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Also See: Struggling Lesotho Signs MCC Compact

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. (MCC) as a reward for carrying out critical and often painful economic and political reforms.

Since its inception in 2004, the MCC has handed out 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 3 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,” explained John Danilovich, the agency’s chief executive officer. “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 Washington Diplomat in a lengthy interview at the 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 class="import-text">2007September.Millennium Challenge Corp.txt,675 per year. It’s also allowed to assist lower middle-income countries (LMICs), which by definition have per-capita incomes of between class="import-text">2007September.Millennium Challenge Corp.txt,675 and ,465 a year, but MCC’s engagement with LMICs is restricted to 25 percent 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 has been to the West African nation of Ghana, for 7 million. That program aims to boost the production and productivity of high-value cash and food staple crops in some of Ghana’s poorest regions, as well as to increase the competitiveness of Ghana’s farm products in regional and overseas markets.

Other particularly large MCC grants have been awarded to Mozambique (7 million); El Salvador and Mali (1 million each); and Benin (7 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 0 million to 0 million.

Some countries that are desperately poor, such as Haiti, wouldn’t have a chance of inclusion into this program because they simply don’t meet the criteria. Nor do Guatemala or the Dominican Republic, although Danilovich said 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 5 million compact with MCC is specifically assisting the departments of León 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 benefiting from the MCC program. “There are already examples of that compact producing 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 [Global Positioning System] projection of their land acreage, and for the first time being able to prove that they own the land,” Danilovich said. “In many countries, landowners are women, and in many cases, this is the first time women actually have entitlement. This is a tremendous source 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,” Danilovich 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,” Danilovich told The Diplomat. “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 [nongovernmental organizations], 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 that 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,” Danilovich said.

Funding from Congress also matters, and Danilovich is worried that any significant reduction to the MCC’s current class="import-text">2007September.Millennium Challenge Corp.txt.75 billion annual budget could comprise its future. The House appropriations bill calls for a fiscal 2008 budget of class="import-text">2007September.Millennium Challenge Corp.txt.8 billion, but it could end up being as low as class="import-text">2007September.Millennium Challenge Corp.txt.2 billion (by comparison, the Bush administration had asked for billion).

“We’re in a very constrained situation, depending upon how the eventual appropriation comes out of Congress. With class="import-text">2007September.Millennium Challenge Corp.txt.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,” Danilovich explained.

But at class="import-text">2007September.Millennium Challenge Corp.txt.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 [Nicolas] 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.”

Struggling Lesotho Signs MCC Compact

Lesotho, a tiny, mountainous African kingdom plagued by severe soil erosion, malnutrition and rampant AIDS, will receive a 2.6 million grant from the Washington-based Millennium Challenge Corp. (MCC), whose slogan is “reducing poverty through growth.”

The bilateral compact was signed on July 23 at the State Department by MCC’s chief executive, John Danilovich, and by Mohlabi Kenneth Tsekoa, Lesotho’s minister of foreign affairs and international relations. Witnessing the signing ceremony was U.S. Secretary of State Condoleezza Rice and Lesotho’s prime minister, Pakalitha Mosisili.

“MCC congratulates the people of Lesotho for reaching this important milestone,” Danilovich told dignitaries and guests at the event. “The people of Lesotho have demonstrated their resolve to create hope and opportunity within their country by developing a results-oriented program which reflects their priorities for poverty reduction and growth. MCC looks forward to building on this dynamic partnership.”

Lesotho, slightly smaller than Maryland, is completely surrounded by South Africa. Average life expectancy at birth is only 40 years, a consequence of the country’s frightening AIDS epidemic. Some 35 percent of Lesotho’s population is HIV-positive—one of the highest infection rates on Earth.

As such, 2.4 million out of the total five-year Millennium Challenge Compact will pay for the renovation of up to 150 health centers, as well as the establishment of anti-retroviral therapy clinics for AIDS sufferers and other health-related expenditures.

Another 4 million will finance the building of a bulk-water conveyance system and improve sanitation for an estimated 25,000 households through the construction of ventilated pit latrines and water systems, among other things.

By 2013, says the MCC, its compact “will benefit the majority of the population of 1.8 million due to its broad geographic scope and focus on sectors that impact most [people], such as health and the provision of water.”

In addition, .1 million will go toward increasing private-sector economic activity in Lesotho by improving access to credit, slashing transaction costs, and boosting the participation of women in the formal economy. A final million will be spent on administration, management, auditing, monitoring and evaluation, as well as environmental and social oversight.

“Lesotho is one of the top performers in the MCC selection criteria,” said Maureen Harrington, the MCC’s vice president for policy and international relations. “We’ve found that a number of private-sector groups are taking notice of this criteria. We’ve had a number of large multinationals tell us they’re using our indicators when thinking about where to expand their business.”

Despite its enormous challenges, one area where Lesotho has distinguished itself is the apparel and textile sectors. The tiny country currently produces one-third of all apparel exports in sub-Saharan Africa, according to A. Mark Neuman, counselor for international trade and global strategies at Limited Brands, Inc.

“One thing we understand as retailers is that achieving success is wonderful,” said Neuman, one of several speakers at a July business conference on Lesotho co-sponsored by the MCC, the Lesotho government and the Corporate Council on Africa. “But sustaining growth is very, very hard. That’s the inconvenient truth. Lesotho is winning here, but the growth has now ended, and there’s a couple of reasons for that.”

One of those reasons is that in the last two years, total exports under the African Growth and Opportunity Act (AGOA) have fallen from 3 billion, at a time when overall apparel exports around the world were rising by double digits. And even though Lesotho has managed to increase its share of AGOA exports from 26 percent to 31 percent, by comparison, Chinese apparel exports have jumped by .5 billion since 2004, or 107 percent.

“That’s four times more than Lesotho exported in the seven years since AGOA was implemented,” said Neuman. “In six months of unrestrained trade in 2005, China’s exports of cotton-knit shirts to the U.S. were greater than the past seven years combined. If China is unrestrained in 2008, Lesotho will no longer be able to compete.”

But the problem isn’t only China. Neuman also blames U.S. subsidies to domestic cotton producers, which depress cotton prices around the world.

“Only 0.15 percent of U.S. cotton imports came from sub-Saharan Africa in 2005. These massive cotton, yarn and fabric subsidies push Africa out of the apparel supply chain, which I think is a disgrace,” he said. “My vision is a vertically integrated African supply chain and world market free of unfair subsidies that harm the poorest people in the world.”

Timothy Thahane, Lesotho’s minister of finance and development planning, agrees with that assessment. “The critical thing for most countries in sub-Saharan Africa is that we don’t have diversified economies,” he said. “Consequently, we depend on our textile industry, which engages more than 45,000 people. Each of those workers supports four to five other people, so [preventing] even a 1 percent or 2 percent cut in exports is critical to our survival.”

 


 

About the Author

Larry Luxner is news editor of The Washington Diplomat.

Last Edited on May 4, 2011