It is a pleasure to be with MCC friends and partners, and I am honored to follow Congressman Dent. The Congressman has been a strong champion for American defense and security, and we are grateful for his support of effective development in general, and MCC in particular.
I would also like to thank MFAN for hosting today’s conversation. By advancing priorities like domestic resource mobilization, MFAN has spearheaded innovation and reform across U.S. development programs.
And just last week—with MFAN’s support and the leadership of friends in the House and Senate—Congress passed the Foreign Aid Transparency and Accountability Act to ensure that American tax dollars are effectively and transparently improving lives around the world.
A year ago—almost to the day—world leaders met in Ethiopia for the start of the Third Conference on Financing for Development. For MCC, this was a notable milestone. President Bush conceived of the Millennium Challenge Corporation at the First Conference on Financing for Development in Monterrey back in 2002, and here we were thirteen years later—an innovative yet now established tool of U.S. economic assistance.
The conference reflected a remarkable shift in the development landscape. There was broad consensus that the development paradigm had dramatically changed since the first FfD conference, where the primary focus was on increasing official development assistance, or ODA.
But developing countries today no longer need to rely exclusively on the foreign assistance budgets of wealthy countries. Other sources of development finance, including private investment and domestic resources like taxes, have rapidly surpassed donor assistance.
Consider the change we have seen since 1990 alone, presented on the chart here.
ODA from all countries—represented along the bottom of the chart—has remained largely flat, increasingly slightly between 1990 and 2012.
By contrast, foreign direct investment in developing countries, represented in green, has climbed significantly since the early ’90s and today represents a major slice of the development finance pie—about 700 billion dollars.
Domestic resources, meanwhile, have broken away from the competition. Since 1990, domestic expenditures have risen 8 fold to nearly 6 trillion dollars.
And yet, despite the gains in development resources, poverty remains deep and widespread. Today, nearly a billion people in the world—or one in seven—still live on less than $1.90 dollars a day. It is clear that official development assistance is as critical as ever
Broadly speaking, there are three sources of development finance—and aid has a role to play in all three.
First, in the poorest countries, assistance remains a primary source of development finance. Countries like Niger simply do not have the private or public resources to tackle their challenges alone.
Second, official assistance can catalyze private investment. New approaches and innovations are transforming how and where we can leverage private sector dollars.
Public private partnerships, for example, can scale up investments many times over, which is why MCC announced last year a $70 million commitment expected to leverage $1 billion in private investment. Social impact bonds and incentive structures like pay-for-results—which have been championed by our friends at CGD—can integrate businesses into the business of economic development. And policy reforms that transform investment climates can unlock private investment in sectors like electricity and water.
Domestic resource mobilization represents the third, and largest revenue stream for development. And development assistance can play an instrumental role in helping countries tap into their largest resource for economic growth.
This type of assistance is one of the most promising opportunities in economic development today. In some cases, development programs that help governments mobilize domestic resources have returned $20 or more for every assistance dollar invested. By supporting domestic resource mobilization, we can help countries reduce waste and raise revenues so they have more funds to spend on public goods like schools, hospitals, and roads.
And the world is taking note. At the Financing for Development conference, the United States and more than 30 other countries and organizations endorsed DRM as part of the Addis Tax Initiative. Together, the U.S. and its partners pledged to substantially increase assistance to developing nations for DRM.
And as we will hear more about today, the U.S. government has been a leader in the DRM space. Around the world, U.S. agencies are helping partner governments help themselves.
In El Salvador, for example, USAID invested roughly 6 million dollars to help the country revamp and modernize its tax collection system. In just five years, the partnership helped to increase annual revenues by 350 million dollars, with nearly half of that money going to social sector spending. That’s an annual return on investment of nearly 60 percent.
And in the Philippines, MCC and the Treasury Department’s Office of Technical Assistance have worked together to tackle corruption, streamline systems, increase public awareness, and ultimately raise tax revenues. I visited the Philippines in May to celebrate the end of MCC’s five-year compact, and I met with folks at the tax agency who told me how transformative our programs have been.
MCC allocated about 40 million dollars to support the country’s ambitious reform of its tax administration system, and we are already seeing results. With MCC’s support, the government has nearly doubled its annual tax collections from five years ago. And since 2013, two innovative programs backed by MCC have generated an additional $300 million in tax revenue.
The additional revenue—which will only continue to grow—means more funds for roads, hospitals, and schools that will lift Filipinos out of poverty.
MCC has additional DRM projects planned or underway around the globe, including in Indonesia, Guatemala, and Honduras.
In our economic analyses, MCC often finds that better resource management can be a key catalyst for growth. And our country partners themselves are prioritizing DRM, recognizing that they are leaving development dollars on the table if they don’t.
The growing focus on DRM as a tool for reducing poverty has created a space for innovation and new ideas. So today represents a great opportunity to discuss how we can improve and build on our approach.
- How can we make sure our partner countries are leading the way and taking ownership of projects?
- How do we approach DRM projects in fragile states?
- On a sector-specific level, what are the institutional and tariff reforms that can bring more domestic resources to bear for development financing?
- And how do we help developing countries design their tax systems and spend their resources in ways that benefit the poor?
There is an incredible wealth of expertise here to address some of these questions, and I look forward to this morning’s conversation.