought being given to regional projects. That thought is probably more, at this stage of this young organization, probably tending a little bit more towards the negative than the positive, that being because our intention is to be transformational in the countries that we deal with.

We're asking countries to make an enormous effort, economically, politically and socially, to rise to the indicators, to adopt indicators, to adopt legislation and to adhere to those indicators throughout the lifespan of the compact. It's not quite clear to us yet, and we're probably not ready to address this question yet, whether a regional developmental program, a regional aid program, would actually be able to have a national impact.

For example, in a country like Brazil, would it be worthwhile to choose a province in the northeast which had a very viable program that we could be of assistance with, when it probably wouldn't have any transformative effect on the overall country? And that's the question we're addressing now.

So, for the moment, we probably would not pursue regional development programs. We'll still stick to a national level.

Thank you.

NORIEGA: Thank you very much, Ambassador Danilovich, for that terrific presentation, and we understand you're going to have to leave during the panel. But he won't be walking out on the remarks of any particular person here, certainly not in reaction to our next speaker, Ambassador Jose Brito, who will tell us a little bit about the experience of a recipient country.

Ambassador Brito was appointed ambassador of Cape Verde to the United States on November 8th, 2001. He has more than 20 years experience in management and government service. He worked for Ocean Energy from 1997 to 2001, serving as the company's government relations manager, government relations vice president and consultant in governmental affairs. From 1992 to 1996, Ambassador Brito worked on a U.N. project to assist African governments in developing a long-term strategic planning process.

Ambassador, thank you for coming.

BRITO: I'd like first to thank AEI for this invitation. I won't try to increase my English. I'm not an Anglophone country, but an English with French accent, representing a Portuguese country. But it is a great honor for Cape Verde, a very small country, to have been chosen to make some remarks after the important speech of Ambassador Danilovich, at this important moment of reflection on the future of the U.S. development assistance.

Based in my 30 years of experience in development assistance, I have had the privilege to work in various capacities on development assistance, as minister of development in the U.N. system and in the private sector, making development in the private sector. I would like to give you some thoughts about my experience working with MCC.

First, development assistance is a two-way street. The donor needs to play his role as provider of adequate resources, and the recipient has to create an environment to use efficiently these resources.

So, I think that the difference between the MCA initiative and other initiatives is that MCA is the first to vocalize this tie, link, between assistance and a good environment for policy implementation. By choosing countries that are doing the right things to develop, MCC has responded to a precondition for success.

But it is not enough, because development takes time and it is a very complex process, as you know. MCC stakeholders have to take time and understand that in development we need to be patient. However, we understand also the U.S. culture that it is important to show results, and it is why we need to demonstrate that MCC is on the right track to show results in the medium term.

Let us try to show that in Cape Verde we are in the good direction with MCC. Cape Verde being one of the more advanced countries in the implementation of the MCA initiative. We already signed the Compact. We fulfilled the conditions for the first disbursement and we have started the implementation, so we are already are in the advanced stage.

So we can talk about these different phases of the MCC process and by doing this I would like to go to what MCC wants to demonstrate to make a difference, and I think they try to make a difference in four areas.

The first one is fostering country ownership. The second is encouraging a participatory process and national priority setting. The third is innovation in the aid business. And the fourth is creating incentive for policy reform. I think these are really the four key areas where MCC wants to show a difference.

First of all, country ownership. I think trying to separate two phases, completely different phases, the pre-compact and the after compact. The pre compact, mainly the issue of ownership is when we make the choice of the program to be financed by MCC, and in this way we have a tension between the tendency of the country to prevent wish lists, and what MCC staff consider reasonable for financing. And in Cape Verde we resolved this issue, because we arrived at the first time with a wishing list, and I have to say that, as the first country to present, we had some difficulty to guess what area MCC really wanted. And we stopped this when we decided with MCC staff to work as a team.

So we decided that Cape Verde team and MCC staff is a joint team, and our objective is to present an MCC program that will be accepted by the Board. So, when after some time we resolved this issue of the team, we really started to make progress. But we know that if we have made progress -- Cape Verde was the first country to present its program -- it's because Cape Verde, before the MCA initiative, had a clear vision, had a strategy, had defined itself its priorities.

So, for me, the first condition, have the country know where it wants to go really, and, with this in mind, start negotiating with MCC. And I think we facilitated the relationship and made it happen very quickly. So, it is a problem we linked at the national level. So you need to have your vision and your strategy to make it happen.

After the compact, Ambassador Danilovich said in his speech that the country conceives, develops and implements its own program, and MCC oversees and monitors the program. And I think it is a very important statement. The country has to conceive, develop and implement its own program, and MCC needs to oversee and monitor the program. And, in this case, we have to think about MCC's tension between the need to respond to the MCC stakeholders -- in particular, the Congress and the NGOs-- always to be sure that we'll show results.

And there is a possibility, and we have this problem, that there is a tendency for the micromanagement of the program -- not because they want to micromanage, but because there is a need also to be sure that the taxpayers' money is well-used. So, it is a real problem. So we cannot say that it doesn't exist, and with this also we have the issue of the lawyers.

We've discussed it several times, with Jon, on this issue, what is the role of the lawyers in the implementation of a program? Just to give an idea, we discussed a lot in the pre-compact phase about the role of the lawyers and what we have to decide. When you come to implementation, you have, I think, maybe to sign a contract with a consultant, and here you start discussing the Napoleonic vision of our judiciary system and the Anglo-Saxon vision.

So you have a tension, and we had some problems on where to go ahead. So, it is important that in this phase, really, we don't see the problem of laws on these things and go to results, really. It is important for us, because I am sure that we may have started already our road program if we did not to wait a long time to have an agreement of the lawyers.

I don't say that this is not important, but in the implementation phase, it is important for us to be a developer. We want to have results, and we'll talk about how these contracts can be done.

The second aspect, encouraging the participatory process approach. In Cape Verde, it is easy, because we are used to doing this since the beginning. Participation is something that we have done, and the vision is a consequence of our participatory process. And, for this, the issue is not only to see participatory processes in the first phase, but also with implementation, to say that now you need to send people to all the places where we have projects to discuss with the stakeholders the question of their participation. Because it is not only in the first phase, but also in implementation.

Innovation in the aid business. There is, from my experience, very little to innovate in the aid business. I think we have tried everything, from budget support, project support, program support, sector support, all these things, but I think in this space what needs to be done, really, is to reinforce the capacity of the country to manage aid resources. This is important. We, in Cape Verde, we have this experience with managing aid.

And I think at this moment, what we more need at this moment, is to create systems for our capability and for measuring results that balance the donors' needs and Cape Verde's priorities. So we are working on this and it is why the monitoring and evaluation at the implementation phase has to be one of the key aspects to allow the MCC to oversee the program without doing micromanagement.

The issue of donor coordination, we have a lot of discussion about this. For me, there is no donor coordination, there is country coordination. There is a consultation between the donors to share information, to know what they are doing, but the coordination has to be made by the country. Ownership is before a country to take the lead for the coordination of the donors.

And we have also another tension, it is a human resources constraint. It is a clear, with the number of donors, you don't have the staff in this country to respond to all the donors, and it is a problem. How do you get the best human resources to help you, really, to implement your program without compromising, other programs, other donors, that also are important for the country. And it is very difficult. It is why capacity building in this case, during the implementation of the program, is very important to help really with the country to be able to add capacity, to reinforce institutional capacity, to do this.

The last, for the creating incentives for policy reform, is an issue really, of how to create political will to support the initiative. In Cape Verde, I can say the driving force is not what maybe MCC thought. The driving force was a need for the current government to win the election, because we needed to show results. As a democracy, we have competitive environment at the political level, and government needs to show results. And to show results, MCC seems a way really to realize some of the objectives of the government to show results.

So, this was really this -- I consider incentive for creating a real political will, because political will, from our experience, is a key issue for the country to implement MCC, even for the first phase in the discussion. So it is very important and this can be one of the aspects.

Another aspect is how effectively MCC is able to put substantial investment to free the most important constraints of the development of the country. For me, the issue is not the amount of money, really, the issue is how you can put enough money to resolve a problem, a constraint that the country has, and when you come and say “I can resolve this problem,” so the political will will be here.

So, we need really to work together as partners, because it is our joint interest in creating wealth to reduce poverty. And I think one of the aspects important of development today, we are too focused on focused on poverty reduction. So the programs that most of them that we have, is poverty reduction.

I think the issue is creating wealth. By creating wealth, we reduce poverty, but we need really to have this idea. And we have to make a shift also, even in the institutions for development today, where we want to see things bigger. And the people of the World Bank come to say, “No, you have to resolve this issue of poverty,” and compensating for problems you create on the other side, for example, in the trade aspects- the unjust trade that we have at the international level, or other problems.

So we need really to work together and for us it is very important, this initiative, because this initiative can make a difference, really, to reduce poverty, and really to help countries to develop. And we have to be patient, really, because I see, from my experiences here in the U.S., that people are impatient to have results. But I think it is important really to be sure that we are in the right direction, is much more important than the image of results. Thank you.

NORIEGA: We have time for a couple of questions, or one or two, for Ambassador Brito?

Yes, this gentleman.

QUESTION: Thank you very much. I'm Ambassador of Burkina Faso. I really don't have a question. I want to say two things. The first thing, I want to congratulate the MCC team, because I know that it is not easy to work on the development area.

As Ambassador Brito said, people are very impatient when it comes to implementing programs and see results. But we know in the development area, things are very complex, and I think what you have done is very good. This is my first observation.

The second one, I think that the most important things that will make the difference with the MCC is the ownership. But we have two kinds of problems when dealing with ownership. The first problem is the tension between ownership and results. If you want the country to be in the driver's seat, you need to know what is the capacity of the country. Do they have capacity? Do they need to build capacity before designing a program, so all the countries are not on the same level?

So, I think we need to be very careful, because if we want to go very quick, maybe what we'll do, we will lose this aspect of ownership. The tension between ownership and results -- and I think the main goal is to have an impact on the beneficiaries, and if you want to have an impact, you need to go at their rhythm.

If you want to go very quick with someone who can't go quickly, what will you do? You will go and leave him behind, and I think it's not what MCC wants to do.

The second thing, dealing with ownership is how we can get really the people involved. When it's come on the elaboration of the compact, I think things are very clear. We need to go through a participatory process in order to have the civil society, the private sector, the NGOs, be part of the participatory process. And from this participatory process, we will see what are the priorities in order to design the compact.

But what is not clear is the implementing of the program. When it's come to the implementing of the program, I think the main problem we have in our countries is the problem of the efficiency of the public expenditure. We don't want to focus only on what the U.S. is doing. How are we going to manage the U.S. budget as it should be done? But I think the main problem we have is the country capacity to manage its whole budget, because we know that MCC alone is not ever, and won't have, a very important development in the countries, but MCC can be transformational. And, if you want to do it, you have to work on the country capacities. And, in our countries, the problem is not really in designing the programs. We know how to do it with the World Bank. The problem is not the participatory process, because all the countries have what we call a poverty reduction strategy paper, and we know how to do all those things. But the problem is how to implement this program in order to strengthen the country's capacity to really take the control.

And I want the MCC really to think a little bit about this, because what I can see sometimes when I discuss with an MCC staff member, I can see that they are very careful when it's time to discuss on the implementation, "No, we want to know where our money is going. We want to follow it."

Yes, of course, that's very good, but what is better is to have a very transparent budget management system in our countries. How can we help, how can you help our countries to implement those kinds of systems and really to be focused on the results?

NORIEGA: Thank you very much. Anyone else not have a question?

No, I think quite frankly the Ambassador's comments have a lot of legitimacy, and I think that we can see the relevance of all of his comments.

Ambassador Brito, thank you very much.

We're going to begin our panel discussion now. The Ambassador of Burkina Faso made a point of thanking the MCC staff for its terrific work. I, as assistant secretary, certainly have no complaints about the work of the MCC and the board that manages it, having approved programs in Honduras and Nicaragua, moved them very, very quickly, the eligibility of Bolivia. And so I personally want to echo the thanks of the work of the Corporation in the last couple of years, and note the presence here of Paul Applegarth. We're very pleased to see Paul Applegarth, who steered the MCC from words on a piece of paper to a program that's worthy of this attention here.

Our first panelist, and I'll introduce them individually just as they will make their presentations, is Clay Lowery, who was sworn in as Assistant Secretary for International Affairs at the U.S. Treasury Department November 2nd, 2005.

The Assistant Secretary supports the Undersecretary for International Affairs in advising the Secretary and Deputy Secretary of Treasury in the formulation and execution of U.S. international economic policy. Prior to his service as assistant secretary, Mr. Lowery was Vice President of Markets and Sector Assessments at the MCC.

We've asked him to comment a little bit on the origins of the MCC concept, specifically the nature of the indicators, incentivizing reforms and the tensions between the priority of moving money and doing so in a way that meets conditions and accountability.

Mr. Lowery.

LOWERY: Thank you, and a pleasure to be here, and thanks to AEI for putting this together.

I have a sort of unique perspective. I was at the National Security Council when this idea was kind of created, so I actually was involved in the original architecture, for better or for worse. I worked at MCC as a staff member under Paul Applegarth and now I am actually sort of a shareholder, I guess, at the Treasury Department. Sean, who will be speaking soon, is kind of more along the type of person who gives either a capital infusion or a foreclosure on the MCC concept.

In 2002, when this whole idea was created, and sometimes the "New York Times" thinks that the MCC has existed since 2002, but it was actually an idea in 2002. It revolved around an initial question, and then a series of questions after that, and I want to juxtapose that until today, because today there's another series of questions that MCC needs to address. And the difference is, back then, there was no such thing, and now they have to do it more on the fly.

The main question I was asked back in 2002 was, "Why isn't anyone listening to us? We always are talking about we really want to reward countries that are doing the right things and provide foreign assistance to those that are doing it and measure the results." And the reason was, of course, is that while there are some very, very excellent U.S. programs, there wasn't anything that did this in a very objective way, that you could see that.

So, the second question then came, all right, so if we know that it's not really being done that way in the United States, maybe we need to do that. And so that kind of created the idea of maybe we should form something like the Millennium Challenge Account.

So the next question was, well, how do you do that? How do you create a system that people can understand as objectively as possible and be transparent, so that everyone understands how you select these countries? And that's where you got into these criteria, and as Ambassador Danilovich said, criteria aren't perfect and they have problems in them, but it is a good way of allowing people to understand how MCC is making its choices. And, if anyone wants, I can go through all the criteria, but since we have a full panel, I'm going to skip to the next questions that were asked.

Another question that was asked was, how do you give kind of a lot of what Ambassador Brito talked about, how do you give the countries more responsibility for these programs? How do you get them to buy in?

Obviously, you can do cost-sharing type of agreements and things like that, but the main thing is we want to use their ideas and their resources so that they can build the capacity, so that the ambassador from Burkina Faso doesn't have to stand up and say, "I need more capacity on budget management." Instead, countries start building it up by themselves by working with people like the MCC.

And another question I was asked is just a simple management question is, where do you put this thing? Do you make it independent, do you put it at the State Department, do you put it at AID? What do you do with it? And the answers were, look, we want to try and get a fresh beginning. It doesn't mean we're going to do better than AID, it doesn't mean we're going to do worse. We're just going to try something different, and so that was kind of the idea of MCC.

Now, we're four years later, and during this time there's been another series of questions you had to keep asking yourself while you were through all of this. Only two of those years has it actually existed, and I think Ambassador Danilovich did a good job of explaining all of the results that had been achieved, but how much more needs to be done.

Now the questions on the table I think are, is it more important to move money or should we measure the results up front and know exactly what types of things we're getting for these results?

Second, should we emphasize sectors? Is there a specific sector--a lady asked a question earlier if there is a specific sector maybe we should be emphasizing -- or should we actually try to really figure out what the country wants, and that might not be the sector. It might not be an infrastructure program or an agriculture program or an education program. It might be something different. But that means, what are these countries telling us that's going to be important for economic growth, and then does MCC have the ability to analyze that to make sure that we agree with that?

And then finally is: Does MCC take more risks about what it's trying to do, or is it more concerned about, "Don't you dare lose a dime. You'd better not lose a dime"? And that's what I kind of want to talk about a little bit for the next few minutes.

The first two questions, I know exactly what I would do in answer, and if anybody wants to know, I will tell them. But, on this last one, it's a very, very tough issue. Do you take more risks or do you worry about losing a dime?

One of AEI's scholars, Roger Bate, has written a lot on this issue. Sometimes he's whacked away at USAID, maybe a little more than probably the Administration would like him to, but he's written some very interesting points.

For MCC to take more risks, basically what does this mean? An analogy is, don't spend $10 to protect $5 going out the door. That's kind of one of the concerns that sometimes goes on in development.

I think MCC has to figure out ways, and I have some of my own ideas, but it's tough because of the way our system works, the way our government procurement and contracting system works, the way the oversight from the Congress works. So, instead of trying to figure out exactly how to do that, because I think the people at MCC can do it, I think that basically I want to talk a little bit about what are the consequences of taking more risks?

The consequences, as I see them, are first toward the Millennium Challenge Corporation and the people there. It means that they have to be good at saying no, or cutting things off. Now, there are different places of saying no. First is, "No, we're not going to do a compact just because you wanted to build a bunch of golf courses in your country."

Second, we need to say no because there's corruption problems. Now, everybody I think would think along those lines.

But, thirdly is, "No, or we're going to cut it back because we're not getting the results out of this program that we said we were going to get at the start."

Now, that's very difficult, so this then puts the responsibility on somebody else, and that responsibility is on the administration, whether me as a shareholder at the Treasury Department, or Roger Noriega at the State Department when he was there. And that means being able to back MCC up when they are saying no-- no to countries that we like, no to countries that are doing a lot of the right things for us in other areas, but maybe not necessarily, the project is not going the way we want it to.

It means that we have to defend MCC up on the Hill, because if you're taking risks, that means the idea is you're taking a little more risk to get more reward, but that means there is chance of something going wrong.

What does it mean for the Congress? It means Congress has to give MCC a little bit of ability to take those risks, and that's a tough thing for Congress to do. I get it. The Congress appropriates the money, expects the administration to spend it wisely and so forth, and we all know there have been lots of problems over many, many years, putting aside earmarks and things like that. But you get more and more controls being stamped down, to the point where, frankly, it's harder to get the results that you want to get.

It also means institutions like the GAO and the Inspector General have to basically understand MCC's model is going to be a different model. It's not a better model, it's a different model. And so therefore you have to judge it differently. You cannot take the way USAID runs their programs and say, "Well, we're going to apply the same model to how we do our oversight to what USAID does."

It means that you'll have to do a different model. You might have to create a whole new model if you're in the GAO's or the I.G.'s spot. It doesn't mean you should tolerate any corruption or stupid procedures on MCC's part, but it does mean that you have to take a little more chance to learn a different subject. It's a whole different way of doing business.

I wanted to say one last thing, which is an example of where I actually think MCC is actually proving and knows how to say no. The Ambassador gave a few, but let me give another one. And I can now say this publicly. I wasn't allowed to for a while.

The country of Armenia turned in a proposal back in 2004 for $900 million over three years. Now, everybody kind of giggled about $900 million over three years, but it wasn't just about the money. I mean, the money was pretty ridiculous because of absorptive capacity issues and things like that, but it wasn't just about the money. It was about the fact that it was $900 million to do 27 different things, and it was like a big Christmas tree. I mean, every ornament and so forth.

So MCC said, "No, we're not doing that. That is not what this program is supposed to be about." And no one really knows that MCC kept saying no to this, and Armenia obviously has a very powerful community and people believe in it very strongly. Instead, Armenia went back to the drawing board and rethought what it wanted to do, and it turned in $175 million proposal to MCC to actually help its rural communities on irrigation systems and to build some farm roads and to help with productivity.

What did MCC do? They boosted it. It became a $235 million program, because that was the best way and the right amount of money, they thought, working with the Armenians, to make this program actually work. So not only did they say "no," they said no first and then they said, "No, but more." Which I think is a good way of thinking about this.

Now, look, MCC is still unproven. It's two years into it. Within the next year, maybe two years, you're going to actually see, is this thing working or not? But I promise you, if they're allowed to do what I'm saying, which is take some risks, there will be things that go wrong, and as long as we can say no at that point and make the corrections, then I think MCC can be a much better institution.

But, anyway, thank you very much for having me here.

NORIEGA: Thank you very much, Secretary Lowery. We'll take questions for the entire panel after all of the presentations.

Sean Mulvaney is the kind of partner that you want to have on the Hill when you're setting up a program like MCC. He worked in the U.S. House of Representatives over nine years in various positions, focusing on foreign affairs, trade and budget. From the spring of 2001 until mid November 2005, he worked as senior adviser to Representative Jim Kolbe, the Chairman of the House Appropriations Subcommittee on Foreign Operations.

He has a bachelor's in science from Washington University in St. Louis and a master's in international management from the American Graduate School of International Management in Arizona, Thunderbird. He currently serves as an assistant to the speaker of the house for policy, but focuses on a different portfolio other than foreign affairs and foreign assistance.

We've asked Sean to talk to us about Congressional intent, Congressional oversight of the MCC, and maybe he can share with us how Congress appreciates this issue, the tension between moving money and taking risks at MCC.

Sean?

MULVANEY: Thank you, Roger.

First off, I want to thank AEI for inviting me here today to be a part of this panel. I really appreciate the opportunity to provide perspective on the legislative intent of the MCC authorization.

I want to do an opening disclaimer, if I could. I mean, my remarks here today are more as a private citizen and a taxpayer, because I've recently switched jobs within the House of Representatives. But what I'm going to say is very much akin, if not very similar, to what you might hear from Congressman Jim Kolbe of Arizona, the Chairman of the House of Foreign Operations Subcommittee.

Until mid November, I worked for him, as Roger noted. I staffed him during the early debates on the MCC, as well as the final authorization that was included in the Foreign Operations appropriations bill, which entailed me providing input to House authorizers of the MCC, negotiating with the White House on the final MCC authorization, as well as negotiating the terms of the MCC appropriation with House and Senate appropriations staff. At present, I work for another member and do not have the MCC as my current portfolio.

First off is an overview. Congressional intent with regard to the MCC was to have a major reform in one sense, a major innovation in another and a major increase in the implementation of foreign assistance. That is to say, for some members of Congress, the MCC truly was a major reform.

It was going to be a sharp departure from the past. That was Mr. Kolbe's view. For others, the MCC was simply an innovation. It was something to incorporate lessons learned in development and to spur economic growth and poverty reduction alongside other traditional development accounts.

For others, still, within the Congress, it was simply a way to argue for more foreign assistance, because they believe in that school of thought that it was the quantity of resources that mattered, not the quality of the effort by the developing country.

Now, creating the MCC authorization was very much a Herculean effort by the Congress. It was far from clear that that authorization or appropriation process would go smoothly, based on the Administration's kind of early submission of a blueprint for authorization. The MCC creation was such an enormous challenge, largely because it was trying to achieve massive reforms in three dimensions of the U.S. government.

Those three dimensions are, first, within the U.S. executive branch, second, between the Congress and the president and, third, a reform of the U.S. government interface with the developing country. Now, any one of those would be difficult alone, but all three at the same time was very much, very much, a challenge.

To date, I think that the MCC has largely been a success, even if only a partial one, given the relative age of the MCC. As a parent of twins who just turned age two, I kind of think of the MCC as in a toddler stage. It is very far from that adolescent stage, or maturity stage of young adulthood. And I think that's important for us, all of us across the Washington spectrum, to have some sense of that age, because it's important to manage expectations.

Results will not be achieved tomorrow. We have to look at initial, intermediate and final results over a three-, five- and seven-year horizon.

Now, what I'd like to do is draw your attention to three areas or issues where major reform or change was achieved in the MCC authorization. First, there's no other account like it within the Function 150 accounts. At the time of its creation, and even now, no other presidential request or congressional account performs the same role.

One can look at all the other accounts of foreign assistance, D.A., DSF, child survival and the president's HIV/AIDS initiative, and none of them provide the incentive for developing countries to attain, or at least strive for, sound political economy as a precondition for eligibility. In other words, this account creates very much a carrot effect for the blocking and tackling fundamentals that I would like to describe in development.

This is different from the rest of the accounts within the federal budget structure. Often, those other accounts, traditional accounts, do the opposite. They actually provide a disincentive for helping countries get the fundamentals right. I can go into that later.

Another area of reform, that I would draw your attention, is how much executive branch flexibility Congress gave the president. Starting with the House and Senate Appropriations Committees, the Congress agreed to provide the resources for the MCC in a way not designated or allocated by country or development sector, as is the case with most all of the other appropriation accounts.

Said differently, or more simply, the resources are not earmarked in bill language or report language. That was a huge amount of congressional trust that the Congress has put in the MCC, and it's one that has to be carefully managed over time, because the MCC will lose it if it doesn't manage that trust carefully. This indicates -- because there largely was a quid pro quo in the authorization. Congress agreed to this experiment as long as the executive branch followed the rules of the road embodied in the authorization.

The third area of reform or innovation that I would draw your attention to would be that the MCC would be wired differently, wired differently in the sense of how organizations or agencies or Congress and the executive branch get influenced in the annual federal budget process, in the implementation process of this foreign assistance.

The MCC was wired differently in order to achieve some local ownership and capacity building in the implementation of foreign aid, and, more importantly, it was wired differently to achieve some local accountability for results. A developing country, national government and civil society would be partners in the process. An indigenous civil society would be invited for input and consulted during the development of a compact.

As an aside -- this is my own opinion now -- this is not the way that most other U.S. programs of bilateral assistance work. Existing U.S. bilateral programs, largely, they can contribute at the civil society development, absolutely. And we have a number of those programs that do quite a good job.

But the current foreign assistance programs in the D.A. or child survival account do not necessarily create this nexus of civil society input and oversight during the creation of foreign assistance programs. So that's something that's very different with the MCC.

Now, I want to kind of -- in closing, let me identify one area where I believe the MCC has a key shortcoming, where we haven't yet accomplished what the authorization wanted to do. As many of you know, the MCC board has a very distinct architecture. There are nine members, five executive branch members and four non-executive branch members.

The Secretaries of State, Treasury, USAID administrator, USTR and CEO of the Corporation, those make up the five executive branch board members. Then, there are four non-executive branch members. These members are nominated by the president and confirmed by the Senate.

Importantly, two are drawn from individual lists submitted by the majority and minority leader of the Senate. The other two are drawn from lists submitted by the House Majority and Minority leaders. There are several reasons for this board architecture, and I won't go into all of them.

But, first, the Board architecture was intended to encourage an integrated development framework among U.S. government departments and agencies. This was supposed to be an improvement on what we don't have, necessarily, in other bilateral programs as well as we should, in terms of interagency coordination.

What I will identify as a shortcoming here really relates, though, to the role of the four non-executive board members. Congress created this board with those four members really to provide stability and continuity to the President's vision to the MCC.

This is particularly important because Congress that the presence of these independent board members would help keep the process honest when decisions were made and programs were implemented. Fear existed that a board comprised solely of executive branch members alone would make country selection and implementation decisions based on geopolitical pressures, the need for a White House deliverable, or a press release, or even regional foreign policy pressures, not according to the eligibility criteria established by the president and by statute by the Congress.

It was intended that these four members, collectively, would serve as a check against other interests operating to undermine the statutory goals of the MCC. At present, we only have two of those non-executive branch board members who are nominated and confirmed by the Senate. Those two are off of lists from the Senate. The other two are supposed to be nominated and drawn from lists submitted by the House majority and minority leader.

And what I would leave you with is I think an importance for the President to take that step, to nominate those individuals and round out the membership of the Board. And it's not because I think that there has been a tremendous problem in MCC board operations to date. I do not. What I'm more worried about is the future, in the sense that over the five- or seven-year horizon, I think it's important to have the other Board members in place for that continuity and stability.

I think the MCC Board has done a terrific job, or a good job, to date, and I think in the future, though, it's important to round out that Board so that it more accurately reflects Congressional intent.

Let me end my comments here and reserve other comments for questions.

NORIEGA: Thank you very much, Sean.

Maureen Harrington is managing director for Africa at the Millennium Challenge Corporation, where she is responsible for overseeing MCC's efforts in Anglophone and Lusophone Africa. Prior to serving in this role, Ms. Harrington was the Senior Adviser to the Chief Executive Officer at MCC. She previously served as Special Assistant with the Bureau of African Affairs at the U.S. Department of State, where she was responsible for a number of private sector development projects, and she'll be telling us a little bit about experiences on the ground and the implementation of MCC's mandate.

Maureen?

HARRINGTON: Thank you. First of all, on behalf of the staff of the Millennium Challenge Corporation, I'd like to thank you all for being here. It's been an extraordinary experience for all of us to be part of this experiment or this process for the last couple of years, and really it's days like this when all of you are sitting here listening and adding your comments and constructive criticism, it means a lot to us as a team, because I think we've learned a lot and we appreciate your support.

As Ambassador Noriega mentioned, my task today is to talk to you a little bit about MCC's implementation efforts, and we've talked a bit about some of MCC's core principles, and what I'd like to do is give you a bit of a report card from a little bit closer to the ground, working with some of our partners. And my experience is through the lens of some of our African partners, and to many of them who are here today, thank you for coming.

The four core principles I'd like to discuss and give you a bit of flavor for are the notion that good policies matter and what that means on the ground with our partner countries, how country ownership has played out in both the proposal design and implementation of our programs, measurable results and transformational impact and, finally, the incentive and reward of being an MCC-eligible country. And if, indeed, as Ambassador Zongo mentioned, there has to be some sort of trade-off to achieve all those, or if we can have it all, as we're trying very hard to do at the moment.

When it comes to good policies, as you know, MCC partner countries have to meet certain criteria to be a partner, but the policy reform continues, and I'd like to share a couple of examples of that on the ground.

In Lesotho, the government has embarked on a very broad policy reform initiative to reduce poverty through growth, giving married women opportunities to own land and bank accounts, reforming the civil legal center, land titling, mortgage reform, customs reform, support for small businesses, financial sector reforms. And MCC is working with the government of Lesotho on some of those to help them, so that when it comes time for our board to make a decision on a compact, we can include some of the technical assistance that's needed to actually put these reforms into place.

In Ghana, Madagascar and Nicaragua, the governments are tackling very challenging issues around land titling that they hadn't been able to resolve up until now, but that have been identified by the countries as necessary to resolve in order to facilitate poverty reduction through growth. And in Cape Verde, as Ambassador Brito mentioned, and in other countries in Latin America, we're doing very innovative things about road maintenance funds. And these are policy decisions that were hard to make in the past, but that MCC is helping our partner countries to move forward with. And not only the countries that are part of the MCC, but also countries that would like to become one of our partners.

We're seeing interesting efforts take place on policy reform that I think it would be interesting to note. In the days to start a business indicator that MCC uses to select our partner countries, we've seen a significant drop, and the IFC actually calls this is the MCC effect, and that's something that we're very proud of. Also, approximately 60 percent of MCC candidate countries, those that are part of the pool of countries that are competing for our assistance, have been by to meet with the team from our development policy shop to better understand what do they need to do, what policy decisions need to be taken in order to qualify for MCC assistance?

And, again, it's kind of an intangible, anecdotal story, but something that we're very proud of in terms of how countries are taking this policy reform seriously in order to work with us. And so I think MCC is doing a pretty good job on spotlighting the importance of good policy.

When it comes to our second core principle of country ownership, as Ambassador Danilovich mentions, countries are being asked to take on a much greater level of responsibility for their development efforts, and implementing the principle of country ownership while also trying to also implement the principle of a quick reward is one of the greatest challenges that MCC is working on right now, and we take very seriously. And let me give you a sense of what I mean.

Following the selection of the countries in 2004, we had lots of questions about the types of sectors that MCC could pay for, and we also had lots of questions of, "Well, is there an allocation for my country? Is there a certain amount that we can be working for?" And the answer, frankly, I think surprised a lot of people. We said, "Look, our metrics are, we want to reduce poverty through growth, we want to make sure you decided on your proposal through a consultative process and we need to make sure we can measure it."

And there was a lot of sort of looking through the papers for the answers, "But there must be a sector or an amount," and we kept saying, "No, there's not." And I think there was a moment when a lot of our country partners said, "Hey, wow, this is really different. We really can use this program to work on our own policy priorities."

One interesting discussion we had with the prime minister of one of our country partners, he said to us, this is fantasy land. Here we are with the United States government, simply because we've taken hard policy decisions, we can now use this money for our own priorities. And I think that's true, and that's what we're trying to do at MCC.

So what does that turned out to? We've got a lot of integrated rural development, a lot of infrastructure to support that rural development and I think what we're also seeing is that countries, without exception, are embracing this notion of country ownership. We've got a lot of great examples around the consultative process that I think many of you have sort of heard before. And one other story that's particularly related to Cape Verde, which I think is important to share, is that when the prime minister was here to work with us after the compact was signed, he was having an off-the-cuff discussion with some folks about their proposal and about their compact. And he was saying from memory what the program was all about and what we were trying to achieve, and all of a sudden I realized, wow, this really is working. This isn't our program, this isn't MCC's idea, this isn't something that the U.S. government wants it to do. This is Cape Verde's program. And I think, again, that's what we're trying to do, and so on this notion of country ownership in terms of design, I think MCC is doing a pretty good job.

I think where we're having a little more trouble making the country ownership notion work, and it's been mentioned before, is on the detailed aspects of program design. Most of our partner countries have known what they wanted to do, the key goals, and they've had some ideas about how to do it, but MCC requires a lot of detail, because we've got to be able to cost these programs accurately up front. We've got to be able to know what the results are. And so we've been working hard at trying to find ways to help countries with program design, using the 609G facility that Sean and his colleagues have so graciously provided.

And what have the critical success factors been? I think in the countries that have had an effective partnership with us, first, they put a team in place, they've given that team a little bit of money and we've had senior access to government officials. And, again, the countries that are moving fastest are the ones that have done that the quickest. And I think it's fair to admit that in some of the countries where there are limited resources, the model that we have in place is problematic and something that we're thinking hard about how we can be more helpful.

But I think for the countries that have been through the process successfully, and I don't want to put words in people's mouth, but we've had a lot of feedback that while it's a difficult process of country ownership, and designing these programs is a lot of work, at the end of the day we have achieved the intended result, which is the programs are owned by the countries and that their success or failure is going to be based on that.

On the third core principle, transformative impact, again, I think it's a little bit too soon to tell, because we're just beginning to implement the programs. But it goes back to the point that I think Clay was trying to make, in that we as an organization are really thinking through the issues of how involved we need to be in the implementation, as Ambassador Brito mentioned. There's a risk of MCC being micromanagers, because of the intense level of oversight that we have on our programs. And I think as a U.S. taxpayer, that oversight is important, and we always used to joke when we first arrived at MCC, our colleagues from the GAO are here, that at one point when they started doing their first review, we were sort of saying, wouldn't it be great if they could join the team and help us, instead of providing oversight at the beginning, because we were so busy just trying to build the program before the oversight even began.

And, lastly, in terms of the incentive effect, in terms of improvements in policy, the incentive is working. And in terms of rewarding MCC eligibility, the first thing that countries get is a lot of work. It's not a check at the beginning, and I think we've disappointed people in that regard, and we are working hard to try and find ways to achieve our measurable results and providing the oversight of the programs that's necessary, and that's really our key challenge, is trying to adhere to all of our core principles while providing a reward in the time frame that people think is acceptable.

So, thank you very much for your time.

NORIEGA: Thank you very much, Maureen.

Our final panelist is Dr. Allan Meltzer, who is a visiting scholar here at AEI. He studies monetary policy and history, tax and budget issues, international finance and financial services. He was Chairman of the International Financial Institution Advisory Commission, which issued its final report to Congress in March 2000.

Dr. Meltzer is a professor of political economy and public policy at Carnegie Mellon University. He'll speak to us a little bit about this concept of monitored grants, which he's very familiar with over time, and the tension, I think, that might exist about wanting to use MCC as a traditional foreign policy tool. In other words, is it possible to say no to countries that we like, as Secretary Lowery put.

Dr. Meltzer.

MELTZER: Thank you very much. I want to begin by saying that I very much favor the concept of the Millennium Challenge Account and the idea. In fact, I'm going to claim to be its godfather, or at least it's grandfather, because it was the Meltzer Commission that really brought this issue up to the fore, and the Bush administration in its early days, looking around for a way to do something about foreign aid, picked up this idea and implemented it in ways that you've heard about.

Just to give you some idea how unpopular the idea is in some quarters, after I had completed the Commission's report, I went around, talked to foreign governments. I won't go through the whole litany, but I remember the attitude of the French government, that was, the idea of monitored grants, “My God, what a terrible idea.” The Bush administration had asked for 50 percent of the money through the World Bank. That's one of the reason we got the MCC. The French government said, "Well, we might give them 5 percent, but it's not a good idea. Just give the money."

The Clinton Treasury was hostile. Congressman Gephardt, the former Majority Leader of the House, declared that we were a bunch of right-wing conservative conspirators out to destroy foreign aid. That's the rhetoric of Washington. He hadn't read the report, but he knew that it must be something that he would be against.

The Bush administration, to its credit, picked up the idea and developed it, and developed it I think in an interesting way.

Now, the idea, I don't claim any originality in the idea. What I think is most remarkable about the idea is how long it took to get three simple concepts put together into a constructive program for development.

The three simple ideas that you've heard about are, that countries reform when they want to reform. If there isn't a constituency in the country for reform, there isn't going to be reform. Second, do we want to focus on results? Unlike the French, we want to look at the outputs and not at the inputs, and so we want to get them.

So the first idea tells us what you've heard a lot about, the country has to come with a program. It has to be a meaningful program, and we're going to monitor the program. We're not just going to throw money at the program, but we're going to make sure, we're going to see that it's a program that they choose and want to implement.

Second, that we're going to focus on the results and, third, that we're going to be willing to cut off countries that fail, and I'm very heartened by Ambassador Danilovich talking about the fact that they have slowed, stopped, money flow to countries that aren't quite living up to their agreement. That's not just because we want to punish them, it's because we want to set an example for other countries that you've got to do what you say or you're not going to get help, so those are good things.

Through these programs, we're building confidence in those countries so that they can think through their problems that they don't go. So we're moving away from the general idea that the World Bank typifies, AID typifies, that we run a command and control program. We tell them, "Here's the money and you do what we tell you," and sometimes they do but often they don't.

We're moving to a system which is based upon the one thing that makes people do the right thing, which is they have an incentive to do the right thing, a personal incentive to do the right thing. So I'm very enthusiastic about the general idea.

The implementation is what I want to talk about next. Of course, we know the past is the past, but the implementation was slow. According to the original proposal, we were supposed to be, I think, at $5 billion in spending by 2006. We're not anywhere near that, but that doesn't worry so much if we do it right. We've had 50 years of bad development schemes. If we have another year that goes by, that's not a great tragedy.

What worries me more is the statement of Secretary of State Rice, who is the chairman of the commission that oversees the Millennium Challenge Account. And she said, and I quote, "The aim is to follow foreign policy objectives."

Now, that's an ambiguous statement, could mean a lot of different things, but it certainly has the ring which suggests that there's going to be some restriction on the independence of the MCC, that it's going to be part of our foreign policy objectives. If it becomes part of our foreign policy objectives, it's going to eventually end up like all the other aid programs. That is, we're going to trade off the objectives of the program for something else that we think is important at the time and that we want to do.

For example, we have now the request, it'll be interesting to see what happens -- we have the request for $600 million from Bolivia. Well, of course, Evo Morales has just become president. He's hostile to the United States. He's going to get a lot of money from Venezuela. He's not going to get much money from Cuba, unless Cuba gets it from Venezuela, but he is going to get money and help from Venezuela and possibly from Argentina and other good friends of the United States in Latin America.

Now, how did Evo Morales get where he is and what is it that we're going to want from him? Well, Evo Morales is there not entirely, but to a very considerable extent, because the United States, in its wisdom, decided to stamp out coca growing in Bolivia, and we told them you can't grow coca. And Evo Morales got up and said, we should grow coca because it's a rich money crop we make money doing that. And the State Department was against that, and he largely on that basis, and some others, he rode to power.

Now, are we going to get Evo Morales to reverse on growing coca, or are we going to blink at growing coca and trade it off some other things? That's going to be an interesting development for the MCC to watch, and it's going to be an interesting development that's going to have, I think, much more profound influence on what happens to the MCC than what happens to Evo Morales.

That is, do they concede to the State Department's desire to stamp out coca, which I think anybody who thinks about it will recognize very quickly that you can grow coca in a damn lot of places in the world, and so if we stamp it out in Bolivia, that will just make them a little bit richer in Afghanistan, where we don't seem to object to their growing coca.

So that is a concern, and, I mean, I think it is a concern that we have put the hand of the State Department -- I have nothing against the State Department. Condoleezza Rice is an academic. I've known her for a while. I have great respect for her, both as an academic and as the secretary of state, but the pressures on her are not to just do good, it's to carry out the policy of the United States, which may or may not always be good.

Well, why is all of this important? I could spend hours -- I won't -- on what has happened to foreign aid. At least we have spent -- not we, the United States, but the world -- has spent something on the order of $1 trillion by this time on foreign aid. The worst results in 42 of the poorest countries is that their income declined on average 25 percent. The record of history, and that's what the MCC is, or could be, about -- the record of history is that countries develop when the people in the country want to develop, adopt the institutions that help them to develop. And just all we have to do is, my God, look at China and India and how they've transformed themselves, and it certainly wasn't because of the $1 billion a year that the World Bank gives to China. It was because of the change in the institutional rules and the institutions in China.

So what we want to see is we want to see that this program can do the marginal work of trying to get the people in the country to make the institutional reforms, to develop the kinds of programs and the constituencies to support those programs that really work.

To just tell one story, I remember going to Peru shortly after the unlamented President Fujimori had just gone in. The initial President Fujimori was a reformer. At least he had reformers in his government, and his minister of finance was a very, very reform-minded man, and the World Bank came with a list of things that they wanted him to do.

He had a longer list. He didn't need our list. He knew what was wrong in his country, and he knew what needed to be done and he set about doing it. And it made a great difference, which has lasted through the Fujimori crisis, through the current government, and one would hope that it would continue to last, that they have a real growth rate of income because they opened their economy, they improved the rule of law. They have a long way to go, but they've moved in the right direction, and that's what one hopes the MCC is going to be able to do.

So, let me close by saying I wish them good luck. I hope they have good outcomes. I am heartened by listening to Ambassador Brito, some of the people on the panel. I urge them to stand their ground.

Thank you.

QUESTION: My name is Otto Reich, and I had the job in the first part of the Bush administration that Roger Noriega just had, Assistant Secretary for the Western Hemisphere, in fact, was with the president when he gave the speech in Monterey that launched this. And I remember, not only in the speech, but the rest of that trip, where we went to Peru, where we went to El Salvador, the president kept emphasizing all the criteria that are required for membership or participation in the MCC.

Today, we focus--and that's fine--on a lot of the economic criteria, but I really do hope, and this is both a comment and a question -- a comment, to follow up on Roger's first question on Bolivia and Nicaragua. What happens if a country that qualifies begins to retreat, in effect, on the political criteria? To me, the political criteria are essential, because without a government that governs justly, the best economic policies are not going to work.

So my question, I guess, to the panel, and particularly those who are in charge today, of some of the MCC criteria, how are we sticking to those criteria of good governance, civil and political rights, anti-corruption, et cetera? And are we saying no, are we prepared to say no, to some governments that go back on them?

NORIEGA: Maureen, you want to take a first stab?

HARRINGTON: Well, I think one of the helpful things about the organization of the MCC is the structure of our Board. Those types of decisions would be taken by our Board of Directors, and we have great information from the State Department and the Treasury Department and USTR and the nonprofit members. And, really, that's a big decision for MCC and it's something that would be discussed by the Board of Directors, but something that I think our behavior up until now demonstrates that we're serious about with the decision to suspend the threshold program in Yemen, to watch carefully what was happening in Armenia.

And I think the decision itself is something that would be well above my pay grade, but that's exactly why the Board of Directors is in place, to take those tough decisions and to say no when we need to.

NORIEGA: Sean?

MULVANEY: Let me just make two points with regard to provisions in the MCC authorization. In that authorization, Congress actually anticipated that there would be scenarios or events like this, and there's a section on suspension and termination of programs. And there are three criteria: essentially, that a country is moving against U.S. natural security interests, essentially that they're retrenching or falling back on criteria that made them eligible in the first place and, third, that they just fail to follow responsibilities that are outlined in the compact. And that provision was specifically added in order to codify some sort of process or expectation. And, absent that, I think it would be a lot more difficult for the MCC to wrestle with this challenge.

The second element of the MCC authorization that I would point out is that the CEO is actually vested with this power to suspend and terminate, after consultations with the Board. And the idea behind that was that the CEO would have the resolve and the responsibility to kind of take action, because it would be the reputation of the MCC at stake. He couldn't do it alone, without consulting with the Board, but it wouldn't necessarily have to be a Board decision, because the Board, as many people know, is made up of other stakeholders and actors who have different equities involved, particularly the foreign policy equities. And we were hopeful that the CEO would take that charge seriously.

Let me stop there. Thanks.

NORIEGA: Great.

Dr. Meltzer?

MELTZER: I think it's the right question and a hard question to answer, and I believe that there's no way we're going to write down a set of rules. This is Washington, not heaven. We know what happens in Washington. There are all kinds of people who can read the rules, and we're full of lawyers who can read these rules in many different ways and justify almost anything that they want to justify. So we'll see how that works out. I think that is the critical question for the MCC, whether it ends up like so many other programs or whether it really ends up making the difference that we all here hope it will make, but no one's going to be able to tell you one way or the other how that's going to work out.

QUESTION: My name is [inaudible] from the Embassy of Azerbaijan. My question is about expertise and coordination. Mr. Lowery was talking about model, which MCC can create model. Maybe it's too early to ask this question, but if at certain stage your expertise will be very important. Can countries which are not right now involved in activity on MCC can use this expertise, or you can maybe share it with USAID and other organizations. I'm talking about the compact, how you use this compact to work in the countries. Can it be used in the countries which are not actually -- where the activities are not going right now?

And the second part is coordination. When you are drafting these compacts, do you consult with other countries? As I understand, these activities, mostly infrastructure, large infrastructure projects. Do you consult with other countries, neighboring countries, for example -- I understand today that there was a call today regarding the Caucasian gas pipeline, where there was some explosion. And, Ambassador Danilovich, he mad a call to Azerbaijan, Turkey and other countries. Know that for example in Azerbaijan there is a complex pipeline system.

And in the case of Armenia, for example, you are doing infrastructure projects. We know that, World Bank, for example, when they do some large hydropower plant project, they usually have to consult according to the conventions on the water because it could be used a river, they consult on (ph) on the riparian states. So do you consult with other states, or do you leave it to the country, which is really implementing this project, to consult with those countries?

Thank you.

NORIEGA: Maureen, do you want to take that?

HARRINGTON: On your first question, I think we are working in partnership with USAID on the approach for countries that are not eligible for MCC assistance. We have something called the threshold program, and USAID administers that program for us, and it's basically designed to work with countries that are close to qualifying for MCC, but are missing, or fall short, on several of their indicators.

And so we apply the same MCC principles to the threshold program that we do to the eligible country programs. In other words, the countries have to design their own programs, there have to be measurable results. We want folks to be talking about what makes sense in order to make a difference, so we're applying the MCC principles to the threshold program and doing that with USAID. And we have signed two threshold agreements thus far, one with Burkina Faso and the other one with Malawi and we have several more that are almost ready, and so we're happy about that partnership and it's working well.

Secondly, on consulting with neighboring countries, again, the whole focus of MCC is that our programs be driven by the countries, and there have been a couple of examples where the countries are working in partnership on programs that have regional impact. In Honduras and Nicaragua, we are making investments in road infrastructure that, together, help those countries to open up their markets and to facilitate transportation across the borders.

So, again, that was really something that was driven by the countries and wouldn't be something that we would insist on, but we were happy to do, because it made sense in that particular case.

NORIEGA: Great, is there anybody back in the cheap seats?

(UNKNOWN): No.

NORIEGA: No, you guys know what's going on up here? No questions. We'll go right here then, to this gentleman.

You want to wait for the mike, just so everybody hears you. Yes, please.

QUESTION: I noticed that you mentioned that you had, I think, four basic, generic areas of requirement and it was a total of 16, somehow divided into those four. My question is, how does a country really be able to respond to 16 separate conditions precedent to getting a compact? And how would you -- do you use a percentage thing, like saying the first four are like 50 percent and the second are maybe 20 percent and the third -- sort of like getting a grade? That's my first question.

My second question is what Mr. Mulvaney mentioned. Where does national security fit into this? How does national security somehow respond or relate to any one of these 16 requirements?

NORIEGA: Secretary Lowery?

LOWERY: Yes, I'm going to answer this mainly more from my past than currently. The 16 criteria are actually in three buckets: ruling justly, investing in people, encouraging economic freedom. All that MCC does is takes -- the criteria are measured by people outside of MCC, so they're all objective in that respect. It's third-party sources. They rank the countries, and then all they do, from like one to whatever, and then they just say, if you're above the median, you pass. So, if you're above the 50 percent, you pass that specific indicator.

And then, to go further, they basically say in each category you must pass half of the indicators. So there are six ruling justly indicators, and you've got to pass three of them. And then there are four in investing in people and you've got to pass two. And there are six in economic freedom, so you've got to pass three.

So, that way, you kind of can weed out some of the problems that there are with these indicators, because the data's not that accurate, right? So, it's basically passing half of half. The only one in terms of weighting that has extra weight is the corruption indicator.

The corruption indicator is one where, if a country does not pass the indicators, or above the median, then it is considered to have failed. Now, basically, because that indicator's not perfect, MCC uses other sources to double check it to make sure that maybe the data might be flawed on that specific indicator. So that's basically how kind of the selection process works.

In terms of how does this affect national security, I think it's a couple ways. First, the criteria that MCC is using are ones that are basically good, objective criteria about what is important for economic growth and stability, but also it's things that are values of the United States -- democracy. A lot of people would say that democracy is not completely related to economic growth. Some people would say it is, but some people would say that it's not, but it is clearly a value of the United States, so we're measuring that, because that goes towards national security issues.

I mean, the types of things that MCC's looking at from economics are macroeconomic indicators, microeconomic indicators like allowing open investment and open trade, investing in people--so good education programs, good healthcare programs, and good rule of law programs, as well as anticorruption and democracy. These are things that I think are very important to the United States as a country. Countries that are against our national security interest, frankly, don't pass those type of criteria.

When you get into much more specific, pure, national security, it becomes more of an issue and it gets toward some of the points that Professor Meltzer was mentioning earlier. But I think it is an important part of how MCC is looking at it. The Bolivia question will be an interesting question for MCC, just because -- by the way, for the record, just because they submitted a $600 million program doesn't mean the MCC needs to actually fund the $600 million.

And one last thing for the record is World Bank has 30 percent grants now through two tough negotiations. So the French aspect of 5 percent was a little off.

NORIEGA: Great, we have time for one, one-part question, and it has to be a real question, so please.

QUESTION: I'm Diana Greg with BNA. Actually, just following up on Mr. Lowery's remark (OFF-MIKE) Bolivia, if Bolivia has submitted a proposal but it doesn't mean it will get approved, can you clarify the situation with Armenia ? I mean, I believe it was that the compact was approved, it just hasn't been signed. What are they waiting for on that? I mean, since that's the other…

NORIEGA: Maureen, that was actually for you, I think, where you are in Armenia ?

GREG: Armenia was sort of reprimanded...

NORIEGA: Was it actually signed?

GREG: It was approved, but has it been signed?

(UNKNOWN): Check our Web site.

NORIEGA: That's fine. Just look at the Web site under Armenia and we'll see what's cooking.

QUESTION: I think the question that I'm asking is what are, they looking for (OFF-MIKE).

LOWERY: Here's what I know. The program was approved by the Board of Directors. There have been some concerns about some of the political situation and beyond that, I don't know anything. But, also, what we've got to remember is the way it works, just so everyone's aware, is a country -- there's an agreement reached between the United States and a country on a compact. That's done with the MCC staff. They bring it to the Board, the Board approves it.

After that, they submit it to Congress through a notification process, to make sure Congress is aware of what the heck is going on and doesn't have a big, major heart attack. And then, at that point, they set up a time where something can actually be signed. So I think Armenia is going through a lot of that process right now, but then there's sort of this extra aspect, which I don't know enough about.

Sean, please.

MULVANEY: I would like to make one comment if I could, Roger, just on the previous questioner's question about how do we expect countries to respond to 16 different indicators. I mean, this is a key point that I actually would invite the audience over time to really contemplate. I think 16 indicators, at present, is the right amount. And I know the MCC is moving to add a 17th, according to the statute, which was mandated by Congress.

But I think in the future there is a great incentive effect within this town just for constituencies to try to use the MCC as a tool to incentivize their foreign policy objective. And there were movements afoot to turn and twist the MCC eligibility criteria toward things like affordable housing, refugee resettlement policy. And I think it's incumbent upon all of the stakeholders who are supportive of the MCC to help protect the MCC's mandate to keeping the incentives and the criteria on sound political economy to the extent that we can accomplish a consensus. So I think we should all contemplate that point that the gentleman raised.

NORIEGA: Sean, let me ask one last question, and I know we've been here a long time. Are you concerned that you have a program here that's not funded at the levels the president originally wanted? I think he wanted at least $5 billion by now, I think.

Are you concerned? You alluded to the constituencies, and there are certainly constituencies for the USAID program, for example, and earmarks generate constituencies. Are you concerned that the MCC -- and any of you can comment on this -- that the MCC would not ever realize its full potential because you'll never have the constituency to go to Congress and lobby for this program, just based on its merits?

MULVANEY: Two parts to your question. First, on levels of funding and our concern over that. The president requested a 50 percent increase in ODA levels based on a level of ODA in 2000, I believe, and at least from Mr. Kolbe's perspective, that dollar amount was something that was an aspiration to be achieved over a very long time, not in three years by 2006, just because of the federal budget pressures and pressures on foreign assistance more generally with the war on Iraq and in Afghanistan.

On the area that you mentioned, with regard to expectations for support in the future as it relates to eligibility criteria, here, what I'm thinking is that the eligibility criteria, if the MCC is reauthorized, essentially it becomes open season for others to come in and add criteria. And then what happens is there is a dilution effect. Countries really don't know what to do in order to become eligible. At least right now there are some boundaries and there are some expectations that the MCC has been able to create, and so that's what I would leave you with.

NORIEGA: Well, thank you very much. I want to thank the panel very much for their terrific...

(APPLAUSE)

Thank you, as well, for your great questions. I'd invite you to discuss the AEI Web site on a couple of issues. We're having several different programs in the weeks ahead. Tomorrow, a program on the elections in Canada. January 27th, a discussion of whether there is a lurch to the left in Latin America. That's January 27th. February 9th, a panel on immigration, and, finally, February 23rd, on the concept of launching an opportunity partnership, which is discussed in a paper issued by AEI on January'06.

Thank you all for coming. Terrific questions. We look forward to seeing you again. Thank you.

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