Keynote by MCC Vice President Patrick Fine at the Aid and International Development Forum

Good morning, everyone. I’m glad to be with you this morning. This is such a remarkable gathering. Walking through the displays and talking to participants, it is impossible not to be amazed by the diversity of our community. Is there any industry in the world that is as diverse as ours?  For profit and non-profit;  big donor governments and small non-governmental organizations; sprawling international organizations and giant multinational corporations; those whose primary motivation is to serve humanity and those focused on serving their shareholders; researchers and practitioners; young people moved by compassion and the desire to do good in the world and those who are driven by wanderlust and a desire for adventure; and those who came to this vocation through coincidence and circumstance. I can’t think of another field of endeavor that combines so many disciplines and melds so many motivations into a single pursuit:  improving the human condition.

This is the 7th year that this Forum is being held. In some ways, the Forum’s first year, 2006, was a kind of high watermark for support for development and humanitarian assistance. The global economy was booming. The United States and its allies were involved in two extraordinary, once-in-a-generation efforts in Iraq and Afghanistan, and the threat of international terrorism made the link between development and national security clearer than ever. The fight against HIV/AIDS was finally receiving large scale resources through the Global Fund, the Gates Foundation and the new PEPFAR program funded at $3 billion a year, an amount that would have been unimaginable only a few years earlier. My organization, the Millennium Challenge Corporation, or MCC, had just been created two years previously with the promise of providing $5 billion a year in untied development assistance to poor but well governed countries. Unfortunately, that promise was not fulfilled, but MCC still has invested more than $10 billion since its creation and has proved that a non-traditional approach to bilateral assistance based on the principles of development effectiveness and good governance can produce powerful results.

The growth of remittances and the surge of private investor interest in frontier and emerging markets reminded us that private resources, especially private sector investment, is more important than official development assistance and it is the key to long-term prosperity. Along with increased resources came a growing consensus around new operating standards of development effectiveness. The Millennium Development Goals had become accepted benchmarks, and in 2005 developing countries and their donor partners signed the Paris Declaration on Aid Effectiveness, which codified a set of principles that have slowly but surely shaped donor policies and the market for the goods and services they finance. I’ll say more about this later.

Yes, those were heady times. Free market policies, increasing investment in emerging markets, the realization that economic development is critical to national security, and a doubling of donor assistance from the lows of the mid-nineties created a booming market for the expertise, goods and services that your organizations provide. It is no wonder this Forum came into being. 

But just like Bob Dylan warned back in 1964, “the times they are a changing.”  This 7th edition of the Aid and Development Forum convenes when the landscape for development and humanitarian work is rapidly shifting. In the United States, we’ve been through the worst economic downturn since the Great Depression of the 1930s. Europe is in the midst of a debt and currency crisis. A group of new world powers, led by China, is exerting increasing influence both economically and politically. Last month, the Center for Global Development and the Modernizing Foreign Assistance Network each published reports about development during an era of austerity. And as donors align their policies with the principles of development effectiveness, new business opportunities increasingly are in the hands of developing countries. For example, USAID Forward, USAID’s umbrella policy for operationalizing the principles of development effectiveness, envisages programming over one-third of U.S. development assistance through partner governments and NGOs by 2015.

These changes have profound implications for us, whether we are focused on the moral imperatives of helping those in need or the business opportunities created by a multi-billion dollar industry. So, I’d like to share some perspectives about the shifting landscape for development work with you this morning.

A More Prosperous World

First, the good news:  The world is becoming more prosperous. The evidence shows that critics who say money spent on development is money down a rat hole are dead wrong. We have seen momentous progress, both for nation-states and individuals, in terms of more income, better health and increased opportunities. I don’t want to overwhelm you with statistics, but since we work in a field where “evidence-based decision making” is the rage, let me offer some evidence to support the extraordinary transformation that is taking place in poor countries.

Poor countries are more prosperous. In 1990, 1.9 billion people—then equivalent to 43 percent of the developing world’s population—lived on under $1.25 a day. By 2008, that figure had been halved—to 22 percent—even as the population in developing countries doubled. Even recognizing that these aggregate trends have been driven by China and India, this is an extraordinary achievement. Many countries are advancing. Since 2004, when MCC began to base its selection of partners on a country’s income level, 25 countries have moved from LMIC to MIC and graduated from assistance.

The poor are healthier. In 1970, people in the world's least developed countries could expect to live to age 42. Today, even with the AIDS pandemic that has pulled down life expectancy in many African countries, average life expectancy in developing countries is 57. 86 percent of people in poor countries now have access to clean water, and we are on track to achieve the MDG of reducing the number of people without access to safe water by 50 percent. Last week’s Washington Post ran an editorial trumpeting the phenomenal drop in child mortality in countries like Senegal, Rwanda and Uganda.

The poor are better educated. Literacy in sub-Saharan Africa countries to increase, fom 53 percent to 62 percent over the last two decades, and access to basic education exceeds 80 percent in all but a few countries. What I think is even more significant for the work we do is the growth of higher education because of what it means for local technical and professional capacity. In the early 1960s, there were a total of 6 public universities in sub-Saharan Africa, not including South Africa. Only a handful of people held advanced degrees or professional qualifications. Today, there are 334 public universities in sub-Saharan Africa, over 450 private universities, and thousands of public and private higher education training institutions. And while we may complain about lack of capacity, many nations are struggling with a graduate unemployment problem.

Technology too has transformed our world. Cellphones and smartphones are a huge game-changer. In Africa, coverage has gone from 10 percent of the population in 1999 to over 60 percent in 2008, when there were over 326 million cellphone subscriptions. Even in a country like the DRC, which has little infrastructure and has been engulfed in conflict for over 10 years, one in four people has a cell phone. From election monitoring, to telemedicine, to mobile banking, cellphones are revolutionizing our work. I’m sure a number of firms at this Forum are working on applications and solutions that can be delivered via cellphone.  I suspect we are just scratching the surface of what is possible. Social media, a la Facebook and Twitter, which is having such a profound impact on our societies, has not yet reached the masses in the poorest countries.  I expect that will change the game again.

And, let me mention one more area where there has been remarkable progress.

Poor countries are better governed.  As people become better educated and linked through information technology and global telecommunications, the demand for good governance has grown. In the past year, we’ve seen a great movement for democracy across the Middle East and North Africa. This year, Freedom House reported that more than two-thirds of the world’s population live in free or partly free societies, with 117 electoral democracies. That is up from 69 electoral democracies in 1989, on the eve of the fall of the Soviet Union. At MCC, we watch democratic and human rights very closely since we only work with countries that demonstrate that they are governing justly. Just in the last few months, we have witnessed free elections and peaceful transfers of power to opposition parties in four of our partner countries in Africa: Senegal, Zambia, Malawi, and this week there is a smooth democratic transition underway in Lesotho.

When we talk to policy makers about the work we do, I believe it is important to make the point that a world that is healthier and more prosperous, where people are better educated and live in societies that are better governed, is not fore-ordained or inevitable. We could be living in a world where things are getting worse. And there are certainly places in the world where conflict, famine and disease are still the norm. Just look at Mali. In March, there was a senseless coup d’etat; Al Qaeda-linked extremists seized the north of the country and committed terrible human rights abuses, and over a hundred thousand people have fled into neighboring countries creating a refugee crisis. So, despite the progress I’ve talked about, bad things still happen. But what is notable about the Mali case is the response from the international community. Mali was an MCC partner, and we terminated a $460 million program 7 months shy of completion. The AU has refused to recognize the junta. ECOWAS, the regional economic community of Mali’s neighbors, voted to impose sanctions and forced the junta to recognize a civilian administration. And other donors have suspended aid. This response from the international community is fundamentally different from what we used to see in the past.

Even with cases like Mali or failed states like Somalia or the ungoverned parts of the Eastern Congo, there has been more progress in the last 50 years than at any other time in human history. The world is making progress because investing in development and people works. In the face of incontrovertible evidence, I—like you—find it frustrating that, as an industry, we still have a difficult time convincing the public of the value of our work.

So, the good news is that our work is succeeding. It makes a difference. The not so good news is that the shifting landscape brings with it a new set of challenges that affect our organizations, whether we are driven by a sense of moral commitment or commercial enterprise. Let me mention three factors that will shape our industry over the coming years and will require many of us to rethink our business models and our operating approaches.

A New Era of Austerity? 

First, I expect that the term “austerity” will become an increasingly common part of our vocabulary as we talk about financing for development and humanitarian relief. Two weeks ago in a lead editorial about Haiti the Washington Post stated, “Humanitarian relief groups, short of cash, are folding their tents.”  In the United States, the international affairs baseline budget fell by more than 14 percent between 2010 and 2012, and the Obama Administration has resisted proposals for more draconian cuts to foreign assistance. To its credit, even in the midst of the worst budget environment anyone has ever seen, the United States and the Obama Administration have remained committed to development, with a budget request of $27 billion for development and humanitarian assistance in FY 2013. Just two weeks ago, President Obama reiterated this commitment at the G-8 Summit and launched a new alliance on food security and nutrition.

But the financial outlook is not encouraging. OECD figures show that aid from major donors to developing countries fell 2.7 percent in 2011, the first decrease in 10 years. At the same time, the extraordinary efforts in Iraq and Afghanistan that created billions of dollars worth of work for development and humanitarian aid organizations are winding down. I don’t think we’ll see anything like that again.

When talking about the likelihood of less public resources for development, we often take solace in the fact that private financial flows, including FDI, portfolio capital, and net bond issuances, now dwarf ODA. This is true. But so far, the majority of private capital has gone to only a few major emerging markets. India alone received one‐third of all private capital flows to developing countries since 2000.

There are a number of countries that are poised to become the new growth economies, and they could be very exciting markets for investors and for organizations that help communities with basic infrastructure, small service-oriented business start-ups and the whole array of goods and services people demand when they have additional income. But it’s unclear, at least to me, whether private investment will finance the types of public goods that donors fund.

New Rules of Engagement 

Second, not only do I foresee less traditional development assistance, but also how it is managed is changing. This will change the way we do business.

If you’ve worked with the military, you already know how important rules of engagement are. Well, the rules of engagement for development and humanitarian aid are changing as donors and developing country governments operationalize the principles of development effectiveness.

The source document for aid effectiveness is the 2005 Paris Declaration on Aid Effectiveness. While it is one of those over-negotiated international statements that has something for everyone, at its heart, it is about helping developing countries formulate and implement their own national development plans, according to their own national priorities, using, wherever possible, their own implementation systems. Following multilateral meetings over the past decade in Paris, in Accra and most recently in Busan, the principles of aid effectiveness are now well-established, and all donors at least pay lip service to them.

I’m sure most of you are familiar with them:  country ownership; alignment with country priorities; harmonization of donor resources; managing for results; mutual accountability; and transparency. MCC’s model for development financing is designed to embody these principles. All of these principles will affect how we do our work, but the one I expect to have the most direct impact on your organizations is country ownership, because it is causing a shift in procurement and implementation responsibilities to partner governments and local implementing organizations.  

Increased Competition, Increased Opportunities

So, what do a tough budget environment and changing rules of engagement mean for you?  This leads to my third point.

If your business model relies on annual growth and public resources, as many do, than you probably should be thinking about diversifying your sources of income. One important consideration, which I’ll touch on in a moment, is positioning yourself to compete for grants and contracts managed directly by developing country governments. Another is to look at new product lines that appeal to private donors or investors. I know many of you are looking at how to do that and finding that it ain’t easy. 

As a result, expect the environment to become even more competitive. I know that may be difficult to imagine but we are going to see a whole new group of competitors enter the market and some will bring natural advantages either because of their location, cost structure or explicit preferences for local organizations.  In fact, I expect that the organizations that are able to be cost competitive will be those that figure out how to control the high overhead costs associated with expensive expatriate experts and headquarters operations. When I was at AED, we experimented with setting up local affiliates and partnerships with local organizations. We never really figured out the business model.
Increased use of country systems also means that international firms will have to become better at competing on country procurements. MCC’s oversight model places implementation responsibility on our partner countries, so it provides a good example of both the advantages and disadvantages of working through country systems. In general, we can say that most countries have more capacity than they are often given credit for and are both willing and able to take responsibility for large and complex projects. At the same time, just as you find next door in Northern Virginia, large projects encounter cost overruns, contractor deficiencies and all types of implementation dilemmas—from environmental issues to health and safety concerns—that call for significant external management and professional technical assistance and rigorous audit oversight. Also, if you want professionally managed programs you have to be willing to pay local staff professional rates. We now operate in a global labor market. Local organizations are often more cost effective, but the cost differentials are driven more by overhead than by salaries and benefits.

All this means that the focus on results will only grow stronger, so organizations that can convincingly demonstrate and quantify their results will have an advantage. Proving that our results are real and not just assertions is a core part of MCC’s model. We put huge resources into establishing baselines, collecting information and assessing impact against a counterfactual. M&E—or monitoring and evaluation—is definitely a growth area. It’s also an area where we still need a lot of R&D. Measuring results is hard, and we don’t yet have the evaluation methodologies we need to assess the real value of our work. On one end of the spectrum are qualitative assessments that often lack independence, rigor and credibility; and on the other side are experimental approaches set up to use randomized controls that often aren’t usable without distorting an activity beyond recognition.  If you are looking for areas where you can make a contribution, come up with new cost-effective and workable approaches for monitoring and evaluation.

Hope is the Essential Ingredient

I’ve shared the really good news about the long-term success of development efforts and highlighted some of the challenges we face as a community as we adapt our business practices to a period of constrained budgets and new rules of the road embodied in the consensus around a set of principles of development effectiveness. Those principles single out the importance of a conducive policy environment, country ownership, accountability, and transparency at the macro level. At MCC, our mantra is:  policy matters, ownership matters and results matter. 

These are all important, but in my experience more important than even these fundamental principles is hope. If people believe that their efforts to build a more prosperous future for themselves and their children will pay off, then the work that we do takes hold and generates results. Faith in the future unleashes innovation and the willingness to try new things; it sustains our willingness to persist in the face of setbacks and keep trying.

This is an amazing gathering of hundreds of organizations that are involved in development and humanitarian assistance. As you share ideas and innovations, discuss your successes and failures and look forward to the opportunities and challenges we face as a community entering what I’m sure will be a new era of development cooperation, I hope you make faith in the future and hope for a better world a key part of your conversations. Despite the challenges I’ve highlighted, we work in an “opportunity rich” environment. There is an Arabian proverb that says, “He who has health, has hope. And he who has hope, has everything.”

Thank you for inviting me here today.