Remarks by MCC CEO Ambassador John Danilovich at “Democracy and Development” Freedom House Event

January 19, 2007

As prepared:

Distinguished Ambassadors,
Ladies and gentlemen,

I am grateful to Freedom House and to my good and valiant friend Under Secretary Paula Dobriansky for hosting and organizing today’s forum on the relationship between democracy and development and for inviting me to participate.
At the Millennium Challenge Corporation, where our mission is poverty reduction through economic growth, we recognize that democratic governance and economic development are, in fact, inseparably linked. It is a package-deal. The synergy between democracy and development produces results that are mutually reinforcing.

Solid democratic institutions responsive to the needs of the people,
sound economic growth policies,
enhanced human capital,
and improved infrastructure

are the bases for

sustained development,
poverty reduction,
and employment creation.

Established by an Act of Congress in January 2004, MCC is an innovative approach to development assistance that

motivates and rewards good policies,
expects full country ownership of the development process,
and demands tangible results.

Based on these core values, let me touch on 3 ways MCC’s approach furthers the twin goals of democracy and development.

First, MCC builds democracy and development by linking aid to policy performance.

MCC rewards good policies. We partner with countries based on their demonstrated commitment to

political and economic freedoms,
investments in education and health,
control of corruption,
a regulatory and fiscal climate favorable to business development,
and respect for civil liberties
and the rule of law.

We use 16 policy indicators adopted from non-U.S. government sources, such as Freedom House, to assess this commitment.

Two more indicators—

a Natural Resources Management Index

and a

Land Rights and Access Index—

will be incorporated in 2008 to measure how well a country promotes

good environmental stewardship
and land access

for its poor and vulnerable.

By rewarding countries that perform well on these specific indicators, we are encouraging them to build their capacity and institutions leading to democratic and prosperous societies. To date, we have concluded 11 Compacts totaling $3 billion with countries that meet our performance criteria.

To reinforce the importance of good performance, MCC is prepared to suspend or terminate a country’s participation with us if we see a serious erosion of policy performance. The Gambia and Yemen, for instance, were suspended because of a material decline in overall performance on our selection criteria.

The Yemeni government—spurred in large part because of MCC—has been pursuing reforms over the past year in order to be considered for reinstatement. We acknowledge and welcome Yemen’s reform efforts.

We want all of our countries to succeed in adopting and maintaining good policies to advance their own

political,
economic,
and social development.

Secondly, MCC builds democracy and development by motivating democratic policy reforms.

Because countries want to be deemed eligible for MCC funding, they are taking it upon themselves to re-evaluate their performance in the three policy areas MCC measures:

ruling justly,
investing in people,
and encouraging economic freedoms.

Thus, MCC becomes a strong catalyst, prompting countries to enact reforms they otherwise would not have made. We call this incentive effect The MCC Effect.

According to the Doing Business report at the International Finance Corporation, 24 countries specifically cited the Millennium Challenge Account—MCA—as the primary motivation for their efforts to pursue business start-up reforms. Some of the most aggressive overall policy reformers in the world are among our eligible countries.

Over a dozen countries have informed us that they have set up inter-ministerial committees and presidential commissions to devise reform strategies that address MCC’s selection criteria. And, some countries are even keeping these committees in place after selection to ensure continued adherence to reform.

We are particularly proud of how the MCC Effect is bringing about transformation in Lesotho. We made equality for women in the area of economic rights a precondition to the signing of a Compact in Lesotho, where married women had been considered legal minors. The recent enactment of the law by Lesotho’s Parliament that confers equal legal status on married women is a tremendous step in the right direction, and MCC’s support for such an important change provided a great incentive for making this tough decision. Helping women realize their political and economic rights is central to any discussion of democracy and development.

To further this incentive effect, MCC established a Threshold Program for countries that are on the “threshold” of qualifying on our indicators for Compact eligibility. Funding is provided to help these countries address specific policy weaknesses. To date, we have 11 Threshold agreements valued at $300 million. These programs focus mainly on improving governance, especially on rooting out corruption.

Malawi's Threshold Program is an example. It contains 14 programs focusing on:

strengthening the legislative and judicial branches of government,
providing support for anti-corruption agencies,
strengthening independent media coverage, and
expanding and intensifying the work of civil society organizations.

The Philippines’ Threshold Program strengthens governance by fighting corruption. In an unprecedented move, Philippine President Arroyo matched MCC’s Threshold funding with an additional $19 million to stamp out corruption. Corruption-related investigations and dismissals have stepped up significantly since the announcement of their Threshold Program.

Lesotho
to Malawi
to The Philippines,

these examples demonstrate MCC’s role as an incentive for encouraging reforms toward democracy-building and development.

Third, MCC builds democracy and development by expecting a country to be accountable for its own development.

Country ownership is essential for carrying out institutional and policy reforms as well as program implementation. The MCC approach is not doing for others, but rather helping others do for themselves.

Thus, we demand country engagement every step of the way.

We encourage better governance from the outset by insisting that MCC-eligible countries conceive, develop and eventually implement their own homegrown proposals for sustainable development. We work with them to design a plan to monitor and evaluate performance toward outcomes. Having countries develop such a plan improves their ability to evaluate other programs, including those of their own governments.

Ghana, for example, has said that it will use the consultative and rigorous MCC process that led to its $547 million Compact last August for evaluating non-MCC funded activities within the country.

In Benin, over 100 local civil society organizations elected their own representatives to the working group that designed that country’s proposal. This degree of civic participation was unprecedented and will continue throughout the implementation of Benin's Compact.

The development of the Compact with El Salvador involved over 2,000 Salvadorans in the consultative process. Their ongoing input is critical now for the Compact’s implementation.

The MCC process toward Compact development and implementation encourages broad consultation and jumpstarts critical thinking about the policies necessary for development and democracy to take root. It also builds local capacity to make democracy and development sustainable.

In fact, MCC’s Compact process—from development through implementation—moves through a number of democratic institutions already existing in our partner countries. MCC does not circumvent these institutions but rather engages them. Locally-elected development councils coordinate project priorities. Parliaments debate and pass Compacts. Civil society representatives monitor our efforts. In all these ways, MCC strengthens democratic institutions in the field.

Given MCC’s dual focus on development and democracy, it is no coincidence that many of the countries with which MCC partners are also members of the Community of Democracies, dedicated to strengthening democracy across the globe.

These countries understand that democratic governance and economic development go hand-in-hand. Democracy can yield a range of tangible benefits by encouraging

stability,
good governance
and the right policy framework

essential for economic prosperity.

Indeed, the MCC model marries development to

good governance,
economic opportunity
and social progress

in the 3 ways I’ve just outlined.

We reward good policies.

We create a powerful incentive for encouraging the adoption and maintenance of good policies.

We empower governments and their peoples to build the institutions and capacity to take charge of their own

political,
economic,
and social development.

In these ways—and as MCC partner countries who are members of the Community of Democracies best exemplify—the intersection between democracy and development is evident.

It leads to transformative and sustainable change by creating the essential conditions for fully leveraging MCC funding in our partner countries to fulfill our mission of replacing poverty with growth.

On behalf of myself and my colleagues at MCC, thank you very much for your interest in the Millennium Challenge Corporation’s role in furthering democracy and development, and I welcome the ongoing discussion on this important topic. Thank you!