"Providing Incentives, Promoting Governance,” delivered at the European Policy Centre in Brussel

Thank you, Antonio (Missiroli). I appreciate the European Policy Center organizing this event. And it is a pleasure to be here with Alex Ellis to try to give some perspective on our efforts on both sides of the Atlantic to encourage better governance in the developing world.

It’s particularly a pleasure to be here in Brussels to discuss this subject since, in many respects, we are trying to do what you have already done so successfully through the European Union’s enlargement –  encourage the creation of stable, democratic, and prosperous societies.

You recognized in the enlargement process that governance is at the center of development. The high standards of the Acquis Communautaire,  the considerable financial and technical support you provide, and the incentive of EU membership have combined to encourage countries to make wholesale changes in laws, practices and institutions and to check undemocratic tendencies.

And, on both sides of the Atlantic we are experimenting with approaches to encourage improved governance in terms of democratic participation,  observance of human rights, and sheer institutional effectiveness.
This is one of the reasons President Bush first proposed the Millennium Challenge Account at the Monterrey Summit on Financing for Development and why the Millennium Challenge Corporation was formally created by the U.S. Congress in January 2004.

While the MCC’s mandate is “reducing poverty through sustainable economic growth,” we, too, recognize that governance is at the center of development. As President Bush said when he proposed the MCA, “Good government is an essential condition of development. So the Millennium Challenge Account will reward nations that root out corruption, respect human rights, and adhere to the rule of law.”

The Board of the MCC only selects countries that have already demonstrated that they perform better than their peers in “ruling justly, investing in their people and encouraging economic freedom.”  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 to apply for MCC assistance based on their performance on sixteen policy indicators in these three areas: ruling justly, investing in people, and promoting economic freedom. All relate to good governance.

These indictors come from independent, non-U.S. government sources.  “Ruling justly” includes six indicators: three related to what might be called “democratic values”:

Civil Liberties and Political Rights, both from Freedom House

and Voice and Accountability from the World Bank Institute—and three related to government performance:

Combating Corruption,

Rule of Law

and Government Effectiveness—all from the World Bank Institute.

Governance also extends to the social sector. We look at:

Immunization Rates,

Girls’ Primary Education Completion Rates

• and the percent of government spending on Health and on Education, to measure government commitments in these social areas.

And, we use six indicators to measure government economic policies, also key determinants of effective governance:

• Regulatory Quality from the World Bank Institute,

• Cost of Starting a Business and Days to Start a Business from the Doing Business Survey at the World Bank’s IFC,

• Trade Policy from Heritage Foundation,

• and Inflation and Fiscal Policy from the IMF.

If you visit our web site you will find pages ranking each of the poorest 113 nations in the world on these indicators. Each year in November our Board meets and selects MCA-eligible countries based on their performance. Countries that score above the median on half of the indicators in each of the three baskets and pass the corruption indicator are prime candidates. Twenty-three countries have been selected so far to develop proposals for MCA consideration.

In this competition, countries compete against other poor countries and are encouraged to race to the front. We hope the median rises over time. Although we are only two years into this experiment, we are already seeing many countries scrambling to improve themselves so that they might qualify in future selection rounds.

• According to the managers of the Doing Business project at the International Finance Corporation, twenty-four countries have specifically cited the Millennium Challenge Account as the primary motivation for their efforts to improve their business environment.  This is what we call “the MCC Effect.”

• Last fall, El Salvador’s President Antonio Saca – with his eye on MCC’s selection round that November – approved an executive decree to establish a code of ethics for public employees and create a Public Service Ethics Commission that will develop and carry out policies to foster integrity, impartiality, and honesty on the part of public officials.

• Inter-ministerial committees and presidential commissions have been set up to devise reform strategies that address the MCA selection criteria in a number of countries, including El Salvador, Cameroon,  Djibouti, Jordan, Kyrgyz Republic, Indonesia, Guatemala, the Dominican Republic, the Philippines, Papua New Guinea, Moldova, and Ukraine.

MCC’s open and public comparisons have strengthened the hand of those seeking to push through difficult reforms. In the words of one Finance Minister, “It’s not about the money. It’s about the recognition that we’re doing the right thing.”

The scoring has also held governments more accountable by energizing debate about their performance on credible, third-party evidence. More than one opposition parliamentarian has been quoted in the press saying that ineligibility for the MCA is the price the country is paying for corruption, poor policies, or tarnished elections.

To further this incentive effect, MCC established a Threshold Program for countries that come close but do not qualify. We have extended an offer to 18 countries to provide assistance if they put forward a proposal that shows they want to address the areas on which they fall short on the indicators. We work directly with USAID which implements the program for us in the field.

We have five Threshold agreements so far – Albania, Burkina Faso,  Malawi, Paraguay, and Tanzania – with more on the way. Our Threshold programs, of a two-year duration, have focused mainly on improving governance—especially on reducing corruption.

• Malawi’s program is an example. It contains 14 specific programs that focus on: o strengthening the legislative and judicial branches of government, o providing support for lead anti-corruption agencies, o strengthening independent media coverage, o and expanding and intensifying the work of civil society organizations.

The 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. That doesn’t mean that the United States doesn’t care about failed and fragile states or the plight of citizens in the most corrupt and poorly governed countries in the world. Far from it. But the United States has many other programs, run by USAID and other agencies, to address these challenges.

But even for those countries in transition, when changes come, MCA can be a guidepost and a goal. Liberian President Ellen Johnson-Sirleaf,  for example, has indicated a strong interest in adopting the reforms necessary to become MCA-eligible.

To continue to encourage reform, countries that are accepted into the program but later move backwards on polices, or fail to design good proposals, or fail to implement their Compacts well, risk losing their eligibility. We will not hesitate to say “no” or “no more.”

• In November, for example, the MCC Board suspended Yemen from our Threshold program for significant drops in its policy indicators. We will welcome Yemen’s return if it reverses its slide and puts itself back on track.

• In December, I also issued a warning to Armenia that its eligibility may be re-examined if the trends in its “ruling justly” category continue to weaken.

Of course, incentives only work if people know about them. Our policy staff has met with representatives, at the highest level, of over 65 of the developing countries we monitor. These Presidents, Prime Ministers and senior government officials are working with the MCC to make key political, economic, and social reforms in order to become eligible.  And our Embassies are actively using this new program as a tool to encourage reform.

In addition to promoting good governance by incentive, we also encourage potential Millennium Challenge countries to conceive,  develop, and eventually implement their MCA programs. We insist that countries formulate their own proposals and develop their own programs in consultation with a broad segment of their own society.

The MCC approach has yielded some impressive results, in terms of building local capacity, encouraging broad consultation, and in thinking about the policy environment necessary to ensure these programs endure in the long term. I call this “aid with accountability”  – not only in the sense of being accountable for taxpayer dollars, but also accountable in the sense that programs are designed so that our partner governments are accountable to their people for their MCA programs.

In Benin, for example, over 100 local civil society organizations elected their own representatives to the working group that designed Benin’s proposal. This degree of civic participation is unprecedented,  and will carry through to implementation now that Benin’s compact is signed. They identified a poor investment climate and the need for more dynamic private sector activity as key obstacles to growth and poverty reduction. The program they designed aims to secure title to better land and property, to expand access to credit for micro and small and medium-sized business, to improve the ability of the justice system to settle small claims and to expand the capacity and improve the operation of the Port of Cotonou.

Other MCC countries have engaged in similar consultative processes. As a result, MCC is helping them remove barriers to growth by improving roads in Nicaragua, by increasing farm production through high-value crops in Honduras, and by overhauling the antiquated land titling system in Madagascar. Through consultation, each country has come up with a unique program to address its own challenges.

We also hope to encourage better governance through our insistence from the outset that each country outline what its efforts will achieve. We then jointly design a monitoring and evaluation plan to measure results. Together, we measure how the program is doing throughout the life of the Compact and have an independent evaluation of results at the end. This reinforces accountability. Further, having the country help develop the monitoring and evaluation framework for its MCA program also improves its ability to monitor other programs, including those of its own government.

Finally, we encourage our partner countries to create and promote a policy environment that will allow the programs that they designed to succeed. Compacts are not just a collection of projects, but they are also instruments for capacity building and policy reform to make the program feasible and sustainable.

Let me conclude by reiterating that governance is central to development, and that we, at MCC, believe that our approach is encouraging better governance.

First, incentives do work, for governments just as individuals, and the public indicators and potential reward of the Millennium Challenge Corporation have already bolstered the efforts of reformers in improving governance in several countries.

Second, insisting that programs will only go forward if the policy climate is right, keeps up the pressure to improve government policies and performance.

And third, giving countries responsibility for program development and implementation, insisting that the government consult with its people,  and agreeing up front on how to measure success all help to improve government accountability—a vital key to good governance.

I am visiting Brussels today to consult with the Commission on how we can reinforce each other’s efforts to help countries improve their governance and move toward a path of sustained economic growth that benefits all their people, especially the poor. It is a true shared Transatlantic goal and we look forward to working together with you and our partners in the developing world to achieve it.

Mr. Ellis: Today, I used to be a teacher in my short career, and I used to dread teaching on Thursday afternoons, particularly when I had the double period where I taught medieval history. My main objective then was usually to try and avoid some of my class going to sleep. That’s always the basic objective of any talk, but we can aim higher than that I think today. And I won’t talk about medieval history, I promise you that.

I’m here to first of all listen, and first of all, thank you very much John for coming over to Europe. I know you’re doing a big tour and I appreciate the words you say both about enlargement, which I worked on for some time, and also on our shared commitments on poverty which we’re working towards.

I’m here to listen to John. I’m also here to listen to you. I’m not a governance expert. I’ll just talk to you about what I see from where I sit. Where I sit is working for the President of the Commission covering development among some other areas including trade, including energy, issues on which governance I think is extremely relevant.

I would say that governance is a kind of core of what Europe is about.  In a way the European Union itself is an experiment I governance.  What’s extraordinary about it in some ways is the nature of the governance of the European Union, and I think it’s very much at the heart of what we do and why we do it.

It obviously permeates many of our policies in Europe, some of the ones I’ve mentioned but others as well. In a way it’s at the heart of the treaties which created the European community and the European Union.  You have the principles set out. You have mechanisms for action in case those principles aren’t respected, although the history of using that mechanism is not a comfortable one.

I came across the issue a lot when I was working on enlargement for exactly the reasons you set out, John, because there we were setting out some ends, and an enormous amount of the work which we did was about delivering those ends through changes in governance, working with the countries concerned.

I don’t think that stops at enlargements. I think it also obviously goes beyond into our neighborhood policy as well, and further beyond that into our development policy.

Of course the European Union can’t offer membership to every single country in the world. One of the issues of course we’re dealing with is how to use governance effectively when we don’t have that enormous transformational carrot, if you can have such an expression as a transformational carrot, but you know what I mean.

It’s quite an elusive concept and it’s defined not always the same.  There are some political choices to the extent, by the way, that governance is defined. The White Paper which the Commission produced in 2003 talks about it as the state’s ability to serve the citizens. And Commissioner Michel, I know he always talks about [le Francione regalien d’elitas] which I think amounts to roughly the same thing. And it’s defined itself in the [Cotinu] agreement, governance is described I think there as transparent and accountable management of human natural economic and financial resources.

What’s clear is the concept is something which covers many different parts of a state and a country. You have political governance, delivery of human rights; you have economic governance, the creation of proper smooth functioning markets; you have social governance, delivery of the most basic social services which you would hope a state could deliver.

Sometimes when I look at some of the documents, and I’m talking also about the community documents, I’ve been reading and thinking about this issue. Governance gets put with the ends, with say democracy as human rights as one of the ends. I’m not sure I’m comfortable with that because actually it’s really the mechanism for delivering those various policy ends which we define.

It’s clear that when you talk about governance we need to be clear about what we’re trying to achieve with it. That’s essential and I think there’s a fairly broad consensus about that. In our case in development policy, what I’ve been working on most recently, it talks of achievements of the Millennium Development Goals for the European Commission. Governance is clearly essential to deliver it, and that’s clear from the Millennium Declaration which actually set out the MDGs which goes into governance in some detail.

I think delivery is particularly important now because of the expectations which have been created around development policy in the European Union in the last year. 2005 was a very big year in terms of commitments. And as you know last summer the European Union and its members agreed to try to lift, to double aid effectively by 2010 from 2004 on the way to achieving the target of [.7] percent of GDP by 2015.  This is enormous sums of money we’re talking about here. Now it’s pledged. Of course there’s an issue about whether they’re being delivered or not, and that’s one of the things which we’ll be talking about including at the General Affairs Council on Monday.

Depending on that desire for change and the willingness to put money up to try and achieve it is quite a strong sense, I think, amongst European citizens of a belief that the European community is an appropriate way of trying to deliver that change.

I’m looking at some of your barometer reports. In 2002, 85.5 percent of Europeans thought that helping developing countries was either very important or important, and that’s been growing over the last few years. And there was quite strong support, around 63 percent, and again that’s been increasing, for the European Commission’s contribution to that effort. In other words, there is a will to do this and there’s also a will or a belief that it’s appropriate for the European Commission to be involved.

So as I say, a lot of money has been put up and that creates an opportunity, but it also creates a risk in my view. Frankly, if at the end of trying to put this money up and achieve these outcomes we fail to achieve them, that’s going to create a great deal of cynicism about the whole process which has led, and the effectiveness of the campaign to try and push for this money, if we don’t actually use it. If we can’t get it used properly then it’s going to damage the policy which it’s supposed to support.

So trying to look very simplistically at some of the countries which we’re dealing with from the European Commission, let me very simplistically put them into three categories when we’re talking about governance. A lot of what we’re doing obviously, and the United States as well, supporting strong performers who are definitely keen to achieve certain principles which we share, and are delivering on them as well, and there are plenty of examples of that – Senegal, [Bakina Fasoi] had some very good experience with Jordan recently as well. That of course affects instruments which are used, and I’ll come back to that because in that case we’re using quite a lot of budgetary support for these countries.

So we have the kind of strong performers and effective partnership.  Then we have what you might call a fragile partnership, I guess, where we have countries which are aspiring to the policy objectives but are finding enormous difficulties in delivering them, partly because they’re coming out of conflicts in many cases, or the various bases of the state is very fragile.

Here the focus obviously of the community is I would say less on putting money through the budgets but more on building up the capacity to even manage the budget in the first place and the other kind of basic functions of a state – courts, police, civil service, and others.

Last week President [Barroso] signed an MOU with the transitional Somalian authorities. First of all as an act of support for those transitional authorities, but also to try and map out how we, the community, could interact with them over the next 18 months as they try and return that country to where it should be and where I think they want it to be.

On a very big scale we’re very heavily involved in the Democratic Republic of Congo as I’m sure you know.

It’s an interesting example where you’re trying to use a very wide range of instruments in order to achieve these ends. I’m talking about development policy here, but also security policy, an absolutely essential part of delivering governance in Congo is to have the right security situation.

Now it’s an enormous country and it’s an enormous challenge not the least for the people of that country, but I’d like to think that we are working with that state, getting them out of conflict.

Then we have a third category which I’ll call difficult partnership.  Strong states which are not actually delivering or showing the will to deliver on the principles which we feel we’ve agreed in partnership with those countries. Here we’re in a pretty familiar dilemma which I think MCC was trying to resolve in a certain way. How do you help with the transformation of these countries and their behavior? And there aren’t easy answers to that, I have to be honest with you.

The [Cotinu] agreement sets out a process for dealing with it including dialogue and ultimately, if necessary, sanctions, and the suspension of cooperation. Now I would say that under this Commission we’re reluctant to go down that path. We’ve tried to avoid it. It’s not something we wish, but it does and it does can happen.

What we’re also working off, and a case in point for instance is Mauritania recently, trying to get out of that situation. How do you effectively get out of that situation? How do you get these countries to say yes, we share your determination, we’re now out to do it. We try and set that down with the countries like Mauritania. We have 22 commitments with them. Togo is another example as well. But sometimes that isn’t possible. We suspended budgetary support for Ethiopia in the last six months after what happened there. Again, Ethiopia, a very strong performer in many ways, but after what’s happened there we have to try and get out of that. At the moment we have suspended cooperation, but we try and work through other means. Again, this is the point about the different actors you’re trying to use in promoting governance, I think, and in this case working more through some of the NGOs and in some cases local authorities.

So these are very simplistic scenarios, but they also bring out I think three basic points about how we try and support governance. The first is there is a very wide range of instruments which we can try and use.  There is a growing tendency for the community to try and use budgetary support where it can. I think it was around 14 percent of total support in 2001. The figure I have here is 30 percent in 2004. And we’re trying to do that in a multiennial way. We have the good fortune in this policy area of having a budgetary process which allows for that possibility of offering some medium term security about that kind of support.

But it’s obviously crucial to tie that support to outcomes, and not just to focus on the inputs. And where we see evidence that those outcomes aren’t being delivered or as is quite often the case we see certain incapacity in terms of management of the budget, then we try and rework the money away from that kind of support into other areas.  We’ve had examples of that in the last few years where we’ve looked to the country, we’ve gone through a strategy evaluation, we’ve thought no, this way of delivering isn’t working, there are some problems here which we need to resolve, so we’ve gone off budgetary support.

It’s about different instruments. It’s about different policies as well. Trade policy as well as development policy or advisic presence on that. And there the European Union is I think the biggest donor in the world of aid for trade, and the president committed to increasing that in the context of the G8 last year, to a billion euros per year. But that very often is about capacity building. Is about creating the possibilities of some countries to take, make use of the opportunities which have been given to them. Now market access is obviously a delicate [inaudible]. We’re talking to the United States happily about that in other circumstances. But in the case of the poorest countries we have the Everything But Arms Initiative. But what we’re finding is that countries who benefit from this initiative are unable to because sometimes of capacity which we’re trying to build up with them.

It seems to me that governance also touches on energy policy. We’ve been focusing very hard on that recently. In some cases what we’re doing is very much about governance, either the management of the resources themselves, and there are various different initiatives for doing that, or indeed creating the conditions which allow for investment to take place in the energy sector. I’m going to just give you one simple example.

In the case of construction of pipelines running through Turkey, the importance of having proper rule of law and land rights in Turkey. It’s one of the issues I think we’re going to concentrate on very heavily in the enlargement negotiation because that is an issue which has come up a lot from private investors who are looking to construct pipelines through Turkey which will allow for a greater diversity of energy resources.

I think the third thing, you have different instruments, different policies, you have different actors. It’s quite clear, and I know this is something, John, you referred to it, and it’s something that’s big in the MCC, it’s working at different levels, the local level as well as at the national level, and that again is something in our policies which we’re trying to increase. We already have substantial sums in support of that under the last EDF. We will try and increase it. A case in point which is often given is Mali where we’ve actually managed to work with the Malian authorities to develop decentralization in a reasonably effective way, a way which they wanted.

Obviously we’re going wider into civil society, particularly in countries where we feel that the state is either unwilling or incapable of working with us to achieve the outcomes which we’ve jointly agreed,  and we’ve been very strongly supporting civil society. Zimbabwe is an example which is sometimes given.

Also, actors not just at the state or the local level but at the super national level as well. We work a lot with the African Union. As you know, the Commission had a joint meeting with the African Union Commission last year. We hope to have another one in the future. And we work very closely on a more day to day basis with the Africa Union Commission, working with them on developments of capacity because they,  and the regional organizations, as well as [NEPAT] of course, have a very important role to play in the development of governance in Africa.

It’s tempting to talk a lot about the outside world, outside Europe when we talk about governance. I think one of the things we have to work on ourselves as a Commission, as a community, is the improvement of our governance within the European Union, by which I mean the relationship between the Commission and the other institutions and the community and its member states.

This is a big theme for Louis Michel, for Commissioner Michel and it was what drove the desire to create a new European consensus on development policy which was achieved and signed in December last year between the president of the parliament, the president of the council,  and my boss, Mr. Barroso. A lot of what I’ve talked about here features in that document. But it’s really a big, big drive now to see if we can improve the tightness of the coordination between the different parts of the European Union on this and its member states, and we shouldn’t stop there. Obviously one of the reasons you’re here today, John, I guess is also to be talking with ourselves exactly about trying to improve that, our own governance in dealing with third countries.

I’m saying there’s a lot more we can do in relation to governance, but to put it simply, it’s an essential prerequisite for development,  everyone’s agreed on that. I’ve given you some of the definitions we use in Europe for governance. It’s pretty broadly defined.

It’s an issue of which we’re very aware, partly for our own origins,  and partly because I think of the enlargement process showed how effective Europe could be in this area.

It underpins our relationship with the Africa, Caribbean and Pacific countries and always has done, think, but is even stronger now as expressed in the [Cotinu] agreements than it was before.

It’s obviously crucial in turning the promises we’ve made into reality,  and that’s why I put such a stress on it after what happened in 2005.  It’s delivered by different players and different scenarios and with a wide range of policies and instruments, and we must never lose sight of what it is we’re trying to achieve in the end, what those objectives are. I think it’s very important in our work on governance over the next few years. And we must coordinate better internally.

We’ll be coming back to this, the Commission will come back to it because we hope to produce a governance initiative in the next few months, as Louis Michel is working on in the moment, and also because in the case of the neighborhood policy as well, I know there is going to be a government instrument as well.

So this is very well timed. I appreciate it, Antonio. I look forward to hearing what you have to say.


Moderator: Thank you very much to both speakers. Ambassador Danilovich gave us a very good quick reference, definition of good governance encompassing economic freedom, ruling justly, investing in people. That seems to me more a point of arrival for some least developing countries than a point of departure, and probably the problem is exactly how to encourage most countries in the world, the developing world, to go down that road. And Alex described to us not only what the European Union has done so far, but what the debate is currently inside the European Union, the reason for thinking as much as it is the thinking across the Atlantic about how to enforce more effective policies. It all boils down to conditionality. How to exercise conditionality without the transformational carrot and how to exercise conditionality without necessarily penalizing those countries who are already badly governed,  and how to change that kind of state of condition of departure.

I would open the floor. We have a half an hour for our discussion. Who wants to break the ice?

Question: You mentioned the [inaudible].

[Inaudible section].

Mr. Ellis: This is a long road, the one you described, and I joined it only in the last year or so so I can just give you an impression of what I see which is that you are absolutely right to point to the issue as a kind of essential part of our governments as it were.

I have the impression that an enormous amount of reforms have been made. I have the impression of coming into something where a very big effort has been made to try and improve the situation because it was extremely heavily criticized, and still is. And I have a sense of a plea from those who are really running the management of it to see if we can actually make these reforms work effectively, and I’m talking just for example about decentralization as one of the ways we try and achieve this.

I sit on a group which every six months looks at our performance on many indicators of disbursements of funds and effectiveness of funds as against targets. Maybe the targets are cleverly chosen, but we seem to be meeting them which—

Voice: [Inaudible].

Mr. Ellis: Maybe. But I think an enormous effort has gone into that and the situation has improved.

Where I think we can still certainly do better is in quality judgments which are always hard to make about whether this money was truly well spent and delivered the outcomes which we were wanting to achieve.

So I wouldn’t like to give a message of complacency, but I have a sense that having made a really huge transformation in the rules and so forth, the last thing the operators want now is to have another huge change. What they’d like to do is if the rules which we’ve changed will now actually work more effectively. But it’s a constant, constant,  constant fight, and we do keep fighting it.

Ambassador Danilovich: I apologize for the barrage of indicators. I know there is no other way to do it but to do it that way. I’ll try to b a little bit more descriptive and to clarify the indicators and also specifically answer both of your questions.

This is what an indicator chart looks like. They look like this for all countries. They’re identical. We have this on the web site so you can easily see them. These are the three categories – political, social and economic; what we call ruling justly, investing in people, economic freedom.

If it’s green it means they passed. If it’s red it means they haven’t.  The median bar is set on a judgment basis of their peer group, not by Western standards as you say, although, as you also point out, these are Western groups that have come up with these indicator categories,  so to speak, or to provide the median bar such as World Bank, such as transparency, such as heritage. Those are the ones that come out with indicator rankings that we can use. To be quite frank, even those aren’t absolutely reliable and sometimes the data that we have is time inefficient, and sometimes it’s inaccurate.

So we have to do the best we can with these indicator sources, and they’re the best indicator sources we can come up with.

I suppose a positive way of looking at it if you are a recipient country is that you are judged amongst your peers. It’s not as if we expect, in this case Madagascar, to be judged against Belgium in terms of these various categories. So there is a certain equalization that does take place with regards to the group that they’re categorized with.

With regards to suspension, and it’s easy enough to address Yemen as that is a country that was suspended. In the ruling justly category there were a number of democratic and freedom of the press areas that were violated by Yemen where they put people in jail, journalists like yourself, and closed certain newspapers that did things that were against democratic free processes and things of that nature. It wasn’t even as if they were drifting in that direction, they went way over the pale. So it was necessary to blow the whistle and say sorry, we can’t continue with you because you’ve clearly shown no willingness to adhere to the initial steps that you did take to comply with the indicators.

We have had other countries where we have had to make it very clear to them that we were aware that we thought that they might very much be heading in the wrong direction and that we were watching them. That in fat the European Commission was watching them with regards to various aspects, and we wanted them to know that they were being observed to make sure that they did not fall below the barrier.

If they do, what we would like to do is to enter into discussions with them to see all that we can possibly do to bring them back in again, to bolster them in the right direction, in the hope that we don’t lose them.

We don’t want to make this huge commitment that we’ve made, both in terms of human resources and time and effort and money, and then lose a country. When they are suspended they’re suspended from the MCC program only. It has nothing to do with USAID or other US activities or whatever. As you may know, the State Department and USAID are responsible for 80 percent of US development assistance. We’re outside of that. So as are many other agencies – the Department of Defense,  which also does humanitarian development programs; or the Department of Agriculture; or most of our other departments. I think there are 16 US agencies that are involved in the aid effort. But the suspension in this particular case applies only to MCC grants.

I’m going to also say with all due respect to the wonderful fellow who made the comment that I quoted to you that it doesn’t have anything to do with the money, it’s really about – Well the fact of the matter is it does have to do with the money. Money I the incentive in these programs to encourage countries to come up to the bar, to perform adequately, to receive these grants, and to move forward. This is a tremendous incentivizing effect that the MCC does have to encourage the institutional reforms as well as implement what turns out to be generally infrastructure reforms.

Question: My question is for the Ambassador. [Inaudible]. How do you take the criticism that after [inaudible], [inaudible] the government’s word that they want future reform, [inaudible] steps before [inaudible]. That was my first question.

The second is now that you are releasing the aid, what [inaudible] steps do you hope to take to ensure that [inaudible]?

Ambassador Danilovich: The sequence of events was that the MCC Board had approved the agreement with Armenia. In November of last year,  2005, they had a constitutional referendum which was a roaring success in the sense that the purpose of the constitutional referendum was to curtail the power of the executive branch, which the executive branch supported. So everybody was saying and doing and voted the right way.

There were allegations that there were irregularities that occurred during this process and they are being investigated and those irregularities were brought to light by various international bodies that were in Armenia observing the election.

Subsequent to these allegations being made I wrote to President Kocharian and it’s a public letter, it’s on our web site, as is his response to me. And as you can see from that letter, in short, I asked for him to give us at the MCC various commitments and assurances that they would address this particular problem. He in fact wrote back, gave us the necessary commitments and assurances, made certain explanations,  if not justifications, as to why certain things had gone awry, and really expressing not only through himself but also through his foreign minister and also through his ambassador in Washington, a very sincere commitment to put things right so that they could remain specifically part of the MCC program. His letter, in fact, is very much the type of response that we needed from him to proceed.

Our efforts, either in Armenia or in Yemen or for example in Benin where we had a situation where we approved a $307 million compact with Benin, there was some question whether or not President [Kufor] would go ahead with elections in that country. I visited Benin and spoke with him and, Kerekou, rather, if he would go ahead with elections in that country, and after having spoken to many different parts of society in that country and culminating with a visit from him, he gave me point blank his ultimate assurance that he would hold the elections. That he wanted his legacy to the country to be his democratic observance of the constitution after 33 years in power. And also being an MCC recipient country. And he did go ahead and hold elections, and they had a second round of elections, and they were deemed to be fair, and they are now going to have an inauguration of a new president. Today is the inauguration.

So today is an important day for Benin because it confirms our faith in what President Kerekou said to me.

I have to rely upon good faith, and it is the MCC’s intention to encourage countries to be part of our program, not to punish them for things that they might do in the future. For example, it would have been inappropriate for me with President Kerekou to say your government negotiated this very complicated proposal and have gone through all the effort, and because you might not hold elections a month from now,  we’re not going to give it to you. We’ll just see how it goes. Or in the case of Armenia where there won’t be an election again and so therefore we can’t see the proof of the commitment until 2007 and 2008,  we have to have a certain degree of faith in them to continue to adhere to the policies that they said they would adhere to.

They certainly know in both countries, in all three countries, and in other countries, that we are watching what they’re doing and if there is a blatant violation, not just an allegation, not just an inconsistency, but a blatant violation as there was in the case of Yemen, we will take the necessary action. But we have to have faith in them. We have to make a commitment to them just as they are making a commitment to us. So it is in that sense another form of the partnership we have with these countries. It’s a risk, but it will be a risk – democratic processes are always a risk in certain countries, but we have to make a commitment to them.

Mr. Ellis: You raise a very important point. And exactly as you were saying, John, I guess the aim of all these programs is that people are in them rather than people are outside of them. We’re trying to encourage the positive behavior and find the incentives for doing that.

If we don’t find that, particularly from the state actors, how do we then approach those countries? How do we work with them in a way to continue with the change? Obviously that’s a kind of age-old dilemma.  That’s where I think the importance of the development of different actors is obviously absolutely essential, and that’s one thing that you guys focus on.

But in some of the countries which I’ve mentioned and John has mentioned, there I think it’s trying to develop the other actors with whom you can work in certain circumstances where you may have to question the good faith of the main state actors. But also trying to make sure that the NGOs or whatever are not under the thumb of those state actors. We have an issue in Ethiopia now about trying to help that country, and through whom do we do that? Trying to identify people with whom we can do that is one of our challenges at the moment and we think we’ve done it, but a lot of people are also saying to us well,  actually, you’re just giving money back to the government via another means, and that is a familiar dilemma.

Moderator: We have time for another round of [inaudible].

[Inaudible section].

Mr. Ellis: Before I answer the questions, it would be churlish of me not to recognize and thank my colleague Charlotte [Buoya], sitting in the back, for her excellent work with me on this subject, in between writing her PhD and learning about the European Union. She’s been very very helpful on developing some thinking on this.

Risk taking. Thanks for the question, Pat. [Laughter]. This is a very personal view. One of the things that strikes me coming into working with the European Commission is the low level of trust there is within the institutions. We’re approaching a very low trust environment in relation to the money.

Now that’s maybe true in other organizations, but compared to other organizations I’ve worked in, this is the lowest level of trust I’ve seen in terms of the relationship between parliament and the executive,  if you like, on the use of money.

The Commission fell as a result of what was thought a misuse of money in 1999. That created a situation which we’re still living in where there is, at the same time large sums of money are being pledged, but at the same time a deeply risk averse organization, we’re wearing the scars of that experience. That’s partly because of the poor management question which is being raised first off, it’s being linked into it I think in a way.

So you have both a strong constituency saying we want to pledge more money, but at the same time a very very cautious system for spending it because of the circumstances of recent years and the belief that money is being spent poorly, and I’m not talking necessarily about development money here, but more widely. That is going to be, it’s very very hard to change it. I’m astonished by the – the president was amused in his first week to be told that he had to sign the chit to confirm that his windows had been cleaned. [Laughter]. He thought well,  okay, there’s perhaps somebody else who could do this. But it gives you an indication of the problems of a very heavy procedure, partly driven,  I think, because of some of the comments which have been made about the poor management of money. But which don’t necessarily help with the management of money or with the effectiveness of the programs which we’re delivering. So I can’t give you a good answer on that one because I am very confronted by the issues described.

In relation to the second question, I’d like to think that actually the fact that we get to hear about whether it’s bugging people’s phones or corruption in local authority, shows that good governance is operating.  That is to say the basis of it all, the rule of law. I’d like to think that we do have laws within the member states and within the European community which are effective enforced throughout these issues. I certainly don’t think that we’re perfect.

Before I came here I was thinking about the criteria by which you would judge whether you thought that democracy was being properly applied in a country. I was thinking, well let’s start. I assume you want to have an elected parliament and not a nominated parliament. Then I got stuck there in relation to the United Kingdom and thought well they don’t pass the first test probably. [Laughter]. And one or two others as well. So I take your point.

But the core of it basically is whether there is rule of law and that permeates everything effectively, whether you can effectively implement the law as well. And there I think we are right to ask for high standards of countries joining the European Union, just as we should always be asking that of ourselves. I’d like to think we have a reasonably active civil society which is asking exactly those questions.

So we’re not perfect, but I think we are absolutely right to ask those high standards of ourselves and of other people. I have no problem with that.

Ambassador Danilovich: I’d like only to say, also in response to your question, very simplistically speaking, we have governments because of the weakness in human nature and human nature is universal. But the fact of the matter is we do have the rule of law, we have the ability to implement our laws and to enforce them and to bring people to justice because for the mayor to skim off money in Marbeya is not a good thing to do, and the other items you cited are not good practices for governments to have. So when those things do occur we nab them and go through a due process, a legal process of eliminating them.

It’s also a matter of changing culture in many of the developing countries that we’re living in. I lived in, and I’ll be very general about this so as not to be offensive in any way, but I lived in South America for a long period of time and I have a very young son, and when we moved to Washington I explained to him a certain situation that had occurred in a country that we were in South America where someone at a very high level had gone to jail and I explained to him why that man had been put in jail. The reason he had been put in jail is because he had accepted a commission or a bribe or a fee or whatever you want to call it from a company that was operating the telecommunications monopoly in that country. And my young son, who had the intellectual cognizance of having lived in that cultural environment for a certain period of time said, “Well, what’s wrong with that?” And I had to explain to him that that wasn’t really a good use of taxpayers’ money,  et cetera, et cetera. So it’s a matter of the culture in which you function also to a certain extent.

Moderator: I think a footnote on the issue of financing. I suppose that anyone here in this room who has to deal with the Commission knows that the rules for getting Commission money, for applying for Commission money have become nightmarish to a certain extent and that is because of the 1999 story, and because all of [inaudible] breathing on your necks.

At the same time, to be entirely honest about this, I don’t think that the commission is the only body or agency in Europe, to limit myself to Europe, that has suffered problems in this domain. Even some development aid administrations in the member states in the past have suffered huge case of corruptions and the use of public money. I am Italian and there was a famous case in the early ‘90s that brought down, basically, an entire department in the foreign ministry, and the overall consequence of that is either a sharp reduction in the volume of overseas aid which is a bad thing, or a radical outsourcing of the management of aid money because that is supposed to be more neutral.  But that doesn’t, I suppose, entirely solve the problem because then risk taking becomes much more difficult if it is the sort of neutral agency that has to deal with that. So I suppose there are still many many dilemmas to be tackled in this domain.

Ambassador, I wanted to ask you a final question. Since Alex was quite on the defensive on the financial issue, and probably your background in medieval history helped you here somehow. [Laughter]. What is the level of accountability of the organization?

Ambassador Danilovich: My ultimate accountability, the accountability of the MCC, of my colleagues Rodney Bent and the others that are here with us today, Dick Morford and Christian Vanderbrook, is to the American public, to the American taxpayer. I am accountable for spending their money and I have to go to Congress to beg for my money,  which I just did ten days ago, for my appropriation. And to give you an idea of the magnitude of what I have to beg for, a year ago, FY06, our request from the executive branch was $3 billion. We received $1.77.  The request again this year from the executive branch is $3 billion. I hope we’ll receive more than that. It’s a very complicated budget environment right now in the United States because of Iraq and because of Katrina and because of other demands on the budget which are very strong in Washington. It’s not clear how much money I am going to get specifically for the MCC. I will run out of money by the second quarter of 2007, all of my money will be committed by that time, so whatever money, because we’re a small organization I have no moving pieces of the puzzle to move around, whatever money I don’t get I’ll simply have to, we’ll simply have to reduce our negotiations and reduce the countries that we’re operating in which will be a pity because these countries have been incentivized to be part of our program.

The bottom line is, I’m accountable for the money that we spend to the American taxpayer and to Congress, and I’m grilled by them as to how we are spending that money, why we’re spending money in certain countries,  why we’re spending money on certain projects, is that really effective,  shouldn’t we be doing more of this, shouldn’t we be doing more of that,  why aren’t we doing one thing or another? And I have to explain all of this. So that’s my accountability to the Congress and to the American taxpayer that they represent.

We also have accountability, of course, within the organization with regards to our indicators, with regards to the standards, and frankly,  leaving aside the US government American nature of our program, and that is what we are. It’s an American aid program. We are also, to a certain extent, accountable to the countries that we operate in, to conduct our policies well, to do our part of the deal that we have with them in a partnership. We call it a partnership and it isn’t they have to do this and we have to do that. We have to do things together in this partnership. So we’re also accountable to them – Dick Morford,  Rodney, et cetera – are accountable to the countries that we operate with.

Moderator: Any other questions? If not, let’s free Ambassador Danilovich for his meeting. I thank both speakers and in particular Alex for being here and sharing his views with us. Thank you very much.