A New Approach to Foreign Assistance

The Millennium Challenge Corporation (MCC) is attacking global poverty by funding targeted projects to foster sustainable economic growth in countries that govern justly, invest in their people and encourage economic freedom.

This concept of “linking greater contributions from developed nations to greater responsibility from developing nations” was proposed by President Bush in Monterrey, Mexico in 2002. MCC was then established as an independent US government corporation by an Act of Congress with strong bipartisan support in 2004.

From this mandate, MCC is fulfilling its mission to reduce poverty through growth by following three overarching principles.

First, for assistance to have the greatest benefit on the lives of the poor it must be awarded to countries committed to, and taking concrete steps toward, good political, economic, and social policies. MCC is designed to provide aid for countries that have a sound policy framework in place. It is a powerful validation of the MCC approach that countries are enacting significant policy reforms to qualify for grants, a motivational force that many in the development community are referring to as the MCC Effect.

Second, to reinforce good policies, we require “country ownership” of the development process. While we work in partnership to define and share respective responsibilities toward realizing an agreement, we ask the partner country to take the lead in creating and implementing its funding proposal. MCC requires that countries themselves identify their barriers to poverty reduction and economic growth, and that they do this in consultation with civil society and the private sector. We expect them to design their own funding proposals, and then implement those proposals with our help and monitoring. We know that even the most generous investment of American development assistance will only be a temporary boost unless favorable conditions exist for private sector enterprise to flourish and become the real engine driving growth and poverty reduction.

Third, tangible results matter. Our partner countries must identify from the outset what impact our funding will achieve. Our assistance goes to those countries that develop programs with clear objectives, benchmarks to measure progress, procedures to ensure fiscal accountability for the use of our aid, and a plan to monitor and evaluate results. MCC’s focus on measurable outcomes ensures that our assistance delivers a difference in the lives of the poor.   

The MCC Approach

We know that to achieve the results we want, and to create the incentives we are looking for, we need to partner with countries that practice good governance, invest in their people and promote economic freedom.  By investing our aid in countries that are pursuing good policies, we are both reinforcing these policies and encouraging further reforms.

We do this by using 16 objective, third party indicators to determine which countries would make the best partners in the fight against poverty. These indicators measure good governance as well as social and economic development. Corruption is the one must-pass indicator because we know poor performance there will undermine every aspect of sustainable development.

Once our potential partners are identified, the eligible countries themselves develop strategies to remove barriers to poverty reduction and economic growth.  We require these strategic plans to be developed through a broad consultative process with input from all segments of civil society including the private sector, nongovernmental organizations, and the poor themselves.  Furthermore, we require that women, alongside men, be part of this process from start to finish.

It is this policy on including women in the consultative process which prompted Ritu Sharma Fox, co-founder and president of the Women’s Edge Coalition, to remark, “The new MCC gender policy is definitely the most comprehensive and practical and most likely-to-be-successful US policy on gender that I have ever seen.”

Extensive monitoring and evaluation plans are integrated into each program to benchmark progress. We ask that countries analyze their constraints to growth before constructing a proposal, and then MCC conducts an economic analysis of every proposal submitted to ensure that each achieves an economic rate of return for the poor in their country. We monitor performance during implementation so corrective action can take place mid-course if needed, and incorporate impact evaluations into our agreements, called Compacts, to measure outcomes.

We then work with countries to ensure that they themselves can, and do, actually implement the economic development and human development aspects of our agreements.

The MCC Impact

Using this approach, Compacts totaling $3 billion have been signed with 11 countries that meet our performance criteria. In addition to our Compacts, we have 13 “Threshold” agreements valued at nearly $310 million. As the name implies, Threshold agreements are signed with countries that are on the threshold—but fall short—of fully qualifying on our performance indicators. Threshold funding is used to address particular policy weaknesses. Some of our Threshold programs focus on improving governance, namely stamping out corruption. Others focus on raising primary education completion rates for girls or immunization rates among children. All support countries who are working to create a policy framework where poverty reduction and economic growth can take root.

Our partner countries are using Compact and Threshold grants to increase agricultural productivity, improve roads, ports and airports, and implement judicial reform.  MCC investments in roads and other infrastructure are providing the poor with better access not only to markets and jobs but also to health clinics, schools, other social services, polling booths, judges, and titling offices.

MCC funds are being used to promote private land ownership, to improve access to credit, and to enable farmers to grow high value cash crops and deliver those products to market.

Land titles are being awarded in Nicaragua and Madagascar, many to women.  Farmers in Honduras are diversifying to higher-profit crops. Farming cooperatives in Madagascar are planting geranium plants that will produce oil for soaps and perfumes.  Grants awarded for agribusiness development projects in Georgia are creating new jobs, improving technologies, and facilitating market access. Our projects to rehabilitate municipal water supplies in two cities will provide a quarter of a million Georgians with fresh water and are expected to generate almost $68 million in economic benefits to those cities.

MCC is also having an impact on human development. In many of our partner countries, projects focus on investments in people that expand human capabilities and directly impact the quality of life. Our Compact with El Salvador contains education and training programs. Our Compact with Ghana supports basic community services, such as constructing schools and water and sanitation facilities and bringing electricity to rural areas. The construction of 132 “girl-friendly” schools in Burkina Faso will double enrollment to 12,500 students, with girls making up more than half of the student population.

­The MCC Effect

MCC’s model—and the way we apply it—has already become a catalyst for positive policy reforms in candidate countries. It is stimulating country governance and development planning capacity and prompting others in the donor community to examine their own approaches. Our selection criteria are motivating countries to take it upon themselves to re-evaluate their policies, regulations and legislation to improve their governance, fight corruption, ramp up investments in health and education, and adopt micro- and macro-economic reforms. MCC’s insistence on sound policies creates a powerful incentive effect for the countries we are engaging in as well as countries that are seeking to become part of our process.

These positive impacts, often without a direct MCC investment of funds, are part of what we call the MCC Effect, and it is becoming widely documented. Often, countries and political leaders need incentives for expensive or difficult policy changes; and the Wall Street Journal recently highlighted two examples of MCC’s role in accelerating policy reform in Lesotho and Yemen.

In Lesotho, traditionally, married women in this southern African country had the same legal rights as children; they couldn’t buy land or borrow money without permission from their husbands. With MCC pressing for changes as a precondition to pursuing a Compact with us, the Lesotho Parliament passed a law in November putting married women on equal legal footing with their husbands.

Yemen was eligible for Threshold assistance in 2004, but was suspended in 2005 because of poor performance on key indicators. From the moment we advised the Yemenis of their suspension, they engaged in an aggressive reform initiative. Because of the tremendous progress made by the Government of Yemen over the last year, we have reinstated their eligibility in our Threshold program.

As a senior person from the Center for Global Development commented, “Countries care really deeply about this ‘seal of approval’ of good governance,” and we are using this as a powerful incentive for countries to reform.

The Dominican Republic, for example, attributes their campaign to immunize five million citizens for measles to their effort to qualify for MCC assistance because one of our indicators measures immunization rates. The president of the Philippines matched MCC’s $20 million Threshold program with additional funds for anticorruption efforts. El Salvador was inspired to reduce the number of days it takes to start a business from 115 to 26 days, and they have since seen a 500 percent increase in business registrations with a sharp spike in customer satisfaction. Indonesia’s Finance Minister has repeatedly argued, in a powerful affirmation of MCC’s role, that MCC’s real draw is its “good housekeeping seal of approval,” sending a powerful signal to private investors that conditions are conducive for doing business.

Transforming Societies

The Millennium Challenge Corporation has moved with energy and passion to put professionals and procedures in place to deliver results in the lives of the poor. We can point to some incredible success stories. And, with the same fervent resolve, we are moving forward to further our critical mission to reduce poverty through growth.

Indeed, reducing poverty through economic growth requires more than foreign aid alone. Government, donors, civil society, and the private sector all play essential roles in moving countries from dependence to independence. MCC creates an incentive for countries to foster a business climate where the private sector will want to do business.   This stimulates homegrown entrepreneurship, small business development, increased trade, and opportunities for investors.

MCC’s approach to development—grounded in sound policy performance, country engagement and ownership, measurable results, accountability, and an expectation that the private sector will pick up where our aid ends—will make it sustainable.

For MCC grants to be most effective, countries must be champions of their own development and foster an environment—through policy changes and private sector engagement—where growth can occur. Growth is the most direct way to increase the incomes of the poor and improve their standard of living in measurable and tangible ways.

Over 22 million people living in poverty are projected to benefit directly from the programs outlined in our first 11 Compacts and this, ultimately, is where MCC’s new approach to foreign aid will demonstrate its impact and effectiveness.

Learn more about the Millennium Challenge Corporation at www.mcc.gov