TESTIMONY: Andrew Natsios Testifies before the Senate Foreign Relations Committee on Future of MCC

By Andrew Natsios | DECEMBER 8, 2015

Testimony of the Hon. Andrew Natsios, former USAID Administrator and CDR participant, before the Senate Foreign Relations Committee on the future of the Millennium Challenge Corporation (MCC).

Mr. Chairman, thank you for the opportunity to testify today on the strengths and weaknesses of the Millennium Challenge Corporation, and to propose some changes in the authorizing legislation.

The Millennium Challenge Corporation was created by President George W. Bush as major reform in the international aid system, where we would reward those countries that made significant strides to improve their governance, economic freedom and expand investments in their people. President Obama has continued White House support for the program which indicates that the MCC business model has strong bipartisan support. More than ten years after the 102nd United States Congress passed the authorization for the MCC, we can take stock of its successes.

The MCC makes three major contributions to the international development practice. First, the MCC relies on transparent and readily available indicators to select countries for participation in compacts, which is advantageous in multiple ways – it makes the MCC effect possible, for one. Second, the MCC compiles the data it uses for selection in a scorecard of all twenty indicators, which it publishes for all countries for which is has data. This scorecard is now a valuable tool for private investors considering entry into a developing country. Third, and importantly, compacts are locally designed, driven and carried out with input from the MCC staff.

Local ownership of compacts is important because project success rates increase substantially when the management of projects is decentralized. Professor Dan Honig, at the John Hopkins School of Advanced International Studies, has shown a significantly higher success rate in aid projects where the local managers have a much higher degree of independence than those where management decisions are highly centralized. Over the past ten years there has been a significant centralization of decision-making in US government aid program in the State Department which has compromised the integrity and success rates of these programs, given the findings of Honig’s research. The MCC has the last hold out in the federal foreign aid system to this creeping centralization, but it too is at risk.

The reality is, of course, that within certain bounds, recipient countries (and project managers in the field) are much better suited to make crucial decisions about how projects should take shape. With increased local participation and local management, it is also more likely that projects are carried through till the end – both because the project was tailored to local needs, and because local officials will take ownership of the projects. Moreover, the local implementation authorities created when a compact is awarded contribute to building the capacity of governments in the recipient countries. Accordingly, locally driven compacts will tend to be more sustainable in the long run.

One success story that is worth mentioning is the George Walker Bush Highway in Ghana, which was built with funding from the MCA. The highway is an embodiment of Ghana’s success in its efforts to rapidly modernize its economy and political system. The highway has substantially improved market access in regions of Ghana that had been relatively isolated from international markets.

After ten years, we can conclude, with some assurance, that the MCC is a success story. We have certainly learned many lessons, but moving forward we should refine the MCC and not reform it.

In my testimony below are several suggested reforms to the MCC. The two most important improvements are the composition of the board – where the Secretary of State should not hold the chairmanship if we expect the MCC to live up to its mandate – and the use of the current corruption indicator, the purpose of which is more effectively carried out by the rule of law indicator.

Moreover, while the MCC is successful in its mandate, it is not an alternative to the United States Agency for International Development (USAID). The MCC is designed to only operate in the most ideal conditions – those where good governance, economic freedoms and investments in people have already been demonstrated. Much of USAID’s work is specifically designed to operate under other and more challenging local conditions, as is necessary to fulfill its much broader mandate.

Strengthening the MCC is more important now than ever. The MCC compacts provide alternatives to Chinese loans and infrastructure development which do not encourage good governance or improved local capacity. The MCC has focused much of its funding on infrastructure, particularly in Africa, because that is what the people and leaders of the countries have chosen to focus their projects on. Donor government tend to appropriate money for sectors which are popular in wealthy countries, such as health, education, and the environment while what the developing countries need and want to build their economies are roads, bridges, and other infrastructure. When countries are left to make development decisions themselves, they prioritize these projects over social services because they know that we have forgotten that without economic growth and the tax revenues it generates, social services are unsustainable. Chinese aid is heavily focused on infrastructure and that it why it is so popular in the developing world. The MCC effectively rewards those countries that strive to achieve improvements for their citizens, but the relatively small budget of the MCC is dwarfed by China’s efforts…

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