A New Model for Foreign Aid
How the Millennium Challenge Corporation is changing how America helps the world's poor.
Critics often assert — now more than ever — that money spent on international development is money that is wasted. They argue that it’s squandered on bad projects, that it bypasses the neediest or is spent in countries with governments that don’t serve their people. But not all foreign aid is guaranteed — and nor should it be. During these tough budget times, citizens across the world rightfully question the effectiveness of government spending, including funds spent on foreign assistance.
At the Millennium Challenge Corporation, an independent U.S. foreign aid agency with a global investment portfolio of more than $9.3 billion, we believe our assistance should be earned. Not only do we expect our investments to yield measurable returns, help the poor, and lead to sustainable private sector growth. We expect them to be matched by progress on a host of good governance benchmarks — including accountability, protection of civil and political rights, and rule of law.
MCC is an integral part of the administration’s comprehensive efforts to modernize U.S. development policies and programs, placing us at the forefront of foreign aid reform. And one of the most effective tools we have to carry out this mission is the ability to say "no."
Take, for example, our partnership with Malawi, a country with gross national income of only $330 per person. Our $350 million agreement in Malawi is expected to generate more than $2.2 billion in economic growth and benefit almost 6 million of the country’s 15 million people by expanding access to electricity. The compact is a model for effective foreign assistance: It will incentivize needed policy reform, spur private investment, drive economic growth, benefit the poor, and create goodwill toward the United States.
The compact is also emblematic of effective U.S. foreign assistance in another important way — it almost didn’t happen. MCC suspended the compact in March because the Malawian government was not living up to its commitments to good governance. Only when the government proved through concrete actions and dramatic change that it was upholding the rights of its people did MCC decide to lift the suspension and go ahead with the investment in June.
Because of our demanding development model, we tell many countries "no" — no to bad investments, no to corruption, no to backsliding on democratic rights, no to partnerships that fail to meet our strict selection standards.
At MCC, the power of no begins during our process of selecting potential partners. We evaluate the world’s poorest countries against a set of 20 independent, third-party indicators that measure a country’s commitment to ruling justly, investing in their people, and promoting economic freedom. Potential partners also must pass standards assessing corruption and democratic rights. Unfortunately, many of the world’s poor countries simply do not pass the scorecard.
Because this process is now internationally accepted, a partnership with MCC can act as a seal of good governance, signaling to the world that a country is open for business and ready for increased private sector investment. Officials from poor countries routinely request that seal of approval — but if they can’t meet our criteria, the answer remains no.
Before we sign an agreement, we appraise potential investments to ensure the outcome will generate sustainable economic growth. Our economists and technical specialists pore over available diagnostic data, and if a proposed project will not produce an acceptable economic rate of return, we say no. If the benefits of an investment bypass the poor, we say no. If the benefits fail to support both women and men, we say no.
Throughout the life of MCC’s partnership with a country, we continue to monitor that country’s commitment to the principles of democratic governance. Meeting our expectations is not a one-time deal. Our partners that renege on their commitment to good governance, like Malawi did last year, have learned that these expectations are real.
When a military coup overthrew the democratically elected government of Mali in July, for example we terminated our agreement — just as we did after Madagascar’s coup in 2009. Deterioration in democratic rights also led us to place holds on or cancel part of the funding for Armenia, Nicaragua and Honduras.
Our collective experiences prove that commitments to good governance, investments in people, and economic freedom — which includes the rule of law — are the very foundation of achieving prosperity and economic growth. World leaders recognize this and will continue the global conversation on this important issue when they meet this month at the United Nations General Assembly, where the rule of law will be the central theme.
Our stance is clear: If your country is not committed to these principles, the Millennium Challenge Corporation will say no.