September 26, 2012
Back in 2004, the Bush administration launched an international program called the Millennium Challenge Corporation to help developing countries reduce poverty and stimulate economic growth through a series of bilateral compact agreements.
Under this novel approach, the U.S. eventually committed to spending $9.3 billion in foreign aid on roads, bridges and other infrastructure in 26 countries that qualified by scoring well in 17 different categories, including political and civil liberties, government effectiveness, anti-corruption efforts and a commitment to investing in their people’s health and education. At the same time, the U.S. Agency for international Development regularly conducted surveys on behalf of the U.S. Trade Representative to identify and quantify the government’s activities overseas to build up trade capacity.
In effect, the Bush administration sought to use foreign aid as a lever to promote economic growth, poverty reduction and social reform to expand free markets in recipient countries for U.S. trade. If that all sounds a lot like what Republican Presidential nominee Mitt Romney was talking about yesterday in his speech before President Bill Clinton’s annual global charitable gathering in New York, that’s because it is.
Demonstrating once again how few original or creative ideas are being offered up in the presidential election campaign, Romney unveiled a proposal for “Prosperity Pacts” that he said would link U.S. trade policy with development policy to promote investment and entrepreneurship in developing countries.
Under the Romney approach, the modest pool of U.S. foreign aid funds would be more closely linked to trade policies as well as private investment and corporate partnerships. Romney said he wanted to use aid initiatives, like the ones the Clinton Global Initiative supports, to encourage lasting change in the Middle East and other developing regions. His program would focus on small and medium-size businesses overseas that are too large for micro financing but too small to qualify for traditional bank loans.
“Nothing we can do as a nation will change lives and nations more effectively and permanently than sharing the insight that lies at the foundation of America’s own economy, and that is that free people pursuing happiness in their own ways to build a strong and prosperous nation,” Romney said.
Working with the private sector, the Romney government initiative would identify the barriers to investment, trade and entrepreneurialism in developing nations. In exchange for removing those barriers and opening their markets to U.S. investment and trade, developing nations would receive U.S. assistance packages focused on developing the institutions of liberty, the rule of law and property rights.
“A temporary aid package can give an economy a boost – it can fund some projects,” Romney told his New York audience. “But it can’t sustain an economy, not for the long term. It can’t pull the whole cart, if you will, because at some point the money runs out. But an assistance program that helps unleash free enterprise creates enduring prosperity.”
Yet this type of strategic overseas market expansion activity has been going on for years. Since 2001, the U.S. government has spent a total of $13.3 billion on so-called trade capacity building assistance, with substantial sums going to Sub-Saharan Africa, South Asia and other regions that were willing to adhere to U.S. ground rules, according to the U.S. Agency for International Development. Those countries qualified for aid packages by reforming their customs regulations, cracking down on corruption, encouraging export activities and other steps that improved trade relations with the U.S.
The Millennium Challenge Corporation typically provides five-year grants of between $90 million and $600 million to countries with potential for economic growth that meet requirements for economic and social reforms. Many of those funds have built roads, irrigation canals, power plants and clean water systems in the poor countries.
“There’s plenty of evidence that traditional aid programs don’t perform very well – certainly not in promoting broad based growth,” said global economist Terry Miller of the conservative Heritage Foundation, a major booster of the Millennium Challenge Corporation because the program utilizes its Index of Economic Freedom. “And for aid to be effective it has to be based on a real attempt to liberalize the regulatory environment, to create greater economic freedom in the countries in question.”
“Certainly the emphasis on opening up economies and moving towards greater economic freedom in these countries is something we’ve documented extensively as being the best way to promote economic growth and reduce poverty around the world,” added Miller, a former Ambassador to the United Nations Economic and Social Council.
While he acknowledged that Romney’s “Prosperity Pacts” mirrors the Millennium Challenge Corporation and AID programs to a considerable degree, Miller said the former Massachusetts governor’s speech yesterday “sounds pretty good to me.”
The Millennium Challenge Corporation signs either a compact or a threshold agreement with a partner country. A compact is awarded if the country scores highly on the selection criteria indicators. If the country scores poorly but has a positive, upward trend on the selection criteria, it can still be eligible for a smaller grant, called a threshold program.
Studies by Heritage and other conservative groups have shown that many countries that received traditional foreign aid saw their per capita income fall or stagnate over the last 40 years. In April 2005, the U.S. Government Accountability Office issued a favorable report about the work of the MCC.
However, the corporation’s record has been mixed at best. For years, the government corporation had a sluggish record of getting projects beyond the planning state to the point where contractors could actually build the road, irrigation canals, power plants and clean water systems in the poor countries, The New York Times reported in 2007. Infrastructure projects were prone to local government corruption, while it was more difficult and time consuming for the corporation to impose stringent accountability systems than officials had expected.
Earlier this month, the GAO reported that the corporation had reduced the scope of its early transportation infrastructure projects and fell short in meeting key performance targets. In the seven compacts that ended in 2010 and 2011 – with Honduras, Cape Verde, Nicaragua, Vanuatu, Georgia, Armenia and Benin – transportation infrastructure projects drained the overall compact program of about 50 percent of its total funding, suggesting major cost overruns. MCC was forced to sharply reduce the total number of kilometers of pavement by a combined 63 percent.
“Most of the projects had to be scaled back dramatically from the initial vision,” a GAO analyst told The Fiscal Times Tuesday. “Part of it was the cost of construction increased during that time period for those early compacts. The market for asphalt and cement in those early years increased. Part of the problem was the dollar plummeted. But the bottom line was the bid they were getting once they put out the request for bids were considerably higher than what they initially budgeted for . . . And then we found that they had difficulty in how they measured their own results . . . regarding quality, usage and longevity.”
Moreover, MCC failed spectacularly in attracting Middle Eastern countries into the program, largely because those countries couldn’t or wouldn’t meet most of the basic criteria for the programs, including government effectiveness, public expenditures on health, girls’ primary education, rule of law and natural resource management. Romney focused mainly on the Middle East in spelling out his proposals yesterday.
“There are no other Middle Eastern countries really other than Morocco that have received these compact funds, or, indeed, any that are even eligible,” said another GAO official who has studied the program.
U.S. aid to the Middle East has come under renewed attack in the wake of the recent violent anti-American demonstrations in Pakistan, Egypt and Libya. The Senate last Saturday voted 81 to 10 to defeat legislation to suspend foreign aid to those three countries after a U.S. ambassador and three other Americans were killed in an attack on a consulate in Libya. Just how Romney would go about reshaping the foreign aid program to impose additional economic and government reforms in that increasingly explosive region remains to be seen.
Officials of the Millennium Challenge Corporation have acknowledged most of their shortcomings outlined in the new GAO report and have vowed to correct them. However, they stressed that MCC’s compact investments have produced significant, demonstrable results that they say are not diminished by problems with their data quality operations.
“For example, over 623 kilometers of rehabilitated roadways are now serving poor and rural households in Honduras, Cape Verde, Nicaragua, Georgia, Vanuatu and Armenia, linking farmers to markets and bolstering important regional trade routes,” Andrew Mayock, acting vice president of the corporations compact operations, said in a letter to the GAO.