Benin: rehabilitating the port of Cotonou. Ghana: building packing and storage facilities for export crops. Madagascar: identifying international market opportunities for small businesses.
Each of these foreign aid projects was conceived and planned by the country itself to maximize economic development through trade. Each was made possible through an innovative approach to assistance now being pursued by the Millennium Challenge Corporation, or MCC, an agency of the United States Government.
Set up three years ago to help poor countries that take responsibility for their own development, the assistance is selective. Sizeable, multi-year, untied grants are awarded to poor countries that perform better than their peers on 16 indicators of good governance, social sector investment and economic policy. Developing countries take the lead, identifying their priorities for "reducing poverty through growth" and developing a programme for funding in consultation with business and civil society. The focus is on results with mutually agreed objectives and benchmarks recorded in a "compact". The country implements the compact with MCC funds.
The early evidence is that countries are putting priority on trade-related assistance. In the 11 country programmes that MCC has agreed to finance, over half of the $3 billion of aid is for projects that will improve the countries' ability to engage in international trade.
Of the 25 countries worldwide currently eligible, 12 are in Africa. Madagascar was the first to sign a compact in April 2005. Since then, there have been ten more, including Benin, Cape Verde, Ghana and Mali. Five-year compacts have ranged in size from $110 million in Cape Verde to $547 million in Ghana. In Africa, Burkina Faso, Lesotho, Mozambique, Morocco, Namibia, Senegal and Tanzania are developing proposals and investment programmes for assistance.
Among the 16 selection criteria are trade-friendly policies. One trade indicator, developed by the Heritage Foundation, measures a country's openness to international trade based on average tariff rates and non-tariff barriers to trade. Other indicators, such as the International Finance Corporation's "days and cost to start a business" and the World Bank Institute's "regulatory quality", also give countries an incentive to improve weak investment climates to the benefit of domestic and foreign investors.
Another, smaller programme helps countries that come close to eligibility but fall short on one or two indicators with "threshold assistance" to address specific areas of policy weakness. To date, MCC has approved 13 such programmes, including six in Africa (Burkina Faso, Kenya, Malawi, Tanzania, Uganda and Zambia). …