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Millennium Challenge Corp. Helps Countries That Help Themselves
The Washington Diplomat / September 2007

By Larry Luxner

The former Soviet republic of Georgia has little in common with Honduras or the Pacific island of Vanuatu. Yet the three relatively poor, isolated states are among a select group of nations now receiving U.S. foreign aid through the Millennium Challenge Corp. as a reward for carrying out critical and often painful economic and political reforms.

Since its inception in 2004, the MCC has handed out $4 billion in assistance to a dozen countries, half of them in sub-Saharan Africa. Recipients of MCC largesse to date include Armenia, Benin, Cape Verde, El Salvador, Georgia, Ghana, Honduras, Madagascar, Mali, Mozambique, Nicaragua and Vanuatu.

On July 23, tiny Lesotho became the latest country to sign a "compact" with the MCC, which will entitle it to $363 million in U.S. aid (see sidebar). Another 12 countries are eligible for future MCC grants: Burkina Faso, Bolivia, East Timor, Jordan, Moldova, Mongolia, Morocco, Namibia, Senegal, Sri Lanka, Tanzania and Ukraine.

"The MCC was created by an act of Congress as an innovative model for development assistance," says the agency's CEO, John Danilovich. "Our mandate is to reduce poverty through sustainable economic growth. We deal with lower-income countries that are dedicated to good government and sound policies."

Danilovich, a one-time shipping executive and former U.S. ambassador to Brazil and Costa Rica, spoke to the Diplomat in a lengthy interview at MCC's headquarters down the street from the White House.

He said countries are selected for eligibility based on political and economic reforms — not on current events. In fact, they don't even have to like the United States or its policies, though it helps.

"We are an independent agency, not part of the State Department or the Pentagon," Danilovich insisted. "We stand alone, and as such, our independence is assured. There has never been pressure brought upon myself to take political sensitivities into regard."

The MCC's primary focus is on lower-income countries with per-capita incomes of under $1,675 per year. It's also allowed to assist lower middle-income countries (LMICs) which by definition have per-capita incomes of between $1,675 and $3,465 a year, but MCC's engagement with LMICs is restricted to 25% of its total budget.

"We're not a temporary aid program, but one that seeks to have definitive, permanent results," said Danilovich, who is fluent in Spanish, Portuguese, Greek and Italian. "We want to exit countries at the five-year mark, having produced the results that are necessary to sustain economic growth, so that those countries can take over where we left off."

Unlike the U.S. Agency for International Development, which doles out money to poor countries with little regard to results, the MCC only helps countries that meet or exceed 16 policy indicators in three clearly defined categories: economic freedom, ruling justly and investing in people.

Two new criteria have recently been added: environmental protection and land rights.

"There was a lot of pressure for us to apply those indicators immediately," Danilovich said. "I resisted that because I felt it wasn't fair, since the countries wouldn't have enough time. So we gave it a year. It now takes effect in November."

So far, the largest single grant is to the West African nation of Ghana, for $547 millon. That program aims to boost the production and productivity of high-value cash and food staple crops in some of Ghana's poorest regions, and to increase the competitiveness of Ghana's farm products in regional and overseas markets.

Other particularly large MCC grants have been awarded to Mozambique ($507 million); El Salvador and Mali ($461 million each) and Benin ($307 million). Danilovich conceded that the first batch of countries in the program — among them Cape Verde, Madagascar and Nicaragua — "were to a certain extent disadvantaged" because the amount of their grants was significantly lower, usually in the range of $100 million to $200 million.

Some countries that are desperately poor, such as Haiti, wouldn't have a chance of inclusion in this program because they simply don't meet the criteria.

Nor do Guatemala or the Dominican Republic, though Danilovich says he's been to both countries and "both have embarked upon a very aggressive reform program to become MCC participants. They're doing this without having received a penny of MCC money."

In the case of Nicaragua, its $175 million compact with MCC is specifically assisting the departments of Leσn and Chinandega — two of the Central American country's poorest regions.

Danilovich said the two departments, which were very pro-Sandinista during the Ortega administration in the 1980s, are already benefitting from inclusion in the program.

"There are already examples of that compact producting results with regard to land tenure," he said, estimating that 43,000 land titles will eventually be distributed to rural Nicaraguan peasants.

"It's really something to see humble people receiving a document with a GPS projection of their land acreage, and for the first time being able to prove that they own the land," Danilovich told the Diplomat. "In many countries, landowners are women, and in many cases, this is the first time women actually have entitlement. This is a tremendous sources of pride and dignity for them.

"In the case of Lesotho, the lure of MCC money encouraged them to undertake significant changes to their constitution, among other things allowing women to be landowners for the first time."

Conversely, if a country doesn't keep its end of the bargain, it can be removed from the program. That's exactly what happened in the case of Gambia, which was suspended from the MCC in July 2006 "due to a pattern of actions inconsistent with MCC's selection criteria."

"We suspended Yemen and the Gambia shortly after I came here, both for shortcomings," he said. "The Gambia frankly said they were not interested, and they've proceeded on their own course of political activity, while Yemen undertook a really aggressive reform program which led to their reinstatement."

Danilovich said his understanding of both the corporate world and the culture of diplomacy qualify him to run a program as complex as the MCC.

"Both my experiences in Costa Rica and Brazil were unique, in that it gave me the sensitivity to be able to deal not only with our partners in Latin America, but also throughout the world — and to understand how their political leaders must deal with the pressure of government in general," he said. "It's been inspiring to see how countries have responded to the Millennium Challenge, regardless of where those countries may be."

He added: "Because the MCC is a new model, it requires leaders of countries to understand what the MCC is all about. They haven't had to deal with this before. It's a matter of becoming aware what's required of them. Many countries have never pursued a consultative process. For the first time, they have been asked to pursue a broadly based participatory process in creating their compacts. We ask that they consult with civil society, NGOs, religious groups and particularly the poor to arrive at a proposal."

According to Danilovich, many companies look upon a country's acceptance into MCC as a "Good Housekeeping seal of approval, a quasi-bond rating."

For example, last year following an MCC conference in Nicaragua, a foreign venture decided to invest hundreds of millions of dollars into the country, creating 1,600 jobs in the process.

"When a company is trying to decide, 'should we build a factory in Country X or Country Y,' participation [in MCC] is looked upon as an endorsement of that country's policies. Leadership is critical for the success of our programs, but it's policies that matter."

Funding from Congress also matters, however, and Danilovich says he's worried that any significant reduction to the MCC's current $1.75 billion annual budget could comprise its future. The House appropriations bill calls for a fiscal 2008 budget of $1.8 billion, but it could end up being as low as $1.2 billion (by comparison, the Bush administration had asked for $3 billion).

"We're in a very constrained situation, depending upon how the eventual appropriation comes out of Congress. With $1.8 billion, we will be able to deal with those four countries that are most likely to have succeeded in their negotiations: Mongolia, Tanzania, Namibia and Burkina Faso. These countries are in various stages of negotiations and due diligence. There are also a number of other countries that may well become eligible in fiscal 2008, such as Ukraine, Moldova, Jordan, Senegal and East Timor," he said.

But at $1.2 billion, he warned, "we will not in good faith be able to continue the negotiating process which we have entered into, bearing in mind that these countries have made the very difficult regulatory and judicial reforms necessary to comply with MCC indicators. This will put us in a situation of bad faith. This is certainly not a message the U.S. government wants to communicate."

Danilovich said the MCC enjoys broad-based bipartisan support, and that both Great Britain and France have expressed interest in instituting similar programs.

"The Sarkozy government is talking about using a degree of conditionality in their foreign assistance programs," he said. "This is a very young program; we've only been in existence for three years. As with any business, you don't make all your investments in Year one. With results becoming evident in the field — for example, pineapple production in Ghana, and the Port of Cotonou in Benin — the program is beginning to show results, as it should. We already have this enormous MCC incentive effect where countries have institutionalized good government and sound policies. That's a huge step forward."

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